VaxGen Inc (OTC:VXGN) is a bread-and-butter play for us. The company is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is now “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” If the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. At its $0.48 close yesterday, VXGN has a market capitalization of $15.9M. We estimate the net cash value to be around 80% higher at $27.7M or $0.84 per share. VXGN has other potentially valuable assets, including a “a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. We’ve added it to the Greenbackd Portfolio.
About VXGN
VXGN is a biopharmaceutical company based in South San Francisco, California. The company was incorporated on November 27, 1995. During 2002 through 2006, VXGN developed vaccines against inhalation anthrax and smallpox for the purpose of biodefense. In December 2006, the Department of Health and Human Services (HHS) terminated its contract with VXGN for the development and delivery of a next-generation anthrax vaccine. Following the HHS decision, VXGN ceased actively developing its anthrax vaccine, scaled back its biodefense activities and began pursuing strategic and other alternatives. The company has now ended all product development activities and sold or otherwise terminated its drug development programs.
The value proposition
VXGN’s earnings and cash flow history is emblematic of many biotechnology companies. In its almost two decades in existence, it has produced no marketable products, raised around $300M and burned through almost $270M of that amount. VXGN has now taken steps to minimize its cash burn, reducing its workforce to three employees, terminating its anthrax and smallpox development activities and selling the assets related to its anthrax product candidate. The company’s value rests on its vestigial holding of cash and equivalents (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):
We estimate the liquidation value to be around $28.4M or $0.86 and the net cash value to be around $27.7M or $0.86 per share.
There is the possibility that VXGN is worth considerably more than this amount. Under the terms of the sale of its assets and rights relating to its anthrax vaccine product candidate and related technology to Emergent BioSolutions Inc, (Emergent), Emergent may be obligated to pay VXGN up to an additional $7M in milestone payments, plus specified percentages of future net sales for 12.5 years beginning from the first commercial sale. VXGN has also listed its “a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products.”
Off-balance sheet arrangements and contractual obligations
According to VXGN’s 10K for the year ended December 31, 2008, it has no off-balance sheet arrangements.
One concern for us is the lawsuit against VXGN by its landlords, in which they seek $22.4M:
In February 2009, a lawsuit was filed against VaxGen by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that the Company defaulted on the lease on the 349 Oyster Point, South San Francisco facility. The complaint seeks possession of the premises and the balance of lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs.
We may incur substantial expenses in defending against such claim, and it is not presently possible to accurately forecast the outcome. We do not believe, based on current knowledge, that the foregoing legal proceeding are likely to have a material adverse effect on its financial position, results of operations or cash flows. In the event of a determination adverse to VaxGen, we may incur substantial monetary liability that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
If the lawsuit is succesful, then VXGN has next to no value.
Catalyst
According to the 10K, the company is considering various alternate strategic transactions to return value to its stockholders. VXGN has ended all product development activities, sold or otherwise terminated its drug development programs and is now seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions. If the company is unable to identify and complete an alternate strategic transaction, the company will liquidate. A Harper’s Magazine article, “Flaws in the BioShield: VaxGen looks for another federal bailout,” details a sordid history of “disturbing ethical failures in the area of human-subject drug testing” and management incompetence. The article concludes:
Based on VaxGen’s string of failures, giving the firm another stay of execution might not just be wasteful, but criminally negligent as well.
That was in 2006. The company has managed to limp along since then, but we think it’s time to take this rooster to the chopping block.
Conclusion
With its stock at a substantial discount to its net cash position, its cash-burning product development activities at an end and a proposal to identify and complete an alternate strategic transaction or liquidate, VXGN is a good prospect. At its $0.48 close yesterday, it has a market capitalization of $15.9M. We estimate the net cash value to be around 80% higher at $27.7M or $0.84 per share. VXGN has other potentially valuable assets, including rights to portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern is that the company may seek to continue as a biotechnology company, rather than liquidating. We hope this outcome doesn’t eventuate. We’ve added it to the Greenbackd Portfolio.
VXGN closed yesterday at $0.48.
The S&P500 Index closed yesterday at 831.88.
Hat tip to Wes Gray.
[Full Disclosure: We do not have a holding in VXGN. We now have a holding in VXGN. 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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