Myrexis (MYRX) to Liquidate
This was one of my early investments and to date one of the more disappointing. When I initially invested (post-spinoff from Myriad Genetics) MYRX shares were trading at about $4.00, only about 57% of the $7.00 cash per share on the balance sheet. This looked like an ample margin of safety at the time, but I was pretty much of a greenhorn when it came to investing in biotech stocks. That was mid 2009, and, in retrospect, clearly I was wrong both about the margin of safety and about management’s intentions and/or capability. Live and learn!
Last week the company issued a press release announcing Board approval of a liquidation plan. The release disclosed that the plan calls for the company to distribute all available cash (between $2.72 and $2.91 per share) as soon as shareholder approval is obtained. On reflection I realized that this means the company burned through around half of its cash and investment hoard in 3 years! What did we shareholders get for that ‘investment’? The press release made no mention of any assets (intellectual or otherwise) to be disposed of by the company after the initial cash distribution, though I expect further information will be forthcoming in the shareholder proxy material.
I am contemplating doubling down on my investment at $2.75 a share or below. With some cash floating around from my sale of BBEP units and interest on idle funds providing practically no returns, this kind of short-term, non-market-correlated investment seems appropriate. The investment proposition is this: at worst I would receive $2.72 in the initial distribution which should take place some time early in the first quarter of 2013, and at best, the initial distribution will be at the high-end, $2.91, providing a return of 5.8% in say three months. That means I would be investing at most $.03 per share for the possibility of further upside if some of the withheld cash ($12 million in the low distribution scenario) is left over at the end of the liquidation process and/or a buyer can be found for some of the intellectual property developed with shareholder’ $100 million investment. That seems like a pretty good proposition to me since projections made under a liquidation scenario are generally very conservative.
This is not a happy ending for my MYRX investment. I’m down 36% on my initial investment with little prospect of substantially improving the return; I’ll be lucky to end with a 30% loss on the position if I end up ‘doubling down’ even under the most sanguine of scenarios, but I will have learned something. To invest in a net-net in the biotech area you have to be sure of management’s track record and incentives. During the development of my investment thesis I should have given more weight to management’s background and precluded the investment because top managers had NOT previously been involved in a SUCCESSFUL small, stand-alone biotech startup. Furthermore, the mangement incentive structure was not right; management had options but didn’t own enough of the company (skin in the game). And finally I should have acted immediately and sold my position when MYRX bid for Javelin in the Spring of 2010 as management made little attempt to explain and justify this incomprehensible move, a further indication that management’s interests were simply not aligned with those of shareholders.
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How come this company has no intangible assets on their balance sheet? Not sure how you think they may get anything from the sale of their intellectual property when the company values it at zero. I would think they would assign at least a nominal value on the BS if they thought it could be sold. Thanks for the idea.
Matt,
I believe That like most pharmaceutical companies MYRX expensed R&D costs as they were incurred. That doesn’t mean that the company considered their intellectual property worthless, its just the convention. In any case, they invested about $100 million in overhead and R&D over their three years as a stand-alone company, and I’m just hoping that somebody might view something in their R&D efforts as worth a few millions. Note that the word is ‘hoping’, as I have no intimate knowledge of their R&D.
Right, but capitalized or expensed, the resulting value of the intellectual property should show up on the BS as an asset (net of amortization if capitalized). Or do I have my accounting mixed up? To me it looks like a company that claims no value on its intellectual property which is HIGHLY unorthodox for what is essentially the core asset of any pharma company (no unusual if there is no actual value, which i suspect).
Matt,
If R&D is expensed it can’t, by definition, show up on the balance sheet as an asset, physical or otherwise. Even had Myrexis capitalized R&D (which it didn’t), the termination of drug trials (presumably because the trials were not worth pursuing as the likelihood of a positive outcome was low) would have triggered a reclassification of the capitalized expenditures to current expense, i.e. a ‘write down’, leaving capitalized only that portion of any expenditures which had a reasonable probability of retaining value.
Proxy is out. They forgot to include exercisable options when calculating the expected first distribution, dropping the minimum to $2.67 from $2.72. Sell now before everyone else reads about it.
Another Matt,
I wouldn’t think about selling those shares I already own for a $.05 reduction in the lower bound of the initial payout. I did, however, reduce my standing buy order for my ‘double down’ to reflect the revised initial payout. The play here is not related soley to the intial distribution but is primarily based on any secondary distributions from 1) funds left over after the liquidation is complete, and, more importantly, 2) funds that might be generated from selling non-cash assets (such as intellectual property). At this point I’m thinking that it might be worth taking a larger position AFTER the initial distribution is made, as that will provide much more leverage on the upside.
Whatever your expectations for the option value, the $0.05 drop just lowered your IRR from here on out by 5% or so, which I consider material. I think the differing degrees of success we’ve had colors our views; I bought all of my shares in the past few months under $2.40 and sold them for an average of $2.77; I was never a believer in their business, so I waited until it appeared a liquidation was likely and it was cheap enough. I will consider buying back in if it drops to $2.70. The stub is going to be so small and eventually illiquid that it may not be worth bothering with.