Nabi rises on renewed pressure; Anadys dives 18%; Discovery Labs surges 26%; Auxilium off

By Ronda Fears

Memphis, June 15 - With the broader markets showing strength, the biotech sector went along for the party Thursday. Discovery Laboratories, Inc. saw one of the biggest gains of the day on news its troubled premature-infant lung treatment Surfaxin had gotten orphan status from the Food and Drug Administration.

Nabi Biopharmaceuticals also took off sharply after Third Point LLC chief executive Daniel Loeb rekindled the fire he lit six weeks ago under the board of directors about turning the company into profits, either by an outright sale of the company or assets.

There were some decliners, too, though. Auxilium Pharmaceuticals, Inc. fell after reporting that its testosterone gel Testim boosted testosterone levels in diabetes type 2 drug patients but missed the primary endpoint of the latest study.

In general, however, traders said there could be a little more to the downswing before the biotech sector finds its footing in the market.

"A lot of biotech stocks are still grossly overvalued based on current fundamentals, including speculative unrealized potential outcomes," said one sellside trader.

"The low side swing points have been taken out with conviction on much greater volume than we are seeing on the upside. However, there may be a bounce today in sympathy with the broad markets. If so, I am a seller into it before the next down leg. I think it's going to get a little worse before it gets a lot better."

Nabi shares, convertible firm

Nabi's stock marked a 5% gain and its convertible moved slightly higher as well after Third Point's Loeb issued a new and equally railing letter to the company, complaining of no action from the company since he wrote a scathing letter in late April.

A sellside market source noted that Loeb's letter - filed at the Securities and Exchange Commission on Thursday - used colorful adjectives such as perfunctory, platitudinous, insouciance, flaccid, diminution and Byzantine to described the company's reaction to his disappointment with how the company has been operating.

Nabi shares (Nasdaq: NABI) moved up 29 cents on the day, or 5.81%, to $5.28. The company's convertible bond moved up about a half point with the stock move, quoted at the end of the day at 83.25 bid, 84.25 offered.

"I love it," said a sellside convertible market source.

"The best part [of Loeb's letter], and I quote, 'We want to be clear that while the May 2006 annual meeting might have bought you time, unless a process is put into place to maximize shareholder value well prior to the next annual meeting we will work assiduously between now and then to ensure that you will have ample time to pursue your golf games and to enjoy the Florida sun thereafter.' "

Loeb also said in the letter, "Rest assured: our silence since receiving your flaccid response should not be interpreted as reduced focus on our position in Nabi.

"The clock is ticking toward the next annual meeting, and we will make sure to fully chronicle your many missteps, past, present and future, as you're shown your way out the door."

A biotech equity fund manager said of Loeb's letter, "The guy sure doesn't mince his words, eh?"

Boca Raton, Fla.-based Nabi is focused of products for Gram-positive bacterial infections, hepatitis, kidney disease and nicotine addiction.

Anadys dives on CEO departure

Anadys Pharmaceuticals Inc. took a dive on heavy selling Thursday after news that its chief executive officer and a co-founder of the company would be leaving by the end of the year.

Late Wednesday, the company said Kleanthis Xanthopoulos will resign at the end of 2006 or sooner if a replacement can be found beforehand. He has resigned to join Enterprise Partners Venture Capital, a San Diego venture capital firm as a managing director, but will continue to serve on the board of Anadys.

In addition, the San Diego-based company has promoted Steve Worland to the new post of president of pharmaceuticals from executive vice president of pharmaceuticals.

Players in the story said the news was unsettling because it sent a signal that Anadys was in trouble.

"Trust me, this guy would never leave if he sees great potential in Anadys," said one buyside source in Atlanta. "He's one of the founders also. It's possible that the results from the trials are not as encouraging as we all had hoped for."

Anadys shares (Nasdaq: ANDS) dropped as low as $6.79 before settling the day off by $1.50, or 17.69%, at $6.98.

Its lead drug, ANA975 for hepatitis C, is being developed with Novartis AG. It is an oral version of small molecule compound isatoribine. Anadys plans to begin a phase 2 trial before the end of the year. It also has ANA380 for hepatitis B in phase 2 trials, as well as several other drugs focused on hepatitis and cancer.

Discovery Labs rebounds

To the upside, Warrington, Pa.-based Discovery Labs announced Thursday that the FDA has granted orphan-drug status to its recently threatened lead product, surfaxin for the prevention of bronchopulmonary dysplasia in premature infants. Traders said the rise seemed more of a move in line with the market rally and could be short-lived as the news was not that exciting.

Discovery Labs stock was crushed in April when there was a delay at the FDA and earlier this month when the company withdrew its surfaxin application for approval in Europe.

"My guess is that the bloom will come off the rose fairly quickly. That is, today's pop will decay with a half life of about one day. The increase today is not that great considering the turn around in the general market," said a sellside trader in the stock.

"But that doesn't mean I'm selling. The problem with that would be that I'd have to follow the sale with another well-timed buy. So I'll take my Gas-X and ride along."

Discovery Labs shares (Nasdaq: DSCO) gained 31 cents, or 25.62%, to close Thursday at $1.52.

A maverick in Chicago who also had been buying during the downswing said, "I was lucky to have bought stock [before today], but I actually feel better and less anxious."

Surfaxin, a precision-engineered lung surfactant replacement therapy, has previously received orphan-drug designation for the treatment of BPD, as well as fast-track designation for both the prevention and treatment of BPD.

Discovery recently concluded its phase 2 trial early and plans to report those top-line results in fourth quarter.

Auxilium closes off 5%

Back to the southerly movers, Auxilium shares dropped around 8% on news that its male hormone drug Testim trial missed the primary endpoint in a study with diabetes patients. But the broader market rally brought buyers in to push the stock up in late afternoon trade and the stock ended with about a 5% slide.

"Seems like a sell on the news thing was going on," one sellside trader said.

"Besides the endpoint thing, which is big too, the news today is very encouraging if it proves true. Moving testosterone levels up is the chief goal of this drug, not specifically as a diabetes treatment. I had heard that Testim was going to be huge and this may be the start."

Auxilium shares (Nasdaq: AUXL) traded as low as $7.60 but closed out the day with a loss of 43 cents, or 4.98%, at $8.21.

The Malvern, Pa.-based Auxilium's phase 4 trial of Testim 1%, a treatment in patients with type 2 diabetes, showed the primary endpoint of the study did not show a statistically significant difference between the treatment groups.

"These findings confirm past clinical studies demonstrating that restoring testosterone levels with Testim can help men lose fat mass and gain muscle mass, both of which are vital components in managing the effects of type 2 diabetes," said Gerri Henwood, Auxilium chief executive, in a news release. "The findings represent an initial analysis of results from the study. We believe that the study investigators will present more complete trial results at appropriate scientific meetings and in peer-reviewed publications at a later date."

Auxilium said the majority of patients started the study at the low end of the hemoglobin A1C entry range and other factors related to patients' health prior to entering the study may have influenced the findings. Also, the company said the treatment period may also have been too short to demonstrate the full impact of Testim's effects on hemoglobin A1C.

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