Greenbackd

Avigen Inc (NASDAQ:AVGN) has filed its 10K for the fiscal year ended December 31, 2008.

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 investor Biotechnology Value 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. The stock is up 60% from $0.65 to close at $1.04 yesterday. We initially estimated AVGN’s net cash value to be around $1.22 per share (BVF estimates $1.20 per share). We’ve now increased our estimate slightly to $37M or $1.24 per share. The net cash estimate does not take into account AVGN’s AV411 assets and program, which could be worth considerably more, perhaps as much as $10M to $25M or between $0.30 or $0.65 per share.

The value proposition updated

AVGN used net cash in operating activities of $21.1m in 2008. While the cash burn rate has been reduced, it still represents a significant risk for AVGN stockholders. AVGN has attempted to reduce cash burn but expects to incur future expenses in connection with efforts to monetize the AV411 assets and evaluate merger and acquisition proposals. AVGN does expect that expenses for 2009 will be significantly below the spending levels of recent years. Our updated estimate for the company’s net cash value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

Off-balance sheet arrangements and Contractual obligations

AVGN does not have any off-balance-sheet arrangements. Its total contractual obligations not included in the balance sheet include $3.2M in operating leases and $1.8M in research funding for third parties.

Conclusion

At its $1.04 closing price yesterday, AVGN is trading at a 20% discount to our estimate of its net cash value of $37M or $1.24 per share. The liquidation value could be considerably higher again, as we have not included in the estimate the potential value of the AV411 assets and program, which could be worth an additional $10M to $25M or between $0.30 or $0.65 per share. BVF has made considerable head way, and we believe they have a good chance of securing the AVGN board seats they seek. The stock is up considerably since we initiated the position, but has not yet reached our estimate of value, and so we are maintaining our position.

[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.]