Myriad Genetics (MYGN) has confirmed that it is considering spinning off its pharmaceutical division from its molecular diagnostic business, a move that is likely to be applauded by investors if it happens.
Strong demand for the company’s predictive genetic tests for illnesses such as hereditary breast and ovarian cancer helped produce its first profit this year, and Myriad is forecast to stay in the black. However, the cash required to fund the ongoing development of its drug pipeline will be a drag on profit growth. Considering the shareholder activism seen across the sector recently, which has forced the management of numerous companies to unlock value, Myriad is wise to act now.
The move is not entirely unanticipated, and many saw the failure of Alzheimer’s disease candidate Flurizan in June as a trigger for the group to split. (Flurizan failure highlights Myriad's diagnostic potential, June 30, 2008).
This is one of the reasons that the failure did not hit the company’s stock, despite the product having a consensus NPV of $949m. In fact, the shares have edged 4% higher since, to $64.88.
The licensing deal Myriad struck with Lundbeck over Flurizan six weeks before the final results were announced included a hefty $100m upfront fee, useful cash to fund both units should they part company. The group ended June with $420m in cash in total.
Last year spending on R&D totalled $120m, of which $20m was spent by the diagnostics unit, and $60m on the Flurizan trials. Analysts have pencilled in spending of between $80m and $90m over the next few years, meaning the company’s healthy cash position will set both businesses up happily for some time.
Myriad’s pipeline consists of two phase II candidates, three in phase I and a handful of earlier projects. Its lead product is Azixa, a novel chemotherapy agent which can cross the blood brain barrier, hence trials in brain metastasis are ongoing. Tests have indicated that the drug does not have the same resistance issues of Taxol, making it a promising compound.
The focus is oncology and infectious diseases; Myriad’s experience with Flurizan has convinced it to give up research in CNS disorders, saying that the additional development risks means it has, “lost its appetite” for drug development in this area.
Myriad currently has a market cap of $2.89bn, with its diagnostics business making up the vast majority of that value. The group believes its five marketed diagnostic tests address a market worth $1.5bn in the US alone.
Research into new tests is ongoing, and a new product should be launched this year.
Considering movement towards personalised medicine, the company is firmly in a growth area. Sales in fiscal 2008 surged 53% to $222.9m, and analysts see that doubling by 2011, according to consensus data from EvaluatePharma.
It is easy to see why investors will be keen to see that business unlocked from the cash hungry and risky research arm. Myriad expects to announce a final decision on its strategic review by the end of the year.
Similar moves by other drug makers have been welcomed by the market, and it is a trend that has strengthened this year. PDL BioPharma (PDLI) and Enzon Pharmaceuticals (ENZN) are both in the process of spinning out their pipeline businesses, and even some larger groups such as ImClone (IMCL) have considered it, to crystallise the value of the Erbitux royalty stream.
However, the core Myriad business that will remain is in a slightly different situation to the examples above, due to its area of operation. Diagnostics and the potential of personalised medicine have become increasingly attractive areas over the last year or so, illustrated by Roche’s determination to win control of Vedanta.
Following any spin-off, Myriad will look more attractive to larger players already operating in the field; another reason why investors are likely to welcome a decision to proceed with the spin-off.