VaxGen: Still a Good Prospect

Aug. 04, 2009 7:20 AM ETVaxGen Inc. (VXGN)
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VaxGen Inc (OTC:VXGN) has released its quarterly report for the period ended June 30, 2009.

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “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. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared.

VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to

act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.

At its $0.50 close yesterday, VXGN has a market capitalization of $16.6M. We last estimated the company’s liquidation value to be around $26.5M or $0.80 per share. Following our review of the most recent quarterly report, we’ve slightly reduced our estimate to $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including 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.

The value proposition updated

VXGN has 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):

VXGN Summary 2009 6 30

Balance sheet adjustments

We’ve made the following adjustments to the balance sheet estimates above:

  • Cash burn: The company used $1.1M in cash in the second quarter, down from $2.1M in the first quarter. We have included cash burn of $4M in our estimate for the year. We have also assumed professional fees and termination payments of $1.1M.
  • Off-balance sheet arrangements and contractual obligations: According to VXGN’s 10Q, it has no off-balance sheet arrangements.

The lawsuit against VXGN by its landlords, in which they sought $22.4M, has been dismissed:

In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. In May 2009, the lawsuit was dismissed.


At its $0.50 close yesterday, VXGN has a market capitalization of $16.6M. We estimate the net current asset / liquidation value to be around 74% higher at $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including rights to a portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern has been a lawsuit brought by the landlord against the company, so it is encouraging that the lawsuit has been dismissed. With its stock at a substantial discount to its net current asset / liquidation value, its cash-burning product development activities at an end and a proposal to identify and complete an alternate strategic transaction or liquidate, we think VXGN is still a good prospect, and we’re going to maintain our position.

Disclosure: We 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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Greenbackd is dedicated to unearthing undervalued asset situations where a catalyst exists likely to unlock the value. Greenbackd focuses on assets for three reasons: 1. Assets are simpler to value than earnings: Earnings are often difficult to forecast with any degree of accuracy and we can't value a security based on unknown future earnings. Assets, on the other hand, are known quantities at filing. This is not to say that the value of the assets recorded in the filing is the value we ascribe to them. We disregard intangible assets, heavily discount long-term and fixed assets, and apply a modest discount to current assets. We take only cash at face value. For these reasons, we prefer that each security is predominantly backed by cash, hence our name: Greenbackd. 2. Assets anticipate the downside, the liquidation value, first: This forces us to be conservative in our assessment of value. 3. Assets are a contrarian measure of value: To the extent that Wall Street makes any assessment of value, it is obsessed with earnings. It pays little attention to assets. This creates an opportunity where a valuation based on a company's earnings underestimates the company's asset value. Our favorite stocks are those trading at a substantial discount to liquidation value with an activist investor pushing the company to undertake some corporate action (for example, return capital, pay a special dividend, buy back stock, sell a key asset or the entire company). Greenbackd is penned by a former securities lawyer now working in value-oriented activist funds management Visit his website: Greenbackd (
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