The Rational Cloning: Weekly Ideas #6

Down the Howard Jonas Rabbit Hole (IDT + Rafael Pharmaceuticals)

Sep 22, 2021

Welcome to the 6th edition of the Rational Cloning Newsletter (Weekly Ideas Series).

Helping you discover the best ideas of others.

Happy cloning.

I’ve been a bit obsessed with Howard Jonas lately, who is one of the greatest under-the-radar capital allocators of all time.

I first stumbled across Jonas reading Old West Investment’s quarterly letters, which talks about Rafael Holdings. Naturally, that led me to IDT (and the rest of the complex, which includes Zedge, Genie Energy, IDW Media, Straight Path Communications, and Rafael Holdings), Howard Jonas’s books, articles, and a handful of write-ups / Twitter threads.

I decided to create a post of all the research/ideas on Howard Jonas I have so far. Hope you find it helpful.

Disclaimer: I do own RFL and IDT.

Overview

Howard Jonas is the Chairman of IDT, which he founded in 1990 and took public in 1996. According to Alta Fox, they estimate that under Jonas’s leadership, IDT stock has compounded at a 49% annual return over the last 10 years. In other words, if you bought $100 worth of IDT on January 2, 2012, it would be worth more than $4,500 today (assuming reinvestment into IDT shares).

In a similar vein to IAC, IDT has completed several spin-offs (five) and sold several other businesses that were incubated within IDT.

Some noteworthy Howard Jonas-led transactions include:

Sold Straight Path Communications (an IDT spin-off) to Verizon for more than $3 billion (Straight Path was spun-off from IDT at ~$6.00/share and was acquired for $184.00/share)
Sold a stake in net2phone to AT&T for $1.1 billion, ultimately buying it back a few years later for pennies on the dollar (and will now be spun-off to shareholders)

After studying Howard Jonas and reading his books, Alta Fox believes that he is ethical, does business the right way, and is extremely philanthropic (donating more than 20% of his income to charity annually, as mentioned in Howard Jonas’s book “On a Roll”).

All the points above can be found in Alta Fox’s write-up on IDT (slide 8).

IDT Corporation

“I think that NRS one day is going to be way more valuable than IDT is today. And if you’re buying into IDT today, you’re getting a great deal, because we’re getting three huge opportunities that already exist.” – IDT CEO, 3/4/21 earnings call

IDT is a collection of telecom and payments-related businesses (currently led by CEO Shmuel Jonas and CFO Marcelo Fischer). Howard Jonas is still involved as the Chairman.

The company’s businesses include:

National Retail Solutions (“NRS”)
net2phone
BOSS Money Transfer
Traditional Communications (Traditional Communications is a segment that itself is a collection of businesses)

Trading at a discount to IDT’s sum-of-the-parts (SOTP), Alta Fox has a base target of $87.75 by 2024 and a bull case of $124.96. It also expects NRS to be spun-off within 2 years and net2phone to be spun-off within 6 months.

IDT Resources

Alta Fox’s IDT Write-Up: Unlocking Value With One of the World’s Best Capital Allocators (Published 7/2/2021, Price Then: $39.33/share, Current Price: $41.96)
Sawbuckd’s Write-Up: IDT Corporation (IDT)
VIC Write-Up: IDT

Additional Resources

Alta Fox/Connor Haley’s Straight Path Write-Up (2013): Straight Path Communications Inc. (STRP): Undervalued, Misunderstood Micro-Cap Spinoff

Rafael Holdings/Pharmaceutical

Rafael Holdings (RFL) is a holding company that was spun-off from IDT in March 2018 with the following assets:

Majority interests in two promising pharma companies, Rafael Pharmaceutical (“Rafael Pharma”, “Pharma”) and Lipomedix.
A wholly owned venture focused on developing a pipeline of therapeutic compounds, The Barer Institute.
And a portfolio of commercial real estate properties.

Howard Jonas will eventually have a controlling stake in Rafael and has been consistently investing (through warrant exercises and capital raises). This is also where Jonas has been spending the majority of time and energy on.

Old West believes (as do I) that Rafael Holdings represents an extremely asymmetric opportunity since:

A portion of the company’s current value is protected by its portfolio of real estate properties, LipoMedix and The Barer Institute and
Rafael Pharmaceutical is potentially worth many, many multiples of its current market cap

Rafael Pharmaceutical’s 50% stake in Rafael Holding is the crown jewel: specifically, CPI-613 or Devimistat. The drug targets enzymes that are involved in cancer cell energy metabolism and are located in the mitochondria of cancer cells.

CPI-613 is currently undergoing numerous clinical trials:

Phase 3 trial for first line metastatic pancreatic cancer
Phase 3 trial for acute myeloid leukemia (AML)
Phase 2 trial for relapsed Burkitt’s lymphoma
Phase II Trial for Fist Line Locally Advanced Pancreatic Cancer
Five additional Phase 1 & 2 trials
Several preclinical studies

And several recent developments are of interest / exciting:

The Phase III trial was fully enrolled in August 2020, 18 months ahead of schedule.
In October 2020, the FDA granted fast track approval, and the company is expecting the data read-out in Q4 2021.
If successful, the treatment would become standard of care and CPI-613 would potentially become a $5+ billion per year treatment for Pancreatic Cancer alone. At a 3-6x Revenue multiple (historical multiple Big Pharma would pay for such an oncology asset), Rafael Holdings’ 50% stake in Rafael Pharma would be valued at roughly $7.5-$15 billion, or 11x-22x the current market cap (~$700M).
Recent hiring of Ameet Mallik to become Rafael Holdings CEO on on May 1st. He came from Novartis where he was the U.S. Head of Oncology, where he was probably making millions. Old West estimates that Rafael’s stock would need to “appreciate more than 5x from current levels for Mallik to “breakeven” on the move and to account for the opportunity cost of moving from a $15 billion Revenue business inside of Novartis”.
Rafael Holdings recently hired 3 executives with global biopharma experience. It seems that they are gearing up for commercialization.
Rafael Holdings announced that they are merging with Rafael Pharma. As part of the deal, they are acquiring 33.3% of Altira Capital (which owns 1% royalty of CPI-613 sales) for $30M, which implies a $9B valuation for CPI-613.
The Barer Institute (named after Sol Barer, co-founder of Celgene, which was acquired by Bristol-Myers for $74B in 2019) has already reached collaborative research agreements with leading scientists in the field of cancer at leading academic institutions (namely, Princeton). Jonas could be running the same playbook for the Barer Institute as he did for IDT: incubating businesses within and spinning them out later.

I could go on and on, but it seems like exciting things are happening at Rafael Holdings and this could be an interesting time to dig into Rafael more.

Links

Howard Jonas Quotes

Howard Jonas has written 3 books: I’m Not the Boss: I Just Work Here, On a Roll: From Hot Dog Buns to High Tech, and Faith and Depression.

I’m making my way through On a Roll, which is basically an autobiography and details his entrepreneurial journey from selling hot dogs in a hospital parking lot to battling At&T at IDT. Below are some of my favorite quotes so far:

The fact is, there are very few truly new ideas… I must readily admit that many of my best “innovations” were borrowed from things I’ve seen in other places or were suggested to me by others. I just knew how to run with them. (pg 30-31)
I also try to be open to new ideas. More than be open to them, I crave them. There’s nothing I prefer than to be in the company of creative people… Books, I think, are the best places to get ideas. I try to read at least one very two weeks. (pg 30)
Test before you spend. Test before you commit. Test. Test. Test. Test. (pg 44)
This lack of patience manifests itself even more ominously in our political and economic lives… Don’t we realize that good things come only with time and patience? (pg 56)
Wall Street can go to hell. I’m going to ignore the quarterly numbers and run my business for the long run. (pg 57)
Something that feels like fingernails on a blackboard to me is when I hear someone from IDT, especially a senior person, say he works for Howard Jonas. I always correct him, and ask him not to say that again. Rather, I ask him to say that he works with Howard Jonas. I similarly make sure to use the same words myself, and never say someone works for me. (pg 120)
I have always been averse to borrowing, unnecessary risk-taking, or taking in investors…. As my business grew from a one-man operation to a million-dollar operation, I never secured a bank credit line or sold stock. It has always seemed to me that the best, most rational way to grow is out of profits. (pg 134)
Even while pushing investors, I hated giving away equity and always looked to sell as little as I could for the fairest price I could obtain. (pg 144)
I am anything but arrogantly self-confident. In reality, I am usually as scared as a person left alone in the wilderness, and I’m in a constant state of anxiety over what to do next… I was always an outsider…. Finally, I was a stubborn non-conformist who had to do everything my own way. (pg 147-148)
A business exists to make money… Each of the thousands of decisions that must be made in running a successful business must, in the end, be governed by one overriding criteria - which course of action will maximize the ultimate profitability of the undertaking. (pg 186)
No one wants to write about the fact that I, and almost everyone who works for me, am obsessed. Obsessed with making IDT as profitable as it can possibly be. (pg 188)
And that’s the fun of it. To never give up. To be Don Quixote. To wake up every day ready to take on that old Meligoth, even when it looks like everything’s against you. If you reach way down inside, you can always come up with just that little extra you need. (pg 286)

The quotes should paint a clear picture: that Howard Jonas is an Outsider CEO who is full of grit & creativity, quite risk-averse, and doesn’t give a damn about convention. That’s the kind of CEO I want to invest with.

Podcasts on Howard Jonas

Links to Articles

Conclusion

I know I’ve only covered IDT and Rafael, but I think these 2 are pretty attractive opportunities at the moment. I will spend some time later on the rest of the complex and hopefully write something up.

In the meantime, happy cloning.

Twitter Threads