Avigen, Inc. (NASDAQ:AVGN) is an interesting opportunity: a rare net cash stock with an activist investor in pursuit. Based on its December 1, 2008 closing price of $0.65, the company has a market capitalization of $19.4M and net cash (i.e. cash less all liabilities) of $36.5M, which means that AVGN is trading at 53% of its net cash. Biotechnology Value Fund LP owns around 29% of the outstanding stock and has filed a 13D/A notice (most recent is here) requesting that AVGN “immediately reduce its expenses to as low a level as possible, partner or sell its remaining assets without further investment and take actions to distribute to [AVGN]’s stockholders as much of the resulting cash as possible.”
About AVGN
AVGN (website here) is a “biopharmaceutical company engaged in developing and commercializing small molecule therapeutics to treat neurological and neuromuscular disorders.”
The value proposition
According to AVGN’s most recent quarterly report, the company is bleeding cash, losing $9.4 in the September quarter. AVGN lost $25.2M last year and $24.3M in 2006. It has also had negative Cash Flow from Operating Activities for the September quarter in the amount of $8.4M. The company does, however, have a substantial amount of cash on its balance sheet. Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):
AVGN is a net cash stock, with $1.22 of net cash (cash after subtracting Total Liabilities). With its stock price at $0.65, AVGN is trading at a little over half its net cash value. We estimate AVGN’s value in a liquidation at around $38.4M ($1.29 per share). Given its net cash position of $36.5M or $1.22 per share, this means we have valued the rest of the company’s assets in liquidation at only $1.9M or $0.07 per share.
The catalyst
Biotechnology Value Fund originally filed a 13G notice in relation to AVGN, which indicates a passive investment. By updating to a 13D, Biotechnology Value Fund has indicated that it intends to take an active role in the company. An earlier 13D filing sets out Biotechnology Value Fund’s attitude towards the company:
“At the invitation of the Chairman of [AVGN], [Biotechnology Value Fund] articulated their views regarding the future of the Company in a conference call with the Board of Directors held on October 30, 2008. [Biotechnology Value Fund] stated their strong belief that [AVGN] should immediately reduce its expenses to as low a level as possible, partner or sell its remaining assets without further investment and take actions to distribute to [AVGN]’s stockholders as much of the resulting cash as possible. [AVGN] reported $56 million, or $1.88 per share, of financial assets as of September 30, 2008, consisting of cash, cash equivalents, available-for-sale securities and restricted investments.
[Biotechnology Value Fund] informed the Board of Directors that they think that the previously announced plan of spending [AVGN]’s remaining cash on the development of its early-stage pain drug, AV411 as well as [AVGN]’s corporate infrastructure is fundamentally flawed, especially in light of the current environment for raising additional capital. [Biotechnology Value Fund] believe that AV-411 is a high risk drug candidate that is best developed (if at all) by a larger company with greater financial resources and a lower cost of capital. By the time AV-411 could be commercialized, or even definitively proven safe and efficacious, [AVGN]’s existing cash resources would be depleted. [Biotechnology Value Fund] believe that the investment community clearly lacks confidence in such a plan, as evidenced by recent reports from stock analysts and by the $0.61 per share closing price of [AVGN]’s common stock on October 30, 2008, reflecting only 31% of [AVGN]’s financial assets as of September 30, 2008.
[Biotechnology Value Fund] intend to work with [AVGN]’s Board of Directors to effecuate a prompt return of cash to [AVGN]’s stockholders and intend to bring the matter directly to a vote of stockholders if their efforts with the Board of Directors are unsuccessful.”
Conclusion
It’s always exciting to find a net cash stock with an substantial stockholder demanding a return of cash. While it’s frightening to see AVGN hemorrhaging cash, Biotechnology Value Fund is awake to the opportunity to salvage what remains of the company’s value. If Biotechnology Value Fund is able to cause the company to quickly distribute the company’s remaining cash to stockholders, purchasers at these levels should see a good return on investment.
AVGN closed today at $0.65.
The S&P 500 Index closed at 816.21.
[Disclosure: We do not presently have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]
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[…] 16, 2008 by greenbackd We posted about Avigen, Inc. (NASDAQ:AVGN) on December 1, 2008, noting that it was a rare opportunity because […]
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