VaxGen Inc (OTC:VXGN) is a bread-and-butter play for us. The company is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is now “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” If the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. At its $0.48 close yesterday, VXGN has a market capitalization of $15.9M. We estimate the net cash value to be around 80% higher at $27.7M or $0.84 per share. VXGN has other potentially valuable assets, including a “a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. We’ve added it to the Greenbackd Portfolio.
About VXGN
VXGN is a biopharmaceutical company based in South San Francisco, California. The company was incorporated on November 27, 1995. During 2002 through 2006, VXGN developed vaccines against inhalation anthrax and smallpox for the purpose of biodefense. In December 2006, the Department of Health and Human Services (HHS) terminated its contract with VXGN for the development and delivery of a next-generation anthrax vaccine. Following the HHS decision, VXGN ceased actively developing its anthrax vaccine, scaled back its biodefense activities and began pursuing strategic and other alternatives. The company has now ended all product development activities and sold or otherwise terminated its drug development programs.
The value proposition
VXGN’s earnings and cash flow history is emblematic of many biotechnology companies. In its almost two decades in existence, it has produced no marketable products, raised around $300M and burned through almost $270M of that amount. VXGN has now taken steps to minimize its cash burn, reducing its workforce to three employees, terminating its anthrax and smallpox development activities and selling the assets related to its anthrax product candidate. The company’s value rests on its vestigial holding of cash and equivalents (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):
We estimate the liquidation value to be around $28.4M or $0.86 and the net cash value to be around $27.7M or $0.86 per share.
There is the possibility that VXGN is worth considerably more than this amount. Under the terms of the sale of its assets and rights relating to its anthrax vaccine product candidate and related technology to Emergent BioSolutions Inc, (Emergent), Emergent may be obligated to pay VXGN up to an additional $7M in milestone payments, plus specified percentages of future net sales for 12.5 years beginning from the first commercial sale. VXGN has also listed its “a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products.”
Off-balance sheet arrangements and contractual obligations
According to VXGN’s 10K for the year ended December 31, 2008, it has no off-balance sheet arrangements.
One concern for us is the lawsuit against VXGN by its landlords, in which they seek $22.4M:
In February 2009, a lawsuit was filed against VaxGen by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that the Company defaulted on the lease on the 349 Oyster Point, South San Francisco facility. The complaint seeks possession of the premises and the balance of lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs.
We may incur substantial expenses in defending against such claim, and it is not presently possible to accurately forecast the outcome. We do not believe, based on current knowledge, that the foregoing legal proceeding are likely to have a material adverse effect on its financial position, results of operations or cash flows. In the event of a determination adverse to VaxGen, we may incur substantial monetary liability that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
If the lawsuit is succesful, then VXGN has next to no value.
Catalyst
According to the 10K, the company is considering various alternate strategic transactions to return value to its stockholders. VXGN has ended all product development activities, sold or otherwise terminated its drug development programs and is now seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions. If the company is unable to identify and complete an alternate strategic transaction, the company will liquidate. A Harper’s Magazine article, “Flaws in the BioShield: VaxGen looks for another federal bailout,” details a sordid history of “disturbing ethical failures in the area of human-subject drug testing” and management incompetence. The article concludes:
Based on VaxGen’s string of failures, giving the firm another stay of execution might not just be wasteful, but criminally negligent as well.
That was in 2006. The company has managed to limp along since then, but we think it’s time to take this rooster to the chopping block.
Conclusion
With its stock at a substantial discount to its net cash position, its cash-burning product development activities at an end and a proposal to identify and complete an alternate strategic transaction or liquidate, VXGN is a good prospect. At its $0.48 close yesterday, it has a market capitalization of $15.9M. We estimate the net cash value to be around 80% higher at $27.7M or $0.84 per share. VXGN has other potentially valuable assets, including rights to portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern is that the company may seek to continue as a biotechnology company, rather than liquidating. We hope this outcome doesn’t eventuate. We’ve added it to the Greenbackd Portfolio.
VXGN closed yesterday at $0.48.
The S&P500 Index closed yesterday at 831.88.
Hat tip to Wes Gray.
[Full Disclosure: We do not have a holding in VXGN. We now have a holding in VXGN. 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.]
Greenbackd: VaxGen submitted an updated balance sheet to Jan 31 2009 in the 8k they filed concerning the landlord dispute. This balance sheet shows 37.9mm in cash, or 1.15 per share (the Investments I believe are CDs of over 3 month duration, should be included in cash). Liquidating value should be an even 1.00 per share. I’m not including the 1.5mm in restricted cash in this calculation…
Even if the Co. had to pay a full 22.4mm out to the landlord (not a likely outcome), this would leave 15mm in cash, or .47 a share, which is slightly above the current stock price…
Also, most of the liabilities consist of 4.1mm in deferred rent, that amortizes through 2016, but which might/could vaporize when the lease is settled, which could add another .12 to liquidation….and there is always the hope of the Emergent additional payments of up to 7mm.
There appears to be little downside here, even in the worst case. Lets say they settle for 2 years rent, appx 4mm bucks, that would leave over a dollar in cash per share…
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Thanks, JM. This is great analysis. We are starting to get quite comfortable with this position. Does anyone see any problems with this analysis?
G
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I think VXGN an interesting play, would not get too scared off by this lease business. I am not an attorney. But for instance, VXGN and landlord are in negotiations, VXGN could as a last resort threaten a bankruptcy, under which it could break the lease anyway…with no debt, shareholders would hold the same place in line.
This is from the California Commercial Code (easy reading!):
(a) Except as otherwise provided in Section 1951.4, if a
lessee of real property breaches the lease and abandons the property
before the end of the term or if his right to possession is
terminated by the lessor because of a breach of the lease, the lease
terminates. Upon such termination, the lessor may recover from the
lessee:
(1) The worth at the time of award of the unpaid rent which had
been earned at the time of termination;
(2) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the lessee
proves could have been reasonably avoided;
(3) Subject to subdivision (c), the worth at the time of award of
the amount by which the unpaid rent for the balance of the term after
the time of award exceeds the amount of such rental loss that the
lessee proves could be reasonably avoided; and
(4) Any other amount necessary to compensate the lessor for all
the detriment proximately caused by the lessee’s failure to perform
his obligations under the lease or which in the ordinary course of
things would be likely to result therefrom.
(b) The “worth at the time of award” of the amounts referred to in
paragraphs (1) and (2) of subdivision (a) is computed by allowing
interest at such lawful rate as may be specified in the lease or, if
no such rate is specified in the lease, at the legal rate. The worth
at the time of award of the amount referred to in paragraph (3) of
subdivision (a) is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus 1 percent.
(c) The lessor may recover damages under paragraph (3) of
subdivision (a) only if:
(1) The lease provides that the damages he may recover include the
worth at the time of award of the amount by which the unpaid rent
for the balance of the term after the time of award, or for any
shorter period of time specified in the lease, exceeds the amount of
such rental loss for the same period that the lessee proves could be
reasonably avoided; or
(2) The lessor relet the property prior to the time of award and
proves that in reletting the property he acted reasonably and in a
good-faith effort to mitigate the damages, but the recovery of
damages under this paragraph is subject to any limitations specified
in the lease.
(d) Efforts by the lessor to mitigate the damages caused by the
lessee’s breach of the lease do not waive the lessor’s right to
recover damages under this section.
(e) Nothing in this section affects the right of the lessor under
a lease of real property to indemnification for liability arising
prior to the termination of the lease for personal injuries or
property damage where the lease provides for such indemnification.
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CORR, its the California CIVIL Code..
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Thanks, JM. You’ve gone above and beyond!
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An interesting cigar butt, indeed. However, after reviewing the civil suit, property lease, and relevant section of the California Civil Code, I think Vax is going to be liable for SOME damages.
Here’s the detail on what has happened:
* VaxGen failed to pay 1/1/09 rent within the 5-day period required under the terms of the lease (sec 26A2)
* Lessor officially terminated the lease in writing on 1/23/09
As for the claim, the lease clearly states, and the Civil Code supports that the lessee can be held liable for the full amount of the rent, discounted to present, plus reasonable fees.
From what I can tell, there are a few possible outcomes:
1. Tenant and lessor sign a new lease – I think this is highly unlikely
2. Lessor re-lets the property. In this case the lessor can claim as damage the difference between the rent of the new lease agreement and agreement with VaxGen. The terminated lease was signed in 10/07, not far after the peak of the real estate bubble at a rate of $2.95/sf ($191,592 rent in 2009 for a 65,000 square-foot facility). Given the way real estate has moved during 2008 and so far this year, I suspect the claim under this clause could be substantial (perhaps 10-25% of the original $22.5mm claim). Also note that Vax would be liable for all rent until another lessee can be found. The lessor is NOT obligated to find another lessee.
3. As mentioned in (2), the lessor sits on the property, forcing Vax to pay the full claim.
The denial of a temporary protective order doesn’t suggest that the claim itself does not hold any weight. I could not find the filing associated with the writ/protective order.
I don’t think there is a high probability of VaxGen getting out of this lease without paying a hefty sum. One way to look at it is to take 25% of the claim, or $5.6mm, which reduces the liquidation value per share to $0.675.
I am not a lawyer or expert on any of these matters, so any input would be greatly appreciated. Thanks.
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Thanks, Davis. That’s a fantastic analysis. We’ll take it into account in our next valuation.
G
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The landlord DOES have the obligation to use reasonable efforts to find another lessee. They can’t simply choose to make no attempt to re-lease the property and stick VXGN with the entire bill. In that case the court would attempt to estimate what kind of rents the landlord COULD have received if they did use reasonable efforts to re-lease the property. VXGN would be liable for the difference between that amount and the amount of rent stipulated in their contract.
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Thanks, Joe.
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I’m pretty concerned about this pending litigation with the landlord.
Otherwise this looks pretty attractive to me…I picked up 1,000 shares just to see what happens, but if you count the $22 million lawsuit as a liability then this company has little value.
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The disclosure in the 10K is as follows:
We think it’s a reasonably low risk and have now acquired a small position.
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Dear G –
Screw the disclaimer. You are not a sell side shop looking to make a commission on these ideas. It is nice enough that you put this effort in bringing ideas to the lazy-assed hedgies (the majority of who have been exposed as bunch of half-witted lemmings in this market downturn) for nothing in return. Keep up the good work!
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Thanks, Double F.
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I think you sometimes forget to update the disclaimer. It says you do not have any holding in VXGN while you said you purchased it at the top.
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Hi Sivaram,
The disclaimers are correct, as far as we are aware. The “Greenbackd Portfolio” contains stocks added on the site. The disclaimer relates to our personal or fund holdings, and is a requirement of Seeking Alpha.
G
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