It’s been a big week for VaxGen Inc (OTC:VXGN). On Tuesday last week the “VaxGen Full Value Committee” nominated five director candidates to the board. Then on Thursday BizJournals.com reported that VXGN’s “failed AIDS vaccine” was “successful in a new trial that combined it with another failed vaccine in reducing the risk of becoming infected with HIV.” The stock ran on the news, prompting VXGN to clarify yesterday that it “retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development” but “has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option.”
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.
BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
Another group led by Spencer Capital and styling itself “Value Investors for Change” has also filed preliminary proxy documents to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.
VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.
The entry of the VaxGen Full Value Committee into the proxy contest will certainly make the next meeting an interesting spectacle, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, by Value Investors for Change or the VaxGen Full Value Committee. We believe VXGN’s rights to the AIDS vaccine should make little difference to the outcome of the proxy contest.
The press release announcing the nomination is set out below:
Contact: Steven N. Bronson
Telephone: 561-362-4199 ext 4
The VaxGen Full Value Committee Nominates Five Highly
Qualified Candidates to Replace Current VaxGen Board
Boca Raton, FL, September 22, 2009 –(Business Wire)–The VaxGen Full Value Committee (Committee) today reported that, on September 17th, it delivered to VaxGen Inc. (VXGN.OB) a solicitation notice for the nomination of five highly qualified director candidates to reconstitute the board of VaxGen at the upcoming 2009 annual meeting.
Members of the Committee, which currently consist of BA Value Investors LLC, a private investment firm founded by Steven N. Bronson, and ROI Capital Management, a registered investment advisor managed by Mark T. Boyer and Mitchell J. Soboleski, collectively own 13.7% of the outstanding common stock of VaxGen. The Committee expects that, if elected, its nominees will work to–
1. Return capital to VaxGen’s shareholders, including an immediate distribution of $10,000,000 in cash;
2. Negotiate a termination of VaxGen’s real property lease, which is out of all proportion to the Company’s needs and constitutes a serious drain on the Company’s resources;
3. Explore ways to monetize VaxGen’s value as a “public shell,” including the utilization of the Company’s substantial net operating losses; and
4. Protect for the benefit of shareholders royalty payments receivable as a result of the sale of VaxGen’s intellectual property.
The VaxGen Full Value Committee is dedicated to maximizing value for all shareholders. After the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board publicly disclosed that it would either pursue one or more strategic transactions or, failing to do so, dissolve the Company. The Company has done neither. Instead, members of the VaxGen board of directors have been paid compensation in amounts that the Committee believes are exorbitant, considering that the Company has no operations and is continuing to burn cash and cumulate losses. Since 2008, over $300,000 annually was paid to each of two non-employee directors serving on the strategic transaction committee of the Company’s board. It was only after Mr. Bronson’s letter to the board in June 2009 that the Company announced that it was discontinuing the compensation to the two outside board members for service on this committee. The Committee is committed to eliminating this type of board conduct.
Certain information concerning the Committee’s nominees follows.
Steven N. Bronson. Mr. Bronson, age 44, is the President of Catalyst Financial LLC, a privately held full service investment banking firm, and has held that position since September 1998. Mr. Bronson also serves as an officer and director of 4net Software, Inc., Ridgefield Acquisition Corp. and BKF Capital Group, Inc.David E. Castaneda. Mr. Castaneda, age 45, is the President of the Market Development Consulting Group, Inc. (MDC Group), a management consulting firm he founded in 1991 to offer expertise in corporate finance, corporate development and investor relations. From January 2004 to October 2007, he was Vice President Investor Relations for Cheniere Energy, Inc.
Leonard Hagan. Mr. Hagan, age 56, is a partner at Hagan & Burns CPA’s, PC in New York and has held that position since 2004. Mr. Hagan is also a director of 4net Software, Inc., BKF Capital Group, Inc. and Ridgefield Acquisition Corp.
Mark Boyer. Mr. Boyer, age 52, has been the President and a Director of ROI Capital Management, an investment advisor, since July 1992.
E. Steven zum Tobel. Mr. zum Tobel, age 42, is the founder, director and shareholder of First American Capital & Trading Corporation, a wholesale institutional specialty brokerage firm. He has been with First American Capital since 2002.
The press release clarifying the rights to the HIV vaccine is set out below:
VaxGen Congratulates HIV Prime-Boost Vaccine Study Collaborators and Clarifies Commercial Rights
South San Francisco, California — September 25, 2009 — VaxGen, Inc. today congratulated the Thai Ministry of Health, the U.S. Army, Sanofi Pasteur and VaxGen’s licensee Global Solutions for Infectious Disease (GSID) on the encouraging results demonstrated in the RV144 clinical trial. The top-line results of the placebo controlled study in 16,000 Thai volunteers were released today, and according to the sponsors of the trial, demonstrated that the vaccine regimen reduced HIV infection in a community-based population by 31.2% compared with placebo. The full results of the clinical trial have not yet been released by the study sponsors. The vaccine regimen tested in the study combined a priming vaccine developed by Sanofi Pasteur (ALVAC® HIV vCP1521) and GSID’s boosting vaccine (AIDSVAX® B/E).
In January 2006, VaxGen granted to GSID a worldwide license to research, develop, manufacture, register, use, market, import, offer for sale, and sell its HIV vaccine candidates, including the AIDSVAX B/E vaccine. VaxGen retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development. This option is, however, subject to an option held by Genentech, Inc. to commercialize HIV vaccines in North America. VaxGen’s option may be exercised during a period immediately following the filing of an application for marketing approval (i.e., a Biologics License Application with the U.S. FDA, or equivalent). VaxGen has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option. If VaxGen exercises its option, it will owe royalties to GSID and be required to reimburse 50% of GSID’s development expenses. If VaxGen does not exercise its option, it will be entitled to receive royalties for sales in the above-mentioned countries. VaxGen is not entitled to royalties on sales in developing countries as defined in the agreement with GSID. VaxGen believes it will not receive any payments under the agreement, if ever, for many years.
Substantial additional research and clinical development will be required to clarify the public health benefits of this outcome. The vaccine combination tested in Thailand was developed based on the strains of HIV that circulate in that country. Separate versions of the vaccine may have to be developed for HIV strains that predominate elsewhere in the world, including Europe and North America. “We are very pleased that this clinical study has yielded encouraging results, and may provide significant new scientific insights into the future development of effective HIV vaccines,” said James P. Panek, VaxGen President. “However, we believe potential commercialization of such a vaccine remains many years away.”
[Full Disclosure: We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]