MedImmune dives 12%; Cubist Gains over 9%; Discovery Labs, Dynavax rise on financing deals

By Ronda Fears

Memphis, April 20 - Earnings rocked the biotech sector with a bag of mixed results but several key disappointments made for a predominant red tape Thursday. MedImmune, Inc., for one, weighed heavily on biotechs after it missed analyst targets and issued a lackluster financial forecast. Amidst the red sea, however, Cubist Pharmaceuticals, Inc. was finding buyers despite a miss with its first-quarter results.

Onto the primary side of the biotech scene, while initial public offerings and straight equity deals have left a lot to be desired - at least from the issuer standpoint - private placement flow is thriving. Two recent examples of the latter were deals from Discovery Laboratories, Inc. and Dynavax, Inc., which followed a whopping $200 million equity line from CV Therapeutics earlier in the week.

As for IPOs, sources said it appeared that the Omrix Pharmaceuticals Inc. deal looked to be the latest victim of a weak market.

"They will either have to ratchet it down quite a bit, which some have done, or it probably will be shelved for a while, maybe just until after all the earnings are digested," said a fund manager who focuses on IPOs.

Omrix is pitching the 3.4 million shares at $15 to $17 a share, which the buysider said seemed very expensive in the current market. Last week two IPOs got off, but both came well below price talk. Vanda Pharmaceuticals, Inc. priced at $10 each - below the range of $12 to $14 - and Targacept, Inc. priced at $9 each - below the range of $11 to $13. New York-based Omrix makes biosurgical and passive immunotherapy products.

Otherwise, buyout buzz heated up yet again as some Big Pharma's remarked about growth in earnings reports. Pfizer, Inc. is hands-down the biggest drug company on the hunt for biotechs to boost its pipeline, what with some $6 billion in repatriated funds to spend. On Thursday, comments from Schering-Plough Corp. executives on its earnings conference call put it in the running as well.

"That opens up a huge can of worms," remarked a biotech fund manager in Boston.

A sellside source agreed, saying, "Yes, you got Serono, Pfizer, Merck and now Schering-Plough looking to buy people."

Schering-Plough's chief executive said the company would like to buy heart, anti-inflammatory, hepatitis and cancer drugs in the company's conference call. Schering-Plough posted dramatically improved first-quarter earnings Thursday, suggesting to some onlookers that the troubled drugmaker has made a turnaround to sustained growth and profitability.

MedImmune mired by miss

MedImmune came off the day's lows but still settled out the day with a 12% loss after it posted first-quarter earnings that missed analysts' marks, because of lagging sales in its flagship premier drug Synagis, plus issued what was interpreted as a weak forecast for the remainder of the year.

Gaithersburg, Md.-based MedImmune, which also has FluMist in its lineup, reported net income of $59 million, or 23 cents a share, sharply off from $114 million, or 45 cents a share, a year ago, while revenue dipped 2.3% to $498 million from $509.8 million. Thomson First Call analysts on average were expecting EPS of 27 cents with revenue of $540.3 million.

MedImmune shares (Nasdaq: MEDI) fell $4.17 on the day, or 11.8%, to $31.17 after trading in a band of $29.53 to $32.25 with a whopping 15.1 million shares changing hands versus the norm of 1.9 million shares.

"It's a sign of dead money, in my opinion," a sellside trader in MedImmune stock said.

"The 2006 revenue forecast news is dreadful - the new [revenue] projection of $1.3 billion compares to the low analyst projection of $1.47 billion. I'd say this pup will be looking at $28 support in short order." But, the trader added that MedImmune put options were paying off.

MedImmune's forecast was the "nail in the coffin" that caused many players to jump ship, the trader said.

The company projects 2006 earnings in a range of 30 cents to 35 cents a share before options compensation expense, or net EPS of 19 cents to 24 cents a share, with revenue growth of around 4% at $1.3 billion. Analysts had been estimating 2006 earnings of 40 cents a share on revenue of $1.4 billion.

"This is terrible, just terrible," the trader said. "Management has to have zero, and I mean absolutely zero, credibility now. And they wanted to compete in a highly competitive influenza market."

MedImmune not at last gasp

MedImmune attributed the slump in part to weakened sales of its respiratory drug Synagis, but one big holder in the stock said he was more than willing to wait out the storm, saying the reaction Thursday was unwarranted panic what with MedImmune having so many other promising drugs in its pipeline. Many traders, however, were bailing out to buy back in when they see a trough.

"Sure, there was a big drop today, but the second half of the year is when you want to own this stock," the Connecticut-based fund manager said, who said his favorite drug in MedImmune's pipeline is its interlukin-9 therapies for immunology diseases.

"You could play around with this and make money on the swings, which seems pretty obvious a lot of people were doing, but I'm not into that. We are buyers today. The P/E isn't bad because [the] company has upcoming cash flow."

One disgruntled player who was bailing out of MedImmune, however, was frustrated but agreed that MedImmune was a good holding long term.

"In 1999, Synagis was doing great. There were some umpteen number of supposed-to-be future blockbusters in the pipeline which was scoffed at as pie in the sky schemes, again and again. Today it is the same story, 15 in the pipeline [and] slowing sales of the only meaningful drug, Synagis," he said.

"OK, it's a bad day in the market. I am a seller today, at a profit. I think there needs to be some rationalization in the stock price to reality. MedImmune right now, after dropping $5 [intraday], is still selling for 125 to 154 times 2006 earnings. MedImmune is so overvalued at $30 it really is comical. When it makes more sense in relation to the market, I will get back in."

Cubist players wave off miss

Cubist Pharmaceuticals, Inc. also missed analysts' expectations, but players ignored that, rather focusing on positive progress in its lead drug, the antibiotic Cubicin. Cubist's focus, antibiotics and hepatitis, are both extremely popular focal points of biotech investors lately, traders noted.

"They hit numbers without the FDA label," to expand use of its Cubicin, said a sellside trader, also noting that short covering accounted for a good portion of the stock's rise. "They hit our numbers, anyway."

Cubist shares (Nasdaq: CBST) climbed $1.98 on the day, or 9.36%, to $23.14 with some 2.4 million shares traded, compared with the norm of 792,971 shares.

After Wednesday's close, the Lexington, Mass.-based company reported that its net loss in first quarter had narrowed to $5.88 million, or 11 cents a share, from a loss of $12.9 million, or 25 cents a share, a year before. Revenue rose 69% to $40.1 million from $23.7 million last year. Excluding expenses for stock options, the loss shrank to $3.31 million, or 6 cents a share.

Cubist on track despite miss

It was not as good as analysts expected - the Thomson First Call average was looking for a loss of 9 cents a share on revenue of $42 million - but well enough to encourage players.

"There was a careful dissection of 'on track' and 'on target' verbiage when talking about the results," on the earnings conference call, said another market source.

"I am extremely pleased. Sales [Cubicin] were up 79% year over year, but more important, up 7% sequentially. This, despite [the] fact there is seasonality to this market with weakness in the early part of each year. Additionally, last year there was still some milestone amortization, which is now fully amortized and thus not a factor in the current quarter."

Cubist's lead product, Cubicin, is an antibiotic used against staphylococcus skin infections.

Looking ahead, players are anticipating a decision May 26 for Cubist's supplemental New Drug Application to add S. aureus bacteremia with known or suspected endocarditis to the indication statement for Cubicin.

Analysts such as Merrill Lynch & Co.'s David Munno are anticipating that with the expanded market for Cubicin the company has a "high likelihood" of reaching profitability as soon as the second half of this year, which would be a huge catalyst for the stock to take off.

Discovery Labs finds buyers

In another respiratory story, Discovery Laboratories was finding renewed interest on the heels of a new $50 million equity line with Kingsbridge Capital Ltd., gaining nearly 6% in trade Thursday following a couple of weeks of pounding after another setback for its lead drug candidate Surfaxin.

Discovery Labs shares (Nasdaq: DSCO) added 24 cents Thursday, or 5.61%, to $4.52 on moderate volume with 1.33 million shares traded versus the norm of 1 million shares.

The three-year committed equity financing facility emerged late Wednesday.

"The Kingsbridge financing deal has gone a long way to put to rest any near-term financing woes," said a trader in Discovery Labs stock.

"The deal itself was not earth shattering and mainly renewed the commitment of Kingsbridge to provide an on-demand 'line of credit,' so to speak, going forward. The implications of the deal, however, have a lot of good PR associated with it because it implies that Discovery Labs does not foresee any near-term need for financing, otherwise they would have simply used the old Kingsbridge deal instead of renewing it.

"My own thoughts are that the deal was renewed with extended time because Discovery Labs is in active negotiations with a partner and they needed to demonstrate that they have long-term financial backing in order to strengthen their negotiating power. Perhaps it is wishful thinking, but I now think that we will see a major partnership deal occur long before we get FDA and/or EU approval."

Earlier this month, Warrington, Pa.-based Discovery Labs had taken a beating after a setback in Food and Drug Administration approval for its lead product, Surfaxin, by making still further requirements. The company is seeking approval for the drug with an indication for premature babies with respiratory problems.

There is a follow-up FDA meeting in June.

Dynavax boosted by financing

Dynavax Technologies Corp. shot up more than 12% on Thursday following a $50 million financing arrangement with Symphony Capital Partners, LP, also bringing in buyers on the development.

Also after the close Wednesday, the Berkeley, Calif.-based company announced it had inked a deal for $20 million immediately with another $30 million forthcoming from a financing arrangement with newly created Symphony Dynamo, Inc. in which Symphony Dynamo purchased Dynavax's immunostimulatory DNA sequence-based compounds to treat diabetes and cardiac disorders.

Dynavax shares (Nasdaq: DVAX) gained 61 cents, or 12.35%, to $5.55 on the news.

"There will be a new set of Rah-Rah players along with new bashers, but bottom line here is hang on to your shares because I don't think this stock will see these prices again," said a sellside trader.

"It sounds like they retained the right to regain the full rights to the products if they so choose. I'm sure Symphony will pocket a nice profit in the process, but if the extra cash allows Dynavax to move products to market faster, it will be worth a lot."

Dynavax said proceeds from the financing will be used to advance Dynavax's cancer, hepatitis B and hepatitis C therapeutic programs through clinical development.

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