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Biotechnology Value Fund (BVF) yesterday called for the management of Avigen Inc (Nasdaq: AVGN) to “address certain fundamental questions BVF believes need to be answered in order for stockholders to effectively evaluate [AVGN]’s future strategic direction.”

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 full text of BVF’s press release is reproduced below:

Biotechnology Value Fund, L.P. Requests Avigen Board to Provide Critical Information to Stockholders

Tuesday February 10, 2009, 1:04 pm EST

Raises Questions to be Addressed by Board and Management on Avigen’s February 11, 2009 Conference Call

SAN FRANCISCO, Feb. 10 /PRNewswire/ — Biotechnology Value Fund, L.P. (“BVF”), today called for the management of Avigen, Inc. (Nasdaq: AVGN – News) to address certain fundamental questions BVF believes need to be answered in order for stockholders to effectively evaluate Avigen’s future strategic direction. Avigen announced in its January 14, 2009 press release that it will hold a conference call on Wednesday, February 11, 2009 (time to be announced) to, among other things, “provide an update on the progress of the strategic review.” To make that update more effective, BVF raises the following questions and challenges the Board and management to finally address these fundamental issues:

1. Why has Avigen failed to call the special meeting of stockholders that would permit stockholders to have a say in Avigen’s future? BVF delivered its request for a special meeting to the Board over a month ago. To date, the Board has failed to call the requested special meeting. This meeting would provide stockholders with the ability to exercise their fundamental right to vote on Avigen’s strategic direction. If stockholders agree with BVF, they can vote to remove existing directors and elect BVF’s nominees. If the Board does not act prior to Wednesday, March 11, 2009 to set a meeting date, BVF can unilaterally set the date of the special meeting and would anticipate setting a meeting date for early April.

2. Why has Avigen not offered downside protection to stockholders? BVF has repeatedly called on Avigen to commit to protecting stockholder value by offering all stockholders a fixed amount of cash under any resulting scenario. Management has continually resisted this suggestion, leading us to believe that Avigen intends to gamble that money. MediciNova has proposed a transaction that offers critical downside protection to stockholders. So why hasn’t Avigen done so directly?

3. Why does Avigen not consider the MediciNova proposed merger to be a compelling outcome for stockholders? BVF does not understand why Avigen appears to be resisting the MediciNova transaction. Economically, based on publicly available information, we believe this proposed transaction to be in the best interest of all stockholders. In a worst case scenario, stockholders would receive approximately Avigen’s liquidation value. In a best-case scenario, stockholders would own 45% of the combined company.

4. Is management requiring downside protection for Avigen stockholders as a condition to all potential “strategic alternatives?” If this is the case, Avigen should state so explicitly so stockholders can stop worrying about losing the bulk of their investment. If not, please explain how any alternative without downside protection could be more attractive to stockholders. Most biotech companies in Avigen’s shoes have managed to destroy the majority of stockholder value through by pursuing their favorite merger. How can Avigen justify standing in the way of the downside protection being offered by MediciNova?

5. What is the estimated net liquidation value of Avigen? In response to our tender offer, management claimed that Avigen is currently worth more than our offer of $1 per share, without support of any kind. We call on management to publicly provide their estimate of Avigen’s liquidation value, together with a detailed analysis. Management should also disclose how much cash was burned by Avigen since its last public filing on September 30, 2008 and how much cash net of debt and obligations will be available on March 31, 2009.

6. What are Avigen’s total “golden parachute” obligations and how much time did Avigen’s CEO spend in Utah versus California during the critical months of December and January? In a shameless example of acting in their own self-interest, in October 2008 management increased its “golden parachute” payments in order to “to attract and retain key executive talent.” At the time, we estimated these payouts to total at least $3 million, an incredible 16.5% of Avigen’s entire market value at the time of adoption. BVF believes this is particularly egregious given the current economic environment. What is the current value of these obligations and how many employees stand to receive these payouts?

7. What is Avigen’s relationship with its financial advisers and how are they being compensated? In January 2009, the Board of Directors announced that it had retained not one but two financial advisers, RBC Capital Markets and Pacific Growth Equities LLC. Why did the Board find it necessary to engage two financial advisers? Will these advisors be paid in the same currency as stockholders or will they, like management, take cash and leave stockholders with paper?

Mark N. Lampert, the General Partner of BVF stated, “Since management announced the failure of AV650 in October of last year, we have found their reluctance to address certain issues, which we believe are integral for stockholders’ assessment of Avigen’s current prospects and future direction, to be incredibly frustrating. We are hopeful management will not hide behind vague generalities, and will provide specific answers to these important questions.

Mr. Lampert continued, “We hope the Board and management will address our questions and concerns and provide stockholders with the disclosure necessary to properly evaluate and determine the best strategic direction for Avigen. We call on each Board member, consistent with his fiduciary duties, to act in the best interests of all stockholders. If we determine this Board has acted inconsistently with its fiduciary duties, we will not hesitate to take any and all actions within our rights as stockholders, including commencing litigation and/or seeking an injunction, in order to protect our investment in Avigen. We look forward to the Board’s and management’s response.”

[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.]