Amgen slips on inquiry, drug concerns; Gilead firms on trial results; Hospitality Properties absent in gray

By Kenneth Lim

Boston, March 1 - Biotech names fell outright on Thursday as stocks declined across the board amid ongoing concerns about the economy.

Amgen Inc. slipped but remained firm on a dollar-neutral basis after the company said the Securities and Exchange Commission requested information related to a Danish study that looked at Amgen's anemia drug Aranesp.

Gilead Sciences Inc. also eased outright with its stock despite trial results showing that a drug under development demonstrated success in suppressing HIV.

Hospitality Properties Trust was quiet in the gray market ahead of its planned $500 million offering of 20-year convertible senior notes, as investors described the deal as run of the mill.

Amgen slips on inquiry

Amgen's 0.125% convertible due 2011 and 0.375% convertible due 2013 slipped outright on Thursday but improved slightly on a dollar-neutral basis after the drug maker said the SEC had asked for information related to a study that was halted in October 2006.

The 0.125% convertible was lower by about ½ point at 96.125 against a stock price of $62 on Thursday. The 0.375% convertible fell 1 point outright to trade at 95.25 versus the same stock price. Amgen stock (Nasdaq: AMGN) closed at $61.70, lower by 3.98% or $2.56.

"Amgen was active throughout the day," a sellside convertible trader said. "It fell on the Aranesp news, but it might have been a touch better dollar-neutral."

Thousand Oaks, Calif.-based Amgen noted the inquiry in its annual report late Wednesday. The Danish study looked at Aranesp's potential use as a treatment for head and neck cancer, but was stopped in October 2006. Amgen said in January that it will not seek approval for Aranesp as an anemia for cancer treatment after a separate phase 3 trial showed increased risk of death in patients that used Aranesp.

Amgen is also in talks with the U.S. Food and Drug Administration over the need for a "black box" warning label for Aranesp and other similar drugs.

Credit Suisse equity Michael Aberman said in a note that while the negative headlines on Thursday were expected, investors are "underestimating the impact of the recent events on Aranesp sales."

"While the actual impact is difficult to quantify, and is unlikely to hit until 2Q07, discussions with clinicians and insurers lead us to believe that it could be as high as 10%-20% of Aranesp chemotherapy induced anemia sales," Aberman wrote.

Aberman maintained his underperform rating on Amgen's stock with a $63 price target.

Insurers are expected to move to limit the use of Aranesp's predecessor, Epogen, while the black-box warnings, a review by the FDA and trial results for Aranesp in a small-cell lung cancer trial increase the risk of holding onto the stock, Aberman wrote.

"We believe the news flow will continue to be negative," Aberman said.

A sellside convertible analyst said Aranesp was a real problem for Amgen, but the company's credit remained solid.

"There's no question that Aranesp isn't turning out to be the drug they were expecting it to be," the analyst said. "How much it affects their revenue will depend on how the FDA review plays out and how the other trials turn out, but it's definitely going to be noticeable...But even if they lose some revenue and growth isn't as expected, Amgen's still going to continue generating a lot of cash and their credit isn't going to suffer very much."

Gilead firm on trial results

Gilead's 0.5% convertible due 2011 and its 0.625% convertible due 2013 declined on Thursday but held steady on a hedge basis after the stock slipped despite positive drug trial results.

The 0.5% convertible lost 1 point outright to trade at 108.625 versus a stock price of $71.15, while the 0.625% convertible eased ½ point at 109.75 versus the same stock price. Gilead stock (Nasdaq: GILD) fell 1.36% or 97 cents to close at $70.59.

Foster City, Calif.-based Gilead, a drug maker, reported on Wednesday that a potential HIV drug called GS-9137 showed success in suppressing the virus during phase 2 trials.

Although the results appeared to be less stellar than rival treatment also announced by Merck on Wednesday, the difference may have been a result of trial design rather than effectiveness, Credit Suisse's Aberman wrote in a note.

"We are comforted by a subgroup analysis (albeit not prospectively defined) that showed similar potency to Merck's drug when at least one other therapy was active," Aberman wrote. "Thus, while we expect some disappointment, we believe the bottom line is that Gilead's drug is active and when included in a regimen similar to what was used in the Merck phase 3 trial, we expect similar results. Further, the Merck data highlighted the safety and potential efficacy of this new class of compounds."

Aberman said volatility in Gilead's stock was expected, but forecasts about $500 million in sales potential for GS-9137.

"With other large biotechs facing multiple growth challenges, Gilead remains our top pick and we believe there will be several positive catalysts including continued strength of its existing HIV franchise," Aberman wrote. Aberman has an outperform rating on the stock with a $77 stock price target.

A sellsider said the stock's decline on Wednesday was probably largely due to broader market trends.

"I think they were down with the rest of the sector," the sellsider said. "The trial result was actually positive for the company, so some people may actually see a bargain in today's drop."

The sellsider said hedge investors may have been interested in the increased volatility.

"They've got a few late-stage drugs that could be volatility events this year," the sellsider said. "Plus it's got a strong credit, which makes it kind of what guys have been looking for the past couple of days."

Hospitality Properties quiet in gray

Hospitality Properties Trust's planned $500 million of 20-year convertible senior notes was quiet in the gray market on Thursday with the deal described as just fair.

The deal was expected to price after the market closed and was talked at a coupon of 3.625% to 4.125% and an initial conversion premium of 12.5% to 17.5%.

The convertibles were offered at par. Hospitality Properties stock (NYSE: HPT) closed at $43.61, down by 5.4% or $2.49.

There is an over-allotment option for a further $75 million.

Merrill Lynch, Morgan Stanley and UBS Investment Bank are the bookrunners of the Rule 144A offering.

Hospitality Properties, a Newton, Mass.-based real estate investment trust that focuses on hotels, said it will use the proceeds to partly repay debt incurred through its acquisition of TravelCenters of America Inc.

"It models about fair," said a sellside convertible analyst who modeled the deal at just over 75 basis points over Treasuries and a volatility in the high teens. "It looks like most of these other REITs...I don't see anything that really stands out about this deal. It's pretty typical."

The analyst said the convertible appeared to have a "high gamma but no carry."

"So it's something that looks good in the short run but erodes over time on a hedge basis," the analyst said. "Maybe on an outright basis there might be some accounts that want exposure to REITs, but there's nothing remarkable except there's pretty decent upside participation in the stock."

The analyst acknowledged that the presence of private equity money and the recently announced buyout of New Plan Excel Realty Trust have raised excitement in the sector, but said it was difficult at first glance to determine whether Hospitality Properties was a potential takeover target and whether its volatility deserved to be raised. The analyst cautioned against raising valuations across the sector.

"I would do it on a case-by-case basis," the analyst said. "I don't know that I would assign more to HPT or any other name across the board."

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