Novavax slips; GenVec steady; Cell Therapeutics drops 16%; ImClone off; Vasogen up 12%

By Ronda Fears

Memphis, Sept. 19 - In a setback for the rebound in biotech stocks, the downturn in the broader markets and biotech indexes Tuesday put players in a frame of mind to insist on fairly strong results rather than inclinations, traders said. Such was the case with Novavax, Inc., which saw no bounce on positive news for its influenza vaccine even though the flu season is coming on swiftly.

"Everything else aside, the NBI [Nasdaq Biotechnology Index] is rather weak today and testing lows from a week ago. The biotech sector is still very much struggling to come back into favor," said a biotech stock trader at one of the bulge bracket firms.

"Novavax is more apt to follow the NBI, especially with the mass of day traders in these overwhelmingly retail penny plays. Today's Novavax news is great, but it is more of a confirmatory nature and a precursor to further developments."

The Malvern, Pa.-based biotech said Tuesday that it has begun preclinical testing of intranasal versions of its flu vaccines, providing a potential alternative to injection, for both its seasonal and pandemic virus-like particle vaccine models.

Novavax shares (Nasdaq: NVAX) dipped by a penny to close Tuesday at $3.67.

A buysider was disappointed in the market reaction to Novavax's news but said with the flu season coming up there should be a bounce in Novavax if any positive news emerges, so he's willing to wait a while longer.

"We're down today in spite of the news this morning. The market is looking for more substance and less promise in the undefined future, I agree," the biotech fund manager remarked. "If we get federal funding, that'll largely validate the company in the next few weeks. If funding is not forthcoming, we're looking at 18 months or more to see if we're just ahead of our time in investing or just bag-holders for another promising small cap. I'm still holding here, hoping for the best."

GenVec steady, ready to rise

There was no reaction Tuesday to news that GenVec, Inc. had hired Douglas Swirsky from the ranks of the investment community as its chief financial officer, but some players in the story are hopeful on the news. Swirsky, most recently head of life sciences investment banking at Stifel Nicolaus and previously at Legg Mason Capital Markets, replaces Jeffrey Church, who left GenVec in August to become CFO at Novavax.

GenVec shares (Nasdaq: GNVC) settled the day unchanged at $1.13.

"In my opinion, this is a very positive day for GenVec. I have been waiting to see who the new CFO would be and the wait is over. I said they might want to try and get someone with more ties and visibility to the investment community. I believe this CFO will without a doubt be better for us than our last one," said a buyside market source in Boston.

"He is an investment guy, plain and simple. He has worked for some really good investment firms (with a very good reputation on The Street) and has had a good deal of work with biotech companies. He will certainly help us with the investment community. The stock price should slowly start to rise as the raising of capital just got much easier."

Swirsky, a certified public accountant, also has previously held investment banking positions at UBS, PaineWebber and Morgan Stanley. Gaithersburg, Md.-based GenVec develops gene-based therapeutic drugs to treat cancer, heart disease, and vision loss and vaccines for infectious diseases such as AIDS, HIV and pandemic flu.

Cell Therapeutics sold off

In another PIPEs deal, Cell Therapeutics, Inc. said Tuesday it will close a $40 million direct placement of stock later this week. The company plans to sell 23,121,387 shares at $1.73 each, and the investors have the option to buy another 5,780,346 shares within 90 days of closing at the same price.

With the deal coming on the heels of a $15 million direct stock deal with Novartis AG as part of a licensing deal for its lung cancer drug Xyotax, for which Seattle-based Novavax could pocket as much as $270 million, it sent the stock for a loop in a massive sell-off.

Cell Therapeutics shares (Nasdaq: CTIC) lost 33 cents on the day, or 15.87%, to close at $1.75. A whopping 30.5 million shares traded, versus the norm of 1.2 million shares.

"This was too much for some guys to take. There just didn't seem to be any reason for another fund-raiser," said a sellside trader.

Although players said the financing transaction was a surprise, one buysider said the Novartis deal as well as the PIPEs transaction are a big vote of confidence and he was buying more on the decline.

"A huge contract with Novartis is reason enough to hold, in my opinion," said the Atlanta-based fund manager.

"These [PIPE] investors are taking a huge stake in Cell Therapeutics. They are not doing it to lose money. I know it sucks after last week's run-up and yesterday's news, but I feel the investors are not stupid."

ImClone closes down 4.5%

In another big downer of the session, ImClone Systems, Inc. took a dive after announcing that a judge in New York has ruled in favor of Yeda Research and Development in the patent case involving antibodies used to develop its colorectal cancer drug Erbitux.

Merrill Lynch analyst Eric Ende said in a report Tuesday that the patent loss could cost New York-based ImClone something like 2% to 3% in Erbitux royalties and the additional royalty cost could reduce its earnings per share by 20 to 30 cents, which in turn could slash the stock valuation by $2.50 to $5 a share.

ImClone shares (Nasdaq: IMCL) fell $1.36 on the day, or 4.46%, to $29.16.

Merrill and other sellside shops have a sell recommendation on the stock, but one trader said there were some players taking the view that with all the bad news out, there is nowhere for the stock to go from here but higher.

"With news out of the way ImClone may move higher in coming days and weeks," the trader said. "In this case, maybe you take a sell-the-rumor and buy-the-news scenario. I don't think it's unreasonable to have a target of $36 to $40 over a one-year horizon."

The court ruled that three scientists associated with Yeda are sole inventors of the patent, which covers the use of certain monoclonal antibodies in combination with anti-neoplastic agents for the treatment of cancer. ImClone disagrees, asserting that the former Sanofi-Aventis scientists originally named as inventors are the correct inventors. ImClone licensed the antibodies from Sanofi-Aventis.

ImClone party winding down

Holders are watching for an indication of how noted investor Carl Icahn will react to the ImClone news, too, but for the most part the news triggered rush to exit the story for many players. Some 9.9 million shares traded in the sell-off, versus a norm of 2 million shares.

"Seems to me the party is over," said a buysider in Boston. "I can't come up with any solid reasoning why this would be a buying opportunity."

He added, "I am curious as to what Carl Icahn's next move is. He has accumulated lots of shares of ImClone because he thought that the stock was cheap vis-à-vis the fundamentals. This patent ruling is a blow for the fundamentals of the company. Does he sell, or perhaps double down? I'm not going to wait to find out; I just think it will be interesting to watch."

Merrill's Ende said that although ImClone will appeal the decision, the court granted sole inventorship of the patent to Yeda. As the sole owner of the patent, Yeda will likely seek non-exclusive licenses, which could cost ImClone damages on past sales and an additional 2% to 3% in ongoing royalty expense.

In addition, the analyst said Yeda will likely be able to license this patent to Amgen, Inc. for use of Vectibix, further eroding Erbitux's competitive position for colorectal cancer. In any event, he said Erbitux now more exposed to competition from Vectibix in combination with chemotherapy.

Vasogen up ahead of talk

Canada-based Vasogen, Inc., which has taken a beating this year, got a bounce Tuesday ahead of its presentation scheduled at the A.G. Edwards Emerging Growth Conference 2006 on Wednesday in New York. The stock has suffered from conflicting data on trials for its heart drug Celacade, which onlookers have seen as regulatory setbacks for its approval.

"The volume suggests that everyone is eager for tomorrow's A.G. Edwards conference," said a sellside trader, noting some 5.5 million shares traded compared with the norm of 3.5 million shares.

Vasogen shares (Nasdaq: VSGN) gained 9 cents on the day, or 14.75%, to close at 70 cents.

Vasogen chief executive David Elsley is slated to present an overview of the Mississauga, Ont.-based biotech at the conference at 10:30 a.m. ET.

"With the move today, if we can close in the high 60s to low 70s [cents], as a minimum, tomorrow we may be close enough to push through the 75-cent roadblock," the trader said.

"I think it can reach 75 cents to 85 cents soon. There should be some very good news at the conference. People have expressed doubts on whether the FDA [Food and Drug Administration] will give approval [of Celacade]. I know that this ship has been rocking left and right but, hey, look at the crew. For a $60 million capitalization company, Vasogen has the best researchers in their field.

"Vasogen will get FDA approval; it might be few months off, here and there, but the data presented is not a fluke. The downside risk is almost nil with the two cardio conferences under their belt. My guess is we will hear about a partnership in Europe and a time table for FDA process by the end of the month."

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