From Pfizer (NYSE:PFE) selling off non-core assets to Abbott Laboratories (NYSE:ABT) initiating a spin-off, BioPharma has been in full strategic mode. There are four key reasons for this transition: (1) to improve growth amidst exclusivity losses, (2) to reallocate risk, (3) to streamline operations, and (4) to raise cash for takeover activity.
In Pfizer's case, patent cliffs (especially where Lipitor is concerned) make for an uncertain future. And even though the FDA recently approved tofacitinib for rheumatoid arthritis in adults, the market is still heavily discounting future streams of free cash flow. Management has thus focused on raising cash, cutting costs, restructuring operations, and so forth. Last month, the company agreed to sell its infant nutrition unit to Nestlé SA in exchange for $11.9B. Pfizer is further looking to sell its animal-health business. Much of this cash -- ~$5B in 2012 -- will fund share repurchases, but another portion will likely focus on buying strategic development-stage drugs.
In Abbott's case, risk reallocation and improved operational focus warranted a spinoff. The supercentenarian parent company will retain the medical device, nutritional products, and generic businesses. By contrast, management is spinning off its pharmaceutical business and calling it "AbbVie". Humira, which is a lucrative arthritis drug, will be housed under this newly-formed company. In the first year, Humira will generate approximately half of AbbVie's expected $18B revenue. The only problem is that Humira will lose its patent protection and face intense competition from biosimilars by 2016. By choosing to separate this liability from Abbott, management has enabled the market to more properly allocate risk and value assets.
Within this context of strategic transformation, small biotech companies are well positioned to gain momentum. Myrexis (NASDAQ:MYRX) is a significantly undervalued firm that has plenty of cash relative to market cap. As of March 31, 2012, the company had a cash position of $96M and yet the firm is only valued at around 75% of that amount. Myrexis recently appointed Richard Brewer as President & CEO and David Gryska as COO with joint board positions. These two healthcare professionals bring with them a breadth of experience in industry M&A that will help unlock value.
Mr. Brewer and Mr. Gryska were the CEO and CFO, respectively, of Scios. In 2003, they sold the business to Johnson & Johnson (NYSE:JNJ) for $2.5B. They also had successful tenures at Dendreon, Celgene, and several other life science businesses.
These appointments were made specifically to execute strategic acquisitions of one or more commercial-stage catalysts. With (1) an attractive balance sheet, (2) pending monetization of three programs, and (3) now a new management team experienced in M&A, Myrexis can expeditiously acquire strategic commercial-stage biotechnology and speciality pharmaceutical assets. Mr. Brewer and Mr. Gryska's total compensation directly incentivize them to complete value-creating deals and improve share price. They have already identified preliminary targets and have a strong network across the investment community to secure promising returns. Within the next twelve months, Myrexis aims to complete at least one transaction. Thus, while the cash holdings and lead products already make Myrexis attractive, takeover synergies add yet another promising layer to this value story.
Additional disclosure: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. We are a consultant to a third-party and have received two hundred fifty dollars for independent research. Always discuss investments with a licensed professional before making any financial decision.