|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|
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:
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:
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.
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.