Alexion stock dumped, credit widens; Ligand gobbled up; Epix dives on FDA news, cutbacks

By Ronda Fears

Nashville, Nov. 23 - Biotech players were not very forgiving ahead of the Thanksgiving holiday, punishing Alexion Pharmaceuticals, Inc. and Epix Pharmaceuticals, Inc. harshly for disappointing clinical trial news.

Moreover, traders on Wednesday echoed comments from the day before that biotech players were nervous about holding long positions ahead of the holiday, as many would also be taking Friday off as well.

"My advice is to stay away from the casino and turn off the news, relax, eat simple foods, and give the morons of the world all the rope they need to hang in peace," said one sellside trader, tongue-in-cheek.

Yet, there were fundamental players that were happy, and perhaps grateful, with the move in Ligand Pharmaceuticals Inc. on Wednesday, particularly on the credit side. Since last week, Ligand shares have been mostly on the rise because of the company's decision to hire a financial adviser, UBS Investment Bank, to seek buyers for the company or key assets.

"Notice the move in the stock," said a sellside source in the convertible market. When the market was killing Ligand shares, he said he was loading up on the Ligand 6% convertible bonds due 2007. "This is why I like being fundamental," the sellsider said, noting that the bonds were taken out Friday at 172 bid, 174 offered. The convertibles were seen at 135.5 a couple of weeks ago, another sellside market source said.

San Diego-based Ligand announced Nov. 18 that its board and management had decided it was appropriate to initiate an external process to explore strategic alternatives to enhance shareholder value. Majority Ligand shareholder Third Point Management Co. LLC has campaigned for a sale of the company for months.

Ligand has collaborations with the likes of Big Pharma names such as Abbott Laboratories, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmithKline plc, Pfizer Inc. and Wyeth. Ligand shares on Wednesday gained 42 cents on the day, or 4.21%, to close at $10.40.

Alexion shares plummet 27%

Shares of Alexion Pharmaceuticals, Inc., however, took a nosedive after the company reported disappointing results for a late-stage clinical trial for Pexelizumab, a drug being tested to reduce the risk of heart attacks following coronary artery bypass graft surgery.

Alexion shares fell $8.03 on the day, or 27.17%, to close Wednesday at $21.53.

One sellside equity trader said, "This is terrible news. [Alexion has] only one other trick in the pipeline, and if that fails, then it's curtains."

But another sellsider saw more potential for Alexion.

"[I'm] going to make some serious money on this one. It's a great company," the latter trader said. "[This was a] bump in the road. Suckers and hot money [are] selling. Smart money [is] buying. This wasn't even the lead drug under development. The lead drug is worth well above $22 per share by itself."

Cheshire, Conn.-based Alexion said the phase 3 trial of Pexelizumab found that the drug did reduce the combined incidence of heart attack or death through 30 days following the surgery in moderate-to-high risk patients but that it didn't "meet the threshold for statistical significance."

Alexion also said it will assess the implications of these results on its second international phase 3 trial of Pexelizumab, which is looking at the benefits of using the drug in patients treated with angioplasty. In addition, data from a phase 3 trial of Alexion's Eculizumab for the treatment of a rare form of anemia are expected in the first quarter.

Alexion credit widens

A buyside analyst at an equity fund said, "This was indeed a surprise. I have to note that the results, from what we know now, are the same as the last trial - close but no cigar."

He said, however, "Mostly, downside risk is limited by two considerations," namely, high confidence in Eculizumab, and that Pexelizumab is more likely to work in at least one of the indications being studied. Meanwhile, he added, "If they push the price down below $18 or so I'll pick up more.

From a credit angle, the Alexion 1.375% convertible bonds due 2012 were marked down, but traders saw little action in the issue.

The 1.375s were quoted at 88 versus $21.50 for the stock, and market sources said the bonds were weaker dollar neutral. The bands were closed at 87 by another sellside market source.

Credit assumptions for Alexion were widened by 100 to 200 basis points, sources said.

Epix stock plunges 14%

Epix Pharmaceuticals, Inc. took a big hit Wednesday, too, after the Food and Drug Administration said another clinical trial will be required for its Vasovist blood vessel contrast product, and the Cambridge, Mass.-based maker of imaging drugs said it would have to cut research and jobs to focus on its lead products.

Epix shares fell 87 cents on the day, or 14.38%, to end Wednesday at $5.18.

Epix said it received its second approvable letter from the FDA, which tells a company that its marketing application is in order but additional data is needed. The company received the first letter in January, and responded to it in May. However, the agency told the company that another clinical trial will be needed to approve the product, which is being developed jointly with Schering AG.

"In light of today's news, we have decided that we will have to reduce substantially our research efforts and our employment levels, which we will do in the first quarter of next year," said Michael Astrue, interim chief executive of Epix, in a statement.

Epix did not specify how many jobs might be affected.

Astrue said the move would cut the company's cash burn rate, plus allow it to focus efforts on advancing its two lead products as well as the company aspirations to "acquire a top-notch therapeutics company as early as possible next year."

A sellside market source said the disappointing FDA news had already been priced into Epix shares over the summer, following the May news.

"I bought in the pre-market. [The] stock was priced in the 5s after the CEO suggested a rejection was at hand. Since the FDA had already asked for a re-read of the images, it was assumed that a second re-read alone wouldn't be sufficient to justify a second rejection, so they threw in the requirement for an additional phase 3 trial," the sellsider said. "Considering the fact that there is no safety issue for FDA, bottom line is the drug will be approved."

A buysider, though, said the company's curtailment in research and staff might make it a takeover target rather than a company able to pursue a takeover. "Epix is going to be acquired by Schering very soon, we suspect," the European hedge fund manager said. "Be ready for big swings in the next days, as short sellers will start to cover on the way down.

"As for the future of this company, I doubt the company should continue the rest of its current R&D pipeline because I suspect it is hard to get around the safety issues," the buysider continued. "The management's ability to take a small company with workable therapeutic pipelines is the key for the future of the company."

Epix convertibles lose 5 points

Epix's credit was injured by the news, as well.

The 3% convertible bonds due 2024, a $75 million issue sold in June 2004 under the company's former name, Epix Medical Inc., are very illiquid, but a convertible market source on the sellside said the issue dropped about 5 points alongside the move in the stock. He closed the issue out at 63.5 bid, 64.5 offered.

Cambridge, Mass.-based Epix, which develops contrast agents for magnetic resonance imaging, had earmarked funds from the convertible offering for general corporate purposes, including working capital, capital expenditures, research and commercialization of products, as well as acquisitions and to repay debt.

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