Greenbackd

In its most recent 13D filing Biotechnology Value Fund (BVF) has provided its “full and enthusiastic support” for MediciNova, Inc.’s (NASDAQ:MNOV) offer for Avigen, Inc. (NASDAQ:AVGN).

We’ve been following AVGN (see earlier posts here, here, here, here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology activist fund BVF has been pushing it to liquidate and return its cash to shareholders. We think that MNOV’s offer represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV). We estimate the cash to be paid at around $1.22 per share (BVF estimates the amount at $1.20 per share), which is more than 60% higher than AVGN’s $0.76 close Wednesday. AVGN’s shareholders also have the option to receive MNOV shares instead of the cash. MNOV values its shares at $4.00 (MNOV closed Wednesday at $1.59).

BVF’s filing sets out its rationale for endorsing the merger. The relevant text is extracted below:

On December 22, 2008 MediciNova, Inc. (“MediciNova”) described details of a Proposed Merger between MediciNova and Avigen, Inc. (“Avigen”) in a letter to Avigen’s Chairman, Zola Horovitz. The Reporting Persons hereby express their full and enthusiastic support for this Proposed Merger and believe it is the best interest of all Avigen shareholders. The Reporting Persons presently have no economic interest in MediciNova. The Reporting Persons call on Avigen’s Board of Directors to negotiate with MediciNova and work to consummate the Proposed Merger expeditiously.

The Reporting Persons support the Proposed Merger for the following reasons:

1. Downside Protection: The Proposed Merger provides for the same downside protection that the Reporting Persons encouraged Avigen to implement directly (which Avigen rejected). Subsequent to the Proposed Merger, if MediciNova is unsuccessful, Avigen shareholders will receive approximately the current liquidation value of Avigen (which the Reporting Persons estimate to be approximately $1.20/share, net of debt and expenses), as determined by an independent auditor. Incredibly, in a worst case scenario, the Proposed Merger would yield about a 60% premium to Avigen’s current stock price.

2. Extraordinary Upside Potential: If MediciNova is successful post-merger, Avigen shareholders could own a substantial percentage of MediciNova (which the Reporting Persons estimate to be approximately 45% of the combined company). Thus, in a best case scenario, Avigen shareholders could enjoy an extraordinary, uncapped return. For this reason, the Proposed Merger is superior to an immediate liquidation of Avigen.

3. Free Option: Shareholders have at least one year after the merger is consummated to choose downside protection or upside potential, as described above. This decision can be based on information obtained over the course of the free option period, including the stock performance of MediciNova. This free option period offers shareholders tremendous upside potential with virtually no risk.

4. Change of Control: The Proposed Merger would result in new stewardship of Avigen’s assets, curtailing current management’s stated plan of seeking ways to utilize (and we fear waste) Avigen’s cash in any way they wish. This is a particularly frightening prospect in light of CEO Ken Chahine’s recent statements that “it’s hard to put a finger on exactly what we would do”, that he “intends to build” and that he “thinks that there are opportunities outside of therapeutics.”

5. Unique Synergies: The Reporting Persons believe there are unique synergies between MediciNova and Avigen which likely would not exist with other potential acquirers of Avigen. These synergies give rise to the compelling nature of the Proposed Merger.

BVF wishes to see the Proposed Merger brought to a shareholder vote as soon as practical and urges other Avigen shareholders to support this offer.

We’ve noted in our earlier posts that AVGN presents an attractive investment opportunity if BVF can persuade it to quickly distribute its remaining cash to stockholders. MNOV’s offer presents a clever way for AVGN’s stockholders to receive an amount equivalent to its cash with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. We estimate AVGN’s cash at around $1.22 per share, which is more than 60% higher than AVGN’s $0.76 close Wednesday. With BVF’s endorsement of MNOV’s offer, we believe the investment rationale for AVGN is strong.

[Disclosure: We 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.]