BIOTECHNOLOGY
VALUE FUND, L.P.
March 12,
2009
VOTE
THE ENCLOSED
GOLD
PROXY CARD TO
HELP UNLOCK VALUE
AT
AVIGEN, INC.
ELECT
DIRECTORS WHO ARE DEDICATED TO MAXIMIZING VALUE FOR
ALL
AVIGEN
STOCKHOLDERS
BY REDUCING CORPORATE WASTE
AND
PROTECTING STOCKHOLDERS’ DOWNSIDE RISK WHILE MAINTAINING SIGNIFICANT UPSIDE
POTENTIAL
Dear
Fellow Stockholders:
We, the
Biotechnology Value Fund (“BVF”), are the owners of 8,819,600 shares, or
approximately 30% of Avigen’s outstanding common stock. Since we took the lead
in protecting value for all stockholders of Avigen in October of 2008, the stock
price has increased by over 65%. We have successfully caused the Avigen
management team and Board to reduce expenses and sell off programs that they do
not have the necessary expertise to develop. We now need your participation to
secure Avigen’s substantial remaining value by removing the members of the
current self-serving Board and electing our independent nominees who are
committed to protecting value for all stockholders.
Let me s
tate from the outset that we neither
seek, nor would we accept, any consideration or benefit solely for
ourselves.
Avigen has falsely accused us of this numerous times, even
though we have been crystal clear on this fundamental issue all along. We are
waging this effort because (a) we feel a sense of responsibility to do so on
behalf of all stockholders given our unique position as the largest stockholder
and (b) we believe it is the right thing to do, especially in the context of the
current economic environment caused, in part, by similar self-serving
managements and Boards.
Throughout
this process we have sought only three simple things:
1. that Avigen stop recklessly wasting
stockholder money;
2. that stockholders be empowered to
decide the fate of Avigen’s remaining cash; and
3. that stockholders be guaranteed a
quantified worst-case outcome of approximately Avigen’s liquidation
value.
Thus far
we have made progress with #1 and #2 above. Facing pressure from BVF, Avigen has
abandoned, at least temporarily, its plan to spend money on its remaining
products. In addition, the Company has now been forced to call a special meeting
to finally permit stockholders the opportunity to weigh in. Prior to our
intervention, Avigen’s stock traded at a mere 33% of the cash in the bank and at
a steep discount to its current price. This is a remarkable reflection on how
poorly Avigen was and is viewed by the investment community. Prior to our
intervention, Avigen’s plan was to spend all stockholder money over two
years on uncompelling products that it has subsequently conceded were not
worthy of investment.
It
is worth reflecting on some of Avigen’s historical
“accomplishments”:
1. Avigen has consumed over $250
million of investor capital, with little value to show for it. Why should they
be entrusted with the last $50 million?
2. Avigen selected a Chief Executive
Officer who lives in Park City, Utah when the Company is based in
California.
3. Avigen has committed to pay
significant fees in the form of golden parachutes to its senior executives and
multiple investment bankers, lawyers and consultants in an amount that, we
believe, could exceed $5 million under certain circumstances.
4. Despite purporting to have reduced
their use of cash and working to protect stockholders, we believe Avigen will
spend nearly $20 million, or over $0.65 per share, between the time they
announced the failure of AV650 and when they supposedly hope to complete a
merger.
5. Avigen adopted a “poison pill,”
which we believe is just another example of the Board acting first to protect
their jobs rather than the stockholders they have a fiduciary duty to
represent.
6. Avigen delayed calling the special
meeting for approximately two months before setting a rushed meeting date that
we believe was set to prevent stockholders from having adequate opportunity to
receive and review proxy materials and vote at the special meeting.
We have
grown increasingly dismayed that Avigen’s Board and management team, who
collectively own little stock, have wasted money on golden parachutes, multiple
investment bankers, consultants and lawyers. Had Avigen merely agreed to
guarantee a worst case scenario for stockholders, this fight would not have
transpired. Thus, we can only conclude that Avigen is likely to gamble
stockholders’ remaining capital that, precedent warns, could result in a near
total destruction of stockholder value.
We are
frankly surprised that the Board has not previously addressed our concerns by
affirmatively and unequivocally agreeing to proceed only with a transaction that
provides for stockholders to receive no less than the Company’s approximate
liquidation value. In fact, it appears to us that the Board is only now even
mentioning an undefined intent to provide some merger liquidity in response to
our demand for full downside protection for
all
stockholders. We
believe that Avigen’s shares are undervalued by the market as a result of
stockholders’ concern about the direction the current Board is taking the
Company. New leadership is needed to prevent further erosion of each
stockholder’s investment in Avigen, as well as to take advantage of
opportunities that exist to maximize stockholder value.
WITHOUT
ANY EVIDENT RATIONAL MOTIVE, AVIGEN HAS NOT AGGRESSIVELY PURSUED THE COMPELLING
MERGER PROPOSAL
BY
MEDICINOVA THAT OFFERED
BOTH
DOWNSIDE PROTECTION AND SIGNIFICANT UPSIDE
TO
ALL AVIGEN STOCKHOLDERS
Unlike
the current Board, we believe that a merger with MediciNova makes sense for all
Avigen stockholders and we cannot understand why only lip service was paid to
pursue a deal with MediciNova. Among the extraordinary potential benefits we see
in a merger with MediciNova are:
•
Downside Protection:
Based on
our analysis, even if a merger with MediciNova is unsuccessful, Avigen
stockholders would still receive the approximate current liquidation value of
Avigen. This means that, even in the worst-case scenario, the merger would yield
an approximate 65% premium to Avigen’s stock price before we submitted our
request to the Company to call the special meeting.
•
Tremendous Upside Potential:
Based on our analysis, if a merger with MediciNova is successful, Avigen
stockholders could own a substantial percentage of MediciNova (approximately 45%
of the combined company). We believe the Board has not had any substantive
discussions with MediciNova. We do not understand why they have dismissed the
offer as providing little value.
•
Free Option:
Under the terms
of the proposed merger, stockholders would have at least one year after the
merger is consummated to choose whether they want downside protection or upside
potential, as described above. We believe this free option period offers
stockholders tremendous upside potential with low risk.
Neither BVF nor its nominees have any
financial interests in MediciNo
va.
BVF is only interested in
the superior transaction for ALL stockholders. We simply believe that in light
of similar historical transactions, it is important that stockholders have
downside protection. If BVF’s nominees are elected to the Board, stockholders
can either tender their shares in the BVF tender, or not tender and participate
with BVF in the future of Avigen, whether through a merger with MediciNova,
subject to the nominees’ fiduciary obligations, or if the merger is not
feasible, to consider liquidation or other similar type transactions. In
any case all stockholders will get to choose and have the opportunity to get
immediate cash back.
The
nominees intend to present any potential MediciNova transaction to stockholders
for approval
—
ensuring
that stockholders will get a true
say in the future of Avigen.
We
believe the Board’s failure to commit exclusively to a transaction that offers
downside protection based on the Company’s liquidation value suggests that the
Board is considering other options, which will
put the
value of Avigen at risk. As the Company’s largest stockholder, we share the
interest of all stockholders in protecting and preserving our investment. Unlike
the directors and management, BVF only profits if the stock price goes up and
shares the interest of all stockholders to increase share value and limit share
loss. We receive no other payments or compensation.
THE
VAST MAJORITY OF FAILED BIOTECHNOLOGY COMPANIES THAT HAVE FOUND THEMSELVES IN
AVIGEN’S CURRENT SITUATION
HAVE
MANAGED TO DESTROY BETWEEN 80%-99% OF STOCKHOLDER VALUE FROM THEIR THEN
LIQUIDATION VALUE
We are
concerned that Avigen will enter into a transaction without downside protection
that would end up destroying value. We have good reason to fear this, because
most recent mergers involving companies similarly situated to Avigen (e.g.,
Transcept Pharmaceuticals, Inc., Anesiva, Inc., ARCA biopharma, Inc., Evotec
Aktiengesellschaft, Cardiovascular Systems, Inc. and others), managed to destroy
stockholder value. In each of these transactions,
the stock prices declined over
80%
from their liquidation value following the Board’s decision to pursue
a transaction, resulting in aggregate lost value in excess of $200 million. Of
course the management, directors, and bankers took their millions of dollars of
fees in cash rather than stock in the companies they supposedly supported. The
directors and management of companies like Avigen deserve recognition: it is
quite a feat to destroy 80% of the liquidation value of a company possessing
little else but cash! The charts below illustrate these astonishing
failures.
*
Approximate net cash per share liquidation value at time of negative binary
event.
This
repeated lost value and waste is a key reason why we believe downside protection
is so important for all stockholders. We want to prevent Avigen from joining
this long and infamous list of failures. This is a key reason why we believe the
MediciNova transaction is so attractive.
WE
BELIEVE THE AVIGEN BOARD IS ENTRENCHING ITSELF AS IT PREPARES TO ENTER INTO
AN
EGREGIOUS
TRANSACTION THAT COULD BURN THROUGH OUR COMPANY’S REMAINING CASH
In a
shameless example of protecting their own self-interest, in October 2008 Avigen
increased its golden parachute payments, allegedly to attract and retain
executive talent. Our first question is: which executive employees does Avigen
need to retain when, in our view, Avigen does not possess a viable business? We
have estimated that the golden parachute payouts total at least $2 million.
Payments to consultants, bankers and lawyers are quickly adding up as well.
Given the current economic conditions, we find it irresponsible for Avigen to
engage in such behavior that amounts to a slap in the face of all Avigen
stockholders. The recent addition of a poison pill by the Board adds further
insult to stockholders who have already been insulted by a Board that ignores
their pleas.
We are
afraid that if the current Board remains in place, they will burn through
Avigen’s remaining cash by engaging in a transaction that will further destroy
stockholder value. For example, any transaction proposed by Avigen is likely to
have a substantial and non-refundable breakup fee that will not be returned to
stockholders even if a transaction is not approved. Everyday that the current
Board remains in place, the cash per share is dwindling.
AFTER
DELAYING THE SPECIAL MEETING FOR MONTHS, THE BOARD FINALLY SET
AN
ACCELERATED MEETING DATE
TO
TRY
AND PREVENT STOCKHOLDERS FROM
HAVING
AN OPPORTUNITY TO LET THEIR VOICE BE HEARD
The Board
has now set March 27, 2009 as the date for the special meeting of stockholders.
We delivered our notice to the board demanding that a special meeting be called
approximately two months ago. Finally, after nearly two months of delay and
significant and unnecessary corporate waste, the Company announced a March 27,
2009 meeting date, which will occur in just over two weeks, barely enough time
to deliver our proxy materials to you. At this critical meeting, Avigen
stockholders will be given the opportunity to remove the entire Board and elect
independent directors who will strive to preserve and enhance value for all
Avigen stockholders. We hope that you will support us by immediately voting the
enclosed
GOLD
proxy
card. If you Share our Concern for the Future of Our Company, Do Not Delay, Vote
Your Gold Proxy Card Today.
TIME
IS SHORT
Act
Now to Protect Your Investment By Voting The Enclosed Gold Proxy Card
Today
Unfortunately,
we have come to the conclusion that the current Board is not fit to run our
Company and that it will continue to destroy stockholder value if it is not
replaced. Please join our campaign to maximize stockholder value by voting the
enclosed
GOLD
proxy card
today.
If you
have any questions or need assistance in voting your
GOLD
proxy card, please
contact our proxy solicitors, MacKenzie Partners, Inc., Toll-Free at
1-800-322-2885 or 1-212-929-5500 (call collect) or by email at
proxy@mackenziepartners.com. We look forward to speaking to many of you during
the course of this campaign and hope that we can count on your
support.
Sincerely,
/s/ Mark N.
Lampert
Mark N. Lampert
Biotechnology Value Fund,
L.P.
IMPORTANT
Your vote
is important, no matter how many or how few shares you own. To vote your shares,
please sign, date and return the GOLD proxy card. You may also vote by phone or
on the Internet by following the instructions on the GOLD proxy card. Do not
return any WHITE proxy card that you receive from management. If you have any
questions or need assistance voting your shares, please contact MacKenzie
Partners, Inc., which is assisting us in this matter, toll-free at (800)
322-2885 or proxy@mackenziepartners.com.