Biotechnology Value Fund (BVF) yesterday filed an amended proxy statement in its effort to remove all of the existing directors 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 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. We estimate AVGN’s cash at around $1.22 per share (BVF estimates $1.20 per share), which is around 20% higher than AVGN’s $1.02 close yesterday.
The Background to Solicitation portion of the amended proxy statement sets out a potted history of the situation to date:
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 stockholder 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. 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 and management’s true intentions.
The Board’s “golden parachute” severance agreements with management, approved under the ridiculous justification that such payouts are necessary to “attract and retain key employees,” are 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 $2 million, a significant amount 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, even though 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. These hastily adopted severance arrangements need to be challenged and, if possible, revoked.
In addition, we believe the Board’s implementation of the stockholder rights plan, or “poison pill,” serves no purpose other than to entrench the Board and keep the BVF Group from purchasing additional stock in the Company. We are concerned that management and the Board 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. Please see “Proposal No. 1 – Reasons for Removing Existing Directors – We believe the unilateral action by the Board to adopt a “poison pill” is an attempt by the Board and management to ensure the retention of their jobs and their compensation” for further discussion of Avigen’s recently adopted stockholder rights plan.
On December 22, 2008, MediciNova, Inc. (“MediciNova”), a company in which we have no economic interest, proposed to merge with Avigen with 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 the Special Meeting to remove the existing directors and to elect new, truly independent directors who, if elected, plan to 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.
Additionally, on January 23, 2009, we commenced a cash tender offer to purchase any and all of the outstanding Shares that we do not own at a price of $1.00 per Share (the “Offer”). The offer price represents a 35% premium over Avigen’s closing stock price of $0.74 on January 8, 2009, the date prior to the date of our announcement that we were seeking to remove all incumbent members of the Board. The Offer was extended on February 20, 2009 and on March 5, 2009 and is currently scheduled to expire at 6:00 p.m., New York City time, on Friday, April 3, 2009, unless it is further extended.
The Offer is conditioned upon, among other things, (i) the Nominees being elected to the Board at the Special Meeting or otherwise being appointed to, and constituting a majority of, the members of the Board, (ii) the Board redeeming the “poison pill,” or our being satisfied in our reasonable discretion that the “poison pill” is otherwise inapplicable to the Offer, the BVF Group or any affiliates or associates of the BVF Group, and (iii) Avigen not having authorized, recommended, proposed, announced its intent to enter into or entered into an agreement with respect to or effected any merger, consolidation, liquidation, dissolution, business combination, acquisition of assets, disposition of assets, alternative strategy or relinquishment of any material contract or other right of Avigen or any comparable event or capital depleting transaction not in the ordinary course of business. The Offer is not subject to any financing condition.
Assuming the conditions to this Offer are satisfied, stockholders would have the choice of (i) tendering their Shares and receiving a fixed cash payment upon the closing of the Offer at a premium to the market price on the day prior to both the announcement of the Offer and the announcement we were seeking to remove the incumbent members of the Board and to elect the Nominees, or (ii) maintaining their investment in the Company and participating in the proposed merger with MediciNova, if it occurs. Regardless of whether or not a stockholder intends to tender their Shares in the Offer, we strongly recommend that all stockholders vote to elect each of the Nominees and in favor of the other proposals set forth in this Proxy Statement.
We encourage you to review the remainder of this Proxy Statement, which describes in greater detail our concerns and the proposals contained herein.
[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.]
We estimate DRAD’s liquidation value at around $29.3M or $1.55 per share.
We estimate ASYS’s liquidation value to be around $40M or $4.40 per share.
Greenbackd 