Staff Writer

Maxygen Inc. on Friday became the latest member of a very small biotech cadre that is returning cash to shareholders.

In the biotech world of sky-high drug development costs and endless opportunities for reinvestment, this just isn't done.

Only big, profitable biotechs with more cash than they could possibly spend on R&D use stock buybacks as a way to return some of that money to shareholders. For companies like Biogen Idec Inc. or Celgene Corp., such buybacks also boost earnings per share and can deliver a nice return, particularly if the stock is undervalued, according to ThinkEquity LLC partner John Fitzgibbons.

But most biotechs are not profitable and "need to hold on to every dollar," Josh Muntner, managing director of health care investment banking for ThinkEquity, recently told BioWorld Insight.

That's why it's somewhat unusual to see a development-stage biotech like Maxygen take the buyback route.

But Maxygen itself is a bit of an unusual case.

The Redwood City, Calif.-based firm has been flush with cash since mid-2008, when it sold preclinical hemophilia drug MAXY-VII to Bayer AG in a $120 million deal that included a $90 million up-front payment. MAXY-VII uses Maxygen's gene shuffling MolecularBreeding platform to improve on NovoSeven (recombinant coagulation factor VII, Novo Nordisk A/S). (See BioWorld Today, July 3, 2008.)

Soon afterward, Maxygen licensed its preclinical autoimmune and transplant drug MAXY-4, which is similar to Bristol-Myers Squibb Co.'s rheumatoid arthritis drug Orencia (abatacept), in a back-end loaded $170 million deal with Astellas Pharma Inc. The companies later expanded the deal into a joint venture around the rest of Maxygen's early stage programs, leaving Maxygen with only one asset: MAXY-G34, its Phase II G-CSF drug designed to improve on Amgen Inc.'s Neulasta (pegfilgrastim). (See BioWorld Today, Sept. 22, 2008.)

Maxygen decided not to advance MAXY-G34 into Phase IIb or Phase III trials until it found a partner, and its search has thus far proven unsuccessful. So the company restructured to reduce its costs and is sitting on $203 million, as of Sept. 30.

With its stock sliding toward $5, Maxygen was trading about at cash value, making the company arguably undervalued and a potential takeover target. So Maxygen put some of its cash to work with a buyback.

The modified "Dutch Auction" tender offer will repurchase 6,557,377 shares at a price between $5.30 and $6.10 per share. If more shares are tendered, Maxygen may boost the buyback by 787,726 shares. The tender offer expires at midnight eastern time on Friday, Dec. 11, 2009, and will likely end up costing Maxygen $35 million to $40 million.

The stock (NASDAQ:MAXY) jumped 73 cents, or 14.5 percent, to close at $5.76 on Friday. The company did not immediately return calls seeking comment.

Although Maxygen's buyback is unusual, it isn't unprecedented. Last month, unprofitable Cardiome Pharma Corp. spent $27.5 million to repurchase shares through a Dutch auction tender offer.

But Cardiome, too, is unique. The company had upward of five years worth of cash in its coffers, and most of the costs associated with Phase III atrial fibrillation drug Kynapid (vernakalant) are being covered by partners. Cardiome's early R&D programs are not particularly expensive as of yet, and more milestones and royalties will be flowing in as Kynapid gains approval and hits the market.

PDL BioPharma Inc. has been returning cash to shareholders lately, too, albeit through dividends rather than stock buybacks. Since spinning out its R&D into Facet Biotech Corp., PDL has transformed into a financial instrument that passes the royalties earned on its antibody patents back to shareholders.

A few other unprofitable biotechs have approved share repurchases this year, including Adeona Pharmaceuticals Inc. (formerly known as Pipex Pharmaceuticals Inc.). Adeona, which last week published results from its Phase II rheumatoid arthritis trial with dnaJP1, got a 279 percent stock boost earlier this year when it announced a $1 million buyback. The company said its goals with the repurchase were to improve its stock price, provide liquidity and reduce outstanding shares.

While PDL may be somewhat difficult to duplicate, is it possible that more biotechs will find themselves in a situation similar to Cardiome or Maxygen, as maturing products sold to pharma partners generate excess cash?

Even if they do, Muntner predicted that most will reinvest their money in R&D rather than returning it to shareholders, and both dividends and buybacks will continue to be relatively rare.

Published  November 16, 2009