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Why TransEnterix Is A Formidable Contender In The Surgical Robotic Market

By The Wall Street Fox → Wednesday, January 29, 2014

For more than a decade, Intuitive Surgical (ISRG) has dominated the robotic surgery market thanks to its groundbreaking and innovative da Vinci Surgical System, a surgical robot that debuted in 2000 and made minimally invasive surgery a reality for patients around the world. The da Vinci System has so many advantages when compared to traditional laparoscopic surgery that it has become the go to for several surgical procedures, such as prostatectomies and hysterectomies. The company's state of the art device has completed more than 1.5 million surgical procedures to date, and nearly 3,000 systems have been sold to date. Intuitive Surgical's stock has acted accordingly, surging to an all time high of nearly $600 back in 2012, reaching a market capitalization of more than $23 billion.

Even though Intuitive Surgical handedly revolutionized the robotic surgery market, the company is now entering a phase of declining growth and margins due to pricing pressures from hospitals, and as competition finally begins to enter the relatively new marketplace, more and more emphasis will be placed on pricing and functionality when hospitals are exploring the purchase of a surgical robot. This is where TransEnterix (TRXC) steps in.

TransEnterix is a North Carolina-based medical device company that's focused on advanced minimally invasive surgery and is on the cusp of obtaining FDA 510(k) clearance for the Surgibot, a robotic surgical platform that addresses a number of problems and concerns associated with the da Vinci System. Because the Surgibot is expected to receive clearance and begin commercialization in mid 2015, the likelihood of TransEnterix's surgical robot becoming the first viable alternative for hospitals contemplating the purchase of a robotic system is very strong. Here's why TransEnterix represents an under valued medical device company that is gearing up for an extended period of growth and should generate significant returns for patient investors.

The Company and Management

TransEnterix was founded in 2006 and served as a platform for Dr. Richard Stack of Duke University to develop and commercialize his groundbreaking single incision surgical platform, the SPIDER System. I first highlighted TransEnterix after the formerly private company turned public in September of 2013 through a reverse merger with SafeStitch Medical, a Miami-based company backed by Dr. Phillip Frost.

The company has raised nearly $100 million since its inception through several rounds of financing funded by several venture capitalists; this acts as a testament to the level of excitement behind TransEnterix and its technology, given that the overall venture capital market has been sluggish and highly selective over the past few years.

The management behind TransEnterix is nothing short of exceptional, and the company has a number of seasoned veterans that are immersed in the developmental process of the Surgibot, as well as the regulatory approval process and legal aspects associated with the soon to be released device.

Todd Pope has served as the President and CEO of TransEnterix since 2008, and was previously the President of Cordis, a multi-billion dollar medical device division within Johnson & Johnson. Pope also held several senior level roles at Boston Scientific. Richard M. Mueller joined TransEnterix in 2011 and serves as the CTO and COO of the company. Mueller previously served as NuVasive's (NUVA) vice president of product development for five years where he oversaw the launch of more than 60 medical products (100+ throughout his entire career), which resulted in revenues increasing from $30 million to $500 million. CFO Joseph Slattery joined TransEnterix in 2013 shortly after the merger with Safestitch Medical took place. Slattery previously served as the CFO of Baxano Surgical (BAXS), a company focusing on minimally invasive surgery, and prior to his work at Baxano, Slattery was the CFO and Vice President of Digene Corporation. During his tenure, Digene went public, grew annual revenues growing from $5 million to over $200 million, and expanded internationally. Mohan Nathan has been at TransEnterix for more than three years and is the Vice President of Global Marketing. Prior to TransEnterix, Nathan was a senior marketing manager at Intuitive Surgical, and he's held several brand management positions at Johnson & Johnson. Nathan's direct hands on experience with selling and marketing Intuivie Surgical's da Vinci System is a valuable asset to TransEnterix, along with his perspective. You can view Nathan showcasing TransEnterix's core technology here and here.

TransEnterix's management is more than capable of running and growing a multi-billion dollar company from the ground up, and when you include Chairman Paul LaViolette, former COO of Boston Scientific, and board members Dr. Phillip Frost and Dr. Jane Hsiao, it's clear that there is a tremendous amount of value yet to be created for this company and its shareholders.

The Value Proposition

To best appreciate the value proposition of TransEnterix, you need to have a general understanding of the evolution of laparoscopic surgery, and what TransEnterix's SurgiBot has to offer hospitals, surgeons, and patients alike.

In the past, open surgery entailed a long incision (up to 12+ inches sometimes) in the abdomen that literally opens up the patient, which allows the surgeon to pry open the rib cage and access what ever needs to be operated on. This traditional approach to surgery results in extensive muscle tearing, significant blood loss, intense scarring, and a long recovery time, which consumes a heavy amount of resources from both the patient and hospital.

An advance in surgery came in the late 1980's when laparoscopic abdominal surgery was introduced. In these procedures several smaller incisions are made around the abdomen, and rigid instruments are introduced through these ports to perform the procedure. This advance lowered the blood loss and reduced hospital stay and complications significantly.

A major advance in laparoscopic surgery was ushered in with the release of Intuitive Surgical's da Vinci System, a multi-port surgical robot that surgeons control via console situated a few feet away from the patient outside of the surgical field. The da Vinci System utilizes several small incisions that are strategically placed around the area being operated on. The multiple incisions enable internal triangulation, and allow several different tools to be present at the operating site at any given time.

The System was also the first to offer 3-D, high definition visualization, a major advance over the 2D systems used in the past. This feature adds a level of depth perception for the surgeon. The initial success of the da Vinci System was based primarily on converting open prostate removal and hysterectomy to laparoscopic approaches. The advantages of multi-port surgery over traditional open surgery include less blood loss, less pain, and a shorter recovery time for patients, which in turn results in less costs for hospitals.

With all the positive attributes associated with the da Vinci System, there were bound to be some negatives, and after fourteen years of use, the negatives of the system (high cost, large footprint) are beginning to overshadow the positives.

The da Vinci System is expensive, costing hospitals anywhere from $1.5 million to $2.5 million for the system depending on the configuration, not including the required annual service contracts or the replacement of tools and accessories. On top of its high price tag, the da Vinci System is large and bulky; the system cannot be moved from room to room, and it usually takes up an entire operating room, limiting the access of bedside assistants.

The moving arms are difficult to reposition, and because the system is run over wires and a computer, the instruments and arms can freeze mid operation. Surgeons have zero tactile feedback when conducting surgery. A loss of tactile feedback means surgeons receive no vibration/resistance/feel to the hands when operating on a patient and therefore can't identify important structures and tissue planes, and can't judge how hard they are grasping on delicate tissue. Surgeons are using two joysticks and have to solely rely on a 3D high definition camera to guide them through the patient. There have been many cases where a surgeon has accidentally snipped a main artery because of this lack of tactile feedback. The loss of tactile feedback lends to a steep learning curve for the da Vinci System, with most surgeons not feeling comfortable until performing procedures on about 12-18 patients. Although the development of training simulation programs has helped speed up this process, some studies comment that the learning curve with robotics is over 100 patients. These drawbacks have created an opportunity for a competitor to step in and offer the next advancement in laparoscopic surgery. TransEnterix aims to do just that with the SurgiBot, a minimally invasive surgical robot that is based on the core technology found in its first groundbreaking device, the SPIDER System.

The SurgiBot

The SurgiBot is a robotic platform that allows surgeons to perform operations, scrubbed in, at the patient's side through a single incision about the size of a quarter (typically the belly button). Once the SurgiBot is inserted through the incision, the device opens up like an umbrella and deploys two articulating and flexible snake like arms that enable internal triangulation, a high definition 3D camera, and another rigid surgical tool at the operating site. The robotic assistance that the surgeon receives from the device allows for precision movement with scaling, increased strength and dexterity, and improved ergonomics.

Source: TransEnteric public filings

The tiny incision utilized by the SurgiBot should result in less blood loss, less recovery time, and is virtually scarless (hidden in belly button) when compared to multi-port surgery. Because the SurgiBot is a patient side system, the surgeon's hands are directly controlling the instruments inside the patient; therefore 100% tactile feedback is achieved during surgery, something extremely important to all surgeons.

The SurgiBot is built around the foundation of traditional laparoscopic surgery, and because the device maintains true tactile feedback, the learning curve for the system should be minimal. It's akin to the introduction of power steering for a car, you already know how to drive the car, now it's a lot easier.

The SurgiBot will cost about $500,000, is mobile and can be moved from room to room thanks to its small footprint. The SurgiBot does utilize software that allows scalability to be achieved on a number of different levels. With so many advantages over Intuitive Surgical's offering, it's hard to picture this device being a tough sell to hospitals, surgeons, and patients alike.

The Opportunity

TransEnterix's SurgiBot is targeting a massive market, and thanks to its affordable price point and small footprint, the company will be targeting another market that has yet to be deeply exploited by surgical robot companies.

Approximately 67% of the more than 5,000 hospitals in America do not have a surgical robot. The da Vinci System's high price point has been well received at large hospitals that operate more than 500 beds because they can afford it, but the biggest opportunity for the SurgiBot lies in the thousands of US hospitals that do not have a da Vinci System. The graph below illustrates a clear picture of the Da Vinci System's US install base, and what remains for the taking for TransEnterix.

In addition to hospitals without a surgical robot, hospitals that already have a da Vinci System installed would still be interested in the SurgiBot because of its intraoperative flexibility and mobility.

The SurgiBot's market potential in US hospitals alone is staggering, but one market that has yet to be penetrated by surgical robots is the Ambulatory Surgical Centers market. These are outpatient surgery centers that do not require an over night stay. More than 5,000 of these centers exist in the US, and they may soon outnumber hospitals. The da Vinci System's high price point and large footprint has limited its ability to market to these small surgical practices, which is why the SurgiBot stands to gain a lot of traction as soon as it's deployed. This point attests to CEO Todd Pope's view that the SurgiBot is not directly competing with the da Vinci System, but rather expanding the overall market.

The SurgiBot will be targeting weight loss surgery, Cholecystectomies, and other types of surgeries that total more than 2 million annual laparoscopic procedures in the US alone.

The market potential for TransEnterix balloons even higher when you consider the thousands of hospitals located internationally. The company expects to receive European clearance (CE mark) around the same time it receives FDA clearance.

A Response to the Skeptics

Since I first published a piece on TransEnterix in November of 2013, my bullish investment thesis has received a number of questions from many people invested in other surgical robot companies. Here are some answers to the most common questions I have received.
Are any prominent surgeons using TransEnterix's technology?

TransEnterix already has a base of US surgeons that are using the SPIDER System for minimally invasive procedures, and providing feedback for the SurgiBot. More than 3,000 surgeries have been completed with the SPIDER System since it launched in 2010, and there's no doubt that the company's current install base is eagerly awaiting the release of the SurgiBot. Some prominent surgeons that have been utilizing the SPIDER System include Dr. Michel Gagner, and Dr. Sherman Yu.

Dr. Gagner is considered one of the world's foremost experts in minimally invasive surgery, having authored more than 225 published journal articles and 5 books on the subject. Dr. Gagner has been participating in pre-clinical trials for the SurgiBot, and currently he serves as the President of the 2014 World Congress of the International Federation for the Surgery of Obesity and Metabolic Disorders. Dr. Gagner was co-surgeon for the world's first trans-Atlantic surgery.

Dr. Yu has completed more than 100 surgical procedures using the SPIDER System, with 100% of his patients saying they were satisfied or extremely satisfied with their overall experience. Dr. Yu has been recognized as a Centers of Excellence Surgeon, and the Consumers Research Council of America has named him one of America's Top Surgeons. You can watch Dr. Yu demonstrate the SPIDER System here. TransEnterix's technology has been featured on a number of news outlets and medical shows, and Dr. Oz has even promoted the SPIDER System as being a revolutionary device in scarless surgery.

If TransEnterix's technology is so great, why have there only been 3,000 surgeries performed to date? If this technology is groundbreaking, shouldn't more people be using it?

TransEnterix has focused its efforts towards developing the SurgiBot rather than marketing and selling the SPIDER System, which explains the low number of surgeries completed with the SPIDER System.

TransEnterix's business model underwent a course correction in 2012 after they realized the disposable device model was unsustainable. The company was utilizing a 100% disposable business model, which means that for every SPIDER System sold, one procedure is performed. The SPIDER System is completely disposable and costs approximately $1,000 per unit. TransEnterix would have had to build a massive (and expensive) sales force to increase the volumes of the device significantly and achieve profitability. With surgeon feedback on the SPIDER asking for additional capability that was consistent with the benefits of surgical robots, the company decided in 2012 to take the deep clinical and commercial expertise of SPIDER and design the SurgiBot, which offers a business model that records revenue from a one time system purchase, and recurring revenue from annual service contracts and disposable instruments, identical to Intuitive Surgical's business model. This proven business model will allow TransEnterix to build out its presence on a much larger scale once the SurgiBot is approved.

What about the Single-Site da Vinci System? This system also utilizes a single incision about the size of a quarter.

While the Single-Site da Vinci System does utilize a single incision about the size of a quarter, there are still a number of drawbacks when compared to the SurgiBot. Besides the high costs and large footprint, the da Vinci System's version of single port surgery requires the instruments to cross each other at the operating site. This cross-orientation presents a serious learning curve for surgeons, and limits the capability of surgeons and their overall performance. Many times the crossed instruments are so close together that they clash into one another during the procedure, known as the "chopsticks effect." Finally, the da Vinci System single-site does not have "wrists" like its multi-port system, which removes one of the key benefits of robotics.

The SurgiBot offers true internal triangulation, which allows the surgeons right hand to control the right instrument and the left hand to control the left instrument. This, combined with the fact that the surgeon is patient side, with hands on the instruments (like the traditional laparoscopy with which they've become comfortable), reduces the learning curve associated with the system and is more comfortable for surgeons.

The SurgiBot's low price point will be viewed as a cheaper alternative (gimmick) with less functionality when compared to the already proven da Vinci System. Would you want to plunk down say $500k for the newer, cheaper, unproven robot that no one knows how to use yet, or do you pay up and get a da Vinci that already has the brand recognition?

The price point of a system should not be reflective of its functionality and reliability. After more than a decade of technological advancements, a less capital-intensive machine that offers more capability and reliability has been developed to fix the problems associated with the current technology in place. The SurgiBot is that machine. The smaller footprint and lack of multiple large robotic arms allows TransEnterix to sell its system at a sub $1 million price point and still make a tidy profit. The core technology behind the SurgiBot has already been proven with the more than 3,000 procedures performed with the SPIDER Surgical System, and its ease of use will attract more and more surgeons to the device.

Intutive Surgical's Earnings

Intuitive Surgical's recent earnings release represents an overall trend of hospitals and surgeons shifting away from expensive multi-port surgical robots and towards less expensive single site robots. Intuitive Surical experienced a drop in revenues due to lower system sales, and lower operating margins due to increased pricing pressure. The company is continuing to experience an increase in sales of its da Vinci Single Site Systems on a sequential and yearly basis. Management's failure to offer 2014 guidance decreases visibility for investors and foreshadows the continued slow down in system sales for Intuitive Surgical. TransEnterix's SurgiBot will surely benefit from the increase in attention/sales for single port surgical robots.

Risks and a Conservative Valuation

TransEnterix is a small cap medical device company that is subject to a number of risks, including sharp volatility, intense competition, and failure to receive approval for the SurgiBot in 2015. I believe the latter risk is extremely low given the fact that the FDA has already approved the core technology behind the SurgiBot back in 2009. TransEnterix has yet to turn a profit and the company has an accumulated deficit of nearly $100 million. TransEnterix has more than 200 million shares outstanding on a fully diluted basis, and it should be expected that the company holds a secondary offering by the end of 2014 to raise more money to support the commercialization of the SurgiBot. The company had nearly $24 million in cash as of September 30th, 2013, so a financing should be expected in 2014. Investors should keep in mind that there are multiple venture capitalists that have been invested in TransEnterix for more than five years, so any secondary offering will likely be shareholder friendly rather than destructive.

The fact that TransEnterix already has an installed customer base of its core technology should lend credibility to this medical device company and quell any fears that the SurgiBot will experience a tough reception when it makes its market debut.

Consider the fact that more than 3,000 procedures have been performed with the SPIDER System, with Dr. Sherman Yu completing more than 100 procedures. Let's assume that Dr. Yu is an outlier, and the average surgeon using the SPIDER System has performed 15 procedures to date. That's equivalent to a minimum current install base of 200 surgeons. Let's assume 90% of the current install base plans to purchase a SurgiBot, or 180 surgeons/hospitals. Assuming that the sale of one SurgiBot will generate an average of $650,000 in the first year (initial purchase $500k + annual contract $50k + annual replacement of instruments $100k), TransEnterix would generate approximately $117 million in revenue. Utilizing the industry average price/sales ratio, shares of TransEnterix would be valued at approximately $1.70 on a fully diluted basis. Utilizing Intuitive Surgical's price/sales ratio of 7.3, shares of TransEnterix would be valued at approximately $4.00 per share on a fully diluted basis, representing a 250% increase from the stock's current $1.57 price. Keep in mind this is a conservative estimate solely based on TransEnterix's current estimated SPIDER install base, and does not take into consideration any of the 10,000+ hospitals/private surgical centers located in America or the international opportunity.


TransEnterix stands to be the first breed of competition Intutive Surgical will be facing in the relatively new surgical robot marketplace. The SurgiBot's long list of positive attributes will surely give the da Vinci System a run for its money, and even a small slice of market share for TransEnterix would equate to a higher valuation than today's ~$380 million market cap. The growth prospects for this company are massive, and investors should brace for a period of accelerated growth while the medical community begins to learn about, and adopt TransEnterix's revolutionary product. The robotic surgery market is expected to grow upwards of $20 billion by 2019, and the global market for minimally invasive surgical devices is expected to reach $35 billion by 2016. TransEnterix is well positioned in a high growth market and will be able to expand this market thanks to the SurgiBot's affordable price and small footprint.

Shares of TransEnterix are an easy double if management continues to execute its strategy and introduce the SurgiBot to hospitals and surgeons around the world in 2015. Shares of the company have been trading range bound since the merger with SafeStitch Medical was announced, and they seem to be putting in a solid bottom after months of sideways consolidation. Any press releases regarding the SurgiBot's progress, or initiation of analyst coverage can act as a positive catalyst for the stock.

At today's current price, I believe TransEnterix offers a compelling risk reward profile for the speculative investor who treats this as a long-term play.

Additional information was sourced from this First Analysis analyst report, and TransEnterix's 3Q 2013 conference call.

Nokia: Anticipation Grows As Investors Get Impatient

By The Wall Street Fox → Friday, January 24, 2014

Thursday morning's release of Nokia's (NOK) Q4 2013 earnings report was met with a sword to the gut with no shield in hand. Nokia brought too many negatives and too few positives to the table when presenting to investors, and the future of Nokia continues to float aimlessly around in the air. The majority of investors who were expecting either the unveiling of Nokia's new strategy moving forward [after device sale to Microsoft (MSFT)], the revelation of a new CEO, or the identification of the vehicle(s) Nokia would utilize to distribute upwards of $4 billion in excess cash to shareholders, were extremely disappointed when Nokia announced they would keep mum on all of these subjects until after the deal officially closed with Microsoft, which is still expected to take place sometime in the first quarter of 2014. On top of that, revenues from all three of Nokia's remaining business divisions, NSN, HERE, and Advanced Technologies, declined year over year, which is discouraging to all investors, especially those who jumped in after the Microsoft tie up was announced.

However, while Nokia has disappointed investors this past quarter, the company has generated returns of nearly 70% in the past year, and investors on the fence need to take a step back and look at the bigger picture in order to understand where this company is situated in its turnaround phase, and how much further it can potentially go.

Nokia has transformed into an entirely new company right before our eyes, and it should be expected that the company experiences a few hiccups during its transition phase. Just a year ago NSN was a 50/50 joint venture that received little attention and was just reaching profitability. Now the division accounts for approximately 90% of new Nokia's total revenues. A lot has changed in a short period of time for the Finnish communications company, and the more than yearlong restructuring efforts taken on by the company should pay off immensely for investors who can sit tight on their holdings.

With a strong balance sheet, three profitable divisions positioned in rapidly expanding markets, and a value creating multi-billion dollar deal waiting to be closed in the next two months, Nokia presents a compelling opportunity for both short and long-term investors. At current sell off levels (~$7.00), short-term investors can capitalize off of the impatience of others by opening a speculative position in Nokia and selling into the news of the closing of the Microsoft deal (highly expected), which would be a 1-2 month play, and long term investors can sit back and collect a soon to be reinstated dividend while watching Nokia's future pan out, depending on the strategy they announce once the deal closes and how that fits in with your personal investment goals/needs. Overall, Nokia shares have entered oversold territory, experienced an irrational selloff after their earnings report was released, and a bounce back higher should be expected after such a steep decline for a fundamentally improving company that is well on its way to completing its multi-year turnaround.

The Results
This image sums up Nokia's financial performance in a flash:

In nearly every division, revenues and margins decreased on a year over year basis, but increased significantly on a sequential basis, a testament to the fact that Nokia is indeed digging itself out of a hole and continuing to build momentum.

Nokia's Solution Network has been experiencing strong momentum in China, with several recent contract wins, and the company attributes seasonality to NSN's strong sequential performance.

However, NSN's year over year decline of 22% was attributed to restructuring costs, foreign currency fluctuations, and the "divestments of businesses not consistent with its strategic focus, as well as the exiting of certain customer contracts and countries." With recent contract wins from China Mobile (CHL), Sprint (S), and Chunghwa Telecom (CHT), NSN is poised to post improved figures in the future as it increases its scale and takes care of necessary one-time charges.

Nokia's HERE division continues to represent the "I think I can, I think I can" engine that is trying harder than ever to prove its value to both shareholders and commentators. While the division's revenue is peanuts compared to NSN, and its margins are laughable compared to Advanced Technologies, HERE has a competitive advantage thanks to its massive car install base, and has the ability to present significant value to its shareholders in the long term. The company is focusing on continuing its development of the autonomous car, its 3D platform to increase the accuracy of its mapping system, real time data, and its cloud offering for cars. The company sold 3.2 million new vehicle licenses in Q4 of 2013, up 23% sequentially. Expect Nokia to continue to milk the automobile market in the short, mid, and long term with its offerings from the HERE division.

Nokia's Advanced Technologies division saw both a yearly and quarterly decline in revenue and margins, and investors are beginning to realize that it will take a significant amount of time before the division can unlock the true potential of its massive patent portfolio due to lengthy trial processes and the more than one year away Samsung arbitration case. However, this division will experience a boost in revenues once the Microsoft deal closes and the software giant begins to license Nokia's collection of patents.

Nokia's Handset/Device division (discontinued operations) performed miserably for the 4Q of 2013. A relatively strong holiday season did not help lift Lumia sales this past quarter, and the company failed to penetrate the ever-important high-end market, even with its plethora of high-end offerings. The company's 2013 Lumia sales doubled year over year, but the dismal 4Q results illustrate how big of a headache the division will be for Microsoft in the first few quarters of integration. This monkey will soon jump off of Nokia's back and onto Microsoft's.

It should be noted that thanks to Nokia's terrible performance in recent years, the company will be able to shield approximately $15 billion in future profits made in Finland.

After listening to Nokia's conference call, one thing's certain, the anticipation is building, and investors are getting antsy, especially those that showed up late to the party.

"After the Close of the Deal"

Nokia executives gave little food to feed analysts with during Thursday's conference call. The juicy details surrounding a new CEO, dividend reinstatement, strategy moving forward, details regarding patent sums, and more were all avoided and would not be discussed until "after the close of the Microsoft deal." In fact, Nokia executives said something along the lines of "after the Microsoft transaction closes," or "after the Microsoft deal", more than 15 times during the conference call.

Clearly there is a lot of exciting, value generating information to be shared with investors, but the company is taking the cautious route and waiting for the Microsoft deal to officially close before spilling the beans. With China being one of the last major regulators waiting to approve the Microsoft/Nokia deal, an announcement of the deal closing can come any day now, and I expect a number of positive announcements from Nokia's management to follow shortly afterwards.
Nokia is now a waiting game, and may in fact be labeled as dead money until the announcement of the deal closing and Nokia's actions moving forward, but those announcement can come at any moment, a few days, a few weeks, and no more than two months, which is why Nokia is an attractive short term play after Thursday's strong sell off.


Shares of Nokia jumped off a mini cliff on Thursday, but the climb back is not too far off, and the company will have plenty of boosters in the coming weeks to help it potentially break through its triple top resistance of approximately $8.20 to new 52-week highs.

There is a possibility that Chinese regulators may delay the approval of the Microsoft/Nokia deal, and any delay in approval would surely send Nokia shares deep in the red. This is a risk all current and prospective Nokia investors need to consider, but I view it as extremely unlikely since Nokia has already received a majority of the necessary regulatory approvals.

Long-term oriented investors should consider the growing momentum of NSN contract wins, the imminent reinstatement of Nokia's dividend, the 2015 Samsung (SSNLF) patent arbitration, and the recent revelation of key Nokia patents targeting Google (GOOG) maps that date back to before Google's inception as reasons to hold on to shares of this turnaround company.

Speculative short-term investors should keep their mind fixated on the announcement of the Microsoft deal-closing coming by the end of March and sell into the news. Expect a number of announcements from Nokia's management that will boost its share price significantly higher than current levels of $7.03 once the announcement is made.

Information was sourced from Nokia's Q4 2013 earnings release and conference call.

Plug Power Offers Patient Investors More Than 100% Upside, Part II

By The Wall Street Fox → Friday, January 17, 2014

A lot has happened since I first recommended Plug Power (PLUG) as a speculative buy in October of 2013. Plug Power, along with its share price, has transformed dramatically in such a short period of time. The company went from being lost and forgotten to one of the most hyped stocks of 2014 in the snap of a finger, so popular that Plug Power's website servers could not handle the high volume of traffic they experienced right before the business update that occurred on Thursday morning.

There was a major flaw in my first write-up on Plug Power, and that was the fact that I underestimated the timing and the magnitude of the potential return the shares could have generated.

You can see it right in the title. Instead of generating 100% upside in what I expected to be at least six months' time, the shares of Plug Power have generated more than 500% in less than three months.
Plug Power has positioned itself for an extended period of remarkable growth thanks to more than 5 years of testing, investing, and continuous product development. Finally, after nearly 17 years of existence, the company is on the verge of recording its first ever profit, and with a growing buzz surrounding the fuel cell industry, increased interest for Plug Power's solutions from businesses across the globe, and a rapidly expanding target market, the shares offer patient investors more than 100% upside.

A Quick Rebuttal

Plug Power has received a lot of criticism lately from both investors and commentators, likely due to the astonishing momentum that drove up its share price and the idea that the move was unwarranted and unsustainable. When people were calling for a correction, the shares kept leaping higher. The stock is now holding on to a solid chunk of its gains and is in the midst of moving sideways and consolidating, similar to December's price action. The stock has more than doubled in January alone, but the long-term potential of this run is just beginning to unfold.

Most articles that criticized Plug Power's ability to sustain the recent monster run and called for a significant price correction were focused on information that has little relevance to the company today. Some of the information presented in Dr. Hugh Akston's second bearish piece was so off that Plug Power CEO Andy Marsh directly addressed this in Thursday's business update. Dr. Akston claimed the idea that Plug Power's GenDrive products providing any tangible benefit over existing technology was nothing but fiction. Specifically, he claimed that Plug Power's GenDrive units only run at an average rate of four hours, compared to six hours for a traditional electric battery (anecdotes sourced from unidentified fortune 500 warehouse managers).

Here's what Marsh had to say about that claim made by Dr. Akston:
Investor: I'm wondering your run rate, where is it compared to the 6-8 hours you are expecting or promising? 
Andy Marsh: It exceeds or meets it. I've heard some rumors, you know I read some rumors and I heard someone mentioning 4 hours, and I think they probably were thinking about our old 200 bar systems from about four or five years ago. We operate at 350 bars, and some of it is dependent upon the operation, how heavy the units are used. I know some of our pallet trucks can operate for over 12 hours, some of our class one products easy get 7-8 hours of operation. I heard those rumors, and I think sometimes people have old information, and I understand that.
Clearly, the argument that Plug Power's fuel cell solutions don't provide any tangible benefit over existing battery technology can be thrown out the window. Not to mention the fact that Plug's GenDrive offering reduces emissions by up to 80% and frees up a large battery charging room that takes up 5%-7% of space in warehouses.

The sheer magnitude of the recent positive developments is jaw-dropping for Plug Power, and with new markets waiting to be entered, some that may eclipse the market potential of Plug Power's already established material handling market (a $20 billion market), one needs to take a step back and look at the bigger picture to understand the true potential of this sleeping giant.

The January Business Update

It should be noted that these business updates were scheduled months in advance and merely serve as a platform to increase transparency between the company and its shareholders. Nonetheless, expectations were high for this business update, maybe a little too high. The share price ran up more than 10% prior to the call, took a tumble in the middle of the call, and finally settled 7% lower for the day. Regardless, the call served as a testament to the increase in business Plug Power has achieved in recent months and will continue to experience in the months moving forward. Here are some highlights from the company's update.

-Booked new orders with Wal-Mart (WMT), Kroger (KR), BMW, Mercedes Benz.

-Mercedes Benz recently received more than 100 GenDrive products at their new distribution center in Alabama. Mercedes is a growing customer for Plug Power, and it is being viewed as a global target.

-Booked a GenKey deal with Kroger that will include more than 200 GenDrive units. Plug will be providing the hydrogen, hydrogen infrastructure, the product, and the service. This site will be deployed in the second quarter.

-Received an additional order from Kroger (product only), which will be deployed in the third quarter. Plug is currently negotiating with Kroger to include the GenKey solution.

-There has been global interest from both new prospective customers and current customers who are looking to deploy electric utility vehicles that utilize Plug Power's range extenders for home delivery of their products. This is an exciting opportunity to expand Plug Power's business with minimal product development and with many current customers.

-Plug Power now has a fully-funded business plan. The company has $46 million in the bank, and expects to use less than $10 million in operating cash this year.

-1Q 2014 bookings will exceed the bookings of 4Q 2013's $32 million. These 1Q bookings will be sufficient to meet the revenue targets Plug Power has set for 2014.

-Plug Power will sign two additional GenKey deals in 1Q 2014.

-Jose Luis Crispo, an experienced international businessman, has joined the International Sales and Business Development division and will be focusing on Asia and new markets for Plug Power. Marsh and Crispo will be in Asia next week exploring business opportunities. After speaking with Andy Marsh over the phone, Crispo said simply, "I would not be traveling to Beijing and Shanghai in the middle of winter for fun."

-Plug Power is expecting to sell more than 3,000 GenDrive units to 20 different manufacturing facilities/distribution centers. This would put its operations in the profitability zone for 2014. The company will deploy its first GSE, TRUs, and range extenders to customers this year.

-Plug Power expects to achieve breakeven EBITDAS by the second or third quarter of 2014.

-Plug Power has more than $50 million in booked orders as of 12/31/2013. These orders are expected to be completed and recognized as revenue within six to nine months.

-Plug Power has rebranded its turnkey solution as GenKey, which allows it to be a single-source vendor for all fuel cell needs of a prospective customer. Plug will be providing key data that will allow customers to view the performance of their units and obtain a sense of the cost savings, emission reductions, and increased productivity that occurs when you switch from a traditional battery/diesel-powered fork lift to Plug Power's GenDrive alternative. Plug Power has shortened its deployment time for the GenKey solution to four months.

-A typical GenKey site revenue breakdown can be seen in the following chart:

The Market Potential

It's difficult to fathom the massive market that Plug is currently situated in. Plug Power's goal is to become a dominant player in multiple vertical transportation markets. This includes the material handling market (forklifts), the Transportation Refrigeration market (TRUs), the ground support equipment market (airport vehicles), and the range extender market. Plug Power already dominates 90% of the material handling fuel cell market, and this dominance should spread over to other vertical markets that it is targeting since many of the company's current customers utilize products across many of these markets.

Material Handling Market

Plug Power's current list of customers operate a total of 250,000 battery-based forklifts in the U.S. Assuming that Plug's GenDrive offering costs an average of $23,000, the market potential for Plug Power is approximately $6 billion in the U.S. alone. Keep in mind that more than 6 million forklifts are deployed worldwide.

Transportation Refrigeration Market

The loud diesel engines that power the refrigeration units attached to 18-wheelers are due for an upgrade. Just about every single dairy, produce, or meat product from your local supermarket sat on a diesel powered TRU at some point. The diesel-powered TRUs are loud and inefficient when compared to Plug Power's fuel cell offering. The company's offering reduces noise pollution significantly, which allows for nighttime deliveries of products in noise-sensitive areas and results in a reduction of emissions and costs. The ability of massive food retailers to deliver goods at any time of the day without worry of noise violations will vastly improve the logistics for these giant companies.

There are approximately 300,000 TRUs operating in America alone. While there is no specific price point for Plug's TRU offering, it's safe to say that it will cost significantly more than a forklift GenDrive unit. If we assume Plug's TRU offering costs ~$50,000 per unit, that would equate to a U.S. target market worth nearly $15 billion.

Ground Support Equipment

There are more than 26,000 units operating in the U.S. If we assume costs similar to the GenDrive units, the potential revenues generated in the U.S. would represent nearly $1 billion. The European market for ground support equipment units is 20%-30% larger than the U.S. market.

Range Extenders

FedEx (FDX) operates a fleet of more than 70,000 trucks, [[UPS]] operates more than 90,000 trucks, and USPS operates over 130,000 trucks. If we assume a price similar to the GenDrive units, these three truck fleets represent combined potential revenue of more than $5 billion. Obviously, these customers could not replace all of their trucks with electric trucks utilizing Plug's range extenders overnight, but a transition of a couple of thousand trucks a year does not seem out of reach. When you consider the logistics hungry characteristics of UPS and FedEx, and strong interest for the product from several of Plug's current customers, the US market alone can easily exceed $20 billion.

GenKey Solution

One GenKey site provided by Plug Power generates $8-$12 million in revenue, with 35% being recognized as recurring revenue over a 5-year time period and the other 65% being recognized upon shipment. Kroger alone operates 37 distribution centers and recently became Plug Power's first customer of this service. Kroger decided to go with GenKey because Plug Power takes away all the internal activity needed to train staff with building and servicing the necessary hydrogen equipment. Wal-Mart operates 158 distribution centers. The GenKey revenue potential of these two customers alone is more than $2 billion, of which $700 million would be recognized as recurring revenue over five years. The GenKey solution appeals to both new and current customers, as it serves as a simple transition to utilizing Plug Power's fuel cell offerings.

Keep in mind that none of the above numbers take into account any of the European markets that Plug is already targeting through its partnership with Air Liquide, and the fact that the costs of the GenDrive and future Plug products have not been made public. This is a rough estimate that points to a combined U.S. addressable market of nearly $50 billion.

Fuel Cells: Here to Stay

The fuel cell industry saw tremendous amount of hype once it debuted in the 1990s, which was one of the factors leading to Plug Power's drastic price action after its initial debut as a public company. The technology back then was not ready for commercialization, but after nearly two decades of constant improvements, fuel cells are finally ready to make a comeback. Plug Power's resurgent business model illustrates how viable this alternative technology is, but Toyota (TM) is taking fuel cells a step further. Toyota has been excited about fuel cells for some time, and at last week's 2014 CES event, Toyota unveiled its fuel cell concept vehicle, announcing plans to introduce it to the market in 2015. Bob Carter, Toyota's Senior Vice President of automotive operations, believes the company's fuel cell vehicle represents what the Prius represented 15+ years ago; a compelling technology that received criticism and was slow to catch on at first, before becoming the best selling hybrid vehicles and one of the top selling cars in the world. Carter specifically called out Elon Musk and other fuel cell critics directly, and is adamant about the success of this technology.

Interestingly enough, Toyota has teamed up with Plug Power's partner, Air Liquide, to build more than 100 fuel cell stations between four major Japanese cities within two years. The automobile company is also targeting California due to their growing base of fuel cell stations, expected to reach 30 by 2015. Toyota claims 68 fueling stations between San Francisco and San Diego could support 10,000 fuel cell cars. As the fuel cell industry increases in size and awareness and enters the mainstream, more investors will be looking to gain some exposure to this market. Plug Power is a pure play on the fuel cell market, and is poised to benefit from the increased attention the fuel cell market is beginning to receive.


As many critics have pointed out, Plug Power has never been profitable in its 17-year existence and the company has a massive accumulated deficit. After nearly two decades of jumping from market to market to market with failed fuel cell products, it has finally found a successful niche area that will propel the company to profitability and enable dominance of its targeted fuel cell markets. Plug Power has a history of diluting its shareholders, and the company recently closed a financing deal worth $30 million with a single institutional investor. The financing consisted of 10 million shares sold at a strike price of $3.00, and 4 million warrants that have an exercise price of $4.00 per share. This is a bullish signal for Plug Power; being able to achieve financing at these levels indicates that this institutional investor foresees a strong future ahead for the company.

Plug Power's current capacity can handle the production of 7,500 GenDrive units, or approximately $200 million in revenue. At some point down the line, the company will be required to expand and build out capacity, which may be financed through another secondary offering of shares or through a newly established credit line from a bank. In any case, long-term shareholders should welcome these types of growth-induced expenses.

This stock is not for everyone. This is a volatile stock that can have 20%+ price swings in one trading session and is subject to heavy day/swing trading. The shares of Plug Power have more than doubled from their 2013 closing price, and are more than 25% below their recent high of $4.90. The fundamentals are in place for Plug Power, now it's up to the company to execute and prove to its critics that the long-term viability of the company and its business plan is stronger than ever. Plug Power will be holding a conference call on March 13th to announce year-end results and provide a quarter-by-quarter financial projection for the coming fiscal year. This conference call will act as confirmation that the company is on the verge of hockey stick growth, but any hiccup in earnings can result in a sharp sell-off. Only investors who have an appetite for risk should initiate a position at these levels, and a long-term outlook is necessary to reap significant gains.


Plug Power is positioned to dominate multiple fuel cell transportation markets, which have combined potential revenues of nearly $50 billion in the U.S. alone. While this number pales in comparison to what Plug is booking in revenue today, it is a clear illustration of the true long-term potential for this company. While 2013 was a big year for Plug Power, avoiding a potential bankruptcy and reverse split, 2014 is gearing up to be an even bigger one. Impending profitability will serve as a confirmation to investors that this party is just getting started, and any development regarding a joint venture based in Asia or an announcement mentioning newly-added customers (Amazon highly anticipated) would serve as a significant growth catalyst for Plug Power and its share price. The shares of Plug Power should be subject to range-bound trading for some time until a significant announcement is made by management or management execution is shown in the numbers of the upcoming earnings call. Current and prospective investors should tune in for Plug Power's conference call/earnings release on March 13th and a business update on April 9th, and act accordingly depending on their risk tolerance/time horizon.

Information was sourced from previous business updates.

Castle Brands: Overserved And Buying More

By The Wall Street Fox → Wednesday, January 15, 2014

I'm not drunk, and this is not one of those "really great ideas" you think of after downing a few cold ones with your friends. This is an article representing what I believe to be a significantly undervalued beverage company that is gearing itself up for a continued stretch of profitability and continuous growth. When I first highlighted Castle Brands (ROX), I did so solely because of the fact that respected billionaire Phillip Frost was purchasing shares of the company (and is also on the board of directors). I opened a position immediately, and since then shares have more than doubled, and at its peak more than tripled.

After doing a little more digging, Castle Brands turned out to be a fundamentally solid beverage company that is experiencing impressive growth and markets a number of premium alcoholic beverages, including the ever so tasty Gosling's Rum. Shares are trading 30% below their recent high of $1.10, and the stock has moved sideways ever since. A strong two-month period of consolidation has allowed the stock to develop strong support at $0.71, bouncing off of this level a number of times intraday.

The most recent quarterly earnings release was a testament to the fact that Castle Brands is on the verge of recording positive net income for the first time in its existence. The stock has been battered ever since it went public in 2006, shedding more than 90% of its value.

Castle Brands is a turnaround story in the making, and the company is extremely close to experiencing a breakout success (think Jameson status) for one of its brands thanks to its diverse offering of premium select liquors. Gosling's Rum and Gosling's Dark N' Stormy may very well be the next breakout drink for the beverage industry, and one highly successful (and expensive) marketing campaign is all Castle Brands needs to slingshot this already popular brand into the mainstream.

Signs of Growth

The 2Q 2014 earnings released on November 11th served as the catalyst that moved shares above a dollar for the first time in more than four years, and for good reason. The company increased revenues, increased profits, continued to cut losses, and for the first time in its history, Castle Brands recorded a positive quarterly EBITDA of $0.1 million, compared to a loss of the same amount a year prior.

Gosling's Black Seal Rum was named a "Hot Prospect" by Impact, and Gosling's Ginger Beer case sales increased nearly 50% when compared to the prior-year period. This bodes well for Castle Brands, as they see their signature 'Dark N Stormy' cocktail, a mixture of Gosling's Rum and Gosling's Ginger Beer, increase in popularity, which in effect drives growth for both products.

Impact is a highly regarded wine and spirits industry newsletter, and the "Hot Prospect" list refers to the U.S. market's most promising wine and spirit growth brands. To qualify for the award, the winner must post annual sales of at least 50,000 cases, and no more than 200,000. Furthermore, the winner needs to have grown the case sales by at least 15% the year prior, and have had consistent positive growth for the two years prior to that. Sales of Gosling's Rum have climbed more than 500% in the past eight years, and once sales break the 200,000 cases mark, the company enters the territory of "Hot Brand."

Gosling's Black Seal Rum was the only non-spiced rum to be honored the "Hot Prospect" designation, and The Beverage Testing Institute recently awarded the rum the Platinum Medal, its highest honor. This rum deserves it. I hope this does not come off as an advertisement, but Gosling's Dark Rum is like no other. After stumbling upon the bottle at my local liquor store, and knowing I owned a tiny sliver of this publicly traded company, I felt compelled to try it. It's delicious.

After visiting 15 different liquor stores, in Ithaca, NY and Westchester, NY, I saw Gosling's Rum for sale in 73% of them. Furthermore, three store managers claimed the drink was a consistent seller, and of the stores that carried Gosling's Rum, 45% of them had a limited number of bottles available on the shelf. Please keep in mind this was an extremely small sample size, varies per region, and was merely used to gauge the level of presence of Gosling's Rum.

Another impressive Castle Brands drink that is showing impressive growth is Jefferson's Bourbon, which led to a 27.8% increase in whiskey revenues from the prior-year period. The success of Jefferson's brand was so strong that Castle Brands was forced to obtain more capital in the form of convertible notes in order to fund and sustain the continued growth. Aged bulk bourbon, raw materials, and finished goods inventory were purchased with the more than $3 million generated in the debt offering.

Purchasers of the debt, offered in October of 2013, included Dr. Phillip Frost, Chairman of the board Mark Andrews, and several other insiders of the company. Given the fact that several insiders recently purchased shares in the open market at approximately $0.75, I believe its safe to say that management has a strong outlook for the future of this company.

Marketing a Hit

Castle Brands knows what it takes to market a successful drink, just ask Sergio Zyman, Chief Marketing Officer of the company. Sergio Zyman was the mastermind behind the successful launch of Diet Coke, and the not so successful launch of New Coke. Regardless of Zyman's major flop, he has the ability and the know how to make any beverage a sought out drink by the masses, and there's no reason why he can't do that with Castle Brands' offerings. Sergio Zyman seems to be back at his old roots, marketing for a beverage company, and if Zyman's past success is any indication, Gosling's Rum could be gearing up for a steep climb.

The brand awareness of Gosling's Rum has improved since I first visited the company's website, Facebook page, and Twitter account a few months ago. Customer engagement is up, along with followers, likes, and comments, and a revamped website makes it extremely easy and compelling to explore Gosling's offerings. However, there is still plenty of room for growth, and the brand awareness looks pitiful when compared to some of the industry titans.

This chart should not be critical of Gosling's deflated level of interest, it should merely highlight that Gosling's Rum, and Castle Brands for that matter, both have ample room for growth. At these levels, the company is sitting on the ground and any spark in marketing can inflate the popularity and sales of Castle's offerings. The Bermuda based Gosling's Rum brand recently breached annual case sales of 100,000 in 2012, which is a key level to break before serious growth can occur.

'Gosling's Looks to New Markets'

Gosling's Black Seal Rum did not become an available option for US consumers up until 2005, when Bermuda based Gosling Brothers Ltd. teamed up with Castle Brands and entered the global rum market.

Here are some interesting statements made by Malcom Gosling, 7th generation President of Gosling Brothers, on the decision to go global with his families Gosling's Rum brand, sourced from this 2005 article published by The Royal Gazette, a Bermuda based newspaper.
There has been a tremendous amount of focus on the aged rum and premium rum category. Before rum was seen as a second class spirit almost- it just wasn't a refined spirit in a lot of consumer's minds- but now it has been getting a lot of attention because a lot of the global companies are snapping up these distilleries and they are putting serious marketing efforts behind it so, it is bringing rum to the forefront.
We want to be a mainstay of the rum category. That is what our goal is. The vodka category has gotten so massive. It is just entry after entry and the consumer is confused and so what happens is that people fall back to the old mainstays (Smirnoff, Absolute) that were there in the beginning before all the new product introductions.
The mainstays are now coming back to the forefront and that is our strategy with rum because when rum as a category grows, there is going to be a tremendous number of entries, new brands just created will go in and try to capture some of these sales by the bigger companies so we need to make sure that we have a firm base now.
Our plan is to manage it and keep a focus and keep the brand image consistent from market to market and gradually we will be adding countries on. We have tremendous interest coming from Germany, France and Ireland and so these will probably be the next steps for us to hit those markets.
Once you are up over 100,000 cases in the US you are truly considered a national brand and then it gets much easier to grow after that point because you have serious recognition to fall back on.
When the category starts to get crowded, people are going to get confused over which brand they like or want to drink on a regular basis, and not only that, but there will be so many that not every bar can carry them all. If you choose to drink this obscure brand, then chances are you won't be able to drink it at many places because they have to carry the mainstays so, that is what we want to be. We want to be a mainstay in the rum category.
The article does a good job at laying out the vision of Malcom Gosling's rum brand, and describing his strategy for the product. Gosling's Rum tallied more than 100,000 cases sold in the US in 2012, and Gosling's Ginger Beer recently recorded more than 100,000 cases sold in 2013. These developments bode well for the growing momentum of Gosling's Rum and the Dark 'N' Stormy cocktail.

Market Consolidation and Valuation

The overall beverage industry that Castle Brands is competing in seems ripe for consolidation, which is a positive for Castle Brands and their impressive growth rates among a diverse number of spirits. Castle Brands may very well be acquired in the future, and their wide variety of alcoholic brands would serve as an appealing platform for added growth to any already established beverage company.

Suntory's recent acquisition of Jim Beam represents one of the last major targets for takeover in the liquor industry (Bacardi and Campari may be the last major takeover targets), and now large companies are going to have to begin exploring smaller distillery groups and build out their growth organically. In a recent article posted in the New York Times Dealbook blog, several analysts commented on the acquisition of Jim Beam and made encouraging statements for smaller scaled distillery groups.
I think there will definitely be further consolidation in the industry, both in the U.S. and globally. 
Beyond that, there is a long tail of smaller distillery groups, which could be attractive targets for big groups looking for growth
Castle Brands' 5 year CAGR is nearly triple the industry average, and its 3-year revenue growth stands at 13%, compared to the dismal industry average of negative 9%. While the company just posted a positive EBITDA for the first time, it should be noted that a positive net income is not far off either. The company's recent quarterly non-cash charge of nearly $4.2 million related to the conversion of warrants issued back in 2011 impeded on the company's profitability potential significantly, posting a total net loss of $4.6 million. The company recently announced that they are converting the rest of the 2011 issued warrants, due to the price action of shares and anti-dilution provisions. This should be represented in the form of one last non-cash charge relating to these warrants. With these charges out of the way after next quarter, it seems positive net income should follow shortly after, if not in the same quarter depending on the size of the charge.

Utilizing the industry average price to sales ratio of 3.9, shares of Castle Brands are worth approximately $1.75. At a simple 2X revenue multiple, shares would be worth nearly $1.00. Utilizing an average sales ratio between the two, which I believe is warranted due to Castle Brands' above average growth rates and imminent profitability, shares should be trading at nearly $1.34. These three target prices would represent respective gains of 116%, 15%, and 65% from today's closing price of $0.81.


Castle Brands is a growing small cap stock that carries all the associated risks of small cap stocks. Volatility is high, liquidity is low, and total shares outstanding exceed 100 million. Furthermore, the company has never experienced a positive net income, they have an accumulated deficit of $136 million, and the need for additional funds to finance the company's strong growth is a certainty, which would result in further dilution of shareholders, or in the form of more debt. The recent debt offering this past quarter suggests that the company will not need to raise additional funds immediately, but their low cash position suggests that a financing round is around the corner.

Technically speaking, Castle Brands has experienced solid consolidation since reaching its 52-week high two months ago, but any close below strong support $0.70 would signal further depreciation of share price. Speculative investors who want to open a position in Castle Brands but don't have a large stomach for risk should set a stop loss around $0.69.


Castle Brands has a diverse portfolio of premium liquors that are growing at an above average rate. The company's strong performance from Gosling's Rum and its whiskey brands bode well for the future of this company, and the possibility of becoming a potential takeover target down the line seems more than likely. With impending profitability around the corner, and a non-cash charge that muddied the company's financial statements last quarter, it seems like now is a good time to open a position in this liquor company and ride its consistent growth wave, before a quarter of strong profitability is posted, rather than after.

Opko Health: History Tends To Repeat Itself

By The Wall Street Fox → Monday, January 13, 2014

Dr. Phillip Frost has a true knack for investing, a unique vision that allows him to see tremendous value where no one else would, and time and time again Frost has exploited this vision to reap 1000%+ gains on his investments. Frost did this with Key Pharmaceuticals, he's done it with Ivax Corporation, and I have every reason to believe that he's now doing it with Opko Health (OPK). The characteristics between Ivax's path to success and Opko's current path are strikingly similar, and with the help of Dr. Jane Hsiao, who seems to be a huge driving force behind a number of Phillip Frost related investments, Opko is priming itself for an extended run of the bulls. Shares of Opko are currently trading 30% below their most recent high, the company has an investor presentation this Tuesday at the 32nd annual JP Morgan Healthcare Conference, and multiple insiders have recently been loading up on shares. Add the fact that shares of Opko Health are trading at key support levels and have multiple technical indicators pointing towards a price increase now seems like a prime time to open a long (speculative) position in Opko Health.

Does This Sound Familiar?

After stumbling upon an extensive write up on the history of the Ivax Corporation, the company that Frost sold to Teva Pharmaceuticals (TEVA) for $7.4 billion, I noticed a number of descriptions about Ivax Corp. that were eerily similar to the current developments/criticisms surrounding Opko Health today. Do any of these points sound familiar to current Opko investors/followers?
To the casual observer, IVAX may have seemed a rather odd organization with limited potential. However, Frost had big plans for the fledgling operation. 
Frost eventually decided to develop and market new delivery systems for proven drugs. He believed that he could eliminate the time, costs, and risk associated with developing entirely new drugs. 
Although IVAX's three companies were a strange mix, they reflected a shrewd strategy conceived by Frost to make IVAX into a major developer, manufacturer, and seller of proprietary drugs. 
First, IVAX would buy drugs that already had passed the expensive and time-consuming regulatory approval process. Second, cash flow from those drugs would be used to purchase drugs that were not yet approved but had shown promise in preliminary clinical trials. Finally, earnings from those drugs would be devoted to the internal development of new drugs by IVAX's own scientists. 
By 1990, IVAX Corp.'s third full year of operation, the company had revenues of $60 million annually. It was still losing money, but IVAX had positioned itself for future growth
Despite analyst's doubts concerning IVAX's long-term prospects, Frost and his management team viewed massive growth during the early 1990s as part of their original growth strategy.

The personal success of IVAX's driving force, Frost, was just as impressive--Frost still owned nearly 20 percent of the company in 1994 and was serving as chairman, chief executive, and president.
With a massive pipeline of both pharmaceutical drugs and diagnostic equipment in trials ranging from preclinical to Phase III, it seems pretty clear that Frost will be utilizing the same three step business plan he utilized to grow Ivax Corporation into the behemoth that it became.

While many short sellers of Opko Health, such as Anthony Bozza and Whitney Tilson, see a money burning developmental drug company that has no clear strategy moving forward and a history of consistent failure, I see a promising developmental drug company that is creating a global distribution presence thanks to the swift, cheap, and strategic acquisitions of profitable generic pharmaceutical companies located around the world. Frost is building a global infrastructure of distribution centers that will cater to the future potential of Opko's strong pipeline of drug candidates, just like he did with Ivax.
Strategic Investments

Opko has made several strategic investments in startup medical companies that are developing breakthrough therapeutic technologies. Several investments include Biozone (BZNE), which recently merged with CoCrystal Discoveries, another Opko investment, Chromadex (CDXC), Neovasc (NVCIF), Tesaro (TSRO), and Senesco Therapeutics (SNTI), which recently merged with Fabrus, another Opko investment. I believe Opko is taking a strategic position in these companies (and many others) for two reasons; First, Frost believes that these companies are severely undervalued, and second, Frost feels that Opko Health could benefit from the future licensing rights/acquisition of the product being developed by said company.

Neovasc Inc develops two lifesaving cardiovascular devices (one in early stage development, other preparing for commercialization) that both address multi-billion dollar markets. In the snap of a finger, Opko Health could acquire this company or licensing rights to its products and immediately become a contender in the rapidly growing cardiovascular device market. If Neovasc does not seem to be a realistic fit for Opko Health, they can sell their position down the road and record gains of upwards of 10X their initial investment, just like they recently did with their exit in Sorrento Therapeutics (SRNE). While the $22 million generated from the exit of Sorrento is peanuts when compared to Opko Health's $3.5 billion market value, the point is that Phillip Frost and Dr. Jane Hsiao have a keen eye for spotting out undervalued companies with potential breakthrough therapies, and exploiting their potential to increase shareholder value.

The Power of Three

Speaking of Dr. Hsiao, I believe an equal amount of attention should be focused on her as it is for Frost (along with Steve Rubin for that matter). Hsiao worked closely with Frost and Rubin while at Ivax, and she is currently the CTO and vice chairman of Opko. Dr. Hsiao has a PhD in Pharmaceutical Chemistry and Medicinal Chemistry, and an M.B.A degree. Hsiao's net worth should be approaching a billion dollars, thanks to shares of Opko Health strong performance in 2013.

TransEnterix (TRXC), a company that's developing a revolutionary surgical robot, describes board of director Dr. Hsiao as follows, "Her broad experience in many biotechnology and life science companies gives her a keen understanding and appreciation of the many regulatory and developmental issues confronting medical device, pharmaceutical and biotechnology companies."
Barrington Research may have summed it up the best when they recently shared a note to Opko investors stating:
Although Dr. Frost is clearly a genius, for us it has been more about Dr. Frost and his team," continued the analyst. "He has some very special people at each shoulder between Jane and Steve and for us, it has a lot to do with Jane Hsiao who we think is a Time magazine cover story in the making. We think the real story that is being missed is Dr. Jane Hsiao and how she has been approaching this investment of her time.
Investors who follow the stock purchases of Dr. Phillip Frost should be following the stock purchases of Dr. Jane Hsiao just as much. Her decades of expertise in the medical industry should speak for itself, and her managerial experience means she's in tune with creating shareholder value from the companies/products she deems worthy.


Opko Health is just like any other developmental pharmaceutical company, and regardless of their impressive group of management, the drugs and devices in development have the potential to fail their clinical trials and negatively affect the share price. The company's revenue continues to grow, but Opko Health has yet to post a profit since Phillip Frost became CEO and Chairman of the company back in 2007, and the company has an accumulated deficit of nearly $500 million.

While Opko Health is an appealing long term investment, shareholders should consider the current age of Phillip Frost (78), and understand that any abrupt step down by Phillip Frost, or any announcement of a deterioration of health would impact this stock and other Frost related companies for the worse. However, the upbeat energy in recent interviews, Frost's constant fear of boredom, and the assumed healthy practices of a once practicing doctor point to a few years before Frost will consider stepping down and retiring for good. Furthermore, the impressive credentials and experience of Frost's two closest business partners, Hsiao and Rubin, should allow them to continue Frost's legacy at Opko Health long after Frost's departure.

An insider of the company recently sold a small portion of his Opko shares, however, the company released a statement explaining that, "The reporting person sold the common stock in part to satisfy federal and/or state income tax obligations in connection with his acquisition of shares of OPKO common stock through the next exercise on January 7, 2013."


Opko Health seems to be following the exact footprints of Frost's last critical success, Ivax Corporation. The similarities between the two, such as the broad range of investments and acquisitions, the diverse offering of both diagnostic equipment and pharmaceuticals, and the expansion into global markets through small pharmaceutical companies, are a testament to the fact that Frost is utilizing the same successful business model he has in the past, and that Opko is preparing to be situated in multiple high growth markets for an extended period of time. Dr. Frost, along with Dr. Hsiao and Steve Rubin have rebuilt Opko from the ground up, and they stand to repeat history again once the introduction of several promising drugs and devices materializes.

With shares trading at a technically appealing level, an upcoming investors presentation that can potentially act as a catalyst, and increased insider buying from Frost (16 times in past month), and recent insider buying from a director, speculative investors should consider opening a long position in the company with a stop loss set near $8.30. A drop below this key trend line would signal a further depreciation in share price.

Plug Power: The Definition Of An Inflection Point

By The Wall Street Fox → Thursday, January 9, 2014

Shares of Plug Power (PLUG) are up more than 100% year to date. That's correct, after the first five trading sessions of 2014, shares of Plug Power have more than doubled after a stellar finish to 2013, surprising all longs, and curb stomping all shorts. Now, a true battle between the bulls and bears is brewing, and a recent bearish Seeking Alpha piece written by Dr. Hugh Akston just goes to show how influential commentary on Plug can be at these volatile price levels. The article may have had an impact on the mild 10% sell off during Wednesday's after hours session, and it evoked a wide spread panic in the online community among investors and traders alike. After the article was released, the raging emotions from both the bulls and the bears permeated like a dead fish left rotting in the sun, which just goes to show how much is at stake here for all shareholders of the company.

Plug Power has come a long way (to say the least). The company was staring down the loaded shotgun barrel of bankruptcy just last year, and just last month, the company was staring down the loaded shotgun barrel of a possible NASDAQ delisting and reverse split. Fast forward to today, and shares of Plug Power have rocketed more than 1000% since possible bankruptcy, and more than 500% since possible delisting, and for good reason.

When such a sharp price increase occurs in a security in such a short period of time, many clueless shorts join the party and declare the price action unsustainable and begin bashing the company, solely based off of the companies historical performance, without taking a deep look at the changing fundamentals of the company in question and their future prospects. Plug Power is no different, and the intricate moving pieces behind this company are evolving at such a rapid pace that many investors are having trouble wrapping their mind around the drastic price change. While previous financials of the company paint nothing but a bleak picture of a dying company, recent business updates held by CEO Andy Marsh paint the exact opposite, a "phoenix rising from the ashes," a company that's truly in the midst of being crowned the turnaround story of 2014.

While Plug Power's recent run up reminds SA contributor Akston of Usec (USU), a uranium play whose share price soared over the summer on nothing more than pure speculation (increased uranium demand from Japan), and has just recently announced plans to file for bankruptcy, Plug Power reminds me of several promising turnarounds I've been invested in that were once written off for dead by just about every mainstream investor. I'm talking about Nokia (NOK), Sprint (S), Clearwire (CLWR), Alcatel-Lucent (ALU), and even Wendy's (WEN). All of these companies, including Plug Power, have had rocky pasts (albeit some much longer than others), and all of them brought in new management, and with it a new strategy. But what's also strikingly similar between all of these turnaround stocks is that they were all going through inflection points when investors were bashing and shorting the stocks like crazy.

In business, an inflection point is a time of significant change in a situation, basically a turning point. This definition is a bit too simplistic for me, and in my opinion, the best description of an inflection point comes from former Intel CEO Andrew Grove, who in his book Only The Paranoid Survive, describes an inflection point as,
"When a change in how some element of one's business is conducted becomes an order of magnitude larger than what that business is accustomed to, then all bets are off. There's wind and then there's a typhoon, there are waves and then there's a tsunami. There are competitive forces and then there are super competitive forces. I'll call such a very large change in one of these six forces a "10X" change, suggesting that the force has become ten times what it was just recently. What such a transition does to a business is profound, and how the business manages this transition determines its future."
At this point, saying that the stars have aligned for Plug Power would be an understatement. The inflection point that Plug Power is currently undergoing is a transformational process that will propel Plug Power to the forefront of the alternative energy space. Currently, every single positive fundamental breakthrough that Plug Power had going for itself is now standing right on its front doorstep, and the potential revenue generation from Plug's growing business is just plain outrageous.


Consider these recent positive developments:

-Plug Power will reach profitability for the first time in its existence during the second quarter of 2014, an estimate that was just moved up by management (from second half of 2014). Keep in mind that Plug Power needs to sell 3,000 Gen Drive forklift units to obtain profitability, and expects to obtain 70% of this figure during Q1 of 2014 alone.

-Plug Power recently initiated a brand new business division, "the turn-key solution". Plug Power is now in the business of providing and installing the hydrogen infrastructure necessary for a distribution center to operate fuel cell appliances, and will also be constantly supplying customers with hydrogen with a five year service contract. One turn-key deal is expected to generate $8 to $12 million in revenue. This business of recurring revenues will add more predictability to Plug's earnings, and the company has already booked $10 million in sales for this division in 2014 (and growing).

--Plug Power is already in the midst of testing a fuel cell based Transportation Refrigeration Unit for Sysco (SYY), who operates a massive fleet of these trucks that carry just about every item you buy from your local grocery store. There are more than 300,000 TRU trucks operating in the US alone, and here's a directory list that points to more than 75 US companies that solely operate these trucks. CEO Andy Marsh commented during Plug's recent business update that he believes the TRU market will quickly surpass Plug's already established material handling market.

-Plug Power recently received $3 million in funding from the Department of Energy to develop and test fuel cell range extenders for 20 electric powered FedEx (FDX) delivery trucks. The fuel cell extenders can extend the range of FedEx trucks by more than 100%. The efficiencies and cost savings produced by these range extenders should be very appealing to efficiency freaks UPS and Fedex.

-Plug Power is currently demoing fuel cell prototypes with FedEx for ground support equipment (airport tuggers, auxiliary power units), with a target market of 26,000 units. The company has already received a $2.5 million grant from the DOE for this project.

-Plug Power is exploring options to set up a joint venture to establish a footprint in Asia, after receiving countless requests to provide its product to businesses operating in the far east. This would be similar to Plug's joint venture with Air Liquide. The ongoing health concerns stemming from Asia's rampant pollution makes this a perfect time for Plug to enter this expansive market, offering a compelling value proposition.

-The Hypulsion JV with Air Liquide is targeting the European market, which is even larger than the US market. More than 6 million forklifts are operating across the globe.

-Plug Power recorded $61.8 million in bookings for 2013, with 80% of those bookings being recorded in the last three months of 2013. Explosive growth.

-Plug Power has increased sales, and reduced costs quarter over quarter for the past four quarters.

It's difficult to ignore all of these recent positive fundamental developments, and Akston's claim that these recent developments are nothing more than "fiction" is absurd.


Currently, a lot of the positive developments listed above regarding new market opportunities will not materialize into revenue for Plug until 2015 or later, with no specific timeline given from management. Focusing solely on Plug's already established forklift business, this company is still a monster. The sale of 3,000 units is needed to generate $70 million in revenue and book a profit for 2014. That means each gen drive unit for fork lifts costs consumers approximately $24,000. Plug Power's current US customers operate a combined 250,000 battery acid forklifts, and this number will continue to increase as the company adds customers who operate massive distribution centers, such as Amazon (AMZN) and other fortune 500 companies. Plug's current customer base represents a potential market of $6 billion, and having only sold approximately 4,000 units so far, there is clearly still ample room for growth. Plug catching just 3.5% of its customers forklift base represents $210 million in revenue, or 8,750 gen drive forklift units. Plug Power's current capacity can handle yearly revenues of $200 million. While chances of Plug obtaining 2014 revenues of $200 million are EXTREMELY slim, the fact is Plug is not that far off. The company has surprised investors before, and in a matter of a month, CEO Andy Marsh has released news not once, not twice, but three times that caused the stock to jump upwards of a $1.00.

If Plug records $200 million in yearly revenues, a 2X sale multiple would imply a value of approximately $4.00 per share (~ $3.00 per share counting for total warrants outstanding). This estimate is a stretch for 2014, but it is not a stretch for 2015. Keep in mind that this does not account for revenues generated from the already established turn-key division (up to $12 million per site), or any of the soon to be entered markets (TRUs, range extenders, ground support equipment, Asia), or any of the millions of battery acid fork lifts that Plug's Hypulsion JV is already targeting in Europe. It's futile to even attempt to put a value on shares of Plug at this point because the true revenue potential behind this company is far out of the ballpark.

Plug Power is short on cash, and the need to raise additional funds soon is a no brainer. While a secondary offering is a big possibility, it isn't Plug Power's only option, and this is evident since most cash strapped companies would issue a secondary offering the second their stock price jumped 100%, let alone 500%. This should give investors the hint that Plug Power is seeking other ways of raising funds without diluting shareholders. Plug Power and its drastically improved business is a new company from just a few months ago, and is barely recognizable. Lenders stopped lending to Plug Power when the company was trading for a few pennies a share, and was truly on the verge of bankruptcy. With a revitalization of Plug's core business, and a drastically improved outlook from just a few months ago, Plug Power should be capable of securing loans from banks, and I believe that's what they're attempting to do right now. A secondary offering and further dilution from Plug Power should not be ruled out by current and prospective investors, but the fact is that this would have already happened by now if Plug was that desperate for additional funds. The company's delay of issuing more shares points to the possibility of securing a new line of credit from a banking institution.


Shares of Plug power have been rocketing straight towards the moon since the new year was rung in. Shares of the company took five steps forward and zero steps backward, and that will change very soon. A healthy pullback/correction is in order for Plug Power, but the fair value of approximately $1.00 per share recently highlighted in Akston's bearish Plug article is disconnected from reality, and investors who are looking for an entry at that price level have a better chance of finding a one ended stick. Prospective investors should continue to monitor shares of Plug Power and view any pullback as a long term buying opportunity with multi bagger potential.

All information was sourced from the company's previous business update calls.