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Avigen Inc (Nasdaq: AVGN) has filed the transcript of its earnings call held last Wednesday. In the call, AVGN’s management addresses their estimate of AVGN’s net cash value, their attitude to the MediciNova Inc (NASDAQ:MNOV) offer, and the possibility of a liquidation or a return of capital.

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. 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. We estimate AVGN’s cash at around $1.22 per share (BVF estimates $1.20 per share), which is a little less than 15% higher than AVGN’s $1.05 close yesterday.

Selected portions of the transcript follow:

On the possibility of liquidation

Ken Chahine [President and Chief Executive Officer]

Oh, okay. So yes, our — so was the question are we committed to liquidation at some point?

Juan Sanchez, [Ladenburg and Thalmann]

Yes. You don’t come out with a real — a proposal to the investors. And in the exercise you guys are going through, are you committing to returning the money back to investors? And is $42 million the money that is going to be available to investors by then, or is a different amount? You see?

Ken Chahine

Juan, our commitment is very, very simple. We’re going to maximize the value. If liquidation ends up being the best offer we have, then liquidation is the best offer we have. There’s no hidden agenda here. It’s simply a matter of maximizing the value.

Is MediciNova the best deal? I don’t really — at this point I honestly don’t know. Could it be? It could be. Is it? I don’t know.

And I think if — let me give you an example, Juan. If you were selling a house and you got an offer for your house and your realtor came by and said you have three more offers that are coming in today, and we have three more that we think are coming next week. I think it’s fair to say that you would probably not take that first offer unless you had at least an opportunity to look at the other three and wait for the other three to come in.

Now, even if you like that first offer, you might say, I think this one is going to be hard to beat. I think you would say that it would be negligent not to at least look at those other offers.

So I think what we’re asking here is not unreasonable. I think it’s absolutely logical, and I think it’s exactly what you and other shareholders on this call would expect — would do. And so that’s all we’re saying.

And so if at the end of the day, is it going to be MediciNova, is it going to be a liquidation, is it going to be sale to a larger company? I don’t know. But I think the commitment absolutely is that whatever it is, it’s going to maximize the value to the shareholders. And if it turns out to be, in our opinion, an M&A transaction, we will propose that transaction and the shareholders will have the right to either vote for it or not vote for it, right?

So at the end of the day, the fate of this Company is not in our hands. The fate of this Company is squarely in the hands of the shareholders. And we’ve protected the burden so that there’s no risk that we’re squandering the money in the meantime.

And again, going back to your — Andy can answer some of the specific questions on the finances, but again, the severance package may or may not be payable at all by the Avigen shareholders. If it turns out that a company comes in and buys us out and retains some of the employees, then the answer is, no, there would be none.

So I think, again, we’re not trying to avoid the question.

Juan Sanchez

So the $42 million doesn’t include the severance package?

Ken Chahine

I don’t know. I’m going to pass that on to Andy, and he can answer that specifically.

Andy Sauter [Chief Financial Officer]

All right, Juan. So the $42 million does not remove any severance payments. At the end of the year we will still have a year of obligations with regard to our lease billing. Again, that’s only one more year. We avoided any extensions that could’ve put further future monies that risk.

Obviously, the process of liquidation involves a number of things. There would most likely be significant monies put in escrow to cover potential unidentified obligations for a period of time. A custodian would have to wrap up any remaining corporate rights and obligations, and that could take a couple of years.

So how exactly liquidation would spill out is something that is very hard to project, exactly what the net payment to shareholders would be and that those delays in distribution further reduce the value. And right now we believe that the value of our current assets and the potential to enter into a successful M&A has significant value over liquidation.

On the MNOV offer

Juan Sanchez

Just one last question before I move on (inaudible). In a nutshell, what do you guys find fundamentally slow or wrong with the MediciNova offer? What’s — what don’t you like about this offer that you’re not willing to entertain it in a more active way, so that –(multiple speakers) See what I mean?

Ken Chahine

Juan, can you — yes. I’d like you to please clarify, though. What have we said that’s said it’s not attractive, and what have we done to not entertain it more aggressively? — so I can answer your question more directly.

Juan Sanchez

The — it’s more like the body language that you guys transmit seems to be that the MediciNova offer is the last option that you guys have and it’s not attractive for you at this point. So from the financial point of view, what’s not to like and what’s to like?

Ken Chahine

Well, I’m very curious at that statement because we have tried, as we stated clearly in our 14D9, to engage MediciNova. As of yesterday, I am very pleased that MediciNova and Avigen came to an agreement to initiate diligence. Up until now MediciNova has been unwilling to sign a confidentiality agreement that every other company has signed.

So we’re not — and this is not a special one for them at all. So again, I take a little bit of issue with that because I think that we have not put them in any special box or disadvantaged them in any way. They’d like to preserve their right to continue to file press releases and other documents, and that’s fine. We respect that. It’s their right, and we respect their right to do that.

However, we do have a common asset in AV411, and I think it’s important that we protect that asset for Avigen shareholders in the event that if a transaction is not consummated with MediciNova and a larger pharmaceutical company would like to come in here and purchase that asset, that we haven’t devalued the asset by sharing a bunch of confidential information with MediciNova.

So we are now just starting to assess MediciNova, and we’re going to look at it very carefully. If it is the winning bid, I guarantee that it will be up to the shareholders to decide whether they like that transaction or not.

I absolutely have no judgment on that right now because we haven’t had a chance to do diligence. So I’m pleased that we’re going to get started, and we’ll see how it stacks up to the rest of the offers.

On AVGN’s net cash value

Edgar Bordovski, [Burlingame Asset Management]

Can you guys put a bound on the time at which shareholders can decide on the state of the Company and whether all possible transactions that you consider attractive will be presented before Management decides to proceed with those transactions? I understand you can’t pinpoint when that will be, but can you put an upper bound on how long we have to wait before we have clarity on all the attractive transactions?

And then my second question is, what is the lower bound on the cash, net of liabilities including remaining liabilities like the leases that you will still have to pay and liabilities that you may not be sure you have to pay? What is the net number at the end of the year? Thank you.

Ken Chahine

Was that — I think I got it right. It’s Edgar? So, Edgar, yes. So thanks for your question.

So yes, we are moving actually pretty rapidly. And I think — I will be honest with you, I think a lot of the pressure is coming from more the capital markets than any other. There’s a lot of companies out there that are in need of cash. Some of them have very attractive assets. And I think that’s what’s really driving the process.

I firmly believe in the next month or two we’re going to have some really good clarity. This is not something that’s going to drag out at all. I just don’t think that, A, we have any desire to drag it out, and, I don’t see any need to drag it out.

So I think in the next month or two we’re going to have a lot of clarity. And again I want to reiterate, I don’t know that we will find something, but I think it’s our duty and I think it’s in all shareholders’ best interest for us to go out there and see if we can find something that’s better.

And at the end, you and other shareholders are going to vote as to whether you agree that that transaction is better.And we know that that’s a high hurdle, and we don’t intend to present anything to shareholders that we don’t think is going to meet that hurdle.

So if — okay again, in a month or two I think we’re going to have some clarity, we will present it. We’ll present what we have to shareholders, and then we’ll go from there. So — then Andy, if you can just address –?

Andy Sauter

Yes. I mean, I guess just to try to reiterate, your question about what’s the lower bound on our cash. At this point, if we go through the year with this limited burn and obligations and nothing else happens, at the end of the year we believe our cash will be between $40 million and $42 million.

At that point we will have one year left on our lease obligations. That’s probably a two-year obligation — or a two-year cost that would have to be paid no matter what. And in the meantime we have significant opportunity to bring in additional cash that exceed our expenses, both through the transaction related to AV411, both through keeping up with potential Genzyme milestone payments, and then basically giving us a free look at these M&A opportunities that could create significant value for the shareholder base and give them a chance to choose something that they might not otherwise have access to.

So that’s how we look at the cash. It’s been preserved. We’ve set our year-end estimates. We’ll have very little obligations left after that. And there’s a lot more potential upside in the meantime than that lower bound is that you’re asking about.

Edgar Bordovski

So just to clarify, when you say very little liabilities, can you put an upper bound on those liabilities at the end of the year?

Ken Chahine

So, Edgar, I guess what we’re trying to say — and I will say it since I’m not a CFO — that — maybe I will say it a different way that maybe you can relate to better.

What is the only expense that shareholders would have to incur let’s say in 2009 that you wouldn’t have to incur otherwise? The reality is that it’s about — it’s under $3 million worth of salaries going forward. So even a very modest, I would argue, almost unattractive transaction in 411 will more than make up for that expense.

Other than that, I think the public listing is something that’s worth keeping up because we think we can get the value, and I can tell you now some of the offers that we have, there’s definitely value in that public listing. I think the public listing could more than make up for all of that.

So what’s really variable here — it’s very little. It’s $2 million in the salaries. There’s some in the listing, which I would argue absolutely we should maintain. And that’s it, everything else has to be paid out whether we are here for the remainder of the year or not.

So does that help a little bit?

Edgar Bordovski

So just to conclude, number one, shareholders will be able to vote within say several months as to all the possible transactions that Avigen is considering, and Avigen will not pursue a transaction without that vote. And number two, the liability at the end of the year that remains, you’ll have $40 million in cash, but you will have some liabilities relating to leases and other things. That number is going to be $2 million, $3 million, $4 million. It’s not going to be more than that.

Ken Chahine

I think that’s right. It is very difficult to think that we can cut the expenses significantly, if at all, without starting to significantly impair the value of the assets that are here.

So I think, yes, you are absolutely right. The cash is safe. The one thing that is a little bit of a variable cost — and we hate to bring it up, but it’s the reality — is the legal costs. We’ve probably spent more on legal costs now than we have spent in any other year since I have been here. I’m an attorney. We handle our finances and our legal costs very modestly, like we do the rest of the company. That’s a variable cost that I can’t help you with because I don’t know what’s down the pipe.

But shareholders will absolutely have the opportunity to vote. There’s a special meeting that has been called. We absolutely plan to have that special meeting. By the bylaws, it’s 120 days from when it’s called. When are we going to have that meeting? We really have not set a date, but we just want to make sure that you had the opportunity to say, yes, I either like this transaction or don’t like this transaction — at the time that you make the vote. And we’re happy with the decision. Whatever it is that the shareholders want, we will abide by.

Edgar Bordovski

Okay. Can I just get an answer on the net liability at the end of the year in terms of putting an upper bound on it? You mentioned it’s going to be very little, but can I — is it possible to quantify that number?

Ken Chahine

I’ll try this — Andy, please feel free to jump in — because I think I have these memorized, right? It’s — we have the leases. Those are in the 10-K. Andy went through them. It’s $2 million on the leases. They would be more except that we’ve been very aggressive at subleasing.

There is some accrued liabilities that came in the fourth quarter. You can’t just stop a trial and decide that you’re not going to pay anything further. There has been work that has been accrued up until the time that we terminated the trial. Those have now been paid, so there’s really no further obligations or very little on the AV650 and other trials.

I’m trying to think. There’s some wind-down costs that would normally have to happen. If we were to — there’s a potential of a severance — partial payment or full payment, depending on, again, what the transaction is or isn’t.

And am I missing anything?

Andy Sauter

No. Again, the only last thing here is that to wind up a company there is some sort of cost of custodialship and execution. So if we are not able to deal with the AV411 asset during 2009, there would be some cost to dealing with it after 2009. It’s hard for us to project what that would be, but as far as you can tell — or as far as we can reassure you — the only obligations we’re committed to that are on the books that you can see is going to be the one last year of leases, which is $2 million net. So we’ve certainly tried to point that out a couple of times.

Ken Chahine

Yes. And we’re certainly not trying to avoid the question. It’s just that it’s not as simple of an answer. A judge in a dissolution proceeding, for example, is not going to just take the AV411 asset and leave it completely untouched, right? There’s going to be a duty for that dissolution judge to actually try to monetize that asset, right? Well who’s going to do it? Well, it could be the Management. It could be somebody else.

But what we’re trying to point out here is that it will be someone and there will be some cost. Okay? So exactly what that, we can’t tell you for sure.

The other thing is, the judge — dissolution judge — isn’t necessarily going to say, okay, that’s it; we’re not going to keep any reserves for liabilities.

We’ve run some clinical trials, and so there may be some liabilities on the D&O side. It could be liabilities for clinical trials. There may be a reservation there that is held out. What that’s going to be? Again, we’re not trying to avoid it. There’s just no really good way for us to do it. That’s typical in a dissolution proceeding.

So I really hope I’m — we’re answering your question as clearly as possible. And we’re not trying to complicate it any further.

On the chances for a return of capital

Joe Spiegel, [Chalet Capital]

Great. I’ve got just two other quick questions. The first is, you guys talk a lot about the value of the public listing, but you said yourself it’s costing you $1.5 million. Now, we can all go and look at the present value of negative $1.5 million going out till infinity.

It seems to me that the value of the public listing is far less than your advisers are telling you. It’s a great drain. So I don’t think you should put too much weight on that.

The number two — and then I guess that was a statement, not a question. But the question becomes, have you looked at NUCRYST and this situation there? The largest holder wanted a return of capital. NUCRYST was tremendously overcapitalized. And I believe they were going to have their special meeting, which they agreed to hold, and the vote’s tomorrow, and the chances are, I would say, 100% that NUCRYST shareholders will receive a return of capital. It will leave the company with plenty of cash to pursue their business objectives or have an acquirer acquire their programs.

What — why do you guys feel that returning capital is an either/or? Capital — a dollar in the bank is only worth a dollar. There’s no multiplier in acquisitions for money, for cash. Why not return capital to shareholders, give us $1.00 a share. BVF is happy. Your other shareholders are thrilled, and you still have more than enough money to run the business. Why is that not the top option?

Ken Chahine

It may very well be. We’re not saying that it’s not.

Joe Spiegel

If it’s the top option, do it. Just do it.

Ken Chahine

Well, but I mean (multiple speakers) I’m sorry. Did I get the — is it “Joe”?

Joe Spiegel

Yes.

Ken Chahine

Joe, I mean, I don’t know this other company’s situation.

Joe Spiegel

Take a look, NCST.

Ken Chahine

That’s fine. I don’t know how long they were operating without sort of the business model. I want to just take a step back.

We are absolutely not dragging our feet. I think you can go back — and I think you even said that in many ways we’re handling this in a professional and admirable way, because we aren’t dragging our feet, and so — but this happened — the third week of October is when we announced the data. We’ve restructured. We’ve cut costs. We’ve sold one asset, and we have just engaged the process. So — and we said it’s going to take a month or two.

I’ve seen this play out many, many times. If we in the next month or two come to some decision as to where we are, we’re going to be at the very top of quick and efficient processes. So all we’re saying is, look, that may be very well the answer. And if that’s the answer, we will absolutely pursue it.

But I think — we’ve been in this thing for two months, and I think we’ve had the strategic process for three or four weeks. So I don’t think it’s even been four weeks. I think it’s been like three weeks. So all we’re saying is that. We’ve had very honest discussions in the Board, and I can tell you unequivocally, the Board is not at a position where it says, it’s an M&A or bust. We’re definitely not that way.

But we’re saying, look, we’re in a very interesting situation where capital markets are obviously shut. Where would a company that they had just launched a product — or was just about to launch a product — where would they normally get their working capital? Well, normally they would go to the credit market. That would be the most efficient way, and that’s the least dilutive way for shareholders. And then they would launch a product and then repay that debt.

Well, that whole market is shut down, right? So (multiple speakers) I guess — would you be completely opposed to the concept — if we could have a Company that would be cash flow positive in the very near term and have revenues by the end of let’s say the year — just throwing it out — would that be something that you would absolutely not consider?

Joe Spiegel

Well guys, you have to understand. You are not a bank. You’re a biotechnology Company that unfortunately is seeing hard times. You can still run your business and still bring value to the shareholders through the AV411 program while returning capital to your investors. It doesn’t have to be either/or. But remember, you’re not a bank.

Ken Chahine

Understood. And I think we do have very strong expertise in identifying opportunities that are good. And all we’re saying is, we can present it if we find one. And if we do, great. And if not, we do not intend to be a bank. But a bank is also not — doesn’t have the expertise we have.

So all we’re saying is, hey, if we can find an opportunity that makes sense — and we may not — then that’s fine. I mean, we’ll do that.

Again I want to continue to reiterate, we really — there is absolutely no hidden agenda here. The Board is completely open. And if that is the best option, we can guarantee that we’re going to pursue it.

Joe Spiegel

Well, great. I appreciate you guys taking the time to explain all of this on the conference call. And like I said, a lot of companies wouldn’t even go that far. So I do think you are doing a good job. Do see what happens at NUCRYST. And do consider the fact that these are not either/or proposals. You can satisfy all your constituents.

[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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