VaxGen Inc. moved one step closer to realizing its proposed merger with Raven Biotechnologies Inc. as shareholders at yesterday's annual meeting re-elected VaxGen's current board of directors and approved a merger-related reverse stock split.

Yet some shareholders, including MedCap Management & Research LLC and MPM BioEquities, continue to publicly oppose the Raven deal.

VaxGen President and CEO James Panek told BioWorld Today he is confident the merger will be approved at a special shareholder meeting scheduled for March 21. "By no means do we think this is an insurmountable task," he said, adding that the outcome of the votes at the annual meeting, indicates investor support for the company.

After losing an $877.5 million government contract for its anthrax vaccine last December, VaxGen began to evaluate strategic alternatives.

Last month, the South San Francisco-based company announced plans to merge with Raven, also of South San Francisco. (See BioWorld Today, Dec. 21, 2006, and Nov. 14, 2007.)

The proposed merger combines VaxGen's public listing and $77.3 million in cash as of Sept. 30 with Raven's clinical pipeline and discovery engine focused on antibodies targeting cancer stem cells.

Raven stockholders would receive about 32 million shares of VaxGen and would own 49.1 percent of the combined company, with VaxGen stockholders owning 50.9 percent. VaxGen also agreed to extend a $6 million bridge loan to Raven, which would be forgiven if the merger closes.

VaxGen's shareholders were not too pleased with the deal, at least at first. The company's shares (Pink Sheets:VXGN) dropped 46 cents, or 41.4 percent, to close at 65 cents the day the news broke. Panek said he was "disappointed in the initial reaction" and that some investors apparently expected something other than a merger.

Sharon Seiler, an analyst with Punk, Ziegel & Co., wrote in a research note that a merger was exactly what her firm had anticipated. "We had assumed that VaxGen's assets - its cash; manufacturing facility; clinical, regulatory and process development expertise; and possibly its deferred tax assets and public listing - would most likely be acquired by a start-up with an interesting protein product but neither the cash nor the infrastructure to pursue its development," she said.

Yet Seiler acknowledged that the Raven merger "is likely to be a bitter pill for investors, most of whom bought VaxGen shares on the expectation of near-term returns" either from the government contract for the anthrax vaccine or, after that failed, from liquidation.

MPM and MedCap both wrote letters to VaxGen management urging the company to monetize its assets.

MPM recommended that VaxGen focus on selling its biologics manufacturing facility, anthrax program and tax-loss assets and then distribute the returns to shareholders. The investment firm argued that VaxGen's cash alone is worth $2.30 per diluted share, so a merger when the stock is trading around 50 cents doesn't make sense.

MedCap raised similar concerns in its letter, arguing that VaxGen should try to sell itself and/or its assets while also mitigating liabilities, repurchasing its own undervalued stock, and distributing gains to shareholders. Neither MPM nor MedCap returned calls seeking comment on Thursday.

Panek argued that VaxGen has spent the past 11 months "aggressively and broadly" marketing its assets and hasn't received any offers, even after contacting nearly 140 companies. A liquidation analysis completed just prior to signing the Raven deal found that investors would receive about 95 cents per share if the company sold everything and closed up shop, while additional analyses suggested that the valuation following the merger could be significantly higher.

Seiler also concluded that "the merger with Raven is likely to provide a better return to shareholders," but one that will come with a longer time horizon. She told BioWorld Today she could understand why some of the investors are disappointed, but said she doesn't know what VaxGen could do that would be better.

Shares of VaxGen rose a penny to close at 60 cents on Thursday.

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