Greenbackd

CuraGen Corporation (NASDAQ:CRGN) has filed its 10Q for the period ended March 31, 2009. CRGN’s stock has risen strongly over the last few months, and is now trading at $1.02, giving it a market capitalization slightly higher than our estimate of its liquidation value. Accordingly, we’re going to take this opportunity to exit. The stock was at $0.67 when we started following it and closed Friday at $1.02, which means we’re up 52.2% on an absolute basis. The S&P500 Index closed on the day we opened the position at 850.12 and closed Friday at 882.88, which means we’re up 48.4% on a relative basis.

Post mortem

We started following CRGN on January 20, 2009 (see our post archive here) because it was a net cash stock with an investor, DellaCamera Capital Management, pushing the company to seek “alternative deployment of [its] capital.” DellaCamera Capital Management increased its stake from 5.6% to 6.5% and nominated two candidates to the board. We last estimated CRGN’s net cash value to be around $59.9M or $1.05 per share. After reviewing the 10Q, we slightly reduced our valuation to $56.9M or $1.00 per share. We exited because the stock is trading at a premium to that estimated value.

The company is not generating any operating cash flow, so was a pure undervalued asset play. The major change to the balance sheet since we opened the position was CRGN’s February repurchase of $4.8M of its 4% convertible subordinated debentures due February 2011, for an aggregate purchase price of $3.8M, which reflected an aggregate discount from the face value of such 2011 notes of approximately 21%. We’ve updated the summary balance sheet 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):

CRGN’s $79.8M in cash and short term investments consists of $45.6M in cash and equivalents, $18.0M in short-term investments and $16.1M in marketable securities.

Balance sheet adjustments

In reaching our estimate, we made the following adjustments to the balance sheet estimates above:

• Cash burn: The company used $4.0M in cash in operations in the first quarter. We have included cash burn of $3M in our estimate for the remainder of the quarter.
• Off-balance sheet arrangements and contractual obligations: According to CRGN’s 10Q, it has no off-balance sheet arrangements. Its contractual obligations (excluding the convertible notes, which we’ve included in the summary balance sheet above) are $3.7M in total.

Deducting the $6.7M from the $63.6M in net assets leaves around $56.9M in liquidation value or $1.00 per share.

Conclusion

We are reasonably happy with the outcome in CRGN. While DellaCamera Capital Management’s campaign has not been run to its conclusion, we feel that with the stock trading at around CRGN’s liquidation value, it is an opportune time to exit. CRGN has announced a plan to undertake a review of strategic alternatives that it says could enhance shareholder value, which might range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. While these alternatives might offer more value from here, there is no assurance that the process will result in any specific action or transaction, and CRGN will continue to burn cash as it funds its operations and develops CR011-vcMMAE. For these reasons, we’ve taken our chips off the table.

[Full Disclosure:  We do not have a holding in CRGN. 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.]