Nature Biotechnology24, 227 - 228 (2006)
Published online: 8 March 2006; | doi:10.1038/nbt0306-227
Deconstructing Myogen's market cap
John Ransom
Lone Tree, Colorado
The best-performing stock from 2005 was a prime example of how biotech stocks are not as capricious as they may seem.
The evolution of Myogen's share price over the past year is subject to a stock market valuation that is not as random as it may seem.
Roy Peterson / Drawn & Quartered / NewsCom
The best performing stock from 2005 was Myogen, a biopharmaceutical company in Westminster, Colorado, focusing on cardiovascular diseases. Myogen offers a prime example of how biotech stocks, albeit often volatile, are not as capricious as they may seem. The stock had a rough start in 2005, but by mid-summer the company had made significant advances in research and financing. As a result, valuations reached an all-time high. Although Myogen's price performance, in going from $5–$38, is exceptional, it can also be seen as a typical example of how a biotech company that is successful at managing news about late-stage testing can propel biotech its market valuation to predictable ranges.
Myogen has three main products in its pipeline. The first, enoximone is a phosphodiesterase 3 inhibitor used to treat chronic heart failure. Phase 3 trial results for the product, announced in June, proved disappointing and caused the stock to hit a low of $5.21 per share. Myogen's more promising drugs include darusentan, a selective endothelin receptor antagonist designed to treat treatment-resistant hypertension. Darusentan did well in phase 2 trials announced in September 2005, sparking a rally in the stock to a trading range of $20–$24—up from $13.50 before the announcement. In September, the company took advantage of those higher equity prices to complete a $125-million secondary offering priced at $23.25 per share. Then in December, positive phase 3 trial results as well as fewer reported side effects than existing treatments were announced for ambrisentan, which is another endothelin receptor antagonist developed to treat pulmonary arterial hypertension (PAH). These results lifted the stock even further to $38.
Now that Myogen has two developmental drugs with $1.4 billion in combined peak sales expectations, where do investors think the stock is headed? The median estimate by analysts tracked by business intelligence provider Thomson/First Data put the company at $40 per share. But with the stock already approaching $38, at the time of writing in January, its price can be predicted by comparing it with the valuations of another company active in the PAH market, Actelion of Allschwill, Switzerland.
In several recent research notes, analysts, including Lucy Lu at investment bank First Albany and Mark Augustine at Credit Suisse First Boston, both based in New York City, called ambrisentan a "best-in-class" option for treating pulmonary arterial hypertension. They found it superior to PAH market-leader Actelion's Tracleer (bosentan), which generated revenue for Actelion of $350 million in the first nine months of 2005 according to the company's own filings. Recently, JP Morgan's biotech analyst Geoffrey Meacham updated his peak sales estimates for ambrisentan to $500 million. "If Actelion trades 3.5 times peak sales on Tracleer," says Meacham, "then I don't see any reason why Myogen couldn't conservatively demand three times peak sales for ambrisentan."
If Actelion trades 3.5 times peak sales on Tracleer, then I don't see any reason why Myogen couldn't conservatively demand three times peak sales for ambrisentan.
Geoffrey Meacham JP Morgan
This type of 'peak sales' model puts the valuation for ambrisentan at $1.2 billion, assuming a 20% discount for future risk. Such a model uses a multiple of predicted 'peak sales' for each drug (from three times to ten times peak sales) and then discounts that number from 10–50% percent to account for the estimated risk associated with bringing the drug to the market. That, in turn, depends on the phase of development the product has reached. The peak sales valuation method is a common model used among biotech analysts. It differs slightly from the so-called 'free cash flow' model, which tries to anticipate the amount of profit that the company can produce by selling its product. Given the large amount of money demanded by R&D in companies like Myogen, and the likelihood that take-to-market products might be distributed by larger pharmaceuticals more efficiently, cash-flow assumptions can vary widely from company to company. Hence analysts often use peak sales models in research-intensive companies like Myogen to keep comparisons equal.
Thus darusentan has an estimated valuation of $750 million–$2.1 billion. That's with the same peak sales valuation model for darusentan but applying a 30% discount for future risk because phase 3 trials are just about to start for that drug. And that's also assuming peak sales in the analysts' estimated range of $500–$1 billion. Combined, Myogen's two most promising developmental drugs would seem to imply a $2-billion to $3.3-billion market capitalization or a price per share of $48–$79, well above the median target price.
So why then is the stock trading at $38 while analysts keep the target at just $40? The market seems to be allowing a 25% discount from the lowest valuation to account for the time it will take to bring these products to market. This discount could get smaller as the company gets closer to commercialization for either or both products, says Meacham.
Myogen Stock Price 1/3/2005 - 2/1/2006
As for the analysts' price? Several factors typically influence the ratings that analysts give. First of all, in this case, results from ambrisentan's announced round of phase 3 trials have been reported, but results from another round, called Aries I, won't be released until the second quarter of 2006, according to Derek Cole, a spokesman for Myogen. "We think it would be very hard for the Aries I results to match the impressive results of Aries II," says Meacham, adding that he still expected great results from Aries I. Consequently, when the Aries I results are released there could be a bit of a letdown in the market.
Second, another aspect that influences the analyst's rating is linked to the valuation models. Although analysts discount for risk, to some extent those discounts are arbitrary expressions of the analysts' own opinion. How to account for the fact that the company will not be ready to submit a new application for ambrisentan until the fourth quarter of 2006 is handled differently by each analyst. In each case, however, that risk will discount an analyst's valuations.
Lastly, another factor to influence an analyst's decision is that substantial revenues are not expected from either drug until fiscal year 2008 with positive cash flow assumed in fiscal year 2009, according to research reports by First Albany's Lu. A lot can happen in a few years to a company that will move valuations up and down. Actelion provides a perfect example of that.
When commercial approval of Tracleer was first announced Actelion's stock traded at CHF60 ($46.80), using current exchange rates. Over the next four years as sales ramped up, the market continued to reward results from the company, lifting the stock as high as CHF153 ($119). But since the announcement of phase 3 trial results from ambrisentan, Actelion's stock has traded down from CHF148 ($115) to a low of CHF112 ($85), in some measure because of the competition that ambrisentan may bring, says Meacham. "Tracleer has a head start and some doctors may be reluctant to switch for patients that are doing well. But from what we have seen there is little doubt the market could eventually belong to ambrisentan," he concluded.
If Actelion trades 3.5 times peak sales on Tracleer, then I don't see any reason why Myogen couldn't conservatively demand three times peak sales for ambrisentan. 
