Insmed drops 11%; Vasogen up slightly; Anadys falls more; DOV, Discovery Labs up; Genelabs gains

By Ronda Fears

Memphis, June 27 - It was a great day for trading biotechs what with a wild summer volatility ride revving up, traders said, but for "the straight guys" it was a depressing day with a big drop in the major biotech indexes tracking the broader market lower. There were widespread declines, traders said, but many severely beaten down biotechs saw lots of buying action and got a nice bounce.

"If you think this is the end of the re-distribution, I bet you are wrong," remarked a buyside market source in Boston.

"Most of the trades today were sell initiated."

A sellside trader said he's given up trying to call the bottom, although he suspects it is near, but is now focused on volatility plays along with a fair portion of the biotech players.

"Volatility is the game right now," the trader said, noting that the VIX (Chicago Board Options Exchange Volatility Index - based on the implied volatility of S&P 500 options) was up by 5% on Tuesday and the VXN (CBOE Nasdaq Volatility Index - a measure of the implied volatility of the Nasdaq 100) gained more than 6% while the Nasdaq Biotechnology Index slumped 2%.

Signs of bulls running

Another buyside trader remarked that the vol game is risky and, while there may be a pack of hedge funds chasing those numbers, "those of us who are serious, the straight guys, are plugging away at due diligence and making real investments." He agreed with the previous trader, however, that a bottom appears to have been hit, or nigh.

"An intermediate bottom was set, I believe, a couple weeks ago when the Nasdaq was at 2,065," the Florida-based buysider said. The Nasdaq closed Tuesday off 1.567% at 2,100.25.

"There is cause to be bullish going forward, I think. The Investor Intelligence Survey is still very bearish, which is bullish. Bulls and bears are equal, as I see it. It could it get more bearish, yes.

"But cash acquisitions are taking place, which removes float from the market. That is bullish. IPOs and secondarys are moderately bullish, although there are not too many taking place. We are entering reporting season for the quarter, which will slow down insider selling for about three to four weeks. We are at end of quarter window dressing time where the tape is painted upward.

"All that being said, could the market go lower? Sure it could. I don't see it happening right now, but it could break lower. Right now we are at a crucial juncture where we are butting up against some resistance trend lines. It will be interesting to see how the market works this week. You have to understand that hedge funds are running the markets these days. About 30% or more of daily trades are by the hedge funds. You have to be in the right sector, in the right direction, or you are going to get killed.

"I think the way so many biotechs have been indiscriminately hammered - some of these 75% declines were based on very early trial data - it is a sweet spot in the market right now."

Whether due to volatility swings or to buy-and-hold, indeed there were several hammered biotech stocks that took a turn north Tuesday, even amid the broader sector's slide.

Discovery Labs rises 16%

One such battered biotech was Discovery Laboratories Inc. as it reported Tuesday that it is making progress on its ongoing investigation into problems that have delayed approval for its lead new drug candidate Surfaxin, and remediation efforts.

Discovery Labs shares (Nasdaq: DSCO) added 25 cents, or 15.92%, to settle at $1.82.

"I think we will have some good days ahead," said a buyside trader in Chicago. "Today was excellent, but we'll have to see how much of today's gains are held, as I don't think we'll see much news for a while now."

The Warrington, Pa., company is seeking to market the drug initially to prevent respiratory distress syndrome in premature infants. The Food and Drug Administration issued an approvable letter for Surfaxin in April, outlining approval contingent on Discovery Labs resolving questions about its stability profile. Discovery Labs said Tuesday that while the company's overall investigation into the problem is not complete, they are optimistic that appropriate remedies can be implemented.

Discovery Labs said it recently made two batches of Surfaxin that have passed "all of the critical release specification assays" but stability monitoring of the batches is continuing.

Discovery Labs sale quiet

Discovery Lab has hired Jefferies & Co. to look for buyers, partners and the like to bail the company out of hot water, but there has been no news on that front. The buyside trader said he doesn't expect the company to be sold, but a partner for Surfaxin might surface.

"Considering a $15 million a quarter cash burn for expenses, that should leave approximately $18 million in cash and equivalents on the balance sheet by the end of June. There are approximately $18 million in liabilities looming at a minimum (their manufacturing facility plus accruals) by year-end," the trader said.

"How does Jefferies monetize an asset at non-fire sale prices? They can't. This leaves Kingsbridge with all the cards and 30% ownership after dilution. The company will need $30 million in a cash drawdown to sustain it until fourth quarter."

Discovery Labs inked a $50 million equity line in April with Kingsbridge Capital Ltd.

"Remember they have two approvable letters from the FDA for Surfaxin. They say they have solved the technical problem (i.e., investigational milestones). A fair price, and this is actually too low, is 3 times sales plus cash, which is about $5," said the buysider.

"So, I'm a buyer. Discovery Labs is in a worst-case scenario. It should go back to the $2.50 to $3 level by end of year."

DOV flies, gaining 7%

Another recent disastrous free-falling biotech getting a boost from buyers Tuesday was DOV Pharmaceutical, Inc., but traders were skeptical that the lift could be sustained.

"Just remember a lot of people bought at $3 plus and though they were buying at the bottom," said a sellside trader. "I see a lower number than today's coming. I mean, look at Neurocrine [Neurocrine Biosciences, Inc.] and they are much better off than DOV."

DOV Pharma shares (Nasdaq: DOVP) added 15 cents on Tuesday, or 6.82%, to close at $2.35.

The stock plummeted in mid-May along with partner Neurocrine after the FDA said it would not approve a 15 mg extended-release dose of their sleeping pill indiplon without a new clinical trial. At smaller doses, indiplon is seen less competitive in the insomnia market.

Neurocrine shares (Nasdaq: NBIX) dropped another 46 cents on Tuesday, or 4.28%, to close at $10.30.

Anadys slips a further 11%

In a more recent example of the down-trodden, Anadys Pharmaceuticals, Inc. took another hit Tuesday as heavy selling continued.

"Anything is possible, but in these situations, the odds do somewhat favor a lower close on the day after a big drop," said a trader early in the day.

Indeed, it did. Anadys shares (Nasdaq: ANDS) ended lower by 39 cents, or 10.57%, at $3.30.

On Monday, the stock plummeted 45% after the company said it had suspended dosing hepatitis C patients in an ongoing phase 1b clinical study of ANA975 pending additional analysis of preclinical 13-week toxicology studies in animals.

While Anadys shares drifted lower, there were hangers-on looking for an entry point.

"I'll buy again when it hits a new low. I did the in-and-out yesterday and don't feel good about Anadys' direction today. I sense it will drop below $3," said a buyside trader in Chicago.

"It's only a suspension of a phase 1b. Probably the dosage has to be altered. My guess is that the animals had a major immune response, which is very dangerous. The animal model may not always apply to humans, however. More analysis of toxicology will require several more months. In any case, there are also other compounds in the works. And with a market cap of now about $130 million, the stock may be cheap where it is today."

Vasogen bleeding stemmed

Another recent casualty, Vasogen, Inc. saw the gushing bloodshed stemmed Tuesday with a slight gain, although there was still a surge of activity in the stock as traders attempted to recapture some of their losses.

Vasogen shares (Nasdaq: VSGN) edged up by slightly under a penny on Tuesday, or 1.93%, to close the day a tad over 49 cents. Some 13.4 million shares traded versus the norm of 1.25 million shares.

A sellside trader said lots of players were making the volatility trade with Vasogen, but some were just licking their wounds after refusing to sell Monday when the bombshell hit. The stock fell a whopping 74% after it announced disappointing initial results from a 2,414-patient phase 3 trial of its Celacade technology in advanced chronic heart failure.

"I am still here, still bleeding and not going anywhere," said the Florida buysider mentioned above. "OK, so I lost more value yesterday than I currently have left in this stock. That means I have no reason to sell. Most of the pain has been done, I am not going anywhere. I guess now I'll ride this baby now to the end, and hopefully just laugh it off."

Insmed drops in profit taking

Another decline, for Insmed Inc., was attributed by traders to profit taking on positive trial news.

"It was a buy yesterday ahead of the news," said a trader. Then when the news out, and not very exciting, all the traders sold. It's classic."

Insmed on Tuesday reported study results from its lead drug candidate Iplex for growth hormone deficiency, which traders said sparked a classic profit-taking opportunity.

Glen Allen, Va.-based Insmed said the study show Iplex is effective in increasing growth and improving glycemic control in patients with severe insulin-resistance hormone deficiency syndromes, specifically Leprechaunism and type A.

Insmed shares (Nasdaq: INSM) dropped 20 cents on the day, or 11.17%, to $1.59.

In another clinical trial, Insmed said Iplex significantly improved height velocity in children with severe primary insulin growth factor-I deficiencies. A third study of the pharmacokinetics of Iplex in normal adults also showed positive results, the company said.

Findings of the studies were presented this week at the annual meeting of the Endocrine Society, Insmed said. Iplex is already approved in the United States as a once-daily treatment for children with short stature associated with severe primary IGF-I deficiency.

Genelabs boosted by PIPE

In financing-related news, which has been sparse of late, Genelabs Technologies, Inc. got a bounce from a PIPE transaction.

The Redwood City, Calif., company said it has received agreements for an $8.7 million private placement in which it will sell to a group of institutional and accredited investors 6.1 million shares at $1.42 each plus warrants for 2.5 million shares at an extra $0.125 each.

Genelabs shares (Nasdaq: GNLB) gained 9 cents, or 6.34%, to $1.51 in the regular session on modest volume, and the stock was seen after-hours higher by another 4 cents, or 2.65%, at $1.55.

"This should provide a nice lift in the short term for the stock," said a sellside trader. About the warrants, he added, "Effectively it means that additional 2.5 million shares can be purchased at net price of $1.42 plus 0.125, or $1.435 per share. Sounds like a good deal for Genelabs shareholders to me."

Genelabs is focused on treatments for diseases like hepatitis C and lupus.

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