Menachem Kranz is Founder and Chief Investment Officer of Ahava Investment Partners, LLC, an alternative investment management firm based out of Delray Beach, Florida. This past week we had the opportunity to interview Menachem and understand where his focus lies heading into 2013.
Timeless Wealth: Menachem, thank you for taking the time to participate in this interview.
Menachem Kranz (MK): My pleasure.
Perhaps we could start by having you give us a little bit of background on yourself?
MK: Certainly. I grew up in a Rabbi's family in Virginia and attended Rabbinical college. Studying why the law is a certain way or why it should be something different shaped a very analytical mind, though I later decided I did not want to be in the Rabbi business. So I looked for something else where this skillset would be useful.
I moved to Florida, and in 1997 I became a series 7 licensed broker. Shortly afterwards I joined a firm called Avalon Research Group, and we were sort of pioneers in what today is called independent research. My clients ended up being some of today's most successful, well-known, hedge fund managers. I covered a lot of those guys when they had a small amount of money back in the mid-'90s. What we did was develop a research product that was sold to these large hedge fund complexes and most of it was actually on the short side and, needless to say, when the clock turned in 1999/2000, it was a very, very good place to be. Everybody was looking for short ideas and we had lots of them. Some of the areas we covered were healthcare, biotechnology, finance, and technology, broadly speaking.
Seven years later, I became an investment banker and focused on raising capital for small and microcap companies. What I quickly learned was that most small cap and micro-cap companies are kind of 'orphaned' and that there is a tremendous information arbitrage. The big hedge fund managers whom I provided coverage for in my previous life showed no interest in small names where I saw opportunity. They were too small, too illiquid, lacking analyst coverage and institutional shareholders, or just 'too early'. The famous line was "call me back when it gets to a billion dollar market cap." I heard this over and over again. So I realized that if you could find a gem in either a small or microcap company, there was tremendous opportunity there. So shortly after that, I decided that's where I would focus. That's when I founded the investment management company, Ahava Investment Partners.
Are you strictly small-cap focused?
MK: On the short side we will go anywhere. On the short side in fact, I'm more mid cap inclined, but on the long side, we really focus on anything under a $500M market cap all the way down to a $5M market cap. So we're small and microcap focused on the long side.
Why is it that your short focus is predominantly in the midcap range?
MK: It's more difficult to have a concentrated position on the short side with small caps. The life-cycle of the investment is sometimes shorter. It's more catalyst- or event-driven. Often [with small or microcaps] you cannot get a locate, or a borrow; the cost of it is very expensive.
Can you talk towards what you look for on the long side and why that focus is on smaller names?
MK: What I have found historically is that management is key. Everybody says that and claims to know it, but I can't overemphasize its importance. Management's ownership is also critical - what percentage of the company do they own? We like to see management and insiders own at least 15%. What have they done successfully in the past, if anything? We look for these qualities in both management and their board. And of equal importance, does management really value their true cost of capital? In plain English, do they treat their stock like gold or not? Is the price of that stock important to them or do they just do lots of dilutive deals and imply otherwise?
When we look at product or service offerings, we look for disruptive technologies. Do they have a platform technology? We feel these are things that the market will really pay up for if the company can execute on them, regardless of whether this is a healthcare or technology name. Further, is the business scalable? Often small or microcap companies have good ideas but they're not truly scalable. And do they have the capital necessary to execute? In healthcare and biotech that's probably the biggest risk - running out of money before you get to the finish line.
I think few investors are focusing on identifying growth drivers in undiscovered companies and, for the most part, small and microcap companies are fairly undiscovered.
Can you talk towards a few names that you're most excited about heading into 2013?
As an investment banker at Ladenburg Thalmann, one of the names that we covered was Modigene, now known as Prolor. At the time the stock traded by appointment. There were days - even weeks - where I don't think it traded at all. It was highly illiquid, listed on the pink sheets, not even the glorified pink sheets but the real old-fashioned bulletin board pink sheets back then. I was trying to figure out why someone like Dr. Phillip Frost was involved with this company. As you might know, Phil sold Ivax to Teva (NYSE:TEVA), and has a long history of success in healthcare. Today he's their chairman and quite a successful investor. I had a chance to meet with both Dr. Abraham Havron, Prolor's CEO, and Shai Novik, the company's President, back in 2008, maybe even 2007. I spent a lot of time doing research on the company and I spoke to some of my old hedge fund clients about it in New York City, Boston, and San Francisco - all the corridors - and for the most part it was just dismissed as 'a science project' and just of no interest to them whatsoever.
I started buying the stock personally back in 2008 at around a dollar and then I think at some point before the end of that year, one of the few institutions that owned it, liquidated and the stock was trading for $0.50. By late 2008 I was buying the stock personally almost every single day. There were days where the only other buyer was Phil Frost.
By the end of 2009, Prolor initiated a phase 1 clinical trial for human growth hormone (hGH), their long-acting growth hormone, and a very well-known fund manager then said to me, "Hey, at least it's not a science project anymore." Over the next couple of years the stock was 'discovered'. Prolor completed a successful uplisting to the American Stock Exchange at ~$2.35 and listed duly on the Tel Aviv stock exchange. Prolor's stock ran as high as $8 and change.
Merck (NYSE:MRK) conducted one of the largest fertility trials in history and now has a successful, approved product that they sell based on the same technology as Prolor is developing for hormone growth deficiency. Given their safety profile, [the company] just seems to be light years ahead of a lot of other development-stage biotech companies, where there's just a lot more inherent risk. Prolor has brought together a strong management team, has a disruptive platform technology offering, and has raised capital with non-dilutive or minimally-dilutive deals from the start. These attributes were a green light.
What kind of a role did Phillip Frost's involvement in Prolor play?
MK: Whether you agree or disagree with Phil, he's proven himself in healthcare/biotech. In respect to Prolor, he's participated in every round and owns a little over 20% of the company. So he's put his money where his mouth is every single time. Further, he's helped build an impressive team - Dr. Havron, Prolor's CEO, was on the research team that developed the Multiple Sclerosis (MS) drug Rebif, which I believe is owned by Merck-Serono and is a multi-billion dollar franchise.
Why focus on Prolor heading into 2013?
MK: I think that 2013 will be an inflection point for the company and, with that, a lot of change as the company evolves and brings four clinical programs or studies on-line. I think a lot of institutions have looked at this name, have seen it, and have dismissed it as being 'too early.' I think a lot of that changes at some point next year. [Prolor] is still really an undiscovered company.
Prolor will be entering phase III studies for their hGH-product in adults; you've got an ongoing phase II for pediatrics and a factor VII product-candidate which probably will launch in a phase IIa trial. And then you've got perhaps obesity going to the clinic on that oxyntomodulin product as well. So there's just a lot going on and I think that there's going to be a point next year where investors will be forced to reckon with the company and say, "Wow, they've got multi-billion dollar potential markets that they're entering," where they could really be a leader and gain tremendous market share rather quickly.
As Prolor launches in four indications, what do you see as being the key value drivers?
MK: Obesity - everybody is talking about it, and we've seen a launch from Vivus (NASDAQ:VVUS), with Arena (NASDAQ:ARNA) not too far behind. But their safety profiles are dawning on investors, who are now starting to question the drugs' ability to sell in the market. It's still early, but Prolor's oxyntomodulin product will be different and, if taken seriously, could be a big driver of value. I think once it gets to the clinic, investors will take it seriously. The safety profile is so much better than some of these other drugs, and so I truly think they're going to get a lot of attention in this area.
I believe an even bigger driver will be Prolor's long-acting factor VII. The company's Factor VII is an anticoagulant for hemophilia patients, which is about a $1.3 Billion and growing market. It's dominated by Novo Nordisk (NYSE:NVO) and Baxter (NYSE:BAX). But as I'm sure you know, Novo Nordisk recently pulled a long-acting factor VII because of safety concerns. It was a phase III product. So it just seems to me that if the factor VII is as safe and as good as we think it is, it could be a big value driver for the company next year. Few investors I've talked to, even those who know of Prolor, seem to mention the company's potential in this area. A lot of the focus seems to be on hGH. So I think factor VII will be a surprise growth driver at some point fairly early next year as they initiate a phase II trial in that area. Moreover, one could argue that a successful factor VII program is worth the market cap of Prolor today.
Either way, I should mention the company's lead program in hGH. The question on a lot of people's minds is 'where is the partner?' We think it typically takes 18 months or so from when you first start talking to a potential partner to actually close a deal. Could it happen sooner? Sure. But for the most part I think historically these deals get done in 17, 18 months from beginning to end. I think that Prolor is probably within six months of closing a deal, maybe even closer. Regardless, my expectation is that a deal happens during the first half of 2013 that makes sense for Prolor, that's strategic in all ways.
Many pharma companies will probably want to look at the data that comes out of their Phase II study of hGH in children. The company will be able to share that data with them next year because it's an open label trial. So our expectation is that first half of 2013 a deal will get done, and that it will be a 'real' deal given the $3 Billion hGH market, and growing at ~10% a year.
There's been some speculation as to potential partners for Prolor. Would you care to comment on this?
MK: The names that just seem the most obvious to us are Teva, because Teva is always interested in bio better, bio similars. That's where they want to live so that's always a possibility, obviously with the Frost connection. But I think more interesting are companies like Novo Nordisk, Pfizer (NYSE:PFE) and Lily (NYSE:LLY). Novo Nordisk and Pfizer basically control 2/3 of the current hGH market: Novo Nordisk with their Norditropin, and Pfizer with Genotropin. Between those two companies it's likely we see some sort of partnership. Then, when you look at factor VII, Novo Nordisk's name again comes up. So that $1.3 Billion market for anticoagulant hemophilia, it's basically Novo Nordisk and Baxter that make up the largest components there. So it just makes sense to me on multiple fronts that Novo Nordisk is a really good potential partner here across the spectrum, not just for one product. The company may choose to only partner for one product, I don't know, but just when I think about it, it just seems to make more of a collaboration 'big picture' sense. Novo Nordisk and Pfizer seem to be the two most likely names.
To sort of return to the theme of value drivers: I think we're looking for a major revaluation of this company if, but likelier when, a partner emerges. Further, investors that previously overlooked the company will be forced to acknowledge Prolor as a contender in several large, unmet markets. Overall, I think 2013 will be a big year for the company.
Let's talk about Planet Payment. Who are they, what do they do, and why do you like this name?
MK: An idea that's off the well-worn path is Planet Payment . Most people have never heard of the company, yet they're a powerful company. Planet Payment is headquartered in Long Beach, New York, however they have offices all over the world. They are a payment processor with a focus on foreign currency transactions. So anything that involves FX, foreign currency transaction, that's really their specialty. They operate in 18 countries around the world and they do business with some of the biggest banks in the world.
They've invested a lot of money, over $70M, and many years into building their technology platform and they're now at the point where they are leveraging the infrastructure they've built over the years. So if you think about it, if you do $100 in revenue but it cost you $90 to keep your lights on, that's not a great business. Once you start getting $200-$300 in revenue, as long as your cost structure is intact, you have a much better business on your hands. I think that's where Planet Payment is at, and I think they're about to have a big breakout year in 2013 as well.
Planet Payment will be uplisting to the Global NASDAQ. Right now they are on the QX, the NASDAQ QX, and primary designation for trading is on the AIM exchange in London. So that's why they're on the NASDAQ QX in the U.S.
Why is 2013 going to be a big year for this company?
MK: So if we go back and look at their revenue, they've grown from $8.8M in '07 to $41.8M through the end of last year. So they've grown quite rapidly and they're at a point now where they're experiencing 'the network effect' - whereby they're seeing much more adoption by merchants and acquiring banks and processor partners to where it becomes sticky and everybody starts to want to use them. The space that they operate in, if you look at Visa (NYSE:V) and MasterCard (NYSE:MA), there's tremendous growth going on in payments and people using their plastic, but one of the big areas that's growing double digits is what's called 'global' or 'cross-border transactions.' This is where the Planet Payment's sweet spot is. They have the ability to process a payment in any native currency, at the point-of-sale. It's a currency neutral technology and nobody really has that.
If you look at the breakout of spending over the years, the US has dominated. It's changing to where there's a lot more credit card spending happening overseas in emerging markets and certainly places like Asia-Pacific, which is a big part of their business. If you think about the globalization of the world, cross-border transactions, where you and I are spending more money over there and they're coming here and spending more money - that's where Planet Payment is going to benefit.
Are there any barriers to entry for Visa, Mastercard, or similar names?
MK: I don't see Visa and MasterCard as competitors. Visa and MasterCard are card issuers. If you look just at Planet Payment's acquiring and processing partners, they're some of the largest companies in the sector. One of them is Global Payments (NYSE:GPN), another is Vantiv (NYSE:VNTV), which recently went public. Then, if you look at their bank partners and customers they're some of the largest banks: Citibank, Agriculture Bank of China, Hang Seng Bank, etc. So you've got some of the biggest banks around the world, and then the technology partners are companies like Micros, VeriFone, Agilysys. They're entrenched with some of the most influential players in the industry. It would take a large amount of money and significant time for somebody to get into the payment processing business and particularly acquire the technology that they have.
What's the exit strategy for this company?
MK: Planet Payment is a relatively obscure name. They're mostly owned by private equity funds, Fidelity and BlackRock in Europe, and a handful of institutional shareholders. So it's a very closely held name and some of the biggest early investors in payment processing are investors in this company and have been for years. Ultimately, I think that as their business really continues to ramp up and grow, they will be acquired. I would not be surprised if they are acquired by one of the top three acquiring/processing partners or even a card issuer like Visa.
Disclosure: Ahava Investment Partners is long Prolor Biotech, Planet Payment. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.