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Myrexis (MYRX) update

September 17, 2011

Myrexis filed its 10k for the year ending June 30, 2011 this week so I thought this would be a good time to review this investment. Myrexis, if you remember, was spun off from Myriad Genetics at the end of June 2009. At the time it had $169 million in cash and marketable securities (about $7.04 as share), a small amount of fixed assets and an ongoing R&D effort with a focus on oncological pharmaceuticals. Fast forward to today; cash and marketable securities on hand has dwindled to about $108 million (my estimate), last July the CEO was cashiered and replaced with the former CFO and in September they suspended development on their primary oncologyl drug candidate, Azixia. Not exactly positive news after 9 quarters as an independent company. But let’s go back and look at my original evaluation of the company and then how I see it now.

I originally was interested in the company because it was selling at less than 2/3 of net cash.  After the spinoff, shares almost immediately traded down from an initial $7.00 level to a range of $4.00-$4.50 and stayed there for a couple of months. I picked up most of my holdings during this period. Then in September of 2009 shares ran up to over $6.50 in a week. They have been gradually declining ever since and currently trade around $2.90. The way I looked at Myrexis when I invested was simply a company with 2 assets, one, the cash on the balance sheet, and the second, the Intellectual Property (IP), for lack of a better term, that their research & development produced. At spinoff, the company had about $188 million in book value (about $7.88 per share), most of this cash, plus certain of Myriad Genetics oncology R&D efforts (what I will call the IP assets). Management’s task was simple, transform the cash (through R&D) into an IP asset, in whatever form, that had a greater value than the initial cash, creating a return for shareholders. After all, that’s what we investors look for, a return on our assets as well as a return of our assets, right? Unfortunately I’m never quite convinced that management understands this basic concept.

How is the ‘transformation’ going? As might be expected it’s not yet clear. Below is a graphic that lays out the progress using three points in time; at spinoff, when I made my last share purchase (1/2010) and now. I’ve also added the market value (price) at each point in time to give us a touchstone. All prices and values are per share.

What becomes immediately clear is that the intrinsic value of the company has become murkier and murkier as we have progressed and as the cash has been ‘transformed’ (or not) into IP.  We have some recent clues that aren’t very positive, but we’ll get to that. The first component of IP, IPa, is the ‘value’ of the R & D efforts before the spinoff and the R&D team then in place. It is not really possible to calculate what this was worth at the time of the spinoff though we have some indication of the total investment up to that point; $90 million ($31 million on the balance sheet at the end of 2008 plus $59 million invested in 2009). Then there is IPb, which represents the investment in R&D efforts between the spinoff and my last investment in the shares in Jan. 2010. There we know the cost is somewhere around $10-12 million, equivalent to the cash burn in the first 7 months after spin. Finally, there is a third component of IP, IPc, that represents the value of the IP asset from investment in R&D between when I made my final purchase of shares and now. The total investment for IPb and c is about $80 million. Together with the investment in R&D before the spinoff that makes about $170 million in IP investment (or $6.50 a share). However, because development of the drug Azixia was recently discontinued, we have to consider all R&D spending on Azixia as impaired, written off, zero value. How much of the total R&D costs to-date is attributable to Azixia? I don’t really know since R&D expense is not broken out by potential drug in the financials. My quick and dirty (and conservative) estimate is about 50% of the total investment was made for Azixia (or $85 million). The 50% figure seems appropriate because, although Azixia was one of 5 drug candidates being developed by Myrexis, it was the furthest along in the development pipeline (Phase 2). Of the other candidates, one is in Phase 1 and the remaining three are in the preclinical phase. But the question we can’t answer given the information we have today is whether the remaining 50% of the IP investment has a value greater than the investment dollars or even a value greater than zero. Mr. Market continues to value the company at about 2/3 of its cash balance, implying that the IP asset has no value and liquidation of the company would ‘cost’ shareholders about 1/3 of the cash held.

If we can’t really put a value on the company’s IP assets can we at least get a hint about what’s happening from recent events? Perhaps. Firing the previous CEO and discontinuing development of Azixia I might interpret as the Board stepping in and recognizing that the value transformation was simply not taking place. Moving the CFO to the CEO position could also be interpreted as the Board looking more toward a financial solution (sale of IP assets, business combination or sale) to the company’s value proposition rather than an R&D solution. However, one should never be too optimistic as there could be other interpretations for the same set of facts. Remember, its more likely that we will get more of the same than a radical change in direction. All this notwithstanding, there is enough of a hint of change in the air to keep me in the position; shares are still trading at a discount to cash and I am, perhaps too optimistically, of the inclination that there must be some value to all that R&D that has been done. So I will continue to follow developments at Myrexis for at least another 6 months to allow new management to show their hand before re-evaluating again .

Post Script: I chalk this investment up to a learning experience. I became too enthusiastic about biotech investing after my experience with FACT and neglected to give enough weight to the binary outcome of such investments combined with the skew towards optimism of Mr. Market and emotionally ‘invested’ managements. I have put a cross on any such future investments where the primary value creation proposition is then transformation of cash into IP assets. Perhaps I should look at my investment in ENZN again in this light.

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