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Biotechnology Value Fund (BVF) failed in its bid to remove Avigen Inc’s (NASDAQ:AVGN) board at Friday’s special meeting of stockholders, despite 58% of stockholders voting in favor of removing the board and only 12% voting in favor of retaining the incumbents.

The outcome highlights the difficulties faced by stockholders in selecting rival slates of directors. To succeed, BVF required affirmative votes from two-thirds of all AVGN’s stockholders, which, as we’ve pointed out previously, was a very high threshold. To use the example we used last time, if only 10% of AVGN’s voters failed to vote, BVF required almost three-quarters of the vote from those actually casting a ballot. With 30% of stockholders failing to cast a ballot at the special meeting Friday, BVF’s task was herculean, requiring 96% of the ballots cast to be in BVF’s favor. It’s possible that stockholders who didn’t vote at all purposely abstained knowing that it would count against BVF, and they did therefore express their voting intentions. It’s also possible that they failed to vote for myriad other reasons, including not receiving the documents in time, not understanding the documents, not caring or not understanding that failing to vote counted as a vote for the incumbents. Of the stockholders casting a ballot, their intentions were clear. BVF received approximately 83% of the votes actually cast by AVGN stockholders (58%/70%). Excluding BVF’s own ballots from the calculation above (~30%), BVF still received approximately 70% of the votes (28%/40%). In either case, a strong endorsement of BVF’s slate, but insufficient to carry the day.

Despite BVF’s failure to remove the board, we’re going to maintain our position in AVGN. BVF has won a number of important concessions from the board that make AVGN a much more attractive stock than it was when we started following it in December last year (see archived posts here). The stock price also reflects this: AVGN is up 89% from $0.65 when we initiated the position to close on Friday at $1.23. We opened our position because AVGN was a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities), albeit a cash burning net cash stock, and BVF was pushing it to liquidate and return its cash to shareholders. While BVF’s slate was not successful at the special meeting, AVGN’s board now plans to develop its own plan of liquidation, which should put a floor on AVGN’s stock at around its net cash value of $37M or $1.24 per share less wind down costs. There exists a good chance that AVGN will yield considerably more than its net cash value. The net cash estimate does not take into account AVGN’s AV411 assets and program or near term payments from Genzyme, which could be worth as much as $6M to $25M or between $0.18 or $0.75 per share more (Thanks Double F). With the downside protected, and a good chance at a substantial $0.18 or $0.75 per share upside from here, we think AVGN still represents good value, and we’re going to maintain our position accordingly.

BVF’s press release is as follows:

Biotechnology Value Fund, L.P. Announces Overwhelming Support to Remove the Board of Directors of Avigen, Inc. at Special Meeting of Stockholders

Friday March 27, 2009, 1:10 pm EDT

Concurs with Avigen’s decision to return capital to stockholders through liquidation

A decisive victory for stockholder democracy

SAN FRANCISCO, March 27 /PRNewswire/ — Biotechnology Value Fund, L.P. (“BVF”), today announced that stockholders of Avigen (Nasdaq: AVGN – News) voted overwhelmingly to remove the existing Board of Directors of Avigen and replace them with BVF’s nominees. The vote took place earlier today at the special meeting of Avigen stockholders called by BVF. The preliminary vote count was approximately 58% in favor of removing Avigen’s entire Board and 12% against removal.

Additionally, yesterday Avigen finally offered what BVF and stockholders have consistently sought but Avigen had steadfastly resisted: quantified downside protection. Specifically, Avigen announced yesterday that it would terminate merger discussions, implement a plan of liquidation and return at least $1.20 per share to all stockholders. BVF supports Avigen’s decision, albeit a late one, and intends to work constructively with the Board to maximize the return to stockholders. Since the removal of the Board required the affirmative vote of 66 2/3% of the outstanding shares — a very high hurdle — the existing Board will remain in office and manage the liquidation.

Mark Lampert, BVF Founder and President stated, “This is a great day for stockholder democracy — stockholders have spoken and their wishes have prevailed. Avigen’s remaining capital will not be squandered but, instead, will be returned to stockholders so that each may decide how best to utilize their capital. For our part, we will look to reinvest the proceeds into the most promising small cap biotechnology companies that have the greatest potential to improve peoples’ lives. In the current economic environment, the capital preserved through Avigen’s liquidation may be the difference between success and failure of important new medicines.”

Oleg Nodelman, a Portfolio Manager with BVF added, “We are deeply appreciative of the trust and support placed in us by the majority of Avigen stockholders. We believe their resounding support was directly responsible for the Board’s decision to discontinue its risky merger discussions and to commence with a plan of liquidation. We are disappointed that Avigen did not offer downside protection sooner so that the significant capital consumed during this proxy contest could have been returned to stockholders months ago. We also wish to acknowledge the constructive and bold efforts of MediciNova throughout this process. We encourage Avigen to engage with MediciNova during the liquidation process; we intend to be helpful in this regard.”

BVF’s existing tender offer will terminate because BVF’s nominees were not elected at the special meeting.

[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. Do your own research before investing in any security.]