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MagicDiligence (< 20)

A Magic Formula Stock to Avoid: Maxygen (MAXY)



February 05, 2009 – Comments (0) | RELATED TICKERS: MAXY.DL , AMGN

Original article

 Maxygen (MAXY) is a development stage biotechnology firm, which makes an investment here highly speculative and full of risks. The company has only one blockbuster potential and fully owned drug in the pipeline - Maxy-G34, which is targeted at white blood cell acceleration. Maxy-G34 is only in Phase II of development, which means the drug still has 5 or more years to go before it would hit the market. However, the company has no products that are currently being sold on the market. At this point, revenues come from collaborative research and development agreements with larger pharmaceutical firms like Roche (RHHBY), and a small portion of grant money. These revenue streams are not nearly enough to cover the costs of drug development, and Maxygen has lost $40-50 million dollars from operations in each of the past 5 years.

So how, you may be wondering, did this stock find it's way into the Magic Formula screen? After all, there had to be some operating profit to even generate an earnings yield! Well, that operating profit came in the form of a one time, $90 million dollar cash payment from Bayer (BAYRY) for Stage I drug Maxy-Factor VII, a potential hemophilia treatment. That $90 million represents more revenue than Maxygen has earned in the last 4 years combined! The big payment skews results dramatically, giving Maxygen a trailing twelve month earnings yield close to 40% and an MFI return on capital in the absurd 1,600% range, which will ensure a position on the Magic Formula screen for some time. However, this is a one time windfall, will not recur, and does not indicate a quality company or a cheap stock price. Maxygen is the kind of Magic Formula stock that MagicDiligence was created for - a mirage, and one to be avoided.

Just for fun though, let's play devil's advocate and take a speculative interest in the company. Maxy-G34 is a "next-generation" form of Amgen's (AMGN) Neulasta, which itself is a newer form of Neupogen, a combination of drugs that delivered over $4 billion dollars in sales last year. If Maxy-G34 can even capture a small portion of these indications, it could be worth several hundred million dollars a year, which would dwarf the $90 million Bayer payment and make this a rocket stock worth probably 10 times it's current valuation.

But what is the chance of Maxy-G34 being approved, and then capturing market share? Maxygen faces the very tall wall of Amgen patent protections, which are backed by that company's massive cash war chest. Since Neulasta/Neuopgen represent Amgen's biggest product line, the company will not lose that revenue stream without a vicious fight. Even worse, Maxygen has recently slowed development of Maxy-G34, unwilling to continue footing the bill until it finds a partner - a difficult task considering the opponent. The company is currently in a "freeze" mode, laying off workers and halting drug development. Management has hinted at a possible sale of the company, which may or may not fetch a premium over market prices, especially in the current economic environment.

It's very difficult to make any case at all for Maxygen, even a speculative one. Avoid this one and have a look at the Top Buys list instead.

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