Myriad Pharmaceuticals: A Value Investor's Dream

| About: Myrexis, Inc. (MYRX)

Recent market volatility has really beaten down some biotech stocks, and I have been going on a shopping spree. One stock which is showing a clear reversal in my opinion is Myriad Pharmaceuticals (NASDAQ:MYRX). Although I know of the company, I had not been following it until it came up on a technical screen last week. From a technical perspective, a rebound has started and there is still plenty of recovery to go in my opinion.
What surprised me about Myriad was how low its current market valuation is right now. Myriad’s current capitalization is less than $100 million, even though it has over $150 million in cash, and no significant liabilities. Mystified as to why MYRX would be trading at a 40% discount to the net value of all its assets (95% of which is cash), I took a good hard look at the company, and learned about the mishaps of MYRX management, and the current reorganization, which have surely contributed to the fall of MYRX stock value. However, probing deeper, it seems to me that the market is overreacting to these events. I see nothing that justifies the company trading at about 60% of its net cash value. MYRX still has a viable oncology clinical program, and can continue to leverage its large cash position to develop this program, or pursue a profitable merger as it has attempted in the past. Right now, short sighted investors are focusing on criticizing management rather than accumulating shares which trade for pennies on the dollar, in real cash value.

The big question is: How did this happen? To understand how MYRX is trading at such as discount, I had to look at its (brief) history: In mid 2009, molecular diagnostic giant Myriad Genetics (NASDAQ:MYGN) separated its molecular diagnostic business from its research and drug development businesses through the spin-off of Myriad Pharmaceuticals. Myriad Genetics contributed substantially all of its research and drug development businesses and about $190 million of cash and marketable securities to Myriad Pharmaceuticals, and distributed this spin-off to shareholders as a dividend of one share of Myriad Pharmaceutical common stock for every four shares of Myriad Genetics common stock (I will refer to Myriad Pharmaceuticals as MYRX in the future to avoid confusion with Myriad Genetics).

The purpose of Myriad Pharmaceuticals was to pursue development of unique, best-in-class therapeutic candidates in the areas of cancer and HIV. Straight out of the gates, MYRX was actively doing that: Six months before the spin-off, Myriad Pharmaceuticals (as a whole owned subsidiary of MYGN) acquired all rights to bevirimat, an anti-HIV drug, from Panacos Pharmaceuticals (OTC:PANC) for an upfront payment of $7M with no milestones or royalties. Myriad obtained all patents and patent applications related to the compound, all product inventories, ownership of all clinical data and all rights to regulatory filings. Myriad assumed control of all clinical and commercial development going forward.

Bevirimat (MCP-4326) appeared to be a promising drug, as it had demonstrated potent activity against a broad range of HIV strains when tested in over 100 HIV patients. Bevirimat has been touted as an inhibitor of HIV isolates that are resistant to currently approved HIV drugs. Although Bevirimat appeared to work in a majority of HIV infected patients, MYRX discovered a high prevalence of mutations in patients resistant to current HIV therapy. Thus, Bevirimat was a failure for its intended purpose of being used in patients who are resistant to current therapy, and has subsequently been dropped.

In the end of 2009, Myriad Pharmaceuticals and Javelin Pharmaceuticals (JAV) agreed to an all-stock merger, which would give Javelin shareholders initial control of about 45 percent of the stock in the combined company. This deal placed the value of JAV at about $100 million. The purpose of the merger was to obtain U.S rights to Javelin’s lead anti-pain drug Dyloject, an injected formulation of the pain reliever diclofenac, once it was approved by the FDA in late 2010. Previously, Dyloject had received EU approval and had entered into an exclusive European marketing partnership for Dyloject with Therabel Pharmaceuticals for marketing in the EU. However, Hospira (NYSE:HSP) came in with a better offer for Javelin and Javelin terminated the merger agreement with MYRX in mid April of 2010. In accordance with the terms of the merger agreement, Myriad received payment from Javelin of about $4.5million, and the return of an $8.5 million loan to Javelin (costs incurred by Hospira, Javelin’s new acquirer). This failed merger was more fuel for criticism of MYRX management.

This apparent failure of a potential HIV blockbuster and failure to bring in a revenue generating drug from the Javelin merger has obviously darkened MYRX investors spirits. Investors likely quickly calculated that MYRX was burning about $45-50 million per year, and feared that MYRX would run out of money in about 3 years and have nothing to show for it. The company’s pipeline is thin and early, including Azixa (MPC-6827) in mid phase 2a for metastatic melanoma and recurrent glioblastoma ("GBM"), and MPC-3100 in phase 1.

Although MYRX has fallen flat on its face with both Bevirimat and the Javelin merger, the company is reacting to these failures. Late this April, Myriad Pharmaceuticals shareholders approved the name change of the Company from Myriad Pharmaceuticals, Inc. to Myrexis, Inc. Clearly a name change in of itself won’t be enough, but MYRX announced a plan a few weeks ago to start anew: MYRX is ending its HIV program, eliminating all research and development staff pertaining to HIV, and will focus on oncology in the future. The company described several strategic initiatives to aggressively develop its oncology pipeline and to conserve its financial resources to extend the company’s cash beyond 2013.

Adrian Hobden, Ph.D., CEO of Myriad Pharmaceuticals commented: "Over the last six years Myriad Pharmaceuticals has generated a deep pipeline of oncology assets. After conducting an exhaustive review of our development portfolio and business operations, we have decided to refocus our clinical efforts on oncology, where we believe we can maximize the return on our investments…..This proactive operational restructuring, allows us to focus our substantial resources to advance our portfolio of exciting oncology candidates.....In addition, we can continue to draw from the proven productivity of our of internal drug discovery team, whose efforts have generated our current oncology candidates, to enable us to have a renewable source of drug development candidates for both partnering and for our own proprietary development."

Apart from the workforce reduction and elimination of the HIV program, these initiatives include:

1) The expansion of the Azixa clinical program to include a two-armed temozolomide combination study for the treatment of glioblastoma multiforme.

Azixa (verubulin) a small molecule microtubule destabilizing agent which is MYRX’s most advanced cancer drug candidate, is being developed for the treatment of advanced cancers with brain involvement. Several currently marketed clinically effective drugs (most notable being Vinblastine and Vincristine) share the identical mechanism of action as Azixa. Importantly, however, Azixa has two unique, distinguishing characteristics from these existing reagents: 1) Azixa can cross the blood-brain barrier and accumulate in the brain to potentially reach brain tumors that current drugs cannot; and 2) Azixa does not appear to be subject to multiple drug resistance (MDR) mechanisms. Thus, Azixa represents a unique therapeutic opportunity with the potential to treat patients with any primary or secondary (metastatic) brain cancer or any cancer that has developed resistance to conventional chemotherapeutics.

At ASCO this year, MYRX presented data on Azixa which demonstrated that 6 out of 19 glioblastoma multiforme patients in their phase II trial treated with Azixa and carboplatin achieved stable disease and two patients had achieved partial responses. The total response rate was 43%. The combination of Azixa and carboplatin was safe and well-tolerated. Notably, the phase II Azixa data appears to be even better than the best current treatment for glioblastoma multiforme using temozolomide plus Avastin: According to Roche (OTCQX:RHHBY), overall response rates in the two studies of Avastin with temozolomide in glioblastoma multiforme patients were 25.9% and 19.6%; about half of that seen in the ongoing Azixa phase II trial. This is very promising data, which already suggests a phase III trial will occur.

At ASCO this year, MYRX also reported final data from the phase 2a study examining Azixa with temozolomide enrolling 22 patients with Stage 4 metastatic melanoma. In this study, two patients achieved partial responses and nine patients experienced stable disease. The median progression free survival (PFS) of patients in the metastatic melanoma study was 2.9 months. This is significantly better than the PFS survival of 1.9 and 1.5 months seen with the standard of care temozolomide and dacarbazine. The combination of the drugs was shown to be safe and well tolerated at all combinations in this study. This is very promising data, which already suggests a phase III trial will occur.

2) The further advancement of MYRX’s orally bioavailable Hsp90 inhibitor, MPC-3100.

MPC-3100 is currently in Phase 1 clinical studies. MPC-3100 is a novel, fully-synthetic, orally-bioavailable, small-molecule inhibitor of Heat shock protein 90 (Hsp90) which has very encouraging non-clinical safety and efficacy data. Hsp90 is involved in folding and maturation and is up-regulated in many types of cancers. Hsp90 stabilizes many of the gene products which cancer cells rely on to grow, and blocking Hsp90 has been proven to kill many types of cancer cells. Existing Hsp90 inhibitors such as Geldanamycin are not suitable clinical drugs, and several companies are pursuing the development of a potent Hsp90 inhibitor with clinical properties.

3) Bringing a new drug, MPC-9528 into clinical development.

MPC-9528 is a Nampt inhibitor. Nampt is a key enzyme used in cell metabolism. Many cancer cells are highly-dependent on Nampt due to increased energy requirements. MPC-9528 is potently cytotoxic to a broad spectrum of cancer cells. MPC-9528 is also highly orally bio-available and causes significant tumor regressions in pre-clinical colon cancer models with both daily and intermittent dosing schedules. The NAD biochemical pathway has been extensively characterized and the basic metabolic function of Nampt is well understood. Importantly, Nampt inhibition presents a unique opportunity to combine a companion diagnostic, which can identify patients most likely to benefit from a Nampt inhibitor, with the adjuvant vitamin B-3 (niacin) that has the potential to maximize therapeutic benefit while minimizing side effects. MPC-9528 is a potential best-in-class treatment targeting aberrant cancer cell metabolism. Myriad Pharmaceuticals expects to complete pre-clinical studies of MPC-9528 in 2010 and advance the candidate into human clinical studies.

4) Aggressive search for partners for all of its pre-clinical and clinical programs.

As a cash rich company, MYRX would not necessarily need partners to bring a drug through phase III. However, considering the costs of these trials, it is prudent to not invest all of the company’s capital in one single endeavor. Seeking a partner mitigates this risk, and would allow MYRX to survive even in the face of clinical failure. Clearly, Azixa is the most likely drug to be partnered, given its clinical stage. I feel it is likely a large pharmaceutical company like Sanofi-Aventis (NYSE:SNY) who just lost patent protection Docetaxel (a similar class of agent) this year would actively seek a partnership for Azixa. The data so far is impressive, and MYRX should not have too much difficulty in securing a partner for it.

After reviewing the company’s history and current state of affairs, it seems that a turnaround is indeed in place. Still, the question remains: What are investors pricing in that justifies a 40% discount to its cash position? The simple answer is failure. Investors have lost faith in MYRX management who appears to have lost direction. Investors are pricing in the outcome that MYRX will burn cash without any tangible results. This is always the risk in biotech, however. Beyond this, recent decisions by MYRX signal to me that management is being responsive to the situation and has the four opportunities mentioned above to come forward as a solid contender and restore investors faith.

Although Bevirimat turned out to be a failure, MYRX management reacted fairly quickly to it - the program was begun and finishes within 2 years. This is very little time in the development of a clinical agent and rather than continuing to invest resources into a fledgling program, management closed it. This is actually sign of good management; not bad management: Failures are an integral part of drug discovery and development; the reaction to these failures is what separates good and bad management.

Although the Javelin merger was a failure, the merger always seemed out of place. The intention was clear: MYRX would begin to bring in revenue from current Dyloject sales in the EU and potentially even more from US sales after FDA approval of Dyloject. This merger would have allowed MYRX to protect its large cash position by buffering the burn rate with income. However, Dyloject was a far cry from their HIV and onocology emphasis, and without any drug marketing experience, it was unclear if MYRX was really the right company to push forward Dyloject sales. In hindsight, I think it is best that the merger fell through.

It was clearly all these factors that prompted MYRX management to re-evaluate the business. That is exactly what they should do. It was their decision to focus on their oncology pipeline that prompted the downsizing; this is also what they should do. Now, with the key priorities in place, and costs trimmed, the company can operate efficiently. They can use a portion of their cash resources and focus on bringing MPC-9528 into clinical trials, and getting MPC-3100 through phase II and potentially find a partner for it. They can finish the Azixa trials, and find a partnership, or even use their substantial cash to finish phase III on their own. They can also continue to push discovery drugs into development streams.

Finally, it seems likely that MYRX management will look for a merger or acquisition again to accomplish the goal of generating revenue rather than burning through their cash. What I have seen from MYRX management suggests that rather than fumbling around and burning cash as biotechs seem to like to do, they are acting with decisiveness, expedience, and foresight. There is simply a lot of things that MYRX can do with that much cash!

I think investors have viewed all this year’s developments wrongly. From what I have seen, MYRX is seeking to protect their large cash position and put it to its best possible use - seemingly an anomaly in the biotech world. If you buy into MYRX now, you are getting what investors thought they were getting when it spun off from MYGN: A cash rich company with a promising discovery and development pipeline. Only now, the company is not divested between HIV and oncology, and will slow down its cash burn rate considerably. Now, you are getting it at a 40% discount to its cash value, without any consideration for the value of Azixa or its earlier pipeline. This is also apart from any merger, acquisition, or partnership news. In my opinion, MYRX is a value investor's dream, which holds the promise of quickly recovering that 40% discount it is currently trading at. Then there is always the looming question: what is preventing someone (besides a shareholder’s vote) from buying MYRX at a 50% premium to its current price of $4 per share at break-even cash value of about $6 per share, and getting the pipeline for free? Such an event would only be facilitated by MYRX’s current 56% institutional ownership.

With all this in mind, it seems unlikely that the share price can remain at its current low levels. Whether a share price recovery is catalyzed by new merger/acquisition news, development news from Azixa, MPC-3100, or MPC-9528, or partnership news for these drugs, investors who see the incredible value in MYRX will soon come out of their shells with fistfuls of dollars. As the name change to Myrexis suggests, it won’t be the same old same old any more; I expect to hear substantial new developments the second half of this year, and I will be happy to hold my extremely undervalued MYRX shares until that time, knowing I got them at a 40% discount.

Disclosure: long MYRX