Race Oncology Limited - Case Study

Written: 9 July 2023

Race Oncology (ASX:RAC) has been one of those stocks that has heavily outperformed the market during its golden years of 2019-2022. During this period their stock price went from ~$0.09 to above $3.00 per share, equating to a $450m market capitalisation for what is a relatively early stage biotechnology company.

This period of huge on-market success coincided with the arrival of their ex-Chief Scientific Officer Daniel Tillet, who later was appointed executive director of the business.

Let's dive into this example to see what threats Race Oncology exhibited during this period and what we can learn from it going forward.

Threat 1: On-market buying
This first threat was blatantly obvious to anyone who was already looking at Race during their early days (2019-2020). The first signal here occurred on 20 August 2019, when Race announced that prominent biotech investor Daniel Tillet was investing $0.56m into the company at a premium. This should definitely raise some eyebrows as most placements occur at a discount in order to attract investors. In some cases, there will be an above average discount in order to give further upside to strategic investors, in exchange for the tailwind of their “name” on the share register. As such, it was surprising that Daniel Tillet invested at an above-market price, as did existing Race directors for an additional $375k.

So Daniel's first involvement with Race was putting up $0.56m of his own cash.

Next, when he was appointed to the CSO role, his renumeration was structured as non-cash. He took a $0 salary in exchange for 2.5m options at $0.19. Great alignment with capital growth here. But what really stands out to me is the huge range of on-market purchases he has made over the years:
Safe to say that just this one director alone has contributed a huge amount (over $1m) of additional cash to increase his holdings in the company. This is in addition to the meaningful on-market purchases by other directors. Granted, his average entry price is very low given the early options etc, yet he could have definitely sat on the free stock and not fronted any additional cash if he wanted to.

Unfortunately, Daniel Tillet resigned from the Race Oncology board and stepped down from his role on 24 March 2023 following untenable differences with some members of the board. Yet he states that he does not have current intentions to sell his stock, so time will tell whether this magnitude of on-market support will be carried on by the new leadership structure.
About on-market buying
Threat 2: Spending to grow
Over the last 3 years, Race has done a great job at spending money on their clinical R&D relative to their overheads required to staff them. This means that shareholder funds are being directed into directly value accretive activities rather that wages, and administrative expenses.
  • FY23 (first 9 months): $6.699m spend on R&D vs $7.226m net operating cash outflow.
  • FY22 (full year): $5.356m on R&D and product manufacturing/opersting costs vs $6.308m operating cash outflow.
  • FY21 (full year): $3.662m on R&D and product manufacturing/operating costs vs $4.696m operating cash outflow.
As a proportion of operating cash outflow, Race has spent 92.7%, 84.9% and 77.9% on R&D and product costs. This is definitely a strong ratio that demonstrates that shareholder funds are being used in productive ways. There are definitely plenty of companies on the other end who do very little tangible product/asset development work yet end up paying generously for director's wages.

For most growth companies, keeping an eye on this ratio is very important and tells us how capital efficient the team is, which directly impacts how much shareholders are likely to be diluted over the years.
About spending to grow
Threat 3: Investor Transparency
I already used this point in the article discussing how management respects investors by being transparent. You can read the article here.

To summarise, Race under Daniel Tillet executed one of the best retail investor engagement programs I have ever seen. The attention to detail across every shareholder was highly impressive and gave me confidence that their management team truely had every investor's interests in mind.

Specific acitivities included:
  • Almost 350 messages on Hotcopper via Race's authorised representative account to answer investor questions and provide helpful information
  • An in person investor briefing in Melbourne
  • Video updates at key announcements
These initiatives all take a lot of time, and are discretionary tasks that management didn't necessarily have to do. Yet, in doing so, they offered shareholders a better chance at understanding Race's progress and technical position. This creates more informed investors who can better protect themselves of any downside and identify upside.
About transparency
Area of Concerns - Key Director Resignation
Although Race demonstrates these areas of strengths and holds a very engaged investor audience, it is worth noting that many investors disproportionately backed ex-CSO Daniel Tillet. Daniel was also highly active at shareholder events and was also the one communicating to investors via RAC's old hotcopper representative account. This generated a lot of rapport and trust with shareholders. His resignation however, may signal a change in engagement strategy by the company which is likely to disadvantage retail shareholders. Furthermore, his departure raises the question as to why he had serious disagreements with members of the board. Together this may cause some shareholders who followed Daniel to reduce their exposure to Race, creating a negative environment for the share price.

These points are uncertain in nature so shouldn't be the dominating factor in our decision making. What the new management team does going forward will be very telling if the progress Daniel made in building a market-darling biotech can be continued and more shareholder wealth created.
My concluding thoughts

Race Oncology is a rare Triple Threat. The company holds 3 key threats - director on-market buying, investor respect and spending to grow. Although no one can tell the future, the presence of these three factors gives us confidence that directors are running the company in the right direction and showing signs of quality leadership.

Yet we must pay attention to the new leadership team how that a key member of the old guard resigned.

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