Avigen AVGN
March 04, 2009 - 11:22am EST by
bruin821
2009 2010
Price: 1.04 EPS na na
Shares Out. (in M): 30 P/E na na
Market Cap (in $M): 31 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT na na

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Description

 

AVGN represents an opportunity to earn 30% + with low risk in the very near term.  The stock is trading below its current cash balance of $1.60/sh ($48m in cash + investments / 29.8m fully diluted shares outstanding) and is on the verge of being forced to liquidate additional assets and return all cash to shareholders.  As management winds down the remaining operations in 2009 and pays off $8m in future obligations, we estimate cash will be approximately $40m or $1.30/sh on 12/31/09.  Additional to the $1.30 cash distribution, investors get a free call option for upside potential via the liquidation of two additional assets, which we believe have some value (see discussion below).

 AVGN, at a crossroads because its AV650 drug did not meet its primary endpoint in phase 2B trials has already dramatically downsized (including headcount reduction of 70%) to preserve cash and minimize any burn.  In the next 60 days there will be a special shareholders meeting, which will force a resolution on the two options the company has in front of it. 

 The most likely outcome is that the activist, Biotech Value Fund (BVF), which owns 30% of the common and is seeking the ousting of the Board, will successfully orchestrate their demise.  If BVF gets control of the Board, they have already publicly put forth the plan of liquidating the remaining assets and returning all the cash to its rightful owners (the shareholders). Or, the second option, (and we believe this is a long shot) management will attempt to spend the cash to create value. The caveat on option #2 is that shareholders (institutions own 75% of the common), will be able to vote on any proposed plan brought forth by management.  Given the consistently skeptical tone of shareholders on the recent Q4 call, we believe management has little chance of successfully convincing shareholders of doing any deal with the cash, and therefore a non-shareholder friendly outcome is highly unlikely.

 The two options discussed:

Option #1: Liquidate the assets and return cash to shareholders.

Cash + investments = $58m

Current Liabilities  =  $10m

 

Estimated Future Liabilities:

Management is projecting to burn approx $8m in cash by 12/31/09. Detailed below:

$2m net leases

$1.5m Corporate overhead (legal, audit, taxes and listing fees)

$1.5m remaining spend on AV411 (falls in first half of 2009)

$3.0m variable expenses: personnel, miscellaneous overhead, etc

 

This should leave them with cash and investments of $40m on 12/31/09 with shares outstanding of 29.8m (or ~$1.30/sh).

 Plus investors get a free call option:

There are two other key assets with potential value that constitutes the "free call option," the AV411 program and the Genzyme milestone payment.

 

1) AV411 program:  This could be sold or AVGN could partner with a larger firm that would shoulder the expenses for a cut of the potential profits.  (Note: The very early stage AV513 (which essentially was just intellectual property) was recently sold by AVGN to Baxter in December 2008 for $7.0m).  AV513 had not entered phase 1 yet. 

 In an outright sale, management believes that AV411's value should exceed AV513 because:

  -   AV411 is already a commercially approved pharmaceutical in Japan under the name Ibudilast. This should mitigate development risk and accelerate clinical trials in the U.S.

  -   AVGN has already completed phase 2 clinical trials in Australia but has decided against initiating phase 2B trials in the U.S. until they get a larger partner involved in order to conserve their cash.

  -   AV411 should be generally more valuable than AV513 because it is a later stage, broader application with ultimately a much larger market potential.

 -    AVGN has already sunk approximately $30m in the R&D of AV411.

 -    Publications are coming out on AV411 in the near term which should shed more light on its efficacy and value.

 -    Management claims they are in discussions about monetizing AV411 with potential suitors / partners.

 

2) Genzyme milestone: In 2005 AVGN sold to Genzyme 68 patents, of which a specific milestone could come due in early 2010.  AVGN would receive $6m if the milestone is achieved.

 Option #1 conclusion: Even if the AV411 program and the Genzyme payment end up having no value, investors should still make ~30% return on their capital when the cash is returned to shareholders.

 Option #2: AVGN is actively seeking to acquire an undervalued asset or company in the pharmaceutical or medical diagnostic space.  Right now, management is at various stages of due diligence on 4 different potential deals.  Obviously the fear is that they blow their cash hoard to make a value destroying transaction and BVF is clearly maneuvering to prevent this from happening.  There is a litany of small bio-techs who have squandered value in the attempt to create it.  Back in November/December, the market was valuing the cash as if it would be poorly allocated (stock was trading .60c+/-) which attracted unsolicited bids for the company.

 Two recent offers have been made to acquire AVGN.

In Dec 2008 Medicinova - (Ticker: MNOV - Iwaki Yuichi from Medicinova serves on AVGN's board) made an offer to buy AVGN for stock and convertible shares, valued at a premium to AVGN's share price.  AVGN management quickly instituted amendments to their severance package (originally crafted in 2005), which gives them as much as $3m in the event of a change of control.   Additionally a poison pill was adopted in order to preclude BVF, which was continuing to acquire shares throughout November, from buying any more. 

 On January 14th, AVGN management retained RBC Capital Markets and Pacific Growth Equities to explore strategic transactions.

 On January 15th, BVF made an unsolicited tender offer for $1.00 share and clearly delineated its reasoning for management to either accept Medicinova or BVF's offer in an open letter to management.

 The Board has rejected BVF's unsolicited offer and currently states that they believe they can create more value for shareholders.

 Management's time is running out:

 Management has 120 days from January 9th to call the special meeting (about 60 days from now), which will determine the Board's fate. It's not clear whether any of the acquisitions they are studying will be ready to vote on by the time the meeting is called to order, but they have given some guidance as to what they are looking for:

 High hurdle in order to make a transaction:

  • Will have to create more value for shareholders than the cash (liquidation).
  • Looking in the generic pharma / diagnostic arena where they claim they have good knowledge/expertise.
  • Company must be late stage, close to break even or cash flow positive
  • Company has to be at an inflection point where some additional capital will make them profitable within short time frame.
  • Strong management team (the AVGN mgt team may just turn over the reigns).
  • Currently under confidentiality agreement with 4 companies.
  • Any proposal has to be approved by shareholders in this extremely skeptical environment.  Given BVF owns 30% of the common and institutions own a combined 75%, it will have to be a very low risk deal to be accepted.

 Conclusion: If BVF, which seems to have tremendous support, wins the special election and gets its people on the board, we will surely see the liquidation plan executed and the cash returned to shareholders.  Given the economic environment and the lack of appetite for risk from investors these days, we do not see how management will be able to put forth a deal compelling enough that the majority of shareholders will vote for

Catalyst

 

BVF, an activist fund who owns 30% of AVGN (which is currently trading at $1.00) called a special meeting on January 9th to replace the majority of AVGN's Directors with its own people.  This meeting, which will take place in the next 60 days, will begin the process of changing management in order to return the cash (estimated at $1.30/sh) to shareholders.  Additionally they will liquidate other assets, which provide further upside potential for investors, instead of doing a risky transaction as proposed by management.

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    Description

     

    AVGN represents an opportunity to earn 30% + with low risk in the very near term.  The stock is trading below its current cash balance of $1.60/sh ($48m in cash + investments / 29.8m fully diluted shares outstanding) and is on the verge of being forced to liquidate additional assets and return all cash to shareholders.  As management winds down the remaining operations in 2009 and pays off $8m in future obligations, we estimate cash will be approximately $40m or $1.30/sh on 12/31/09.  Additional to the $1.30 cash distribution, investors get a free call option for upside potential via the liquidation of two additional assets, which we believe have some value (see discussion below).

     AVGN, at a crossroads because its AV650 drug did not meet its primary endpoint in phase 2B trials has already dramatically downsized (including headcount reduction of 70%) to preserve cash and minimize any burn.  In the next 60 days there will be a special shareholders meeting, which will force a resolution on the two options the company has in front of it. 

     The most likely outcome is that the activist, Biotech Value Fund (BVF), which owns 30% of the common and is seeking the ousting of the Board, will successfully orchestrate their demise.  If BVF gets control of the Board, they have already publicly put forth the plan of liquidating the remaining assets and returning all the cash to its rightful owners (the shareholders). Or, the second option, (and we believe this is a long shot) management will attempt to spend the cash to create value. The caveat on option #2 is that shareholders (institutions own 75% of the common), will be able to vote on any proposed plan brought forth by management.  Given the consistently skeptical tone of shareholders on the recent Q4 call, we believe management has little chance of successfully convincing shareholders of doing any deal with the cash, and therefore a non-shareholder friendly outcome is highly unlikely.

     The two options discussed:

    Option #1: Liquidate the assets and return cash to shareholders.

    Cash + investments = $58m

    Current Liabilities  =  $10m

     

    Estimated Future Liabilities:

    Management is projecting to burn approx $8m in cash by 12/31/09. Detailed below:

    $2m net leases

    $1.5m Corporate overhead (legal, audit, taxes and listing fees)

    $1.5m remaining spend on AV411 (falls in first half of 2009)

    $3.0m variable expenses: personnel, miscellaneous overhead, etc

     

    This should leave them with cash and investments of $40m on 12/31/09 with shares outstanding of 29.8m (or ~$1.30/sh).

     Plus investors get a free call option:

    There are two other key assets with potential value that constitutes the "free call option," the AV411 program and the Genzyme milestone payment.

     

    1) AV411 program:  This could be sold or AVGN could partner with a larger firm that would shoulder the expenses for a cut of the potential profits.  (Note: The very early stage AV513 (which essentially was just intellectual property) was recently sold by AVGN to Baxter in December 2008 for $7.0m).  AV513 had not entered phase 1 yet. 

     In an outright sale, management believes that AV411's value should exceed AV513 because:

      -   AV411 is already a commercially approved pharmaceutical in Japan under the name Ibudilast. This should mitigate development risk and accelerate clinical trials in the U.S.

      -   AVGN has already completed phase 2 clinical trials in Australia but has decided against initiating phase 2B trials in the U.S. until they get a larger partner involved in order to conserve their cash.

      -   AV411 should be generally more valuable than AV513 because it is a later stage, broader application with ultimately a much larger market potential.

     -    AVGN has already sunk approximately $30m in the R&D of AV411.

     -    Publications are coming out on AV411 in the near term which should shed more light on its efficacy and value.

     -    Management claims they are in discussions about monetizing AV411 with potential suitors / partners.

     

    2) Genzyme milestone: In 2005 AVGN sold to Genzyme 68 patents, of which a specific milestone could come due in early 2010.  AVGN would receive $6m if the milestone is achieved.

     Option #1 conclusion: Even if the AV411 program and the Genzyme payment end up having no value, investors should still make ~30% return on their capital when the cash is returned to shareholders.

     Option #2: AVGN is actively seeking to acquire an undervalued asset or company in the pharmaceutical or medical diagnostic space.  Right now, management is at various stages of due diligence on 4 different potential deals.  Obviously the fear is that they blow their cash hoard to make a value destroying transaction and BVF is clearly maneuvering to prevent this from happening.  There is a litany of small bio-techs who have squandered value in the attempt to create it.  Back in November/December, the market was valuing the cash as if it would be poorly allocated (stock was trading .60c+/-) which attracted unsolicited bids for the company.

     Two recent offers have been made to acquire AVGN.

    In Dec 2008 Medicinova - (Ticker: MNOV - Iwaki Yuichi from Medicinova serves on AVGN's board) made an offer to buy AVGN for stock and convertible shares, valued at a premium to AVGN's share price.  AVGN management quickly instituted amendments to their severance package (originally crafted in 2005), which gives them as much as $3m in the event of a change of control.   Additionally a poison pill was adopted in order to preclude BVF, which was continuing to acquire shares throughout November, from buying any more. 

     On January 14th, AVGN management retained RBC Capital Markets and Pacific Growth Equities to explore strategic transactions.

     On January 15th, BVF made an unsolicited tender offer for $1.00 share and clearly delineated its reasoning for management to either accept Medicinova or BVF's offer in an open letter to management.

     The Board has rejected BVF's unsolicited offer and currently states that they believe they can create more value for shareholders.

     Management's time is running out:

     Management has 120 days from January 9th to call the special meeting (about 60 days from now), which will determine the Board's fate. It's not clear whether any of the acquisitions they are studying will be ready to vote on by the time the meeting is called to order, but they have given some guidance as to what they are looking for:

     High hurdle in order to make a transaction:

     Conclusion: If BVF, which seems to have tremendous support, wins the special election and gets its people on the board, we will surely see the liquidation plan executed and the cash returned to shareholders.  Given the economic environment and the lack of appetite for risk from investors these days, we do not see how management will be able to put forth a deal compelling enough that the majority of shareholders will vote for

    Catalyst

     

    BVF, an activist fund who owns 30% of AVGN (which is currently trading at $1.00) called a special meeting on January 9th to replace the majority of AVGN's Directors with its own people.  This meeting, which will take place in the next 60 days, will begin the process of changing management in order to return the cash (estimated at $1.30/sh) to shareholders.  Additionally they will liquidate other assets, which provide further upside potential for investors, instead of doing a risky transaction as proposed by management.

    Messages


    SubjectRE: shareholder approval
    Entry03/04/2009 04:47 PM
    Memberbruin821

    To my knowledge it is not in the bylawys, but they have publically committed to it.   With 75% of the stock owned by angry shareholders they will be thrown out if they try to do an anquisition without shareholder value.com


    SubjectLeases
    Entry03/05/2009 05:06 PM
    Membercanuck272

    Does the $2 million get them out of all leases and any other contractual liabilities?  Could this number be substantially higher.   Landlords are not anxious to let cash rich tenants out of leases these days.

    Thanks in advance for your reply.


    SubjectRE: Leases
    Entry03/06/2009 12:36 PM
    Memberbruin821

    According to management they only have one year left on their lease and 70% of it is subleased.


    SubjectAVGN Article in NY Times
    Entry03/09/2009 10:25 PM
    Memberbruin821

    http://www.nytimes.com/2009/03/10/business/10biocash.html?ref=business


    SubjectBVF Proxy is out
    Entry03/16/2009 10:31 PM
    Memberbruin821

    We voted with BVF


    SubjectBVF increases lender
    Entry03/20/2009 10:43 AM
    Memberbruin821

    to $1.2


    SubjectRE: BVF increases tender-
    Entry03/20/2009 12:46 PM
    Memberbruin821

    typo on last message


    SubjectAVGN Mananagement Capitulates
    Entry03/26/2009 10:54 AM
    Memberbruin821

    Delighted to report that AVGN announced they will liquidate the company.  They confirmed that the net cash after liquidation costs is about $1.2 PLUS .20 from Genzyme payments and proceeds selling AV411.  We believe that the .20 number is very conservative. 

    However, even here it is up 15% from the write up and should be at least 30% when the drug and Genzyme payments are recieved.


    SubjectMore AVGN Liquidation
    Entry03/26/2009 11:06 AM
    Memberbruin821

    Just to clarify, the .20 only refers to the Genzyme payments not the sale of AV411-so additional 15% return is only for those payments.  We believe the drug is worth around $10mm, so future returns are potentially much greater, probably in the 40% range.

     

     


    SubjectRE: More AVGN Liquidation
    Entry03/26/2009 11:27 AM
    Membergocanucks97

    can you discuss the timeframe/likelihood of the Genzyme payment? The press release mentioned it is "near-term", but in your write-up, you said it would be a 2010 event. Have the milestones been reached for sure?

    Thanks.


    SubjectRE: AVGN Mananagement Capitulates
    Entry03/26/2009 01:04 PM
    Memberdurian966

    Does the "termination without cause" of all of management trigger their golden parachutes?


    SubjectRE: RE: AVGN Mananagement Capitulates
    Entry03/26/2009 01:14 PM
    Memberoogum858

    binnngo.  fishy smell surfaces. . . .or at least a durian-like stinky smell. . .


    SubjectRE: RE: More AVGN Liquidation
    Entry03/26/2009 01:36 PM
    Memberbruin821

    Yes, they said they are negotiating accelerating Genzyme payments right now and are optimistic they will get the full $6mm or close to ASAP.


    SubjectRE: RE: AVGN Mananagement Capitulates
    Entry03/26/2009 01:36 PM
    Memberbruin821

    I would assume so

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