Despite Myrexis’ Appeal As A Value Investment, There's More To Consider

Following the broader market deep into the red throughout late May and June of 2012, the former drug developer Myrexis (MYRX) looks capable of a temporary relief rally despite the prevalent concerns about the company’s direction, but it will be difficult. After the company switched from a drug developer to an acquisition-based firm earlier this year, it became apparent that any future value creation would have to be done through some sort of transaction rather than through clinical trials.

While the company is currently trading at a market cap well below its tangible book value, and while there has been a significant amount of insider buying in recent history, the fact remains that Myrexis has not announced any partners for its dead portfolio of drugs and continues to accumulate substantial operating losses as time goes on. Despite the stock’s current appeal as a value investment, Myrexis shareholders will grow increasingly pessimistic the longer the company takes to produce any meaningful streams of revenue.

February 15 was when Myrexis unveiled the official suspension of all pre-clinical and clinical programs and hired the investment bank Stifel Nicolaus Weisel to find strategies that could enhance the company’s value. Quoting the press release:

“The Company is committed to conducting its review of potential alternatives as promptly as practicable. However, there can be no assurances that any particular alternative will be pursued or that any transaction will occur, or on what terms or as to its timing. Myrexis intends to provide additional information as appropriate.”

The market’s initial reaction was clearly positive, with shares rising over 12% on the announcement. The stock continued to hover just above $3/share for the next three months (likely supported by strength in the financial markets), but lost a lot of ground after an update on the company’s strategy was announced on May 11th. This press release noted the appointment of Richard Brewer as CEO and David Gryska as COO and included statements about the company’s intent to acquire commercial stage assets.

According to the balance sheet that was updated on March 31stof 2012, Myrexis had $99.01 million of total assets (about $96 million of which were cash and marketable securities) and a very small total of current liabilities, sitting at at $5.6 million. This implies that MYRX should be trading closer to a $93.4 million market cap (meaning ~$3.50/share) on the basis of Myrexis’ net worth, but investors seem rightfully focused on the operating losses that continue to eat away at what’s left of the balance sheet.

Consider the first quarter of 2012, where the company’s net loss totaled $10.692 million despite significant reductions in the company’s research & development expenses (reflecting the company’s discontinuation of its clinical development programs). If this burn-rate were to continue, it would give Myrexis a lifespan of just over two years with virtually no chance of appreciation in the stock. The one defense here is that the expected declines in R&D costs will buy the company more time. Nonetheless, this is just a slight reduction of pressure on Myrexis to take meaningful action.

While Myrexis’ acquisition-based strategy is backed by industry veterans, I would advise investors to be very cautious about buying MYRX in its current state. The value of the company’s asset pool is virtually meaningless without an eventual purchase mitigating the company’s steep operating losses. In addition, the value of the existing drug portfolio is questionable at best.

Myrexis’ oncology program included the Hsp90 inhibitor MPC-3100 and the cancer metabolism inhibitor MPC-8640, neither of which have progressed past phase I trials. In their latest 10-Q filing, there was little detail on how the company originally intended to bring the drugs into phase II trials, which could indicate a real lack of intrinsic marketing potential for the drugs themselves. There is also the company’s anti-interferon compound MPI-0485520 which just has proof-of-concept results from to animal studies – another hard sell considering how many alternative drugs can be partnered with. Perhaps the biggest disappointment of them all was the brain cancer drug Azixa, which was suspended in 2011 after the completion of phase II trials which demonstrated that it was well-tolerated in patients.

The company is now downsizing considerably, and expects to have only 10 employees (down from 30 at the start of 2012). In addition, there should be an enormous reduction in research & development expenses that should reduce the operational burn-rate significantly, but how exactly is Myrexis creating value for the shareholders, and how will the company generate any revenue down the road? Until that question is answered, MYRX stock is only valuable for the company’s financial assets. Even these are in a state of deterioration as the company continues to operate at a loss. We’ll see if Myrexis can make an acquisition worthy of justifying its $68 million market cap in the future, but it’s going to take a miracle to turn the company around. Trade accordingly.