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The board of Avigen Inc (NASDAQ: AVGN) has responded to Biotechnology Value Fund’s (BVF) cash tender offer to purchase the outstanding common stock of AVGN, writing that the offer is “inadequate and not in the best interests of stockholders.”

We’ve been following AVGN (see archived posts 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. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that we think 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) 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 (BVF estimates $1.20 per share), which is a little less than 20% higher than AVGN’s $1.04 close yesterday.

The letter to AVGN stockholders is reproduced below:

Dear Avigen Stockholder:

Your Board of Directors has determined that the unsolicited conditional offer (“Offer”) by BVF Acquisition LLC (“BVF”) to acquire your shares is inadequate and not in the best interests of stockholders. The Board strongly urges you not to tender any shares into BVF’s Offer, and to withdraw any previously tendered shares. We believe we can create more value for your investment than the $1.00 per share that has been offered by BVF.

To that end, we are pleased to report good progress in our process of considering strategic alternatives to maximize stockholder value. In the last few weeks, Avigen has received multiple proposals that place significant value on its cash position, intellectual property portfolio, AV411 product development program, and public listing on the NASDAQ Global Market. We expect to receive additional proposals in the weeks ahead and are optimistic about achieving our objective of creating significant value for all stockholders.

Reasons for the Board’s Recommendation to Reject the BVF Offer

The Board cited the following reasons for recommending that stockholders reject BVF’s Offer:

* The Offer price is inadequate and substantially undervalues Avigen. The Board believes the Offer price substantially undervalues Avigen’s business, including its cash position, AV411 development program, intellectual property, license with Genzyme, experienced management team and public listing.

* We believe we can structure a transaction that will allow you to receive value for many or all of the company’s assets. The Board believes that the current global economic crisis provides significant strategic opportunities to companies such as Avigen that have a strong cash position and public listing. In addition to pursuing a potential strategic relationship with MediciNova, Inc., we have recently received other written proposals which appear competitive to the MediciNova proposal. These proposals place significant value on many or all of Avigen’s assets, and we believe we will receive additional proposals in the weeks ahead.

* The Avigen stock price has recently traded as high as $1.06 per share, and closed February 5, 2009 at a price of $1.00 per Share.

* The BVF Offer transfers to BVF any future increases in the price of your Avigen stock. Under the terms of BVF’s Offer, if you tender your shares, and the Offer is consummated, you would not receive more than $1.00 per share. The Board does not believe that BVF would make this Offer unless it expected the stock price to increase.

In fact, BVF states in its Offer that “[t]he Purchaser is making this Offer because BVF believes that the purchase of Shares at the purchase price pursuant to the Offer represents an attractive investment for the Purchaser.” If you tender your shares to BVF and the Offer is consummated, BVF will benefit from any gains in Avigen’s stock price, not you.

* The BVF Offer is not a firm commitment to you and is unlikely to close by the Expiration Time. The Offer has conditions that make it unlikely to close on February 23, 2009 as stated in the Offer, and carries significant uncertainty that the Offer will be consummated at all.

Avigen’s Board is committed to listening to its stockholders and working with them to achieve the maximum value of the company’s assets. The Board has met and interacted with BVF a number of times, received and evaluated its proposals, and tried to draw on its ideas in a collaborative manner. These efforts to work with BVF are described in detail in Avigen’s Schedule 14D-9, which accompanies this letter and has been filed with the Securities and Exchange Commission.

The Board also has worked diligently to engage in discussions with MediciNova, Inc., which in December 2008 proposed acquiring Avigen. Since making that unsolicited proposal, however, MediciNova has been slow to advance discussions, as more fully described in Avigen’s Schedule 14D-9 filing.

Our Pledge to Stockholders

Avigen’s Board and management took decisive action since the announcement of our AV650 trial results on October 21, 2008, and acted swiftly to preserve cash. We believe the value of Avigen’s remaining assets is significant and the potential for a strategic transaction is worthy of consideration. Whatever the outcome, we intend to apply the same financial judgment used in the past to decisions going forward.

In the meantime, Avigen intends to provide its stockholders with regular updates and to continue to work with all its stockholders in a thoughtful, collaborative and respectful manner.
Respectfully,

Signed for the Board of Directors:

/s/ Zola Horovitz, Ph.D.
Zola Horovitz, Ph.D. as Chairman of the Board

/s/ Kenneth G. Chahine, Ph.D., J.D.
Kenneth G. Chahine, Ph.D., J.D. as Chief Executive Officer

The relevant portion of AVGN’s Schedule 14D-9 filing follows:

Although BVF had previously been a significant stockholder of Avigen, BVF’s filings with the SEC show that BVF had sold almost all of its Shares prior to October 21, 2008. Specifically, in the two months prior to October 21, BVF sold more than 640,000 Shares, at prices ranging from $3.95 to $4.60 per Share.

On October 21, 2008, Avigen announced that the top-line data from its AV650 trial for the treatment of spasticity in patients with multiple sclerosis did not meet its primary endpoint. As a result of this announcement, Avigen’s stock price dropped by more than 80% and, on the same day, BVF purchased more than 8,100,000 Shares in the open market at an average price of approximately $0.58 per Share.

Avigen held a conference call announcing the data from the AV650 trial. On the call, Avigen stated that the management and Board were pleased with the trial design and execution, but unfortunately the results were unequivocal. As a result, the AV650 program would be immediately terminated and no additional investment in the program was planned.

On October 22, 2008, Avigen’s representatives met with BVF’s representatives. At the meeting, BVF’s representatives expressed admiration for the team’s past performance in creating stockholder value. BVF proposed that Avigen, given its expertise and cash balance, look for attractive companies to merge with or acquire. BVF expressed its belief that such a strategy could lead to a significant return on its recent investment.

Avigen’s Chairman, Dr. Zola Horovitz, invited Mark Lampert, President of BVF, to present his views to the Board at the upcoming Board meeting on October 30, 2008. Mr. Lampert presented at the meeting and again expressed his admiration of the Board and management on taking swift and decisive action to terminate the AV650 program. However, instead of pursuing strategic alternatives, Mr. Lampert recommended to the Board that Avigen immediately liquidate. Following Mr. Lampert’s participation, the Board approved management’s recommendation to significantly reduce head count and to monetize both the AV513 and AV411 assets through either a partnership or sale transaction, and authorized management to initiate a process to identify potential strategic opportunities that could maximize stockholder value and result in returns that exceeded Avigen’s liquidation value.

On the next day, and without waiting for any response from the Board, BVF filed an amendment to its Schedule 13D expressing the same view Mr. Lampert had expressed at the Board meeting and threatening to bring a proposal for liquidation directly to a vote of the stockholders.

On November 3, 2008, Avigen announced a significant restructuring aimed at preserving cash and reassessing strategic opportunities, including staff reductions of over 70 percent of Avigen’s total workforce, as approved by the Board on October 30.

Dr. Kenneth Chahine, Avigen’s CEO, continued to have an open dialogue with Mr. Lampert through phone conversations and emails. Dr. Chahine tried to reassure BVF that Avigen was going to conduct an orderly and efficient process and that Avigen was being fiscally prudent. Mr. Lampert expressed his opinion that Avigen should grant BVF a “put option” (an option to sell its Shares back to Avigen at a set price in the future) to guarantee the minimum “worst case outcome” for BVF. Dr. Chahine expressed that such a put option could potentially weaken Avigen’s negotiating position in its efforts to monetize AV411 or a sale of Avigen. Dr. Chahine explained his concerns by using the analogy of someone trying to sell their house for full value when the buyers know the house is scheduled to go into foreclosure at a fraction of the price in the future.

On November 21, 2008, Avigen entered into the Rights Agreement described in more detail in Item 8 below, in order to discourage a hostile takeover by a third party at a price that would prevent stockholders from obtaining fair value for their Shares.

During the next two weeks Avigen continued discussions with strategic advisors and began negotiating engagement letters with Pacific Growth Equities (“Pacific Growth”) and RBC Capital Markets (“RBC”).

On December 4, 2008, Dr. Chahine, along with one of the strategic advisors, spoke with Mr. Lampert. Dr. Chahine stated that he had spoken with counsel, strategic advisors, and several Board members regarding BVF’s demand for a put option. Dr. Chahine conveyed that numerous legal and business concerns had been raised and cautioned that a put option might have unintended consequences that would disadvantage all stockholders, including BVF. Nevertheless, Dr. Chahine stated that he remained open-minded and invited Mr. Lampert to provide Avigen’s strategic advisors at Pacific Growth support and rationale for BVF’s proposal for presentation and consideration by the Board at a meeting to be held on December 9.

On December 8, 2008, Dr. Horovitz received a letter from MediciNova, Inc. (“MediciNova”), proposing an acquisition of Avigen by MediciNova and setting forth very general terms for the proposed acquisition. Dr. Horovitz promptly contacted MediciNova’s Chairman and expressed that Avigen was in the process of retaining strategic advisors to consider proposals such as this early in the new year. This timing was necessary to permit Avigen’s management to focus on the ongoing restructuring efforts and to complete the negotiation of the sale of AV513 to Baxter Healthcare, and to formally retain strategic advisors.

On December 9, 2008, the Board met. While not formally engaged, strategic advisors from Pacific Growth and RBC gave presentations outlining their expertise and the review process. The Board discussed the MediciNova proposal and Dr. Horovitz stated that he had contacted MediciNova’s Chairman and had proposed a timeline for discussion. BVF did not provide any supporting material to strategic advisors on the mechanism or rationale for a put option.

On December 11, 2008, BVF published an open letter to the Board. In the letter BVF accused management and the Board of general mismanagement and reiterated BVF’s demand that the Board “guaranty” an outcome for stockholders.

On December 18, 2008, Avigen announced the sale of its AV513 product candidate for $7,000,000 ($0.23 per Share) to Baxter Healthcare.

On December 22, 2008, Drs. Horovitz and Chahine issued a letter to stockholders underscoring the Board’s and management’s commitment to act in the best interests of Avigen’s stockholders and emphasizing the swift and decisive actions already taken to preserve cash since the AV650 announcement. The letter to stockholders also reminded stockholders of the significant value of Avigen’s remaining assets, and of the Board’s and management’s commitment to pursue possible strategic transactions that would be in the best interests of all of Avigen’s stockholders. The letter concluded with a pledge to stockholders that Avigen would continue to use the same fiscally prudent approach that had allowed it to preserve cash.

On that same day, Dr. Horovitz received a second (and modified) proposal from MediciNova. In the letter, MediciNova proposed terms substantially similar to those contained in MediciNova’s December 8 letter, modified to reflect the $7,000,000 received from the sale of AV513.

The Board subsequently reviewed the proposal from MediciNova and concluded that the MediciNova proposal, as revised, should be carefully considered and that due diligence should commence early in the new year following the engagement of strategic advisors. Dr. Horovitz again contacted MediciNova’s Chairman and communicated the Board’s conclusion.

On December 29, 2008, BVF filed an amended Schedule 13D advocating that Avigen should “consummate the Proposed Merger expeditiously.” It was the Board’s view that BVF’s publicly-stated support for the MediciNova proposal weakened Avigen’s negotiating position, making it more difficult for Avigen to negotiate a better transaction with MediciNova on behalf of all of Avigen’s stockholders.

On January 9, 2009, BVF delivered a notice to Avigen, demanding that Avigen call a special meeting of stockholders to, among other things, remove the current members of Avigen’s Board, without cause, and for the proposed election of BVF’s slate of director nominees (the “BVF Nominees”).

On January 14, 2009, Avigen announced that it had engaged RBC to oversee the review of merger and acquisition opportunities for Avigen and had engaged Pacific Growth primarily to assist in monetizing Avigen’s AV411 assets.

On the very next day, BVF publicly announced its intention to make a tender offer to purchase all of the outstanding Shares of Avigen. In its offering documents filed subsequently, BVF incorrectly stated that Avigen had rejected the MediciNova proposal and expressed BVF’s view that, if elected to the Board of Avigen, the BVF Nominees would pursue the MediciNova proposal.

On January 19, 2009, Avigen sent a confidentiality agreement to MediciNova’s Chairman of the Board, in order to initiate the due diligence process and negotiations regarding a possible transaction between Avigen and MediciNova. The Board proposed in the confidentiality agreement that both Avigen and MediciNova share information with each other in order to permit the Board and, if a transaction is agreed upon, Avigen stockholders, to understand key aspects of MediciNova’s business, including anticipated expenses, development plans, and commercialization strategy in order to properly evaluate the proposal and determine whether it is appropriate to recommend or, if recommended, approve.

In the days following, Avigen’s strategic advisors at RBC met with representatives of BVF to engage in further discussions.

On January 20, 2009, RBC presented various financial analyses and an overview and update of the process of evaluating Avigen’s strategic alternatives to the Board. On that date, Avigen received multiple proposals from companies to engage in strategic transactions that, on their face, appeared competitive with the MediciNova proposal. Avigen contacted these companies and initiated discussions to assess these potential strategic transactions.

Avigen’s strategic advisors at RBC sent an email to MediciNova’s Chairman on January 22, 2009, stating that efforts to reach MediciNova’s CEO and CFO were unsuccessful and urging him to review and return the confidentiality agreement so that due diligence could commence as soon as possible. The Chairman responded that he would remind the MediciNova management. RBC subsequently received a communication from MediciNova’s CFO promising that they would review the draft and return it with any comments.

In spite of Avigen’s continuing efforts to assess potential strategic transactions and the Board’s and management’s efforts to engage Mr. Lampert in productive discussions, on January 23, 2009, the Purchaser filed a Schedule TO with the SEC, formally initiating the Offer.

At Board meetings held on January 26 and 29, 2009, at each of which the Board assessed the Offer, RBC presented various financial analyses and an overview and update regarding the process of evaluating Avigen’s strategic alternatives.

One week after MediciNova’s prior communication, on January 29, 2009, strategic advisors at RBC once again contacted MediciNova’s Chairman reiterating that efforts to reach MediciNova’s CEO and CFO were unsuccessful and urging him to review and return the confidentiality agreement so that diligence could commence as soon as possible. The Chairman responded that he would remind the management again.

On January 30, 2009, RBC received a revised version of the confidentiality agreement from MediciNova with suggested changes. The draft was reviewed by Avigen’s counsel and on February 3, 2009, promptly returned to MediciNova. RBC proposed that MediciNova’s counsel call Avigen’s counsel to expedite the process and resolve any issues so that the due diligence process could be initiated as soon as possible.

As of the date of this statement, MediciNova’s counsel had not yet contacted Avigen’s counsel.

AVGN’s other proxy documents can be found here.

[Full 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.]