RAC - RitzyBusiness' Investment Case - 8 June 2023

Thanks to those who read my RAC Investment Case note from 8 June.

As suggested by @PatchKolan and @Wasabi193, I have started a new thread for focused discussion purposes on this topic.

Below is the full text of my previous note and as well as the original pdf copy (feel free to share).

• RAC - Investment case - 8 June 2023 - Final.pdf

Subsequent to this note, my buy order was hit yesterday. Making it 3 Fridays in a row that I have accumulated:

- 27 May at $1.55
- 3 June at $1.44
- 10 June at $1.33

The above pattern doesn't immediately look good to us long term shareholders. However, use the market forces to your advantage, and not the other way around. When an asset (one you have watched, researched, and are comfortable with the company and fundamentals) is on sale, that's the time to happily accumulate.

Hence the subtitle of my note "Race's IP is on sale". This doesn't just mean that the sp is a bargain (IMO) but also refers to CEO Damian bringing RAC out from "under the radar" and "marketing"/ "shopping" RAC in the US this month. This would not be happening at this time, unless RAC's house is in order and current data is compelling enough. Remember FDA's unofficial slogan "In God we trust, all others bring us DATA". And when small biotech (such as RAC) speaks to Big Pharma, what does BP often say, "that's nice information, come back when you have more concrete data". Damian has been around long enough to know how to maximise RAC's business impact.

Damian and team (including US based ex-Chair, John C) has been working very, very hard over there in the US. Dr Tillett stepping away from CSO/ED roles, ironically could be good for the company long term, but the market has been pricing this in as a negative (IMO). He would not have left if his 10% RAC shareholding is not in a good position, if it was not the right time and if it was not in safe pairs of hands (Damian and management team). My sense is that the Top 20 are net buyers at these levels (we will find out in the next quarterly report). And tax-loss selling will be over very soon (the sp turn around happened in mid-June last year). I won't be surprised if we get hit with an unexpected trading halt pending (positive) announcement/s any time soon.

Therefore, if you are still accumulating, don't be too cute with your buy orders ... don't haggle for pennies when the upside in measured in dollars, if not tens of dollars.

Have a very pleasant weekend.

---------------------------------------------------------------------------------------------------------------------------------------

Race Oncology (ASX.RAC) – Updated Investment Case “Race’s IPis on sale” – 8 June 2023

New CEO – We have the Right CEO, at the Right Time.

- In 2023, Damian Clark-Bruce is the right person at the righttime in RAC’s transformation to come in as CEO and MD. Just like Dr DanielTillett, back in 2019, was the right person at that time to come in asExecutive Director and CSO.

- Although a first time CEO, Damian has previously run USD3.4 –USD5 billion dollar global programs delivered products to FDA approval, designed CMC programs (chemistry, manufacturing, and controls which are crucial activities when developing new pharmaceutical products), built teams and have global collaborations both business and clinical; and know how to get the job done. Key companies (drugs) included: Biogen (Tysabri/Avinex), Novartis (Portfolio), Celgene (Zymposia), and Pharming (Global lead of Neuroscience). (Refer to LinkedIn for Damian’s profile: DamianClarke-Bruce - CEO & Managing Director - Race Oncology | LinkedIn )

- The only negative is he had never had to talk to retailinvestors before, which is a non-issue in my mind and can be learnt on the jobwith support of the greater Race team.

- In just a little over 4 months since Damian commenced as CEO,there has been plenty of work moving ahead, evolving and validating Target Product Profiles (TPP’s) and Clinical Development Plans (CDP’s) in cardio-protection, a new world class CMO starting in July, evolution of the strategic plan to help define regulatory pathways and improving IP position, and identification of an additional scientist.

- A collaboration meeting with City of Hope Medical Research Centrein the USA (COH) improving the chances of aligned business opportunities onFTO. A meeting with COH should have occurred some time ago, but it tookDamian’s new set of eyes and past experience to achieve this.

- Increased global presence, growing external advisory groupand discussions with Big Pharma (Damian shared on social media that he met witha Beigene representive at the Boston Biotech conference this week. If you wantto do China, you need to partner with Beigene!). At ASCO, he met with multiplecompanies including but not limited to Amgen, Aztec, Pfizer, Sanofi and EMDSerono.

- We now have over 10 US academic and clinical consultantsaligned with RAC, bringing their experience of drug development and clinicaltrials globally and US.

- IP and publication plans being optimised to maximise our valueproposition which may explain why RAC communications has not been as regular asbefore.

- There is an updated strategic plan due in July/August. Timewill tell how material this update will be. My sense is that is will besignificant to move the company to the next level and attract a new, more sophisticatedinvestor base.

Departing CSO – We now have the Best of Both Worlds

- Dr Tillett is not going anywhere and this scenario provides thebest of both worlds, where he can still continue to share with RAC management histhoughts and ideas (from a science and business perspective) as the number oneshareholder. His past problems were with some historic members of the Board andnot with the new CEO. There is no reason Dr Tillett and Damian will notcontinue to maintain an open and positive CEO / largest shareholderrelationship. Dr Tillett can now give his 2 cents worth to Damian just like anyoutside investor, however his 2 cents represents circa 10% of the company’sdilutied shareholder base and comes with a PhD in Biochemistry and MolecularBiology.

- As he is the single largest investor with the majority of hisholdings bought on market with his own money, his interest is now purelyaligned to us outside retail investors. Dr Tillett previously mentioned that RACmade up to 90% on this net worth / portfolio value. Granted, this was at ahigher share price than now, however, RAC would still be his biggest investmentfocus and hence his largest investment concern. He is out to maximiseshareholder value purely on a self-interest basis. Remember, Dr Tillett was a succesful investor before he was ever a biotech CSO or a ASX listed company director.

- But as a soon to be outside RAC investor, he can now be amore active commentator, as well as an activist investor if the situationwarrants for RAC. In particular, if there is a transaction on the table, he canspeak his mind and share his thoughts on valuation as any outside investor can.I personally find Dr Tillett engaging and approachable, he can simplify thescience unlike any other biotech executive I have come across.

- Dr Tillett has previous runs on the board in regards torallying retail shareholders to knock back an opportunistic takeover offer fora gold mining company he was a Top 20 investor in. For more information,research Egan Street Resources (ASX.EGA) where there was a takeover in July2019 which was unamiously approved by the board. Dr Tillett led a shareholderrevolt resulting in the final all script bid to be increased by 60% by the endof 2019.

- Dr Tillett’s resignation from Race may prove to be a blessingin disguise for us retail holders. He is now one of us, just a retail investor,but a very informed one at that.

- Although Dr Tillett has never disclosed his valuation opinionof RAC, he has supported the annual revenue potential of USD 5 to 8 billion asindicated in the Triangle Insight report released in Apil 2023. In fact he hasmentioned that it was conservative given the various discounting assumptionsapplied by Triangle Insights.

- He has also recently commented on Facebook (late May 2023) that“Race has two massive opportunities. The FTO and cardio-protectionopportunities are as big as they come in the pharma space. Any company would behappy to have just one such opportunity, to have two is beyond lucky. The onlydownside is it is hard to know which of the two is bigger, but this is really afirst work problem to have.” Therefore, if he suggests the cardio-protectionopportunity is conservative at Triangle Insights’ assessment of USD 5 – 8billion annual peak revenue, and that the FTO opportunity is just as large, ifnot larger, then you can do the maths yourself.

- I believe the market is irrationally pricing in a potentialsell-down by Dr Tillett. I argue that he could more likely be a buyer at theselevels, instead of a seller. He has after all bought more on market at muchhigher levels than today’s $1.37. He will be free to buy at will once he has officiallyleft RAC employment, so long as he no longer has inside information based onhis previous work.

- His position as the largest RAC investor, with previousinside knowledge and his track record of looking after the retail shareholderbase (in RAC and EGA) provides us with ‘optionality’ for when RAC comes intoM&A play or a licensing deal is announced. This optionality would not havebeen possible if he remained an insider.

Why is the share price so depressed?

- Churn of management with the hightened fear of a potential selldown from the former CSO, churn of board members, awaiting new strategicupdates, pausing of the share buy back, delay of AML EMD trial, delay ofpre-clinical and clinic announcements has resulted, in my opinion, impatienceand churn in the shareholder base. I sense this is similar to back in mid tolate 2019 (refer chart below), when Dr Tillett first got involved in RAC. Backthen there was impatience mainly due to the lagging share price, uncertainty instrategy and direction, the new strategy (5 Pillars) announced at the 2019 AGM,resulting in a churn of investors (out with the old, and in with the new …management, strategy and investor base).

- Coincidentally, that was around the time I first came acrossand invested in RAC in December 2019. I remember it was tough buying RAC at 15cwith very little volume on offer. Every purchase seemed to move the market inRAC. Looking back in highsight, I wished I just bit the bullet and bought asmuch as a could “at market” no matter how the price moved back then. And I havekept buying ever since, so my avearage cost is far above my 15c entry price.

- Fast forward 3.5 years, to mid-2023, we have new management,a refreshed Board and Chair, new strategy to be announced on a couple ofmonths, pre-clinical and clinic updates delayed slighty but should be outshortly. Feels like 2019 all over again. This is again resulting in a churn of impatientinvestors. Some investors liked the old management and old strategy and decideto leave the RAC register. Some investors can’t stand the time and the painassociated with biotech investing, which requires patient capital, and areunderstandably seeking other opportunities or cutting their loses. We can alsosee this in the Relative Strength Index (RSI) which is again in Oversold territorysimilar to back in 2019 when there was uncertainty and impatience on behalf ofthe investor base.

My view/ my take – what am I doing now?

- My view is that the current risk/ reward is skewed asymetricallyto the upside. I argue that the negatives keeping the share price down, i.e. overallbiotech market sentiment, increase in interest rates/ inflation, management andboard churn, and investor impatience are not fundament to the RAC story as acompany or as an investment opportunity. The science, market opportunities andthe cancer treating potential of Race’s Zantrene drug remain fully intact, andin fact I argue, have only increased over the past 12 months while the shareprice has lagged. Hence the current opportunity … RAC’s Zantrene IP is onsale!

- Revisit the Triangle Insights report and videopresentation (linked provided below) to remind yourself of the outsizedmarket of RAC’s Zantrene cardio-protective opportunities. “If anti-cancer efficacy isdemonstrated, sales for Zantrene could represent an overall peak commercialvalue of ~$1.7B USD in breast cancer alone within the US (~$3.4B USDglobally). Revenue may extend to $5-8B USD annually if expansion is achieved into additional identified cancer indications and further approvals are obtained in ex-US markets.”

§ e0c332e661c11f781398af97fd2fe108(sharelinktechnologies.com)

Extract of the Triangle Insights report (April2023)

- Looking at the 3 to 4 year chart (below), RAC returned 100xin 20 months, from a low of 4c in the second half of 2019 (when the previouschurn of management/board, strategy and shareholders occurred) to a high of$4.23 in March 2021.

- I believe we are in a similar situation today in 2023. Oncewe churn through the impatient investors stuck to the old strategy, managementand timeframes, I argue we could experience another long awaited rerate of theshare price. A 100x return from here in 20 months will take us to $137 by endof 2024/early 2025. This is my extreme bull case. My bull case is AUD20 to AUD50(with mid-point of AUD35 which is 25x from today) in this 20 month time frame.With my bear case of AUD1 which was a previous resistence/support level back in2020.

- The AUD35 price target represents an AUD5.7 billion(USD3.8 billion) market capitalisation based on current shares on issue. ThisUSD3.8 billion market capitalisation compares extremely favourably to theTriangle Insights report of a revenue potential for Zantrane’s cardioprotective opportunity of USD5 – 8 billion annually for peak sales. Applying a multipleof 3 to 5 times (which is the expected peak revenue mutliple range for abiotech buyout), this results in a valuation of USD15 billion to USD 40 billion(equating to a share price of AUD137 (100x) to AUD365 (266x)). This revenuepotential and resulting valuation is only for cardio-protection and does notinclude any other of RAC’s opportunities such as FTO. Some would arguethat my AUD35 target (market cap of USD3.8 billion) extremely undervaluesZantrene’s full commercial potential. I will be more than happy to be provedwrong.

- In summary, this is an effective downside of AUD 37 cents verus a AUD 33.63 upside. 90 to 1(reward to risk) on the upside. Hence, the best risk vs reward investment thatI can find on the ASX or elsewhere.

- I am continuing to top up where I can. Latest buy was lastweek at $1.44 (after buying at $1.55 the week before). And I have anothercheeky buy order in at a lower price, hoping and waiting to be hit.

Extractfrom the last Quarterly Report (28 April 2023): (Note the multiple expected updates by end June2023)

Disclaimer:

• The above is just me sharing my thoughts around investment ideas and does not constitute investment advice.
  
• Investing, in particular small-cap biotech is a high risk/ potentially very high reward endeavour.
• Only invest with funds you can afford to put at risk and seek independent financial and investment advice.
• Investment research and writing are both hobbies of mine, hence this newsletter is for information and entertainment purposes only.