MethylGene (MYG.TO): Another Biotech to Consider

Posted on September 23, 2009

With the success of my last biotech pick, MYRX, up 40% since the write up in late August, I’ve been scouring the markets looking for other biotechs trading for less than their cash value, but with the potential for significant upside.

Recently, a subscriber pointed me to MethylGene (MYG.TO - Note: For US Investors the pink sheet symbol is: MYLGF.PK ), a tiny Canadian biotech, recently quoted at C$0.38, down from nearly $2 last year.

As in my write-up of MYRX, I will refrain from a specific scientific analysis of MYG.TO’s product pipeline, since I am not qualified to offer such an evaluation. Interested readers should review the materials on MYG.TO’s website, as well as other scientific publications and form their own opinion as to the potential of MYG.TO’s various research projects.

However, from a non-scientific perspective, I found three things of note about MYG.TO, which lead me to believe that the stock has low downside risk at current prices, and significant upside.

Firstly, from a financial perspective MYG, with approximately 37 million shares outstanding, sports a market cap of about C$14 million, while the company has nearly C$27 million in cash, implying a negative enterprise value. As discussed in the MYRX post, given the high cash burn of biotechs (MYG is burning $7 million a quarter), a balance sheet analysis is not entirely appropriate. Nevertheless, for various reasons, assuming other investment criteria are met, a biotech trading at a negative enterprise value may represent a good value.

Additionally, earlier this month MYG announced that it and Otsuka, a Japanese pharmaceutical giant, would continue development of proprietary kinase inhibitors for ocular diseases. In addition, Otsuka will make a US$1.5 million equity investment in MethylGene, by the end of October 2009. This agreement provides MYG with significant credibility.

Finally, just a few days ago MYG announced announced that the U.S. Food and Drug Administration (FDA) has lifted the partial clinical hold placed on MGCD0103, the Company’s proprietary selective histone deacetylase (HDAC) inhibitor for cancer. What is interesting is that the original FDA clinical hold on MGCD0103, and the subsequent dissolution of a partnership with Celgene for MGCD0103, is what caused the initial fall of MYG.TO’s stock starting last year. Combined with the financial crisis, this pushed MYG’s stock to penny status. It stands to reason, though, that with the FDA reversal of the clinical hold, the value of MYG should be similar to what it was before the FDA hold, as the entire reason for the stock price drop has now been eliminated. More importantly, the lifting of the clinical hold, now allows MYG to find a new partner for MGCD0103. The signing of a new partner could act as a significant catalyst for stock price appreciation.

In conclusion, despite considerable funding and operational risks, MYG.TO, at the current negative enterprise value, represents an interesting biotech value at current prices. Continued support from Otsuka, as well as potential partnership from new pharma companies for MGCD0103, and other products in the pipeline, could lead to a significant reevaluation of the shares.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in MYG.to. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.