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Avigen Inc (NASDAQ:AVGN) has authorized its CEO, Dr. Chahine, and RBC to contact Biotechnology Value Fund (BVF) to explore the possibility of negotiating a settlement between BVF and AVGN with respect to BVF’s increased $1.20 per share offer for AVGN. AVGN shareholders are to decide on BVF’s proposal to remove the board of AVGN and elect Biotechnology Value Fund’s (BVF) slate of director nominees at a special meeting of stockholders to be held this Friday, March 27, 2009.

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 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. BVF has offered $1.20 for each share of AVGN, which is up from its initial offer of $1.00. The stock is up 72.3% from $0.65 to close at $1.12 yesterday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 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 $5M to $20M or between $0.15 or $0.60 per share.

The text of AVGN’s press release is set out below:

On March 20, 2009, BVF issued a press release announcing that the Purchaser had increased the Offer price from $1.00 per share to $1.20 per share in cash.

Later in the day on March 20, 2009, the Board authorized Dr. Chahine and RBC to contact BVF to explore the possibility of negotiating a settlement between BVF and Avigen with respect to the Offer and the proxy contest.

The Board is currently reviewing the revised Offer price and will provide its recommendation, or determination that it does not have a recommendation, after the Board has had sufficient time to review thoroughly BVF’s amended Offer and make its recommendation with respect thereto.

Avigen has continued discussions with third parties, including MediciNova, regarding potential strategic transactions. Avigen intends to continue such discussions, and does not intend to provide public updates on the status of such discussions until such time as a definitive agreement with respect to a strategic transaction has been reached with a third party or all such discussions are terminated. There can be no assurance that any discussions will lead to an agreement or transaction.

[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.]

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Avigen Inc (NASDAQ:AVGN) has filed its assessment of the cash portion of the MediciNova Inc (NASDAQ:MNOV) proposal.

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 BVF has been pushing it to liquidate and return its cash to shareholders. 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 72.3% from $0.65 to close at $1.12 yesterday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 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 $5M to $20M or between $0.15 or $0.60 per share.

The text of AVGN’s press release is set out below:

In filings with the Securities and Exchange Commission on March 10, 11 and 18, 2009, Avigen disclosed that it had assessed the cash portion of the MediciNova proposal described in those filings at approximately $0.91. Avigen arrived at this assessment by taking the estimated net cash and securities at the end of June 2009 to be sequestered by MediciNova of approximately $27.1 million, and dividing it by the approximately 29.8 million shares of Avigen common stock outstanding.

The estimated net cash and securities at the end of June 2009 was arrived at by taking the audited cash and securities balance at the end of December 2008 of $56.8 million, and subtracting therefrom, an estimated:

* $7.0 million in debt,
* $3.1 million of accrued liabilities at December 31, 2008,
* $3.1 million of remaining building lease obligations, net of potential subleases,
* $2.2 million of estimated severance for Named Executive Officers,
* $5.0 million of estimated operating expenses for the six months ended June 30, 2009,
* $2.3 million of estimated winddown and other transaction costs,

and

* $7.0 million that MediciNova would take in exchange for the issuance of 1.75 million shares of MediciNova stock at $4.00 per share, that as of March 13, 2009 were valued at $1.59 per share or $2.8 million in the aggregate, resulting in an immediate loss of $4.2 million of value.

In assessing the adequacy of the offer presented by MediciNova, the Board of Avigen also obtained an opinion, dated March 17, 2009, from RBC Capital Markets Corporation (“RBC”), that, as of the date of such opinion, and subject to certain assumptions, qualifications and other considerations set forth in its written opinion, the consideration being offered by MediciNova in its proposal to acquire Avigen is inadequate, from a financial point of view, to the stockholders of Avigen. RBC’s opinion was provided for the information and assistance of the Board of Avigen. RBC expresses no opinion and makes no recommendation to any stockholder of Avigen. All advice and opinions (written and oral) rendered by RBC were solely for the use and benefit of the Avigen Board and may not be used or relied upon by any other person.

RBC’s opinion does not address the merits of the underlying decision by Avigen to accept or reject the MediciNova offer or the relative merits of the MediciNova offer compared to any alternative business strategy or transaction in which Avigen might engage. RBC does not express any view on, and RBC’s opinion does not address, the fairness, from a financial point of view, of the consideration offered by MediciNova.

A copy of RBC’s opinion is filed below. You are urged to read this opinion in its entirety.

RBC’s analysis included, among other analyses, an assessment of MediciNova’s proposed offer on a per share basis as of the date of the analysis which was based upon certain assumptions and information both publicly available and provided by Avigen management. Such analysis was further limited by the fact that RBC did not have access to any of MediciNova’s non-public financial information (including forecasts) and, as result, valued MediciNova’s common stock solely based on the closing price for such stock on the Nasdaq Global Market on March 13, 2009. The following sets forth a summary of such assessment:

(3) Black-Scholes calculation based upon certain assumptions for Convertible Security including: MNOV stock price of $1.59 as of March 13, 2009; convertible security exercise price of $4.00; assumed risk-free interest rate of 0.44%; one-year term for convertible security; and standard deviation volatility assumption of 69% based upon MediciNova’s 10-K filed March 17, 2008.

The above assessment of MediciNova’s proposed offer was one of several analyses performed by RBC in connection with its opinion and should not be regarded as critical to the overall conclusion RBC reached. Such assessment has inherent strengths and weaknesses, and the nature of the available information may further affect such assessment. The overall conclusions RBC reached were based on all the analysis and factors presented, taken as a whole, and also on application of RBC’s own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. RBC therefore gives no opinion as to the value or merit standing alone of the above analysis.

(1) Based upon 29.8 million Avigen shares outstanding per 10-Q filed on November 10, 2008.
(2) Based upon information provided to RBC by Avigen management as of March 15, 2009.

RBC’s summary valuation is set out below:

March 17, 2009

The Board of Directors
Avigen, Inc.1301 Harbor Bay Parkway
Alameda, CA 94502
Members of the Board of Directors:

We understand that MediciNova, Inc., a Delaware corporation, (the “Offeror”) has made a non-binding, publicly disclosed offer (the “Offer”) to acquire, pursuant to a proposed merger transaction, all of the issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”) of Avigen, Inc., a Delaware corporation (the “Company”), in exchange for the Consideration (as defined below) pursuant to letters sent by the Offeror to the Company dated December 22, 2008 and February 9, 2009 (the “Letters”), which letters are contained in the Offeror’s Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 23, 2008 and February 9, 2009, respectively.

You have requested our opinion as to the adequacy, from a financial point of view, of the Consideration to the holders of the Company Common Stock (the “Stockholders”).

The Letters provide, among other things, that each Stockholder would receive (i) a pro rata portion of 1.75 million shares of the Offeror and (ii) a convertible security that would allow each Stockholder at their election to either (a) convert each share of such convertible security into shares of the Offeror at a conversion price of $4.00 per share at certain pre-specified accelerated conversion dates or the later of March 31, 2010 or 12 months from the closing of the proposed merger transaction (the “Final Conversion Date”), or (b) have the convertible security redeemed by the Offeror on the Final Conversion Date for cash in an amount per share which represents each Stockholder’s pro rata interest in the Net Cash Assets (as defined below) of the Company (items (i) and (ii) above, together, constituting the “Consideration”). Pursuant to the Letters, “Net Cash Assets” means the amount of the Company’s cash remaining after the completion of the Company’s wind-up activities, including satisfaction of all of the Company’s obligations by way of indebtedness, severance and related liabilities (provided that the Company will retain all intellectual property assets for the combined companies), minus $7 million in cash that the Offeror will receive in exchange for the stock portion of the Consideration described in item (i) above.

RBC Capital Markets Corporation (“RBC”) is a global, full service securities firm engaged in securities trading and brokerage activities, and providing investment banking, investment management and financial advisory services. In the ordinary course of its trading, brokerage, investment and asset management and financial activities, RBC and its affiliates may hold long or short positions, and may trade or otherwise effect or recommend transactions, for its own account or the accounts of its customers, in debt or equity securities or loans of the Company or any other company that may be involved in a transaction with the Company. Further, in connection with its merchant banking activities, RBC may have made investments in the Company or any other company that may be involved in a transaction with the Company. As a global, full service financial organization, RBC and its affiliates may also provide a broad range of normal course financial products and services to its customers (including, but not limited to investment banking, commercial banking, credit derivative, hedging and foreign exchange products and services), including companies that may be involved in certain transactions with the Company.

We are acting as financial advisor to the Board of Directors of the Company (the “Board”) in connection with its consideration of the Offer and pursuant to an engagement letter between the Company and RBC dated January 13, 2009 (the “Engagement Letter”). We will receive a fee for our services upon delivery of this opinion, which is not contingent upon the Offer being accepted or rejected by the Company. For our services as financial advisor to the Company, if a Transaction (as defined in the Engagement Letter) is successfully completed we will receive an additional larger fee.

We have also been engaged to advise the Company in connection with an unsolicited third party offer to merge with, acquire or purchase the common stock of the Company, and will receive a fee for such services regardless of the outcome of such unsolicited offer. In addition, the Company has agreed to indemnify us for certain liabilities that may arise out of our engagement and to reimburse the reasonable out-of-pocket expenses incurred by us in performing our services (subject to a limit which may not be exceeded without the Company’s written approval). In the ordinary course of business, RBC may act as a market maker and broker in the publicly traded securities of the Company and/or Offeror and receive customary compensation, and may also actively trade securities of the Company and/or Offeror for our own account and the accounts of our customers, and, accordingly, RBC and its affiliates, may hold a long or short position in such securities. RBC may also provide investment banking and other financial services to the Company, Offeror and their respective affiliates in the future, for which we may receive compensation.

For the purposes of rendering our opinion, we have undertaken such review and inquiries as we deemed necessary or appropriate under the circumstances, including the following: (i) we reviewed the financial terms provided in the Letters and other correspondence between the Offeror and the Company; (ii) we reviewed and analyzed certain publicly available financial and other data with respect to the Company and the Offeror and certain other relevant operating data relating to the Company made available to us from the internal records of the Company; (iii) we reviewed publicly available equity research reports and Thomson One Analytics consensus estimates regarding the potential future performance of the Company and Offeror as standalone entities; (iv) we reviewed financial projections and forecasts of the Company (“Forecasts”) prepared by the management of the Company; (v) we conducted discussions with members of the senior management of the Company with respect to the business prospects and financial outlook of the Company as well as the value of the Company’s assets as a standalone entity; (vi) we reviewed the reported prices and trading activity for Company Common Stock and the Offeror common stock, including their trading relative to one another; (vii) we have taken into consideration that the Company has been approached by, and has initiated contact with, other parties who have expressed interest in exploring a transaction involving the Company; and (viii) we considered other information and performed other studies and analyses as we deemed appropriate, including recent developments with respect to the Company’s business.

Several analytical methodologies have been employed and no one method of analysis should be regarded as critical to the overall conclusion we have reached. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The overall conclusions we have reached are based on all the analysis and factors presented, taken as a whole, and also on application of our own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. We therefore give no opinion as to the value or merit standing alone of any one or more parts of the analyses.

In rendering our opinion, we have assumed and relied upon the accuracy and completeness of all the information that was publicly available to us and all of the financial, legal, tax, operating and other information provided to or discussed with us by the Company (including, without limitation, the financial statements and related notes thereto of the Company), and have not assumed responsibility for independently verifying and have not independently verified such information. We have assumed with your consent that all Forecasts provided to us by the Company were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the future financial performance of the Company, as a standalone entity. We express no opinion as to such Forecasts or the assumptions upon which they were based.

In rendering our opinion, we have not assumed any responsibility to perform, and have not performed, an independent evaluation or appraisal of any of the assets or liabilities of the Company, and we have not been furnished with any such valuations or appraisals. We have not assumed any obligation to conduct, and have not conducted, any physical inspection of the property or facilities of the Company. We have not investigated, and make no assumption regarding, any litigation or other claims affecting the Company. Our opinion does not address any legal, regulatory, tax or accounting matters.

Our opinion speaks only as of the date hereof, is based on the conditions as they exist and information which we have been supplied as of the date hereof, and is without regard to any market, economic, financial, legal, or other circumstances or event of any kind or nature which may exist or occur after such date. We have not undertaken to reaffirm or revise this opinion or otherwise comment upon events occurring after the date hereof and do not have an obligation to update, revise or reaffirm this opinion.

The opinion expressed herein is provided for the information and assistance of the Board in connection with the Offer. We express no opinion and make no recommendation to any Stockholder with respect to the Offer. All advice and opinions (written and oral) rendered by RBC are intended solely for the use and benefit of the Board and may not be used or relied upon by any other person, nor may such advice or opinions be reproduced, summarized, excerpted from or referred to in any public document or given to any other person without the prior written consent of RBC. If required by applicable law, this opinion letter may be included in any disclosure document filed by the Company with the SEC with respect to the Offer; provided, however, that this opinion letter must be reproduced in full and any description of or reference to RBC must be in a form reasonably acceptable to RBC and its counsel. RBC shall have no responsibility for the form or content of any such disclosure document, other than this opinion itself.

Our opinion does not address the merits of the underlying decision by the Company to accept or reject the Offer or the relative merits of the Offer compared to any alternative business strategy or transaction in which the Company might engage. Our opinion addresses solely the adequacy of the Consideration, from a financial point of view, to the Stockholders, as of the date hereof. We do not express any view on, and our opinion does not address, the fairness, from a financial point of view, of the Consideration. We also do not express any view on, and our opinion does not address the adequacy or fairness of the amount or nature of any compensation to be paid or payable to any officers, directors or employees, or class of such persons, whether relative to the compensation proposed to be paid to the public Stockholders or otherwise.

We do not express any opinion as to the price or range of prices at which the Company Common Stock or the Offeror’s common stock may trade at any time.

Our opinion has been approved by RBC’s M&A Opinion Review Committee.

Based upon and subject to the foregoing, including the various assumptions and limitations set forth herein, it is our opinion that, as of the date hereof, the Consideration is inadequate, from a financial point of view, to the Stockholders.

Very truly yours,

RBC CAPITAL MARKETS CORPORATION

[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.]

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Biotechnology Value Fund (BVF) has increased its tender offer for Avigen Inc (NASDAQ:AVGN) from $1.00 per share to $1.20 per share contingent on the election of BVF’s nominees to the board of AVGN.

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 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 77% from $0.65 to close at $1.15 Friday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 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 $5M to $20M or between $0.15 or $0.60 per share.

The text of BVF’s press release is set out below:

BVF Acquisition LLC Increases Tender Offer Price for Avigen, Inc. to $1.20 Per Share

Friday March 20, 2009, 8:00 am EDT

Why does Avigen refuse to guarantee $1.20 per share in cash?

NEW YORK, March 20 /PRNewswire/ — BVF Acquisition LLC (the “Purchaser”), an affiliate of Biotechnology Value Fund L.P. (“BVF”), which has commenced a cash tender offer to purchase all of the outstanding shares of Avigen, Inc. (Nasdaq: AVGN – News; “Avigen”), announced today that it is increasing its cash tender offer price from $1.00 per share to $1.20 per share. The offer is currently scheduled to expire at 6:00 p.m., New York City time, on Friday, April 3, 2009. The key condition to the offer is the election of BVF’s nominees.

BVF is offering all stockholders $1.20 per share in cash. Why won’t Avigen do the same? Without this protection, how can Avigen be trusted?

BVF has repeatedly called on the Board to guarantee downside protection for stockholders, rather than gambling the remaining stockholder money. This Board has repeatedly refused to commit to proceeding only with a transaction that offers quantifiable downside protection, in cash, of approximately the Company’s liquidation value. The MediciNova merger provides for this; why not Avigen directly? The Board’s refusal to do so should be cause for great concern and suspicion. For example, is Avigen about to give away millions of dollars in “break-up” fees in a flawed, unprotected merger, with full knowledge that stockholders oppose it? BVF has offered stockholders the option to tender their shares for $1.20 per share in cash or participate with BVF in the future of Avigen. BVF’s objective is to protect and maximize its investment in Avigen stock; management’s incentive is to maximize salaries and fees, and to trigger their multimillion-dollar “golden parachute” agreements.

To tender your shares and receive $1.20 per share in cash, BVF’s nominees must be elected. Importantly, should stockholders fail to remove the current Board and replace them with BVF’s stockholder-oriented representatives, the tender offer will expire and no shares will be accepted. Is it possible that Avigen’s stock price could fall significantly without the support of the outstanding BVF tender offer?

We urge stockholders to vote the GOLD proxy to remove the current directors and elect BVF’s stockholder-oriented nominees. BVF believes its nominees offer the best opportunity for stockholders to protect their investment in Avigen. All stockholders are encouraged to act now to protect their investment and vote the GOLD proxy card today.

MacKenzie Partners, Inc. is the Information Agent for the tender offer and any questions or requests for the Offer to Purchase and related materials with respect to the tender offer or the special meeting may be directed to MacKenzie Partners, Inc.

[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.]

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Wes Gray’s Empirical Search Strategies (ESS) has proclaimed its support for a “downside protection” measure described by the Biotechnology Value Fund (BVF) in the Avigen Inc (NASDAQ:AVGN) proxy fight. ESS is the beneficial owner of approximately 2.3% of AVGN’s outstanding common stock.

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 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 77% from $0.65 to close at $1.15 Friday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 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 $5M to $20M or between $0.15 or $0.60 per share.

The text of ESS’s press release is set out below:

CHICAGO, March 20 /PRNewswire/ — Empirical Search Strategies, LP. (“ESS”), the beneficial owner of approximately 2.3% of the Avigen, Inc.’s (Nasdaq: AVGN – News) outstanding common stock, has proclaimed their support for a “downside protection” measure described by the Biotechnology Value Fund (“BVF”). ESS believes a clearly articulated downside protection measure is beneficial to all shareholders for the following reasons:

* First, offering downside protection guarantees shareholders an opportunity for liquidity. Without a liquidity option, shareholders who decide to exit their Avigen position for individual reasons (or those who view the final transaction unfavorably) will be forced to sell shares into an extremely illiquid market environment. It is not uncommon to see a 5% bid/ask spread in Avigen stock on any given day.

* Second, there is currently excess cash on the balance sheet of approximately $35mm (which includes a healthy, but unwelcome burn rate of approximately $10mm and an estimate of required capital/miscellaneous costs of roughly $2mm throughout 2009). This excess cash is not needed to sustain the sale of AV411 or to pursue the Genzyme partnership. To ensure agency costs are limited, management should publically state they will either (i) distribute this excess cash immediately, or (ii) structure a deal similar to the MediciNova deal that offers shareholders an exit option for a specific amount and at a specific time in the future.

* Third, Avigen is not a bank. Management should focus on selling their value-proposition: experience and know-how in the AV411 program, and continuity and understanding of how to maximize value from the Genzyme partnership. It may seem sensible to bargain for a “good deal” from an acquirer who is in financial distress by offering them a pile of cash. However, if a potential buyer is strapped for cash in this environment, it’s probably not a company Avigen shareholders want to own–even if they offer a slight premium. As a matter of fact, the very thought of owning a distressed company is the main reason ESS values a downside protection measure that is clear and transparent from the beginning.

In conclusion, ESS believes it is not impossible that in a year from now Avigen shareholders will find themselves experiencing a bout of deja vu. We worry that we will be holding a biotech company that is burning cash, selling at .5x liquidation value, and paying management salaries of $500,000 to $1,000,000 a year during the worst economic environment since the Great Depression. In the end, ESS believes the following statement from Avigen (or anything even resembling this statement) would maximize the utility of all Avigen shareholders, and cause BVF to IMMEDIATELY drop their proxy fight, which will save shareholders the fees associated with the proxy battle:

“Dear Avigen Shareholders:

Regardless of the deal we choose to pursue, we will guarantee a downside protection option for all shareholders. Specifically, we will offer all shareholders the opportunity to exchange their shares for $1.10, six months following the closing of a deal. If shareholders find that the NewCo is simply burning cash and providing no value, they will have a 30 day window to exchange their shares for $1.10 per share. If shareholders believe the NewCo is worth more than $1.10, they can maintain their ownership in NewCo and participate in the future of the company.

We believe this arrangement will provide downside protection to shareholders who are risk-averse in the current economic environment, and at the same time, this deal will offer NewCo management an opportunity to prove their worth and earn shareholder trust.

Sincerely,

Avigen Management”

Wesley R. Gray, ESS Portfolio Manager, stated, “I really appreciate the steps management has taken to maximize shareholder value and I value their hard work. I just wish they would listen to shareholder requests more diligently. For the vast majority of shareholders I have spoken to, downside protection and a decent chance for reasonable upside beats the outright ownership of a distressed biotech company–especially in this investment environment.”

[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.]

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We cast our proxy votes on-line today in support of Biotechnology Value Fund’s (BVF) proposal to remove the board of Avigen Inc (NASDAQ:AVGN).

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 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 65% from $0.65 to close at $1.07 yesterday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 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 $5M to $20M or between $0.15 or $0.60 per share.

BVF’s task is a difficult one. Why? Let’s turn to the proxy material, which states as follows:

To be approved, the Board Removal Proposal must receive “FOR” votes from the holders of at least two-thirds of all of Avigen’s outstanding shares entitled to vote either in person or by proxy at the Special Meeting. If you do not vote or “ABSTAIN” from voting, it will have the same effect as an “AGAINST” vote. Broker non-votes will have the same effect as “AGAINST” votes.

This is an incredibly high threshold. For BVF to unseat the board, it requires two-thirds of all of AVGN’s outstanding shares entitled to vote. This means that BVF’s enemy is likely not stockholders voting against BVF’s proposal, but stockholders not voting at all, because failing to vote has the same effect as voting against BVF. Let us say that again: failing to vote has the same effect as voting against BVF’s proposals. If 10% of AVGN’s voters fail to vote, BVF requires almost three-quarters of the votes from those actually voting.

If the purpose of voting at stockholder meetings is to give voice to the majority (or, in this case, the supermajority) of the stockholders, surely the process should be designed to reflect that will. At present, it is not. The deck is stacked heavily in favor of the incumbent board. At least two-thirds of all of AVGN’s outstanding shares must be voted for BVF. The real threshold is actually higher than two-thirds, because failure to vote equates to a vote against BVF. If even a small proportion of stockholders neglect to vote, BVF’s threshold is proportionately that much higher. Each obstacle reduces the chance that a stockholder votes along with BVF, and that’s a shame. The corporate voting process should function to reflect the will of each stockholder and it does not presently do that.

The special meeting is to be held next Friday, March 27, 2009. If you hold stock in AVGN, you must cast your vote before that date. If you wish to support BVF, you must vote GOLD card.

[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.]

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Biotechnology Value Fund (BVF) has filed the slides to its presentation to the stockholders of Avigen Inc (Nasdaq: AVGN) to remove the existing directors at the special meeting to be held March 27, 2009.

The slides can be viewed here.

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 activist 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 68% from $0.65 to close at $1.09 on Friday. We are maintaining our position because we estimate AVGN’s liquidation value to be around 12% higher at $1.22 per share (BVF estimates $1.20 per share).

BVF has also issued the following press release:

BIOTECHNOLOGY VALUE FUND CONFIRMS NOMINEES’ PLANS IF ELECTED TO THE AVIGEN BOARD AT SPECIAL MEETING

Urges Stockholders to Vote to Remove Current Board and Elect its Slate of Four Stockholder-Oriented Independent Nominees

Biotechnology Value Fund, L.P. (“BVF”), today confirmed its plans for the future of Avigen, Inc. (Nasdaq: AVGN) if stockholders remove the current members of the Avigen Board and replace them with BVF’s four new, stockholder-oriented, independent director nominees at the Special Meeting of stockholders to be held on March 27, 2009. BVF, the beneficial owner of approximately 30% of the Company’s outstanding common stock, has called the Special Meeting to give stockholders the opportunity to protect what remains of Avigen’s assets, which it believes are in danger of being completely wasted by the Board. Upon the removal of the current Board and election of BVF’s nominees, subject to the nominees’ fiduciary duties, BVF pledges the following:

· First, all stockholders who desire liquidity will have the immediate ability to cash out of their investment in Avigen and receive a payment of $1.00 per share by tendering their shares into the BVF tender. Stockholders who do not wish to sell their shares will have the opportunity to participate with BVF in the future of Avigen;

· Next, the nominees will immediately announce that Avigen will only consider and proceed with strategic transactions that guarantee a quantified worst-case outcome of approximately Avigen’s liquidation value;

· Next, the nominees will then commence negotiations with MediciNova, with the goal of reaching an agreement on the best terms possible for all Avigen stockholders;

· Next, the nominees will consider any other transactions that satisfied the downside protection requirements described above; and

· Ultimately, the nominees will present any transaction that satisfies the downside protection requirements described above and that the nominees believe is in the best interests of stockholders to stockholders for their approval.

Should the nominees be unable to negotiate final terms with a third party that satisfies the requirements described above, or should such transaction not be approved by stockholders, the nominees intend to promptly return the Company’s remaining cash to stockholders.

Mark N. Lampert BVF Partner stated, “In addition to confirming our plan for the future of the Company, we also wanted to clarify a few remaining issues for stockholders. Specifically, neither BVF nor its nominees have any financial interest or other stake in MediciNova or its proposed transaction. Our only concern is for the fair valuation and prevention of lost value of Avigen. Our interest in Avigen is solely as stockholders – we have never sought, nor would we accept, any benefit solely for ourselves. In addition, in the event they are elected to the Board, our nominees will not receive any compensation for their services as directors of Avigen, other than Mr. Coppedge who stands to receive only nominal director fees. We encourage stockholders to act now to protect their investment by voting the GOLD proxy card today.”

[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.]

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