Description

Recommendation: Long Rafael Pharmaceuticals (RFL)

This idea is fairly simple so it merits only a brief write-up. It is not that liquid, so it is likely only appropriate for smaller funds or PA’s given the trading dynamics. Rafael Holdings is a recent spin-off of IDT, similar in some respects to Straight Path. It is a holding company consisting of cash, real estate, a stake in a pharmaceutical venture, and some de minimis investments in hedge funds. It has one of the cleaner balance sheets I have ever seen for a spin-off (i.e., no debt, only $627k of liabilities which are mostly accounts payable). Based on the current trading price of $7.35, you are paying effectively zero for the call option of a pharmaceutical stake.

The company holds $44mm of cash and equivalents, $4mm of investments in hedge funds, $2mm of illiquid securities, $50mm book value of real estate (largely a building which serves as IDT’s headquarters), and a stake in Rafael Pharmaceuticals, which is, according to the Form 10, “a clinical-stage, oncology-focused pharmaceutical business committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells. Rafael Pharmaceuticals’ primary objective is to develop highly selective and effective oncology agents with minimal toxicity to normal cells and tissues. Rafael Pharmaceuticals’ proprietary approach to targeting cancer metabolism has led to two distinct technology platforms: its altered energy metabolism directed, or AEMD compounds, and a lipid nanoemulsion-based drug delivery system.”

Per the RFL April 2018 shareholder letter, "Based on the agency’s [FDA's] feedback, Rafael is planning to initiate Phase III registrational trials for both pancreatic cancer and acute myeloid leukemia by mid-2018."

http://rafaelpharma.com/wp-content/uploads/2018/04/Rafael_Pharmaceuticals_Stockholder-Letter_April-2018_SL.pdf

Howard Jonas, the founder and chairman of IDT, owns ~20 of the common stock of Rafael, but controls ~70% of the voting rights. Additionally, he separately owns a 10% stake of the MidCo entity which controls RFL's stake in Rafael Pharmaecuticals.

According to a WSJ profile from last year, "Mr. Jonas’s latest interest is far from telecom: Drug developer Cornerstone Pharmaceuticals Inc. is taking up 90% of this time."

https://www.wsj.com/articles/how-telecom-speculator-howard-jonas-made-billions-from-verizon-at-t-1494525703

I would frame this investment as effectively investing in a mix of cash + assets while getting the pharmaceuticals business for close to free. Checks with family / friends in the clinical oncology space indicate that the research Rafael is pursuing is a promising area in the space and could potentially prove very valuable, but obviously, as with any early stage biotech concern, there can be no assurance it will end up as such.

In terms of valuation, there was also an interesting tidbit in the 2017 IDT 10-K indicating one milestone they have contemplated for the RFL business is an IPO in the $500mm range:

"In addition, IDT-Rafael Holdings had the contractual right to receive additional shares of Rafael Pharmaceuticals representing 10% of the outstanding capital stock of Rafael Pharmaceuticals that will be issued upon the occurrence of any of the following: (i) Food and Drug Administration approval of a Rafael Pharmaceuticals drug application, (ii) an initial public offering of Rafael Pharmaceuticals at a valuation of over $500 million, or (iii) a sale of Rafael Pharmaceuticals above certain valuations."

https://www.sec.gov/Archives/edgar/data/1005731/000121390017010610/f10k2017_idtcorporation.htm#a_009

Another interesting leg to this story is the caliber of people involved, both from the medical community and the investment community. In a prior capital raise for Rafael (previously known as Cornerstone), Michael Steinhardt and Mortimer Zuckerman (co-founder of Boston Properties) both invested.

https://www.prnewswire.com/news-releases/idt-corporation-announces-investment-in-cornerstone-pharmaceuticals-300359699.html

http://rafaelpharma.com/leadership/executive-management/

http://rafaelpharma.com/wp-content/uploads/2017/05/Rafael-Website-CPI-613-Fact-Sheet-2.pdf

What's it all worth?

It's anyone's guess as to what the pharmaceutical stake is worth, but precedent transactions, capital raises, and public market offerings indicate that if the pharma venture shows material promise, it could be worth $500mm+, potentially even in the billions of dollars. The moral of the story here is you are paying very little for a pool of cash and other hard assets in combination with a call option on what could be a very valuable pharmaceutical stake, investing alongside a proven value creator in Howard Jonas and numerous savvy investors who have made private, direct investments into the pharmaceutical venture.

Appendix:

It should be noted that RFL does not directly own all of the pharmaceutical stake; Howard Jonas personally owns a portion of the MidCo, and there are some other minority investors who have participated in previous capital raises. Additionally, the majority of RFL's stake is in convertible preferred stock, so the ultimate value will depend on the event path of the pharmaceutical venture. I don't think it's necessary to go through the mental gymnastics of trying to game-out the different scenarios of what might become of the Rafael stake as you are currently paying effectively zero for it, and if it works even modestly well, RFL will appreciate materially.

Bio of Vice Chairman of the Board (very successful in the Pharma space):

Jean-Pierre Sommadossi, Ph.D.: Renowned entrepreneur and Principal Founder, Chairman and CEO of Atea Pharmaceuticals, Inc. Dr. Sommadossi is also the Principal Founder of Idenix Pharmaceuticals, Inc. and a Co-Founder of Pharmasset, Inc., both of which had successful multi-billion dollar exits. Dr. Sommadossi has agreed to serve as Vice Chairman of the Board.

Risks:

1) If the pharmaceutical stake does not pan out, best case scenario is probably a flattish return (not necessarily horrible in the current market environment - would think of it the same way as many investors think about investing in SPAC's pre-deal)

2) I noted above that Howard Jonas is a proven value creator – I believe this is true, but he occasionally has put his own interests ahead of those of other shareholders (as I'm sure some on VIC are familiar with). In 2008, he decided to accept his salary in stock, effectively diluting shareholders at almost the nadir of the stock – that being said, you can argue this was still a noble, bet on the company type move to an extent.

Catalyst

1) Continued progress in the oncological research

2) Sale or IPO of Rafael Pharmaceuticals

3) Broader investor discovery and understanding of RFL