Myrexis (MYRX) and Affymax (AFFY) are two overlooked gems loaded with an unusual and valuable asset: tax benefits. While traders have mostly forgotten these once promising biotech companies that racked up big losses years ago, investors may wake up one day to find a deal struck that makes them highly valuable and send their shares soaring higher. Clever investors can get there first.
Dealmaker Jonathan Couchman, who runs both companies, has carved out a niche in the world of global M&A deals. He scouts for defunct companies that have racked up big losses on R&D and marketing. When these company CEOs are ready to give up and file for bankruptcy or shut down to avoid the wrath of shareholders whose cash has been squandered, Couchman swoops in, buys a big stake, and takes control. Patient investors can potentially profit handsomely as you'll see below from following Couchman's moves.
How NOL Shell Companies Work
Couchman understands that big losses can also mean big profits, if played smartly. Take the case of Affymax (AFFY) for example. In Feb 2013, Affymax recalled its drug Omontys after the FDA received reports an allergic reaction to the drug caused three deaths. Affymax's stock dropped dramatically and its Japanese partner recalled the drug. With no other major drugs in its pipleline, the company's future looked destined for never-ending losses and lawsuits. The standard response would be bankruptcy as executives washed their hands of the failed company.
However, Couchman took a different perspective. He noticed Affymax (AFFY) had accumulated $481 million of "Net Operating Losses," which can be used to offset taxes on any future profits. Such tax benefits can be very valuable for a profitable drugmaker, but Affymax (AFFY) had no other substantial drugs in its pipeline. Still, working within the tax code, profitable companies can merge with defunct loss-making companies and utilize some or all of those tax benefits if they carefully follow IRS guidelines.
It's complex and not always easy to do such deals. The IRS has a series of strict rules about how to do this, especially in situations involving mergers. That makes it essential that an NOL shell company finds the right investment or merger partner and carefully structures a deal to make it acceptable to the IRS and other regulators. Fortunately, Couchman is experienced in these situations, having led two such past deals before as explained below.
Mr. Couchman convinced the Affymax (AFFY) board to give him management of the company and took a stake, betting he could monetize the $481 million of tax benefits. We estimate those NOLs could be worth a maximum of $100 million to a profitable biotech company (at current tax rates of above 20%).
Similar KKR and Carl Icahn Deals Have Done Well
While Couchman didn't invent the NOL shell strategy, he's certainly made it a hallmark of his investing approach. Now, others big name investors are doing similar. His past tax-advantaged deals, including one for Xstelos Holdings, and another that utilized the tax assets of Golf Trust of America through a reverse merger with privately-owned Pernix Therapeutics Holdings. These successful deals put Couchman on the map.
Big names like KKR & Co. (KKR) and Carl Icahn have gotten in on the act. The most high-profile of late the 2018 deal for mortgage servicer Mr. Coopers Group Inc. to aquire defunct bank Washington Mutual’s (WaMu) parent company in $3.8 billion deal, going public swiftly and receiving $6 billion of WaMu’s NOLs. That will provide a valuable tax shield for Mr. Cooper's earnings for years to come. Those who got in on the WaMu NOL shell before the deal closed in October last year included private equity giant KKR. They made out handsomely on the bet.
Carl Icahn has done similar in at least two cases including Voltari Corp (VLTC) and Cadus Corporation (OTCQB:KDUS). Icahn's preferred route has been to use to these entities and their tax attributes to fund purchases of real estate.
The Myrexis Deal
In Jan. 2013, Couchman spotted the winding down biotech research firm Myrexis (MYRX) and its valuable NOLs. Couchman cut a deal to pay $250,000 for 20% of Myrexis (MYRX); becoming CEO and preserving the tax benefits rather than liquidating the company (as had been the original plan). Based on Myrexis' 2012 10-K filing, we calculate around $132 million of net operating losses and other tax credits on the books of Myrexis (MYRX). Based on an estimated combined federal and state corporate tax rate of 25%, those could be worth up to $33 million to a profitable company wanting to reduce its tax bill and gain a public listing by cutting a deal with Myrexis (MYRX). See a more detailed analysis of Myrexis (MYRX) here.
Why This Opportunity To Make Money Exists
In order to maximize returns, investors like Couchman and Icahn typically take an initial stake and then increase it over time so more of the benefit accrues to them when a deal is eventually struck. Couchman stopped filing regular financial reports to the public on Myrexis (MYRX) and Affymax (AFFY) after taking over management. This encourages more investors to sell and reduces reporting expenses given it has no operating businesses.
Understandably, investors fled these once high-flyers as their stock values dropped and traded below $1. Still, both company websites (view here: Myrexis and Affymax) make clear they are actively hunting for deals, including revamping the Myrexis site last year.
Bargain for Patient Investors on These Tax Benefits
Both Myrexis (MYRX) and Affymax (AFFY) remain publicly traded on the over-the-counter market at bargain basement prices. It's unclear how big of a stake Couchman holds today in each, but after a period of time insiders can raise their stakes in such companies and its likely he has been scooping up shares at pennies.
Based on the limited data available, I calculate the Affymax (AFFY) NOLs could be worth up to $100 million, or around $3 per share. That compares with the most recent trade at just 2 cents per share. My rough calculations estimate for Myrexis (MYRX) values its roughly $100 million of NOLs at around $33 million, or $1 per share. Myrexis (MYRX) stock currently trades at 3 cents a share.
This large discrepancy between the value of the NOLs and the market price is certainly due to a mixture of uncertainty about whether Couchman can pull off deals, the willingness of the IRS to bless such transactions, and the dearth of information available as investors wait around for years. Any partner in a deal will surely want to capture some of the benefit for themselves so its unlikely that current Myrexis (MYRX) or Affymax (AFFY) shareholders will capture the entire upside in a transaction.
In the end, if no deal happens these shares could end up worthless. Still, Couchman has put his money, in the Myrexis case at least $250,000, and reputation at stake.
But in investing, patience can bring big rewards. The potential for an up to 33-fold return on Myrexis (MYRX) or an up to 100-fold return on Affymax (AFFY) should perk the ears of bold investors willing to commit a small portion of their overall portfolio. Given that they trade at pennies, an investment of thousands of dollars could yield a six-figure payoff.
Investors should be cautious as with the stock of any low-priced stock that offers no current balance sheet and income statement disclosures. The shares also have limited liquidity and are most suitable for small accounts. Any new investor purchasing over 5% of outstanding shares could impact the company's ability to preserve the NOLs. Consult your financial and legal advisers before making any determination on these issues.
Disclosure: I am/we are long MYRX, AFFY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article and associated research does not constitute investment advice.You should consult with your investment adviser and conduct your own research before making any investment decisions. We take no liability for any losses or fees you may incur from such investments. We may buy or sell securities related to or mentioned in this article at any time and will not update on those changes in position. Invest at your own risk and do your own work.