How Myogen Grew Its Market Cap More Than 7X Last Year (MYOG)

Colorado-based Myogen (MYOG), a biopharmaceutical company focusing on the cardiovascular market, had a spectacular 2005. From a June low of $5.21 per share, the company's stock is currently trading in the $35 range. Nature's John Ransom took a look at the stock's performance last year as an example of how biotech companies can grow valuations to predictable ranges by actively managing news about late stage testing.

According to Ransom, Myogen has three products in its pipeline: Enoximone (phospohodieterase 3 inhibitor for chronic heart failure) which had dissapointing Phase 3 results in June causing the stock to tank to its low of the year; Darusentan (selective receptor antagonist for treatment resistant hypertension) that did well in phase 2 trials bringing the stock up from $13.50 pre-announcement to $20-24 at the announcement; Ambrisentan (endothelin receptor antagonist for pulmonary arterial hypertension) that announced positive Phase 3 results in December, bringing the stock to $38.

Median analyst estimates ranked by Thomson have price targets for Myogen pegged at $40. Geoffrey Meacham at JP Morgan recently updated his peak sales estimates for Ambrisentan to $500 million. Ransom explains the connection between the 'peak sales' model and company valuation:

This type of 'peak sales' model puts the valuation for ambrisentan at $1.2 billion, assuming a 20% discount for future risk. Such a model uses a multiple of predicted 'peak sales' for each drug (from three times to ten times peak sales) and then discounts that number from 10–50% percent to account for the estimated risk associated with bringing the drug to the market. That, in turn, depends on the phase of development the product has reached.

The peak sales valuation method is a common model used among biotech analysts. It differs slightly from the so-called 'free cash flow' model, which tries to anticipate the amount of profit that the company can produce by selling its product. Given the large amount of money demanded by R&D in companies like Myogen, and the likelihood that take-to-market products might be distributed by larger pharmaceuticals more efficiently, cash-flow assumptions can vary widely from company to company. Hence analysts often use peak sales models in research-intensive companies like Myogen to keep comparisons equal.

Thus darusentan has an estimated valuation of $750 million–$2.1 billion. That's with the same peak sales valuation model for darusentan but applying a 30% discount for future risk because phase 3 trials are just about to start for that drug. And that's also assuming peak sales in the analysts' estimated range of $500–$1 billion. Combined, Myogen's two most promising developmental drugs would seem to imply a $2-billion to $3.3-billion market capitalization or a price per share of $48–$79, well above the median target price.

According to Ransom, there are a number of explanations for the discrepancy between the median target price and the price implied from the peak sales valuation model. First is the anticipation of additional phase 3 results for Ambrisentan next quarter. Second is the subjective assessment of risk resulting from the long time frame (Q4) until Myogen will be ready to submit a new application for Ambrisentan. Finally, substantial revenues are only expected in fiscal 2008 and positive cash flow in 2009; as Ransom writes: "A lot can happen in a few years to a company that will move valuations up and down."

MYOG 1-yr Chart