why i'm voting against the avx merger, page-4

There is truckload of misinformation being put out by AVX and current PGL management at present. The following is an attempt to clear things up a bit.

(1) The AVX team are claiming that there is no guarantee of a buy-back if CYT gain control. What they really mean by this claim is that, for reasons stipulated by the corporations act, CYT/Andrew Macdonald cannot formally offer PGL shareholders a buy-back until the old PGL board has been spilled and new directors voted in (at the March 27 meeting). However, CYT and the nominated new directors have made it perfectly clear in ASX announcements that their first order of business, should they gain control of PGL on March 27, is to institute a buy-back at $1.10 for ALL PGL shareholders who want out (even if this means there is virtually no cash left following the buy-back). By contrast, the AVX team are only offering a $20mill buyback, which is nowhere near enough to meet demand. (Some market research has been done by CYT on the anticipated demand for a buyback at $1.10, and it is estimated at around at around 75% of the share capital or nearly $50mill – leaving $20mill in the bank). So, if the AVX merger goes ahead, PGL shareholders will likely only get 30-40% of their capital back at $1.10. ONLY THE CYT OPTION ALLOWS PGL SHAREHOLDERS TO SELL ALL THEIR SHARES AT $1.10.

(2) The AVX team keep claiming that their merger option is "low risk." Nothing could be further from the truth. The AVX merger has the potential to deliver some upside over the next 12 months ONLY IF an attractive deal with big pharma can be signed re ATC. However, if a deal is not done in the next 12 months, the putative merged entity will soon find itself without cash (it will cost $50mill+ to run the merged entity over the next 12 months), and with virtually no hope of raising further capital. Already there is much suspicion about the commercial viability of ATC simply because big pharma have chosen not to sign up with AVX so far. Big pharma have not yet signed despite every effort by AVX to find a partner last year and despite GSK (for example) recently signing another HIV drug after phase II. (If a drug shows genuine commercial potential, then big pharma typically like to sign as early as is practical. It is relatively rare for big pharma to sign half way through a phase III trial). So, if there is no deal done with ACT in the next 12 months, then then the suspicions regarding ATC will have been confirmed: big pharma are not interested in ATC. And if this scenario eventuates, then the company will likely be forced into administration, with shareholders losing 100% of their capital. As I said in an earlier post, the chances of big pharma signing ATC over the next 12 months are 50% at best. This means that the proposed AVX merger offers PGL shareholders a 50% chance of losing 100% of their capital over 12 months. There can be no doubt that this is a high risk proposition.

(3) It should also be kept in mind that institutional investors (fund managers) currently hold around 22% of PGL's stock. I know the mind set of these fund mangers in this market, and I know that they are not the slightest bit interested in AVX's, PGL's or CYT's pipeline. All they want is to do is to sell their entire holdings at $1.10 (which for many fund mangers translates into a quick 25% gain – a rare gift in this market). Now PGL shareholders need to ask themselves what these fund managers are likely to do if the AVX merger is successful, and fund managers can only offload 30-40% of their holdings into the small AVX buy-back. My guess is that they will not hang around for the next 12 months and risk losing 100% of their remaining holding. Rather, they will immediately start dumping shares on market. For this reason, all the so-called "near term milestones" that AVX keep touting to the market will not translate into any gains for PGL shareholders. Rather, if the AVX merger is successful, the next three months are likely to be characterized by relentless institutional selling – potentially pushing the share price down to 20c or lower.

(4) Another point PGL shareholders should keep in mind is that, if AVX genuinely thought that they were close to signing a deal with big pharma, then they would not need to pursue this merger with PGL. So the fact that AVX are desperately trying to get $50mill of PGL's cash indicates that they are not confident of any deal in the near term. Rather, in pursuing PGL, they are simply buying time (saving their careers) with the hope that big pharma will eventually come along to the rescue. Furthermore, AVX management are taking no chances: AVX's CEO is making sure he gets a substantial cash payment now ($250k or $925k if no options are granted), just in case he is out of a job in 12 months.

If the AVX merger is successful, three of PGL's existing management team will be able to keep their jobs (at least until the cash runs out). If the AVX merger is unsuccessful, these PGL directors will literally be out of a job on March 27. And given their track record with PGL, they probably know that the chances of finding new employment in the biotech space are limited. So you can understand why they are fighting so hard for the AVX merger: it has nothing to do with the best interests of PGL shareholders, rather it is all about the best interests of these 3 directors.

One final point for shareholders who intend to vote against the AVX merger:
If you haven't nominated Andrew Macdonald as your proxy, it is not too late to call computershare and change your proxy nomination (either online or by post). If the AVX merger is voted down, but Andrew Macdonald (and his supporters) do not get enough proxy votes, then the existing PGL board could potentially try and spend PGL's cash on another pipeline or introduce 'blocking measures' before the March 27 meeting.