ZymoGenetics follow-on upsized but discounted; Eli Lilly sells $1.5 billion variable floaters

By Ronda Fears

Nashville, Aug. 4 - ZymoGenetics Inc.'s follow-on offering was upsized but discounted and the stock was off on the development, but other secondary offerings on deck after Thursday's close were thought to be doing well ahead of pricing.

Anadys Pharmaceuticals Inc., Ariad Pharmaceuticals Inc. and Nastech Pharmaceutical Co. Inc. were on deck, and one sellside market source said that in general equity offerings "are feeling a little better, it seems." Anadys shares were up $1.09, or 9.18%, to $12.96 before pricing while Ariad and Nastech were slightly lower. Ariad ended off 17 cents, or 2.26%, to $7.34, and Nastech dipped 2 cents, or 0.16%, to $12.75.

"We've heard most of the deals are looking pretty good for tonight," the sellsider said.

In the credit markets, Human Genome Sciences Inc. and Eli Lilly & Co. put new paper into circulation with mixed reactions from the investment community.

Eli Lilly & Co. sold $1.5 billion of variable floating-rate notes at par to yield the one-month Libor minus 3 basis points in year one, Libor minus 1 bp in year two and Libor plus 3 bps in years four and five. The notes initially mature in 2006 and are extendable to 2010. On the news, Lilly shares fell $1.07, or 1.95%, to close Thursday at $53.87.

Human Genome's new convertible bond with a 2.25% coupon and 20% initial conversion premium was reoffered by underwriters Citigroup Global Markets and Merrill Lynch at 98.5 in order to get it off. The issue closed out the day lower still, off another 1.5 points to 96 bid, 97 offered while the underlying stock fell $1.29, or 8.71%, to $13.52.

The Human Genome 5% and 3.75% convertibles, which will be redeemed with the new convertible proceeds, moved toward par with the 5s having to come down about 5.75 points and the 3.75s gaining around 3.25 points, according to a sellside source in the convertible market.

ZymoGenetics dives on discount

Seattle-based ZymoGenetics priced an upsized secondary offering of 7.5 million shares at $18 each, discounted from Wednesday's close of $18.39, for gross proceeds of $135 million. It was boosted from 6.5 million shares.

After several sessions of gaining ahead of the deal, ZymoGenetics shares took a dive in the aftermath. The stock closed Thursday lower by $1.27, or 6.91%, to $17.12.

A buyside trader said the reaction was because many onlookers expected the deal to price better.

"The feel ahead of it was that it would not be discounted, that it would price even [with Wednesday's close]," the buysider said. "That weighed on it big time today, even though it [the discounted follow-on price] wasn't much."

ZymoGenetics has earmarked proceeds for clinical and preclinical development of existing product candidates, discovery and development of additional product opportunities, capital expenditures and working capital, and other general corporate purposes.

Memory up on fast track rumor

Elsewhere in secondary activity market chatter about various rumors moved biotech stocks.

Memory Pharmaceuticals Inc., for example, took off sharply Thursday on chatter that the company would be announcing fast track approval for one of its drugs.

"There's a rumor going around about Memory Pharma getting fast track approval. That's what's driving the stock today," a sellside trader said.

Memory shares closed with a gain of 40.91%, or by 90 cents, to $3.10.

Montvale, M.J.-based Memory Pharma develops drugs for the treatment of central nervous system disorders, such as Alzheimer's, schizophrenia, depression, and vascular dementia, mild cognitive impairment and memory impairments associated with aging. The company has collaborations with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.

Memory's latest stage drug, MEM 1003, a new-generation drug candidate to treat Alzheimer's disease, has completed Phase I clinical trials.

Calls to Memory executives were unreturned by press time Thursday.

Icos buyout chatter scoffed at

In addition, a buyside convertible trader noted that Icos Corp. securities dropped sharply Thursday ahead of the company's second-quarter results after the closing bell and a downgrade in the stock by Morgan Stanley. Moreover, the trader said Morgan Stanley essentially wrote off market chatter about Icos as a takeover target because of valuation, but the trader said the securities also were reacting to a view that the market for erectile dysfunction drugs was slumping amid rising competition.

Cialis is marketed by Lilly Icos - a joint venture of Eli Lilly and Icos. Viagra is made by Pfizer Inc. and Levitra is co-marketed by GlaxoSmithKline plc and Bayer AG.

Icos' 2% convertible notes due 2023 dropped 2 points to 77.5 bid, 78.5 offered while the stock closed off by $1.67, or 6.35%, to $24.64. In after-hours trading, the stock was seen off by another 54 cents, or 2.19% as results were released, which showed a narrower net loss for second quarter that Icos attributed to better sales of Cialis.

The company posted a net loss of $22.6 million, or 35 cents per share, compared with a loss of $51.9 million, or 82 cents a share, a year ago. Companywide revenues edged up to $18.1 million from $17.9 million.

The Lilly Icos venture posted a second-quarter net loss of $1.7 million, narrowing sequentially from $41.7 million in first quarter. Worldwide sales of Cialis in second quarter totaled $190.9 million, an increase of 39% from $137.2 million a year earlier.

At June 30, Icos reported cash and equivalents of $192.6 million.

Lilly takeover of Icos debated

Buyout rumors, with Lilly as the buyer, surfaced after Icos recently adopted a poison pill for management. The convertible trader said Morgan Stanley was putting a buyout price tag on Icos of $1.5 billion and found "the valuation does not appear to offer a compelling takeout opportunity."

Icos, after a number of pipeline setbacks, is now a single product company fully dependent on the prospects of Cialis, the trader said, and Cialis prescriptions have been flat for several months.

Another buysider, however, said he was an Icos fan, with or without the prospect of a buyout.

"Icos has $3 per share in cash and a market cap of $1.56 billion, so that's something all by itself," he said, adding that "Maybe it all means nothing but Lilly is in a position to spend $1.8 to $2.5 billion for an all cash deal or an unknown amount of part cash/part stock. Lilly would receive $300 million back in tax savings over a few years."

Lilly Icos, Icos outlook better

Lilly Icos is expected to post net income for 2005 in the neighborhood of $30 million, plus or minus $10 million, Icos executives said.

The level of Cialis sales achieved is the primary variable that will affect Lilly Icos results for 2005, and Icos is forecasting 2005 worldwide Cialis net product sales around $775 million. Also, the company expects Lilly Icos selling, general and administrative expenses to decline in the second half of 2005 from previous levels.

For Icos alone, the company is projecting a net loss for 2005 in the range of $77 million, or $1.20 per share, to $82 million, or $1.28 per share, assuming net income of $30 million for Lilly Icos in 2005. The narrowed net loss - compared to $198 million, or $3.13 per share, in 2004 - again, is primarily due to the expectation that Lilly Icos will be profitable in 2005, compared to a net loss for the venture of $262 million in 2004.

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