Human Genome finds volatility players get it; Access Pharma off, then steadies; Endo, Noven firm

By Ronda Fears

Nashville, Oct. 13 - Biotech players were dipping their toes back into the market but overall remained very cautious, traders said. For the most part, traders said hedge funds have stepped in to take advantage of the volatility spike seen over the last couple of weeks as a result of earnings and drug approval surprises - some negative, some positive.

The uptick, however slight, may be short-lived, one sellside trader said, however. "If Fed Funds go to 5%, which was splashed all over CNBC this afternoon, if that happens, the whole market gets crushed," he said.

Human Genome Sciences Inc. in particular was a popular volatility play, traders said. After eight straight declines - with losses amounting to roughly 50% in the stock - Human Genome shares on Thursday added 28 cents, or 3.61%, to $8.03. A lot of the vol players were convertible arbitrageurs, one trader said, noting that Human Genome's convertibles traded up about 1 point on Thursday.

From the primary side of the fence, initial public offering optimism came crashing down, as one syndicate source put it, because of IPO investors' sentiment turning suddenly sour. In addition to a major snag in a recent medtech IPO - HemoSense Inc. - he said the Refco Inc. "nightmare" in which the stock, which debuted about six weeks ago, has collapsed from the IPO price of $22 to $7.90 on Thursday amid alleged securities fraud that goes back to the IPO roadshow.

"IPOs have had such a hard time this year anyway that anything negative, in any sector, just crushes us," the syndicate source said.

HemoSense, which priced its IPO in late June at $5.50 after three price cuts from initial plans of $9 to $10, on Thursday said it received a warning letter from the Food and Drug Administration regarding the blood monitoring system company's San Jose, Calif., production plant. The news sent the stock reeling, settling the day lower by 50 cents, or 5.88%, at $8.00.

Access saved by short covering

Access Pharmaceuticals Inc.'s announced asset sale, coming on the heels of an out-of-court debt restructuring last month, at first caused a sell-off in the stock early Thursday. But by the end of the day the stock had bounced back to close unchanged, a trader said, attributing the lift to short covering with volume in the stock about two times the norm.

The stock traded as low at $1.19 but ended unchanged at $1.46.

"There are still some skeptics on the story, so we were seeing more sellers this morning," the sellsider said. "But short covering kicked in this afternoon and that pushed it back up."

The sellside trader said he felt Access Pharma's current management seems to have some savvy about keeping the company afloat but some holders were disappointed with the asset sale.

Dallas-based Access said late Wednesday it has sold its oral care business to Uluru Inc. in a deal worth more than $20 million, receiving upfront $8.7 million plus up to $3.7 million in 12 months and another $1 million two years after the closing. Last month, the company restructured its convertible notes in arrangement with holders that gave it more time to make coupon payments and extended maturity dates.

The company said it will now focus on oncology drug candidates.

Access bankruptcy seen averted

For the past month, many players have feared that Access would go the route of bankruptcy but now many of those same folks feel the story has completely turned around.

"In my opinion, the fears that surrounded Access are gone," said a hedge fund manager in Chicago. "The fact that short covering kicked in tells you that that is the prevailing line of thought. The only reason all these shorts came here in the first place was because the news that hit the tape regarding Access only having enough cash on the balance sheet to make it through the end of August. That fear has been squashed."

Aside from the asset sale and debt restructuring, he said the company is set to start a phase II trial this quarter and the results are expected to be positive, moving the stock price higher.

"With bankruptcy absolutely out of question, the new money, the oncology pipeline, we now can re-evaluate Access as a real stock," the buysider said. "Sure, it's not fairly valued at $1.55 so I bought today! Most people are clueless. There has been information out there for almost a month detailing a financial transaction that anyone with brains would know would lead to this sale. In the coming months this stock will explode."

Endo, Noven pain eases

Based on monthly update of prescription data from IMS Health, Jefferies & Co. analyst David Windley said Endo Pharmaceuticals Inc. and Noven Pharmaceuticals Inc. should meet expectations for third quarter. On Thursday, those stocks were slightly higher, both having slumped a great deal over the past two weeks following news that the FDA would not approve their jointly developed generic pain patch.

Endo shares added a nickel Thursday, or 0.19%, to $26.05. Noven added 4 cents, or 0.3%, to $13.29.

But a buyside source in Pittsburgh said the growing caution at the FDA pushed his decision to sell out of Noven, at least, and added that he would be skeptical to hold Endo as well.

"I am now out completely from Noven after following it for over five years now and being long for most of that time. I would be very cautious owning Noven near the methypatch [a patch to treat attention deficit hyperactivity disorder] filing date of Dec. 28," the buyside analyst said.

"The FDA is overly-cautious now and especially with a c2 drug [Class 2 narcotic] in patch form that will be used primarily in school-age children, it looks like a bad setup for Noven. For example, kids could be targeted for their patches or they could simply remove them at school and give them to someone else or whatever."

Jefferies' Windley, however, focused on short Oxycodone scripts being offset by stronger than expected performance from Percocet and Endocet and that Noven has drugs targeting other areas besides pain, including a hormone therapy line and attention deficit hyperactivity disorder. Windley said Noven's hormone therapy franchise continues to perform well.

Durect soars ahead, after results

An Endo partner, Durect Corp. was stronger ahead of reporting earnings after the close Thursday, and climbed even further in after-hours trading once the company reported a spike in revenues and showed its net loss narrowed sharply in third quarter.

"Earnings and revenues were well beyond expectations," one sellside market source said. "Any news on phase 3 trails will send this one through the roof."

The stock closed Thursday up 35 cents, or 5.74%, at $6.45. In after-hours trade, the stock was seen up another 39 cents, or 6.05%, at $6.84.

Cupertino, Calif.-based Durect, which designs drug delivery systems, a third quarter net loss of $3 million, or 6 cents per share, improved from a loss of $7.3 million, or 14 cents per share, a year ago. Revenue more than doubled to $8.6 million from $3.4 million, chiefly attributed to its agreements with Endo, Voyager Pharmaceutical Corp. and Pain Therapeutics Inc., along with patent licensing.

Also after the close, Durect filed a $75 million shelf registration.

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