MYREXIS INC MYRX
April 12, 2012 - 1:13pm EST by
wolverine03
2012 2013
Price: 3.05 EPS $0.00 $0.00
Shares Out. (in M): 27 P/E 0.0x 0.0x
Market Cap (in $M): 82 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): -21 TEV/EBIT 0.0x 0.0x

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  • Discount to Liquidation Value
  • Biotech
  • Net-Net
  • Potential Sale

Description

 

Thesis

Myrexis trades at a negative enterprise value and a discount to its current liquidation value with a high likelihood of one of three catalysts for value realization occurring in 2012:  1) the sale of the company, 2) the liquidation of the company, or 3) some combination of the first two options (e.g., special dividend consisting of the bulk of the Company’s cash and one or more securities that would pay off as a MYRX partner achieves milestones for development of MYRX’s current clinical and preclinical programs).  Oh yeah, it’s biotech, and not terribly liquid, so many of you can stop reading now.

 

Situation Overview - This Time It’s Different…Seriously

MYRX has basically been a perpetual net-net since being spun out of Myriad Genetics (under the name Myriad Pharmaceuticals) in June 2009 and we suspect a long and distinguished list of investors has lost money betting that the discount to NAV gave them a free option on MYRX’s pipeline, or that the gap between NAV and market would carry them through to the next piece of good news on the pipeline.  Nevertheless, we’re not going to let that stop us from throwing our hat in the ring.

To date the Company has made a valiant effort to close the valuation gap.  The first attempt to close the gap was a brief –but ultimately failed—attempt to dilute shareholders by ~40% in a stock deal to acquire a pre-revenue business, Javelin Pharmaceuticals.  Unable to close the gap in one fell swoop, MYRX instead opted—more successfully this time—to grind it out via the path of steady cash burn to the tune of ~$90 million cumulative burn from June 2009 to year-end 2011.

So why now given the past performance?  Because a lot has changed in the last year.  Here are the highlights:

  • March 2011 – MYRX announces a plan to reduce its workforce by ~40% in order to focus resources on its lead product, Azixa, and second product candidate, MPC-3100.
  • June 2011 – MYRX reports mediocre phase II results for the Company’s lead product candidate, Azixa.
  • July 2011 – Adrian Hobden resigns as CEO and a member of the Board.  Robert Lollini, previously the CFO, is named interim CEO.  [Speculation here, but doesn’t seem far-fetched bullet point #2 and #3 are related and that the CEO’s departure involved a disagreement as to the best path forward re:  Azixa.]
  • September 2011 – Lollini appointed full-time CEO.  As part of a comprehensive review of MYRX’s pipeline, the Board decides to suspend development of Azixa in order to focus on the Company’s other development-stage assets.
  • October 2011 – MYRX appoints Jason Aryeh to the Board.  Aryeh is appointed as part of a standstill agreement with MSMB Healthcare.  In short, MSMB appeared to be prepared to run a proxy contest to win 2 board seats.  MYRX struck an agreement whereby MSMB got one seat (the nominee who was not employed by MSMB) and in turn agreed to limit their ownership to under 5% of MYRX.  As an aside, it’s not often you see an activist situation where the activist won a board seat without ever having a filing requirement (i.e., MSMB never filed a 13G or 13D so presumably their ownership was under 5% when they struck this agreement).  This leads us to believe that A) the MYRX Board welcomed the change and it potentially provided cover for the next few bullet points, B) MYRX suspected its investor base would be inclined to support MSMB in the proxy contest, or C) some combination of A and B.   Separately, we’d recommend looking at the history of other Companies where Aryeh has been a board member (see LGND, NABI).
  • November 2011 – MYRX announces a further reduction in its workforce (an additional 20% of employees).
  • February 2012 – MYRX announces that it has suspended all development activities (both pre-clinical and clinical).  In addition, the Company announces that it has retained an investment bank to evaluate strategic alternatives.
  • March 2012 – MYRX announces a plan to reduce its workforce to 30 employees by March 30 and then to 10 employees by June 30.  Also limits equity ownership to below 5% of shares outstanding in order to prevent restrictions on the use of its substantial NOLs.

In sum, the Company has taken actions that indicate the Board and management are trying to preserve value.

 

What You Pay and What You Get

Current valuation is as follows:

 

 So what do you get?  Most significantly, you get the following balance sheet:

 

 

It’s a straightforward enough balance sheet and nothing particularly exotic, as far as we can tell, in the marketable securities category.  You also get the following options for free (although they are getting less free, which we’ll deal with momentarily):

 

What’s It Worth – Downside

We think a reasonable downside scenario has the company continuing to operate through the end of CY 2012 before deciding to liquidate.   That’s about 10 months to exhaust “strategic alternatives.”  In reality they’ve been exploring partnerships for their drugs for longer than that, so they will have had over a year to gauge interest.  In that scenario the downside is as follows:

 

Here’s how we get to the cash burn numbers above:

 

It’s worth noting that Board members (although mainly Aryeh) purchased shares in the last few months from the $2.50s - $2.70s.  Seems unlikely they’re playing for the $2.89 liquidation value above. 

 

What’s It Worth - Upside

Upside is harder to say.  Nobody will confuse us for biotech experts, but here’s what we’d say on the pipeline.  The company has a history of shutting down development of candidates to focus on other areas.  Sold off an Alzheimer’s drug and shortly thereafter it failed a phase III trial; refocused on HIV but eventually ceased development to focus on oncology; poor Azixa results so refocused on assets in earlier stage of development; eventually ceased development of everything.  So there’s not a lot to point to in terms of huge success in terms of clinical programs.  That being said, the Company has spent ~$115mm in R&D to develop these programs since 2009.  Do we think the pipeline is worth that spending?  No, and certainly we’re not suggesting that you can value binary outcome spending on something akin to replacement cost.  But the company has thrown a lot of money at a lot of different problems, so you don’t need to have a lot stick for this to work out fine.  But let’s say the pipeline is worth no upfront cash, what is the upside:

  1. Company sells itself sooner – If buyer pays a $0 enterprise value it’s worth up to ~$3.44, or 13% upside.
  2. Company “sells” clinical programs for no upfront cash and liquidates sooner – Company is worth up to ~$3.26, or 7% upside.

In addition to the 7% - 13% upside you get in the form of a cash distribution, you would likely receive a security (CVR, or something along those lines) that would pay milestones and / or royalties to the extent that a buyer elects to, and is successful in, further developing MYRX’s clinical assets.  So you’re getting 7% - 13% upside and a “free” long-tailed option on the clinical assets (as an aside we doubt this instrument would be tradeable).

We think it’s not difficult to imagine some amount of upfront cash for any clinical programs that are sold.  Is there a natural buyer for the entire company?  No, we don’t believe so.  That’s not to say that someone couldn’t buy the whole thing and just kill the pieces they don’t want, our point is simply that we can’t say X & Y have to own this Company.  If the Company is successful in selling any of its pipeline assets we’d expect the upside to be above the two scenarios we outline.  Note:  we are assuming that the Company’s NOLs are sufficient to offset the tax impact of any gains from selling clinical assets. 

 

Risks

  1. Biotech management teams like science.  It’s biotech:  there is a non-zero chance the Company buys something with its cash or spends to develop its pipeline.  The range of acquisitions varies from probably not a terrible idea (e.g., see Footstar / CPEX where you acquire a royalty using a bunch of debt and monetize MYRX NOLs with minimal cash outlay) to very bad for shareholders (e.g., MYRX acquires preclinical assets).  We think this risk is mitigated by a) the Company’s actions to date (i.e., they will have a skeleton staff by June, they have said they will partner and not spend on development), b) an activist on the Board, and c) a shareholder base (e.g., BVF, Bulldog) that is not afraid to make itself heard. 
  2. Duration of Strategic Alternatives.  The Company could drag out strategic alternatives longer.  We think this is mitigated by many of the same factors mentioned before, namely an activist on the Board and vocal shareholders.  In addition, an $11.5mm annual burn rate for a company that does no R&D and has a staff of 10 people strikes us as unreasonably high, although we’ve used that number since it is effectively what the company has guided to in its restructuring.  There are examples of similar busted biotechs that burn less and we believe our estimated run rate burn rate may prove conservative.

 

Conclusion

To sum it up:  low / protected downside to a reasonable downside scenario, low correlation, engaged shareholder base to keep management honest, activist with a Board member who has shown a willingness to sell assets / companies, and asymmetric return to the upside by monetizing the pipeline.

Catalyst

  • Sale of the Company
  • Sale of / partnership for pipeline drug(s)
  • Liquidation of the Company
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    Description

     

    Thesis

    Myrexis trades at a negative enterprise value and a discount to its current liquidation value with a high likelihood of one of three catalysts for value realization occurring in 2012:  1) the sale of the company, 2) the liquidation of the company, or 3) some combination of the first two options (e.g., special dividend consisting of the bulk of the Company’s cash and one or more securities that would pay off as a MYRX partner achieves milestones for development of MYRX’s current clinical and preclinical programs).  Oh yeah, it’s biotech, and not terribly liquid, so many of you can stop reading now.

     

    Situation Overview - This Time It’s Different…Seriously

    MYRX has basically been a perpetual net-net since being spun out of Myriad Genetics (under the name Myriad Pharmaceuticals) in June 2009 and we suspect a long and distinguished list of investors has lost money betting that the discount to NAV gave them a free option on MYRX’s pipeline, or that the gap between NAV and market would carry them through to the next piece of good news on the pipeline.  Nevertheless, we’re not going to let that stop us from throwing our hat in the ring.

    To date the Company has made a valiant effort to close the valuation gap.  The first attempt to close the gap was a brief –but ultimately failed—attempt to dilute shareholders by ~40% in a stock deal to acquire a pre-revenue business, Javelin Pharmaceuticals.  Unable to close the gap in one fell swoop, MYRX instead opted—more successfully this time—to grind it out via the path of steady cash burn to the tune of ~$90 million cumulative burn from June 2009 to year-end 2011.

    So why now given the past performance?  Because a lot has changed in the last year.  Here are the highlights:

    • March 2011 – MYRX announces a plan to reduce its workforce by ~40% in order to focus resources on its lead product, Azixa, and second product candidate, MPC-3100.
    • June 2011 – MYRX reports mediocre phase II results for the Company’s lead product candidate, Azixa.
    • July 2011 – Adrian Hobden resigns as CEO and a member of the Board.  Robert Lollini, previously the CFO, is named interim CEO.  [Speculation here, but doesn’t seem far-fetched bullet point #2 and #3 are related and that the CEO’s departure involved a disagreement as to the best path forward re:  Azixa.]
    • September 2011 – Lollini appointed full-time CEO.  As part of a comprehensive review of MYRX’s pipeline, the Board decides to suspend development of Azixa in order to focus on the Company’s other development-stage assets.
    • October 2011 – MYRX appoints Jason Aryeh to the Board.  Aryeh is appointed as part of a standstill agreement with MSMB Healthcare.  In short, MSMB appeared to be prepared to run a proxy contest to win 2 board seats.  MYRX struck an agreement whereby MSMB got one seat (the nominee who was not employed by MSMB) and in turn agreed to limit their ownership to under 5% of MYRX.  As an aside, it’s not often you see an activist situation where the activist won a board seat without ever having a filing requirement (i.e., MSMB never filed a 13G or 13D so presumably their ownership was under 5% when they struck this agreement).  This leads us to believe that A) the MYRX Board welcomed the change and it potentially provided cover for the next few bullet points, B) MYRX suspected its investor base would be inclined to support MSMB in the proxy contest, or C) some combination of A and B.   Separately, we’d recommend looking at the history of other Companies where Aryeh has been a board member (see LGND, NABI).
    • November 2011 – MYRX announces a further reduction in its workforce (an additional 20% of employees).
    • February 2012 – MYRX announces that it has suspended all development activities (both pre-clinical and clinical).  In addition, the Company announces that it has retained an investment bank to evaluate strategic alternatives.
    • March 2012 – MYRX announces a plan to reduce its workforce to 30 employees by March 30 and then to 10 employees by June 30.  Also limits equity ownership to below 5% of shares outstanding in order to prevent restrictions on the use of its substantial NOLs.

    In sum, the Company has taken actions that indicate the Board and management are trying to preserve value.

     

    What You Pay and What You Get

    Current valuation is as follows:

     

     So what do you get?  Most significantly, you get the following balance sheet:

     

     

    It’s a straightforward enough balance sheet and nothing particularly exotic, as far as we can tell, in the marketable securities category.  You also get the following options for free (although they are getting less free, which we’ll deal with momentarily):

     

    What’s It Worth – Downside

    We think a reasonable downside scenario has the company continuing to operate through the end of CY 2012 before deciding to liquidate.   That’s about 10 months to exhaust “strategic alternatives.”  In reality they’ve been exploring partnerships for their drugs for longer than that, so they will have had over a year to gauge interest.  In that scenario the downside is as follows:

     

    Here’s how we get to the cash burn numbers above:

     

    It’s worth noting that Board members (although mainly Aryeh) purchased shares in the last few months from the $2.50s - $2.70s.  Seems unlikely they’re playing for the $2.89 liquidation value above. 

     

    What’s It Worth - Upside

    Upside is harder to say.  Nobody will confuse us for biotech experts, but here’s what we’d say on the pipeline.  The company has a history of shutting down development of candidates to focus on other areas.  Sold off an Alzheimer’s drug and shortly thereafter it failed a phase III trial; refocused on HIV but eventually ceased development to focus on oncology; poor Azixa results so refocused on assets in earlier stage of development; eventually ceased development of everything.  So there’s not a lot to point to in terms of huge success in terms of clinical programs.  That being said, the Company has spent ~$115mm in R&D to develop these programs since 2009.  Do we think the pipeline is worth that spending?  No, and certainly we’re not suggesting that you can value binary outcome spending on something akin to replacement cost.  But the company has thrown a lot of money at a lot of different problems, so you don’t need to have a lot stick for this to work out fine.  But let’s say the pipeline is worth no upfront cash, what is the upside:

    1. Company sells itself sooner – If buyer pays a $0 enterprise value it’s worth up to ~$3.44, or 13% upside.
    2. Company “sells” clinical programs for no upfront cash and liquidates sooner – Company is worth up to ~$3.26, or 7% upside.

    In addition to the 7% - 13% upside you get in the form of a cash distribution, you would likely receive a security (CVR, or something along those lines) that would pay milestones and / or royalties to the extent that a buyer elects to, and is successful in, further developing MYRX’s clinical assets.  So you’re getting 7% - 13% upside and a “free” long-tailed option on the clinical assets (as an aside we doubt this instrument would be tradeable).

    We think it’s not difficult to imagine some amount of upfront cash for any clinical programs that are sold.  Is there a natural buyer for the entire company?  No, we don’t believe so.  That’s not to say that someone couldn’t buy the whole thing and just kill the pieces they don’t want, our point is simply that we can’t say X & Y have to own this Company.  If the Company is successful in selling any of its pipeline assets we’d expect the upside to be above the two scenarios we outline.  Note:  we are assuming that the Company’s NOLs are sufficient to offset the tax impact of any gains from selling clinical assets. 

     

    Risks

    1. Biotech management teams like science.  It’s biotech:  there is a non-zero chance the Company buys something with its cash or spends to develop its pipeline.  The range of acquisitions varies from probably not a terrible idea (e.g., see Footstar / CPEX where you acquire a royalty using a bunch of debt and monetize MYRX NOLs with minimal cash outlay) to very bad for shareholders (e.g., MYRX acquires preclinical assets).  We think this risk is mitigated by a) the Company’s actions to date (i.e., they will have a skeleton staff by June, they have said they will partner and not spend on development), b) an activist on the Board, and c) a shareholder base (e.g., BVF, Bulldog) that is not afraid to make itself heard. 
    2. Duration of Strategic Alternatives.  The Company could drag out strategic alternatives longer.  We think this is mitigated by many of the same factors mentioned before, namely an activist on the Board and vocal shareholders.  In addition, an $11.5mm annual burn rate for a company that does no R&D and has a staff of 10 people strikes us as unreasonably high, although we’ve used that number since it is effectively what the company has guided to in its restructuring.  There are examples of similar busted biotechs that burn less and we believe our estimated run rate burn rate may prove conservative.

     

    Conclusion

    To sum it up:  low / protected downside to a reasonable downside scenario, low correlation, engaged shareholder base to keep management honest, activist with a Board member who has shown a willingness to sell assets / companies, and asymmetric return to the upside by monetizing the pipeline.

    Catalyst

    • Sale of the Company
    • Sale of / partnership for pipeline drug(s)
    • Liquidation of the Company
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