Post mortem
We started following VXGN (see the VXGN post archive here) because it was trading at a substantial discount to its net cash position, had ended its cash-burning product development activities and was “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” VXGN had 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. I initially estimated the liquidation value to be around $0.84 per share, although that reduced over the holding period to yesterdays $0.71 per share. The authors of a letter sent to the board on July 14 of this year adjudged VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.On the catalyst front, management had said that, if the company was unable to identify and complete an alternate strategic transaction, it proposed to liquidate. One concern of mine was the lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, at which point the path for VXGN to liquidate appeared to clear. Unfortunately the board dragged its feet on the liquidation, which, given their relatively high compensation and almost non-existent shareholding, was not difficult to understand.
This state of affairs drew two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change called out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.The VaxGen Full Value Committee, comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intended to replace the current board with directors who would focus on the following objectives:
1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;
2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;
3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and
4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.
BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, 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.”
For a while it looked like a decent outcome was possible, but then VXGN threw a spanner in the works, striking an appalling deal with OXGN at a discount to VXGN’s $0.70 close the prior day. It is also priced at a discount to VXGN’s net cash and liquidation values, and payment is to be made in the watered scrip of OXGN, a speculative biotech play (see our more detailed take on the terms of the VXGN / OXGN deal). BA Value Investors and VaxGen Full Value Committeeexited the stock shortly thereafter. Value Investors for Change has also been conspicuously silent, so I think we can assume they’ve thrown in the towel.
Disgruntled shareholders have now initiated several class actions against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserved the suit, but a successful outcome in any litigation will be a Pyrrhic victory for participating VXGN shareholders. As I understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee.
It’s also possible that the merger will not survive the shareholder vote. As readerbellamyj noted, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table. If that happens, we’ll revisit VXGN, but for now, we’re going to say, “Good riddance.” VXGN directors, hang your heads in shame.
Hat tip garp.
[Full Disclosure: We don't 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.]
Greenbackd
http://greenbackd.com/
Greenbackd is a former corporate advisory and securities lawyer working in value-oriented activist funds management.
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User Comments:
1. Valuearb says on Nov 04, 2009 at 10:37 AM:
As you know I've been wrong on this one fairly consistently but I'd bet the merger is voted down. Sadly they haven't learned anything from the Raven attempt, and don't realize their shareholder base has turned over even more towards liquidation. I was very fortunate to bail out during the "aids cure" hysteria at a nice profit, and I'm considering re-entry if I can get a large discount to liquidation value as a bet on the merger failing and activists replacing the board.
Management really fooled me here, you were always more clear eyed about the situation.
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