Point to consider, and I don't want to derail, but it's possible for Rocky to be both one of the first LGBT-affirming musicals AND to be transphobic. The problem you run into with that show is that what was once bold and transgressive has now become trite and yes, possibly offensive. Frank is a walking collection of "predatory trans/bi person" stereotypes, and while depicting him was, at one point, daring, it can be VERY tricky to walk that line in an era of more gay and trans acceptance.
Think, by way of comparison, of Shylock. If you compare him to other contemporary portrayals of Jews, like Marlowe's Barabas, he's amazingly progressive. But apart from that one speech, he's still a pretty strong antisemitic stereotype, and it can be hard for directors to walk that line now. For like 300 years, they didn't even try, and Shylock was just "the evil Jew", and it's just as easy to accidentally make Frank "the evil queer".
That's why the 2001 RHS revival was, for my money, the only truly good modern production. They cut the gay camp angle in favor of the 60s sci-fi camp angle, they changed the tone from "These gays are having sex and it's WEIRD" to "These people are having sex and it's COOL", they made Frank the "manliest" character instead of mincing and effeminate, and they cast an actually gender nonconforming gay woman as Eddie.
But productions that don't take that level of care can very frequently wind up accidentally embracing some pretty regressive views. So I don't think your friend was as far off the mark as you might think. I don't know what their exact argument was, of course, but it's certainly something I've thought about.