Avigen Still a Good Value

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 |  Includes: AVGN, MNOV, SNY
by: Greenbackd

Avigen Inc (NASDAQ:AVGN) has filed its 10Q for the period ended June 30, 2009.

One interesting aspect of the 10Q is the cost the company attributes to responding to the proxy fight and hostile tender offer:

Operating Activities. Net cash used in operating activities was $8.2 million during the six months ended June 30, 2009. Net cash used in operating activities during this period was primarily used to fund costs associated with our response to a proxy fight and hostile tender offer, and winding down clinical research and development activities, including non-clinical studies and clinical trials performed by third parties.

$8.2M? That’s $0.27 per share. Granted, some of it went to other activities, but presumably costs associated with “response to a proxy fight and hostile tender offer” was the larger portion of the $8.2M and that’s why it was listed first. It’s galling what directors are allowed to spend fighting off shareholders.

We started following AVGN in December last year (see archived posts here) because it was a net cash stock and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. AVGN is now back in negotiations with MediciNova, Inc. (NASDAQ:MNOV) regarding a proposed acquisition by MediciNova. The consideration for the deal is AVGN’s “net cash liquidation value plus $3 million” and

a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation (GENZ), potentially subject to certain adjustments.

The stock price reflects this: AVGN closed yesterday at $1.34, up 106.2% from our $0.65 purchase price. We last estimated the net cash liquidation value at around $34M or $1.14 per share. We’ve now updated our estimate to $35M or $1.17 per share. Including the $3M from MediciNova would increase that value to around $38M or $1.247per share. We believe that there is a reasonable chance that AVGN will yield more than its current $1.34 share price when the “contingent payment right” capturing the near term payments from Genzyme is taken into account. AVGN shareholders also have an option-like exposure to any value in AVGN’s AV411 assets and program, although we cannot estimate the value of this with any certainty.

The value proposition updated

Set out below is our adjusted balance sheet for AVGN (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):

AVGN Summary 2009 6 30

Conclusion

While BVF’s slate was unsuccessful at the special meeting, AVGN’s board has developed its own plan of liquidation, which should put a floor on AVGN’s stock at around its net cash value of $34M or $1.14 per share less wind down costs. There exists a good chance that AVGN will yield considerably more than its net cash value. The net cash estimate does not take into account AVGN’s AV411 assets and program or near term payments from Genzyme. With the downside protected, and a good chance at some upside from here, we think AVGN still represents good value, and we’re going to maintain our position accordingly.

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.