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Biotechnology Value Fund (BVF) has filed its proxy material for the Special Meeting of Avigen, Inc. (NASDAQ:AVGN) stockholders. BVF want to replace AVGN’s board with BVF’s slate of director nominees who will support MediciNova, Inc.’s (NASDAQ:MNOV) offer for AVGN.

We’ve been following AVGN (see earlier posts here, here, here, here, here, here and 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 activist fund BVF has been pushing it to liquidate and return its cash to shareholders. We think MNOV’s offer 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 a little less than 40% higher than AVGN’s $0.87 close yesterday.

BVF’s proxy material sets out the rationale for removing the incumbent directors:

The members of the BVF Group are currently the beneficial owners of an aggregate of 8,819,600 Shares, representing approximately 29.63% of the issued and outstanding common stock. As significant stockholders of Avigen, we have one goal: to maximize the value and minimize the risk on behalf of all stockholders. A brief synopsis of Avigen corporate history as well as our recent efforts to maximize stockholder value is summarized in the following chronology of events leading up to this proxy solicitation:

We first became a shareholder of Avigen in 2005, the year Avigen sold, for $12 million, its unsuccessful gene therapy business in which the Company had invested over $150 million. The Company, led by its current CEO, Ken Chahine, spent nearly two years running a “process” with the mandate to re-invent the Company by investing in whatever the current management team deemed compelling. In January 2006, this management team chose to acquire its lead development candidate, AV650, because, in their own words, “we believe it is a low risk.” In fact the Company’s entire strategy, then and now, is supposedly “designed to mitigate the risk of bringing innovative therapies to U.S. patients.” $100 million later, on October 21, 2008, Avigen announced the outright failure of its “low risk” bet on AV650, resulting in a collapse in the Company’s stock price. This same management team and Board, which has failed previously, now wishes to bet the substantial remaining shareholder capital on whatever it deems appropriate.

We recently acquired a significant number of Shares and became the largest stockholder of Avigen. We increased our investment in October 2008 based upon our belief that Avigen’s shares were significantly undervalued. In fact, Avigen reported $56 million, or $1.88 per Share, of financial assets as of September 30, 2008, consisting of cash, cash equivalents, available-for-sale securities and restricted investments, while trading at a price well below $1.00 during the two months prior to filing this proxy statement. We believe this depressed trading price, substantially below Avigen’s cash liquidation value, is based upon the market’s concern that management and the existing Board will pursue ill-advised or other value destroying ventures, at stockholders’ expense, while compensating themselves in the process.

Since this time, we have reached out to the Board numerous times, each time raising our concern that Avigen’s existing liquid assets not be wasted or otherwise committed to value destroying ventures.

We have specifically suggested that the Board “guaranty” the worst case outcome for all stockholders. This guaranty could be accomplished in several ways, including by dividending or distributing all excess cash to stockholders at the present time, or by offering to buy back any and all Shares from stockholders that wish to sell at a specific price at a specific future date (e.g. $1.25 per Share in December 2009). At no time have we asked for – nor would we accept – any consideration or benefit for ourselves that would not be offered to all stockholders.

The Board has ignored our attempts to work constructively for the benefit of all stockholders. Avigen responded to our offers by unilaterally increasing and broadening management’s “golden parachute” severance agreements and unilaterally adopting a “poison pill,” raising our concerns about this Board’s true intentions.

The Board’s “golden parachute” severance agreements with management, under the ridiculous justification that such payouts are necessary to “attract and retain key employees,” is particularly outrageous given Avigen’s current circumstances. Our analysis indicates that these payouts, which we believe would be triggered by most “change in control” scenarios, including a liquidation, total at least $3 million, an incredible 16.5% of the Company’s entire market value at the time of adoption. The recipients of these golden parachute arrangements include Avigen’s CEO, Ken Chahine, who resides in Park City, Utah, while the Company is based in California. We question how the Company can justify such actions as necessary to “attract and retain key employees” when Avigen has no real business at this time and has abandoned the development of all its products. These hastily adopted severance arrangements need to be challenged and, if possible, revoked.

In addition, we believe the Board’s implementation of the “poison pill” serves no purpose other than to entrench the Board and keep BVF from purchasing additional stock in the Company. We are concerned that management and Board members are more concerned with retaining their jobs and compensation than with maximizing stockholder value. As evidence, Avigen’s stock price fell more than 20% after the adoption of the poison pill. The pill should be redeemed. The Board’s recent actions reveal its true self-interest and leave us concerned that the Board will indeed destroy and/or take all remaining value.

On December 22, 2008, MediciNova, Inc. (“MediciNova”), a company in which we have no economic interest, proposed to merge with Avigen in an innovative and, we believe, compelling downside-protected structure. We believe the proposed merger is uncontrovertibly in the best interest of all stockholders and we had grave concerns that the Board may not negotiate in good faith with MediciNova, if at all. Avigen’s statements apparently rejecting this proposal confirmed our worst fears. We are concerned that the Board’s and management’s self-interest will prevent them from acting in what we believe to clearly be the best interests of all stockholders.

Accordingly, after much consideration we felt compelled to call this special meeting of stockholders to remove the existing directors and to elect new, truly independent directors who, if elected, will take actions to benefit all stockholders, including redeeming Avigen’s stockholder rights plan, working to consummate the proposed transaction with MediciNova and/or working to complete a distribution of Avigen’s assets to all stockholders.

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In its most recent 13D filing Biotechnology Value Fund (BVF) has provided its “full and enthusiastic support” for MediciNova, Inc.’s (NASDAQ:MNOV) offer for Avigen, Inc. (NASDAQ:AVGN).

We’ve been following AVGN (see earlier posts here, here, here, here and 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 activist fund BVF has been pushing it to liquidate and return its cash to shareholders. We think that MNOV’s offer 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). We estimate the cash to be paid at around $1.22 per share (BVF estimates the amount at $1.20 per share), which is more than 60% higher than AVGN’s $0.76 close Wednesday. AVGN’s shareholders also have the option to receive MNOV shares instead of the cash. MNOV values its shares at $4.00 (MNOV closed Wednesday at $1.59).

BVF’s filing sets out its rationale for endorsing the merger. The relevant text is extracted below:

On December 22, 2008 MediciNova, Inc. (“MediciNova”) described details of a Proposed Merger between MediciNova and Avigen, Inc. (“Avigen”) in a letter to Avigen’s Chairman, Zola Horovitz. The Reporting Persons hereby express their full and enthusiastic support for this Proposed Merger and believe it is the best interest of all Avigen shareholders. The Reporting Persons presently have no economic interest in MediciNova. The Reporting Persons call on Avigen’s Board of Directors to negotiate with MediciNova and work to consummate the Proposed Merger expeditiously.

The Reporting Persons support the Proposed Merger for the following reasons:

1. Downside Protection: The Proposed Merger provides for the same downside protection that the Reporting Persons encouraged Avigen to implement directly (which Avigen rejected). Subsequent to the Proposed Merger, if MediciNova is unsuccessful, Avigen shareholders will receive approximately the current liquidation value of Avigen (which the Reporting Persons estimate to be approximately $1.20/share, net of debt and expenses), as determined by an independent auditor. Incredibly, in a worst case scenario, the Proposed Merger would yield about a 60% premium to Avigen’s current stock price.

2. Extraordinary Upside Potential: If MediciNova is successful post-merger, Avigen shareholders could own a substantial percentage of MediciNova (which the Reporting Persons estimate to be approximately 45% of the combined company). Thus, in a best case scenario, Avigen shareholders could enjoy an extraordinary, uncapped return. For this reason, the Proposed Merger is superior to an immediate liquidation of Avigen.

3. Free Option: Shareholders have at least one year after the merger is consummated to choose downside protection or upside potential, as described above. This decision can be based on information obtained over the course of the free option period, including the stock performance of MediciNova. This free option period offers shareholders tremendous upside potential with virtually no risk.

4. Change of Control: The Proposed Merger would result in new stewardship of Avigen’s assets, curtailing current management’s stated plan of seeking ways to utilize (and we fear waste) Avigen’s cash in any way they wish. This is a particularly frightening prospect in light of CEO Ken Chahine’s recent statements that “it’s hard to put a finger on exactly what we would do”, that he “intends to build” and that he “thinks that there are opportunities outside of therapeutics.”

5. Unique Synergies: The Reporting Persons believe there are unique synergies between MediciNova and Avigen which likely would not exist with other potential acquirers of Avigen. These synergies give rise to the compelling nature of the Proposed Merger.

BVF wishes to see the Proposed Merger brought to a shareholder vote as soon as practical and urges other Avigen shareholders to support this offer.

We’ve noted in our earlier posts that AVGN presents an attractive investment opportunity if BVF can persuade it to quickly distribute its remaining cash to stockholders. MNOV’s offer presents a clever way for AVGN’s stockholders to receive an amount equivalent to its cash 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, which is more than 60% higher than AVGN’s $0.76 close Wednesday. With BVF’s endorsement of MNOV’s offer, we believe the investment rationale for AVGN is strong.

[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.]

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Avigen, Inc. (NASDAQ:AVGN) has received an offer from MediciNova, Inc. (NASDAQ:MNOV), a biopharmaceutical company that is publicly traded on both the Nasdaq Global Market and the Hercules Market of the Osaka Securities Exchange (Code Number: 4875).

We’ve been following AVGN (see earlier posts here, here, here and 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 it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. We esimate AVGN’s net cash value at $43.5M or $1.46 per share.

According to this filing, MNOV proposes to offer AVGN stockholders a pro rata portion of 1.75M shares of MNOV and a convertible security representing AVGN’s “Net Cash Assets,” which MNOV defines as AVGN’s cash remaining after it is wound up less $7M paid to be paid to MNOV. The convertible security issued by MNOV would allow each AVGN stockholder at their election to either (i) convert each share of the convertible security into MNOV at a conversion price of $4.00 per share or (ii) have the convertible security redeemed for cash in an amount per share that represents the Net Cash Assets per share of AVGN. The redemption would occur on the later of March 31, 2010 or 12 months from the closing of the merger transaction. The letter from MNOV to AVGN is reproduced below:

Zola Horovitz, Ph.D.

Chairman of the Board

Avigen, Inc.

Dear Dr. Horovitz:

The purpose of this letter is to provide you with more details concerning the recent expression of interest MediciNova, Inc. (“MediciNova”) made to Avigen, Inc. (“Avigen”) with respect to a potential merger of the two companies in the letter to you dated December 9, 2008.

Our present thinking, based upon the information in publicly available documents and preliminary due diligence, is that we would offer as consideration a combination of registered MediciNova common stock and shares of a MediciNova convertible security for each share of Avigen common stock outstanding. In connection with the merger, Avigen would wind up all of its business activities, including satisfying all of its obligations by way of indebtedness, severance and related liabilities, while retaining all intellectual property assets for the combined companies.

MediciNova proposes that at closing each Avigen shareholder will receive a pro rata portion of 1.75 million shares of MediciNova common stock. In consideration for this, MediciNova will receive $7 million of Avigen cash.

The remaining amount of Avigen cash after Avigen’s wind-up activities are completed and less the $7 million in cash received by MediciNova (the “Net Cash Assets”) will be sequestered and, unless converted earlier as described in the next sentence, not used until the later of March 31, 2010 or 12 months from the closing of the merger transaction (the “Final Conversion Date”). The Net Cash Assets of Avigen will be attested by an independent auditor. The convertible security issued by MediciNova as consideration would allow each Avigen stockholder at their election to either (i) convert each share of such convertible security into shares of MediciNova common stock at a conversion price of $4.00 per share at certain pre-specified accelerated conversion dates or the Final Conversion Date or (ii) have the convertible security redeemed by MediciNova on the Final Conversion Date for cash in an amount per share which represents the Net Cash Assets per share of Avigen.

Based on this proposal, we note that the proposed transaction values each Avigen share at a substantial premium to both your recent stock price and the closing average market price of Avigen’s common stock since your October 21, 2008 announcement. Additionally, the convertible security allows each Avigen stockholder the choice of receiving cash in an amount not presently available to them, other than in a liquidation scenario, or participating in what we believe will be growth in value of the combined entity.

We continue to believe that a merger between MediciNova and Avigen would be in the best interests of the stockholders of both companies for many reasons, including the likely incremental increase in value of the Companies’ combined product candidates. We note that it also addresses the recent pressures Avigen has faced from its stockholder base.

Our proposal remains subject to the completion of customary due diligence, as well as the negotiation of definitive transaction agreements and the satisfaction of necessary approvals and customary conditions to closing of a transaction to be set forth in such agreements. While this letter, and our prior letter to you dated December 9, 2008, are not intended as a binding offer, we continue to stand ready to meet with you and your advisors immediately to discuss this matter.

Please be advised that, because of the past relationships among various of our respective directors, MediciNova has constituted a Special Committee of Directors to represent MediciNova with respect to the proposed business combination. That Special Committee consists of myself as Chair, along with Alan Dunton, Arlene Morris and Hideki Nagao from the MediciNova Board. Our Committee continues to believe this proposal represents a unique opportunity for Avigen’s stockholders and we look forward to a prompt and favorable reply.

Very truly yours,

Jeff Himawan, Ph.D.

Chairman of the Board of Directors

MNOV’s offer represents a clever way for AVGN’s stockholders to receive cash in an amount almost equivalent to what they would receive in a liquidation scenario less $7M paid to MNOV. This equates to approximately $1.22 per share in cash. AVGN’s shareholders also have the option to receive MNOV shares valued at $4.00 (MNOV closed yesterday at $1.60) instead of the cash. AVGN shareholders would also receive 1.75M shares of MNOV divided between 30M AVGN shares on issue.

The offer seems broadly positive to us. Our few quibbles are as follows:

1. the $7M payment to MNOV seems excessive
2. the MNOV conversion price of $4.00 is too high
3. the redemption date – on the later of March 31, 2010 or 12 months from the closing of the merger transaction – is too far away.

If these could be negotiated to a more favorable position for AVGN, the MNOV offer should be welcomed by AVGN’s stockholders.

Hat tip to commenter KC.

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