MedCap Urges Vote Against Proposed VaxGen Merger With Raven biotechnologies

Wed Mar 19, 2008 2:59pm EDT

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Stock Price Decline of 40% in the Past 45 Days Shows No "Momentum"
 for Proposed Raven Transaction; Current Balance Sheet Working Capital
                          is $2.01 Per Share
SAN FRANCISCO--(Business Wire)--
MedCap Management & Research LLC and its affiliates ("MedCap"), a
substantial VaxGen Inc. (VXGN) shareholder, urge all VaxGen
shareholders to vote AGAINST the proposed merger with Raven
biotechnologies, inc. ("Raven"), on or before the upcoming scheduled
shareholder meeting on March 28, 2008, and to vote AGAINST the
Adoption of VaxGen's 2008 Equity Incentive Plan. MedCap intends to
vote all of its VaxGen shares against the proposed transaction and
against the proposed equity incentive plan. MedCap continues to hold
approximately 4.8% of the company's stock.

   Raven's Extremely Early Stage Profile

   Raven is an extremely early-stage biotechnology company that we
believe would not otherwise be able to complete an initial public
offering on its own. Raven's CEO has publicly stated recently that he
would not pursue Raven's lead product candidate on the company's own
since it would consume far too much cash and he would therefore only
partner it, if at all possible. Aside from this product candidate,
that would leave Raven with lead product candidates that are all in a
pre-clinical non-human early stage of testing.

   VaxGen's Current Team Has Not Performed Adequately

   VaxGen's management and board of directors have not performed
adequately. The current management under the supervision of the
current board of directors spent $56.1 million during 2007, the year
the company was up for sale and had supposedly largely closed down its
operations. Excluding impairments and restructuring, the company still
spent $40.1 million, or $1.21 per share in 2007. Many members of the
current management and board of directors would continue to be
significantly involved if the company merged with Raven, including
VaxGen's Chairman, its CEO and other VaxGen board members.

   Lack of "Momentum" to Approve the Proposed Transaction

   We take issue with the "momentum" publicly expressed by the
company for a deal to close with Raven. We respectfully see no such
momentum, rather to the contrary. The Company sites the lack of
another deal surfacing as reason for the proposed merger to have
merit, yet no other deal surfacing prior to a vote on the proposed
merger to date has more to do with VaxGen's actions than with other
potential interest in the value of the assets.

   Despite the apparent efforts by VaxGen, the only deal it says is
available is a merger or purchase of Raven, but by perverse incentive
this transaction also keeps many of the same people in place. The
complete and accurate portrayal of the current situation is not being
told, as the company continues to put forth the worst-case scenario
regarding value if the Raven proposal is not consummated. For
instance, the company has recently purchased a portion of the
convertible notes at a 50% discount, but it has chosen to disregard
this fact in its analysis of value for the rest of the company's
outstanding convertible securities. This analysis paints a worse
picture of liquidation value, which by the company's own analysis as
of November 12, 2007, equated to a value that is more than twice the
current stock value. The only research analyst that currently covers
the company stated in a March 18, 2008 research note that $1.35 in
value exists in a liquidation, before expenses. While low and only an
estimate, this value equates to a 221% premium to the current stock
price as of the close of market March 18, 2008.

   MedCap Strongly Urges a Vote Against the Proposed Raven

   We believe that, contrary to public comments made by the company,
there are many more diverse shareholders that oppose the proposed
merger and that a vote against the proposed merger is likely. This
does not appear to be a "small group of dissident shareholders" as
characterized by the company's statements. MedCap is strongly urging
all VaxGen shareholders to cast their vote AGAINST the proposed
transaction with Raven.

   MedCap believes that a vote AGAINST the Raven proposed merger
could yield greater returns for VaxGen shareholders than VaxGen's
proposed merger with Raven, which has resulted in a substantial stock
price decline that remains depressed at just $0.42 per share or an
equity market capitalization value of $13.9 million, as of the close
of market March 18, 2008. Conversely, the company's just reported
balance sheet shows the company has $74.5 million of current assets
and restricted cash (or $2.25 per share) and just $8.0 million of
current liabilities (or $0.24 per share). Thus, working capital is
currently $66.5 million (or $2.01 per share). The convertible senior
subordinated notes are valued on the company's balance sheet at $30.7
million (or $0.93 per share), but the company separately reported the
recent purchase of a portion of outstanding convertible senior
subordinated notes at a 50% discount (when applied to the convertible
securities on the balance sheet equates to an additional $15.4 million
or $0.46 per share in value). Nevertheless, the company continues to
publicly present liquidation value of the company using the higher
balance sheet amount for the convertibles.

   VaxGen Shareholders Continue to Vote With Their Feet; Stock Now
Down 82%

   VaxGen's shares have declined 82% since VaxGen announced on
January 9, 2007 that it had hired an investment banking firm to pursue
a sale of the company. The company also continued to have substantial
expenses during this period of a possible sale process, including
excess employee headcount and excess compensation. Furthermore, VaxGen
shares have now declined 62% since the closing market price on
November 12, 2007, when the company then announced the proposed merger
with Raven; and the shares have declined 40% since January 31, 2008,
hardly momentum in support of the proposed transaction. MedCap
believes that these share declines clearly indicate that VaxGen
shareholders do not support VaxGen's recent efforts or the proposed
merger with Raven. This has been reinforced by comments from a large
number of investors in the company.

   Once the proposed merger with Raven has been voted down on March
28, 2008, MedCap believes that VaxGen should immediately reconsider
the composition of its board of directors and its governance practices
to ensure that the company's board is properly constituted to maximize
shareholder value.

   C. Fred Toney, Managing Partner of MedCap stated, "VaxGen's value
is not reflected in the proposed Raven merger and shareholder value
has been substantially impaired during the sale process throughout
2007 and now in 2008 as evidenced by the company's stock price
declines and the company's substantial use of its most valuable
resource - its cash and cash equivalents. There remains little
acknowledgement by the company of a likelihood of a vote opposing the
proposed Raven merger or any substantial opposition to the proposed
merger, which we believe remains widespread. Additionally, governance
issues must be immediately addressed after the proposed Raven merger
is terminated, in favor of finally focusing on preserving the assets
and maximizing its shareholders' value in the company."

   About MedCap

   MedCap Management & Research LLC, headquartered in San Francisco,
California, is the General Partner of MedCap Partners L.P., a private
investment fund focused primarily on public companies in the life
sciences, medical technology and healthcare sectors. C. Fred Toney is
the Managing Member of MedCap Management & Research LLC.

MedCap Management & Research LLC
C. Fred Toney, 415-495-1010

Copyright Business Wire 2008
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