tough choices ahead

I think the EGM poses a dilemma for all intelligent, reasonable AVX shareholders.

On the one hand, we have Droner who (like Chick) may have been less than honest with shareholders over the last year or so regarding the likelihood of ATC finding a partner, who doesn't seem to know too much about biotech, and who appears to have an arrogant, condescending attitude to shareholders that wins him few friends. The temptation to boot Droner off the board is completely understandable.

On the other hand, we have Hewett et al, who are puppets for an obscure fund manager (PT Dragon - not to be confused with the larger Asian Dragon funds) who has already lost a heap on AVX. We know almost nothing of substance about this mob, except that they want to spend AVX's remaining cash trying to commercialise ATC. Voting this mob in would get rid of droner, but pouring more cash into ATC after unambiguous rejections from every HIV player (large and small) is an enormous risk, with no clear return.

I consider myself a well-researched, clear headed (unemotional) biotech investor, and for over a year now it is has been pretty obvious to me (and other sophisticated investors like me) that ATC was never going to find a partner. (See my old posts on the PGL thread roughly 14 months ago where I predicted that ATC, while likely to pass phase III, is not commercially viable, and would never find a partner). My personal view is that it would be an act of breathtaking stupidity to spend more of AVX's cash on ATC. If shire or another third party want to pony up another $30-40mill to try and get ATC approved, then that is a different story. But in the absence of external financial support, further internal spending on ATC will almost certainly destroy all the remaining value for AVX over a relatively short period (roughly 12-18months by my estimate). In other words, if the Dragon mob are voted in, AVX is likely to be completely out of cash in around 18 months with nothing to show for it.

So what to do on July 6? My suggestion (and hope) is that shareholders split their vote. I.e., they vote to remove Drona as chairman and director, but they also vote against resolutions 2-4. This will have the effect of leaving Uri Ratner in charge, who is has a solid biotech background (unlike crowley and Hewett), and who I think is a relatively safe pair of hands.

Uri will then be in a position to appoint a new board, probably including a Calzada representative. The new board should spend the next year pursuing new deals that are considered unambiguously good by sophisticated, seasoned biotech investors. One option that will likely be considered is some kind of merger with Calzada, which will have the effect of increasing the cash of the combined entity to about $30mill. In today's climate (where it is basically impossible for small biotechs to raise cash), a $30mill cash box would open serious doors (and, incidentally, would generate over $1.5mill a year in interest). As i see things, every cash-starved biotech on the asx would be lining up trying to offer AVX/CZD the most attractive deal; the new board could take their pick merging or buying attractive assets for a song.

It should also be recognised that a second global down turn in FY11 will only increase the value of this cash as well as lower the entry price for potential targets: so this is a great period to be cashed up and debt free. If the macro-economic situation get really sticky, perhaps non-biotech investments could also be considered. However, if nothing really REALLY attractive presents itself over the next 12 months, then I think the board should return the remaining cash to shareholders and wind up the company.

May clear heads prevail on Tuesday.