Since my two-part analysis, a key development has emerged that has not yet become reflected in Maxygen's stock price. Bayer Healthcare (OTC:BAYZF) recently disclosed in a recent investor day that it is likely to begin Phase II trials on a key drug originally sold to it by MAXY in 2008. When this likely Phase II trial begins, MAXY should receive a $30 million payout, which equates to an additional $1 a share in cash. Given that MAXY is trading only modestly above cash, the realization of the Bayer payment will likely serve as a key catalyst that will send the stock price $0.50 to $1.00 per share higher.
Review of MAXY investment thesis
First, I'll review the investment thesis on Maxygen. MAXY is a former biotech high-flyer that began winding down most of its drug programs and monetizing assets in order to return capital to shareholders. Under CEO Jim Sulat, these efforts have resulted in special dividends, spinoffs and other shareholder friendly actions that have helped realize value for MAXY shareholders.
Sulat's efforts have led to $160m of cash now sitting on the company's balance sheet, as well as an additional $3m of publicly traded CDXS stock that MAXY holds. This $163 million of value is greater than the company's $155 million market cap. The company's cash burn is minimal, with approximately $2m of cash outflow currently per quarter; the company is now incurring no R&D expense and the G&A costs of $2m are comprised of personnel costs for finance, legal, general management, etc.
In addition to this $160m of cash, the company has two additional assets: (i) MAXY's G34 drug and (ii) a $30 million contingent payment that MAXY will receive from Bayer Healthcare when Bayer initiates a Phase II trial of the drug MAXY-VII.
The catalyst that I'm expecting to soon be realized is with respect to the Bayer payment. To review, in July 2008, MAXY sold its hemophilia program assets to Bayer Healthcare for a $90 million upfront payment and a potential additional payment of $30 million. Below is the relevant language from Maxygen's 10K:
"In July 2008, we sold our hematology assets, including MAXY-VII, our factor VIIa program, and granted certain licenses to the MolecularBreeding™ directed evolution platform to Bayer for an upfront cash payment of $90.0 million. Under the technology transfer agreement with Bayer, we remain eligible to receive future cash payments of up to an additional $30.0 million based on the achievement of certain events related to the potential initiation by Bayer of a Phase II clinical trial of MAXY-VII. The milestone payment is also subject to the satisfaction of certain patent related conditions, with half of the potential $30.0 million milestone payment subject to the satisfaction of certain patent related conditions in the United States and the remaining half of the potential milestone payment subject to the satisfaction of similar patent related conditions in certain European countries. To date, all of the patent related conditions have been satisfied …"
As we can see, MAXY is owed $30m from Bayer upon the initiation of a Phase II clinical trial involving the Maxygen assets. Fortunately for MAXY shareholders, Bayer has indicated that it will initiate this Phase II trial in 2012.
Bayer recently conducted an analyst day where they revealed that their Phase II/III study on factor VIIa was scheduled to be initiated this year. The relevant presentation can be found at this link. The 98-page presentation can be downloaded by clicking on the "Meet Management Investor Handout" item.
In that investor presentation, on page 57 of the slide deck (page 31 of the PDF document), Bayer discloses that their development program for their hemophilia franchise includes the following plans for the Maxygen recombinant FVIIa assets: "Target to initiate a Phase II/III study in 2012".
When this Phase II study is initiated, we expect the $30 million contingent payment to be released to MAXY. The result would be an additional $1 per share of cash that will go to Maxygen shareholders.
When the Bayer Phase II trial on MAXY's factor VIIa drug program is launched, we expect an additional $30 million to be paid to MAXY and bring the cash balance per share to nearly $6.75 per share. This compares to the current $5.70 stock price. My belief is that the likely Bayer payment is not being appropriately reflected in the stock price, and when the announcement is made, MAXY's stock price should get a much-deserved pop. In the downside scenario where the Bayer payment is delayed, MAXY is currently trading at net cash, which stands at about $5.70 per share, so we see minimal downside to the stock price at current levels.