The New York Times has an article by Andrew Pollack, “Drug Investors Lose Patience,” about investors pushing biotechnology companies to liquidate and return capital to investors. Pollack notes that such clashes have become much more common in recent months as the stock market crash has pushed the market capitalization of many biotechnology companies to less than the cash on hand, which creates an opportunity for investors to realize an immediate return if the company dissolves. The article covers three situations that we have been following closely for several months, Avigen Inc (Nasdaq: AVGN), Neurobiological Technologies Inc (NASDAQ:NTII) and Northstar Neuroscience Inc (NASDAQ:NSTR).
The first is the clash between Avigen Inc (Nasdaq: AVGN) and Biotechnology Value Fund (BVF). We’ve been following AVGN (see archived posts here) for exactly the reason that Pollack identifies: 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 around 20% higher than AVGN’s $1.02 close yesterday.
Pollack provides a good background to the AVGN vs BVF stoush:
The Biotechnology Value Fund, often called BVF, was a longtime shareholder in Avigen. But it sold 640,000 shares, nearly all its holdings, for about $3.95 to $4.60 a share. The sale was near the stock’s highs for the year – in the two months before Avigen was scheduled to announce, in October, the clinical trial results of its drug to treat a symptom of multiple sclerosis. After the drug failed, BVF swooped in and bought more than eight million shares, nearly a 30 percent stake, at about 58 cents a share. That was well below Avigen’s cash total of about $1.90 a share at the time.
BVF has made a $1-a-share tender offer for Avigen and is trying to replace the directors. If it gains control, it could liquidate Avigen or sell it to MediciNova, which has said it wants to buy it. Mr. Chahine, the chief of Avigen, which is based in Alameda, Calif., said its assets might be parlayed into a deal that would be worth more than BVF or MediciNova would pay and more than the liquidation value. “All we’re saying is, give us an opportunity to canvass the field, see what’s out there and bring something to the shareholders,” he said.
But Mr. Nodelman said such a process might eat up the company’s remaining cash. “Someone’s got to police the space,” he said. “We’re making sure that the last $50 million in the company don’t go to the bankers and the consultants and the golden parachutes.”
BVF, which specializes in smaller biotech companies, has become the most outspoken investor pressing for its money back. The fund, based in San Francisco, gets about half of its capital from the Ziff family, which made its fortune in magazine publishing.
Mr. Nodelman makes no apologies for BVF’s having bought Avigen stock again after the collapse.
He also neatly captures the perspective of AVGN’s CEO, Ken Chahine, who, we think, speaks for on behalf of most CEOs in the same position:
“I hear that argument” about shareholder rights, said Kenneth G. Chahine, Avigen’s chief. “But it’s really ‘I want to raid the cash.’ We’re back to 1987 and ‘Barbarians at the Gate.’ “
The second situation mentioned in the article that we have been following is Neurobiological Technologies Inc (NASDAQ:NTII):
BVF is also one of four investors, which collectively own about two-thirds of the shares, demanding money back from Neurobiological Technologies of Emeryville, Calif.
The company’s stroke drug is derived from the venom of the Malayan pit viper. Three of the investors, including BVF, were shareholders when that drug failed in a clinical trial in December. The fourth bought in after the failure. The stock now trades at 58 cents, but its liquidation value would be as high as $1 a share.
Matthew Loar, the chief financial officer, said the company was sympathetic to the requests but had not yet decided what to do. In any case, he said, it could not act as fast as the investors want.
“You can’t just turn off the lights in a company in a day,” he said. Among other things, the company must figure out what to do with 1,000 poisonous snakes, he said. “We’re going to get rid of them in the most expeditious, reasonable way possible.”
We’ve been following NTII because it’s trading at a substantial discount to our estimate of its liquidating value. At its $0.59 close yesterday, NTII has a market capitalization of just $15.9M, which is around 10% higher than our $14.5M estimate for its net cash value but around two-thirds of our estimate of its $21.9M or $0.81 per share liquidation value. There exists the possibility that its liquidation value is significantly higher again if NTII receives a portion of the net proceeds paid to Celtic Pharmaceuticals upon a sale of XERECEPT. With stockholders representing 45% (note that Samuel L. Schwerin estimates 65%) of the outstanding stock of NTII calling for its liquidation, we feel the company will be under some pressure to accede and that should lead to a reasonably quick resolution.
The third situation we have been following is Northstar Neuroscience Inc (NASDAQ:NSTR), and it is particularly interesting because the company has agreed to liquidate:
Under pressure from the hedge fund RA Capital Management, for example, Northstar Neuroscience, a medical device company in Seattle whose stroke treatment failed, is proposing to liquidate, with shareholders receiving an estimated $1.90 to $2.10 a share in cash. The company’s stock, which had been as low as 90 cents in November, closed at $1.90 on Monday.
We started following NSTR because it is a net cash stock that has announced that it plans to liquidate. NSTR closed yesterday at $1.92, giving it a market capitalization of $50.2M. We originally estimated the final pay out figure in the liquidation to be around $59M or $2.26 per share, which presents an upside of around 17%. The company estimates a slightly lower pay out figure of between $1.90 and $2.10 “assuming we are unable to sell our non-cash assets” and expects to make an initial distribution within approximately 45 days after the Effective Date (which is to be announced) of approximately $1.80 per share.
The article notes that in some cases the investors asking for their money back are “not long-suffering shareholders” but “speculators who bought in only after the stock price collapsed, hoping to make a quick killing.” Aside from their characterization as “speculators,” we find ourselves in the latter camp. Our definition of investment hell is being caught in what Pollack calls a “zombie” – a company “lurching from product to product, surviving years or even decades without ever achieving success.” Finding a stock trading below a conservative estimate of the value of its assets with a good prospect that the value can be unlocked is our definition of investment heaven. Here’s to a few more quick killings, even if an investor requires the patience of Job to get them.
Hat tip to John Allen.
[Full Disclosure: We have a holding in AVGN. We do not have a holding in NTII or NSTR. 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.]