RAC ValuationI have long put forward my opinion that RAC should be trading at many multiples of the current share price, and that it appears to have departed from what I consider to be an appropriate price trajectory back in early 2021. This post is to outline the opportunity for RAC’s lead candidate “Zantrene” and to highlight the underlying analysis behind Pitt Street’s RAC Research Report where they state that the stock is “highly undervalued”. I firmly believe that RAC shares should currently be changing hands at 10 times their current value and that there are credible arguments to suggest that the share price should be above $30 today.
OpportunityZantrene is an anti cancer therapeutic that has been applied in trials in the clinic to over 1500 patients and was previously approved for use in France as a treatment for Acute Myeloid Leukaemia (AML). The action of Zantrene confounded its owners when it acted in a manner that is inconsistent with its original design and it fell into obscurity before being reborn by Dr Bill Garner and rolled into RAC. Since its original invention, science has made a number of discoveries that reveal Zantrene’s opportunities, effects and benefits. These include both FTO suppression and Cardio Protection.
Based on current knowledge the main opportunities for Zantrene have been identified as:
- A combination with or superior lone treatment for Breast Cancer chemotherapeutics in the $26Bn annual Breast Cancer market
- A combination with or superior lone treatment for Pancreatic/Colorectal cancer in that $21Bn annual market
- FTO treatment for a portion of the AML/Melanoma/Renal Cancer market representing a $2.6Bn per annum revenue opportunity for RAC*
- Cardio Protectiive action with improved cancer fighting effects* which incredibly represents a market opportunity that ranges up $100Bn
*Both of these have been demonstrated by independent and company preclinical work in cell lines and animal studies
ValuationVarious methods can be used to estimate a current value for the shares: DCF, Peak Sales Ratio with discounts, Stage Progress analyses etc
The Pitt Street Report provides a current DCF of $6.61 to $11.91 per share, equivalent to $3.4Bn to $6.1Bn market cap.
This analysis from Pitt Street involves a number of interesting conservative assumptions. I will lay these out to show what their underlying analysis says.
The analysis assumes:
- that RAC issues 125M shares to raise $450M for trials and development programs
- a 50% discount for failure risk (while also increasing the risk factor in the discount rate by 50%)
- that underlying expenses are double the industry benchmark
- That 50% of the revenue goes to an industry partner
Working through each of those in order:
- As laid out in the Pitt Street report, if the dilution of 125M additional shares is not required the value increases to $10.79 to $19.40 per share
- Removing the 50% discount for failure (because of extensive previous testing and the fact that the discount factor already accounts for increased risk) increases the estimated value range to $21.58 to $38.80 per share
- Assuming expenses at the industry average rate increases margin by 50% and increases the estimated share price to $32.37 to $58.20 per share
- Assuming the revenue is not shared 50:50 with an industry partner increases the estimated range to more than $64.74 to $116.40 per share
Note also that all of these numbers are the current DCF valuation i.e. the price that the shares would be trading at today if the market recognised the opportunity that Pitt Street thinks RAC represents. These prices are easily supported using a multiple of peak sales valuation discounted for trial stage and timing.
ScienceIn 2011, long after Zantrene had become dormant in the market, Professor Chuan He discovered reversible RNA methylation, and thereby set the foundation for a new field of science “Epitranscriptomics”. This year Professor He has been recognised with a major, prestigious international prize “The Wolf Prize” for this discover. Only now is the world of science recognising how important this is. The FTO gene is a significant gene in this field that has been shown independently to be important to cancer treatment resistance in more than 25 major cancers.
In 2020 Professor Jianjun Chen a foremost leader in m6A RNA methylation, announced the discovery that Zantrene is the most potent inhibitor of FTO known to science, and that it is effective at doses much lower than the doses required to create chemotherapeutic effects. Professor Chen has joined the RAC Scientific Advisory Board.
In 2021 Professor Chuan He replicated Professor Chen’s results for Zantrene.
In 2021 Professor Doan Ngo proved Zantrene’s cardio protection for chemotherapy in the laboratory showing that it also comes with enhanced anti-cancer benefits, and yesterday she was awarded the Australian Cardiovascular Alliance’s “Game Changer Award” for 2022 for this work.
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