Maxygen (MAXY) historically has been a biotech company engaged in discovery and development of protein pharmaceuticals for the treatment of chemotherapy-induced neutropenia and acute radiation syndrome. For the last several years, the company has stopped its operations completely and is actively trying to monetize its R&D assets and return value to the shareholders. As of today, the only asset the company owns is its MAXY-G34 product candidate, that it has been trying to sell for the last year or so and has been unsuccessful in doing so.
With its various other asset sales in the last few years, the company has accumulated large levels of cash. On September 7, 2012, Maxygen distributed $98.5 million to its shareholders as one time payment. This amounts to $3.6/share. The company also continues to buy back its shares in the open market. The latest repurchase authorization for 2012 in the amount of $10 million is not fully used and still has $8.5 million in repurchases remaining. As a contrast, the $10 million repurchase authorization in 2011 was fully used and was later expanded to $20 million. Clearly, the company is doing all it can to return value to the shareholders on its way to liquidating all its assets and closing down.
This is what one may term as a cigar-butt stock. There is at least 1 last puff remaining, as we will see below. The nature of the business state also makes this a reasonably low risk investment.
Before we begin analyzing the value, I want to reiterate. The company has NO ongoing business, so there is no revenue, earnings or profitability that we need to concern ourselves with. This makes our analysis much simpler and less error prone. We can pretty much confine ourselves to looking at the cash in the business.
The Value at Maxygen
Let’s start with the obvious. As of today (Nov 15, 2012)
- Market Value = $67.28 million
- Cash on hand (includes short term cash and treasuries) = $82.23 million
- Available for sale equity securities = $1.25 million
- Shares outstanding = 27.358 million
- Unrealized expenses for Restricted Stock Awards: $1.9 m
- Fair value of the remaining Contingent Performance Units: $1.5 m
Restricted stock awards and contingent performance units were leftovers from its 2006 incentive plan when the company was still actively engaged in research and development. For our purposes, we will take the current cash value and book it as a draw against cash assuming they will be paid out before the company shutters down. This implies the total cash current shareholders can lay claim to is 82.23 + 1.25 – 1.9 – 1.5 = $80.08 m or $2.93/share
In essence, investing in the stock today means you pay $2.41/share in cash and get $2.93/share cash in return. This is a 21.6% return if the shares get revalued to the level of cash. This could happen if the company decides to shut up shop today and pay out all the cash to the shareholders.
But the Company is Not Planning to Close Up Right Away
As I said earlier, the company has MAXY-G34 product candidate that it is shopping around hoping to be able to sell this asset. It is unclear if the company will be able to monetize this, or if it does, what value can be realized. There are 3 possible scenarios that we need to keep in mind:
1. The company is unable to sell it and gives up
Realize that the current gap between the tangible cash assets (80.08 m) and the market value (67.28 m) is $12.8 m. The company currently runs an expense of $2.4 m/quarter (it was $2.7 million last quarter due to 1 time repricing of its Contingent Performance Units due to $98.5 million distribution). Which gives it almost 5 quarters of additional shopping around before it needs to call it quits to avoid eroding shareholder value.
2. The company is able to sell it at some yet undetermined amount
Any such sale needs to happen in less than 5 quarters or before 2013 ends. When the sale is completed, the company will have nothing left to do and it can return all the remaining cash to the shareholders and close down. If the sale does occur, its value could be in 10s of millions which flows straight to the shareholders.
3. The company is able to sell it but as a part of the deal needs to develop it further before closing the deal
This is where the company will need to use some of its cash holdings for further R&D. Hopefully this deal will only be accepted if it has attractive return on investment, but it does introduce uncertainty and extends the timing for our returns.
Also Consider the Share Repurchase Dynamic
The company currently has a capacity to repurchase $8.5 million worth of shares this year. Also as it has done in the last 2 years, MAXY may approve another $10 million worth of repurchases in January 2013. For the following analysis we assume that the company, if it does add another $10 million in repurchase authority in 2013, will buy stock evenly at $2.5 million per quarter. There is another table below this one that shows the cash position with no repurchase activity taking place. The reality will be somewhere in between so it is nice to know the two extremes.
Also, the current stock price $2.41/share is 17.75% discount to the tangible cash value of $2.93/share. We will assume that the repurchases are done at 15% discount to the last quarters ending tangible cash value (if the discount is lower, it means our shares have appreciated already and we are happy)
|1. With repurchases|
|Total Cash at the Beginning||$ 80.08||$ 69.18||$ 64.28||$ 59.38||$ 54.48|
|Expenses||$ 2.40||$ 2.40||$ 2.40||$ 2.40||$ 2.40|
|Repurchases (Price)||$ 2.49||$ 2.45||$ 2.38||$ 2.31||$ 2.23|
|Repurchases (# of shares, million)||3.42||1.02||1.05||1.08||1.12|
|Repurchases ($ million)||8.5||2.5||2.5||2.5||2.5|
|Cash Used||$ 10.90||$ 4.90||$ 4.90||$ 4.90||$ 4.90|
|Total Cash at the End||$ 69.18||$ 64.28||$ 59.38||$ 54.48||$ 49.58|
|Shares Outstanding at the Beg||27.38||23.96||22.94||21.89||20.81|
|Shares Outstanding at the End||23.96||22.94||21.89||20.81||19.68|
|Cash/Share at the end||$ 2.89||$ 2.80||$ 2.71||$ 2.62||$ 2.52|
If the company forgoes repurchasing the shares, perhaps if it need cash to invest in MAXY-G34 to make it saleable,
|2. Without any repurchases|
|Total Cash at the Beginning||$ 80.08||$ 77.68||$ 75.28||$ 72.88||$ 70.48|
|Expenses||$ 2.40||$ 2.40||$ 2.40||$ 2.40||$ 2.40|
|Cash Used||$ 2.40||$ 2.40||$ 2.40||$ 2.40||$ 2.40|
|Total Cash at the End||$ 77.68||$ 75.28||$ 72.88||$ 70.48||$ 68.08|
|Shares Outstanding at the Beg||27.38||27.38||27.38||27.38||27.38|
|Shares Outstanding at the End||27.38||27.38||27.38||27.38||27.38|
|Cash/Share at the end||$ 2.84||$ 2.75||$ 2.66||$ 2.57||$ 2.49|
The thing to note is that any repurchases done when the market value is below the net tangible cash value (table 1) has the effect of increasing the cash/share for the remaining shareholders. The hypothesis is that this can happen only a few times before the investors start bidding the shares up. Also as the quarters progress, it will become clearer what the company may be able to do with its R&D asset. If there is a potential sale, the company will likely stop doing the buybacks and we will have to switch to table 2.
Either way, it is unlikely that the value of the company will materially degrade over the next 5 quarters. (excepting legal/tax risks which are low considering the company has no operations).
If there is no sale of MAXY-G34, we are unlikely to lose our investment by any significance and at the end of 2013 MAXY will very likely dissolve. However, in the event of any sale, almost all the sale proceeds will flow through to the investors since the company will lose its reason for existence and dissolve.
What if the Company Issues a Dividend?
Because the company has no operations, if the company decides to make a "dividend" like payment, it is not likely to be considered a dividend, but rather a return of capital which may not be taxable at all for the investors. For example, only about 10% of the $98.5 million payment made earlier this year to the shareholders was classified as dividends. This would be preferable to buy backs that will result in capital gains. In the worst case scenario above, and if the company chooses to pay a cash distribution, we will have received tax free distributions by the end of 2013 and the 26% valuation gap would have closed to a large extent
Another Tactical Reason to Buy Now
IShares Nasdaq Biotechnology Index Fund, IBB, ETF owns about 213,000 shares of MAXY and they are dropping MAXY from their holding. They are scheduled to complete selling all their shares by Monday, Nov 19, 2012. Buying the shares now while this large fund is in the process of unloading is a good idea and will likely give a better price than say, waiting for a few more weeks to buy.
Bottomline: Purchase MAXY as follows
- Price < $2.45/share
- Portfolio Weight ~ 4%
- Sell Target = $2.9/share but will change if a buyer for MAXY-G34 is found
- Expected holding period = 12 months or less
We are looking for 1 year return of 15% or more.
PS. The expenses for restricted stock awards and contingent performance units are to be taken over the next 4 years. to be conservative, I have applied these expenses all at once now. if spread out, the valuation will be better.