Altana crushed by Pfizer news; Cubist, Corixa rise in thin market, Millennium off; Cephalon higher

By Ronda Fears

Nashville, July 1 - With players skipping out early Friday to begin the three-day Fourth of July weekend, it was a thin market for biotech issues, mirroring the broader markets. The lack of volume made it difficult to form a solid view of the session, but traders noted moves in a couple of names that have been abuzz as takeover targets - namely, Cubist Pharmaceuticals Inc. and Millennium Pharmaceuticals Inc.

However, also of note, Cephalon Inc., a recent serial issuer in the convertible market, was mentioned Friday heading north in tandem with the stock. The new 2% converts closed at 101.625 bid, 102.125 offered with the stock adding 70 cents on the day, or 1.76%, to $40.50.

Following the Federal Reserve's quarter-point bump in interest rates, financing activity was slight but syndicate sources said it was more a function of the holiday than the rate hike. One pointed to Mylan Laboratories Inc. reverse flexing its pending bank facility, by 25 basis points, as a sign that funding activity remains robust for situations that make sense or companies that have a smart business plan.

Mylan Labs reverse flexed pricing on its $275 million term loan to Libor plus 150 bps from Libor plus 175 bps, a market source told Prospect News. Merrill Lynch is the bookrunner on the $475 million five-year credit facility (Ba1/BBB-) that also contains a $200 million revolver. Proceeds, along with a $500 million bond (BB+) deal, will help fund its Dutch auction self-tender offer for up to 48.8 million shares, or up to $1 billion, of its common stock, at $18 to $20.50 per share, which is currently scheduled to expire on July 15.

Moreover, traders said the market lacked any conviction Friday, and one strategist echoed that sentiment on a broader scale, especially regarding financing alternatives.

"Broadly, from the standpoint of looking at healthcare, with biotech being a part of that, we are not expressing anything very positive, or negative for that matter, right now," the chief market strategist at a sellside shop told Prospect News on Friday when asked about the prevailing climate for biotech funding.

Manager tiptoes into sector

From the buyside perspective, sentiment appears more bullish, but there are concerns about valuation and terms on new financing deals.

"I have been in and out, or around, in AMLN, CNMD, IVGN, FSH, WPI and LABS, to name a few," said the Los Angeles based fund manager, who participates in a broad range of securities. "I bought a load of stuff during Armageddon [the market downdraft] and have been lightening recently.

"I guess trees grow to the moon?" he added, suggesting a skeptical approach to the biotech sector. "Stuff still looks cheap but ..."

Amylin Pharmaceuticals Inc. is a San Diego-based biotech focused on treatments for diabetes, obesity, and cardiovascular disease. The company has collaborations with Eli Lilly & Co. and Alkermes Inc. On Friday, Amylin shares added 7 cents, or 0.33%, to close at $21. The company also has convertibles in play and the 2.25% due 2008 was pegged at 94 bid, 95 offered with the 2.5% due 2011 at 90 bid, 91 offered.

Conmed Corp., based in Utica, N.Y., is a medical technology company that designs and makes instruments, implants and video equipment for arthroscopic sports medicine and other surgical procedures. On Friday, Conmed shares added 48 cents, or 1.56%, to close at $31.25.

Invitrogen Inc., based in Carlsbad, Calif., makes products used in biotech research, such as functional genomics, cell cultures and a wide range of enzymes. On Friday, Invitrogen shares added 29 cents, or 0.35%, to close at $83.58. Invitrogen is another serial convertible issuer, and its new 3.25% convert was higher with the stock, ending at 107.75 bid, 108.25 offered.

Fisher Scientific International Inc. is another medical devices name. The Hampton, N.H.-based company makes products and services for scientific research, biopharma production supplies, clinical laboratories and lab safety and personal protection products. On Friday, Fisher shares lost 74 cents, or 1.14%, to close at $64.16. Fisher's convertibles were lower, as well, with the floater quoted at 122.5 bid, the 3.25% issue at 103.754 bid and 2.5% issue at 144.625 bid.

Watson Pharmaceuticals Inc. is a generic and branded drugmaker with antidepressants, analgesic, oral contraceptives, anti-anxiety, antibiotics and other products on the market. On Friday, Watson shares dropped 15 cents, or 0.51%, to close at $29.41. Watson's 1.75% convertible due 2023 was closed out at 92.5 bid, 93 offered.

LabOne Inc., based in Lenexa, Kan., provides diagnostic and laboratory services, such as drug testing, for employers, insurance companies and government agencies. On Friday, LabOne shares were off 6 cents, or 0.15%, to close at $39.74.

Manager eyes bond features

Another fund manager, focused on the convertible arbitrage strategy, said the converts of several takeover candidates in the biotech space are particularly attractive in light of the trend in convertibles to include specific takeover protection language.

Abgenix Inc., Icos Corp. and DOV Pharmaceutical Inc. are three he particularly likes that market buzz has names as potential takeover targets. Bothell, Wash.-based Icos markets Cialis for the treatment of erectile dysfunction through its joint venture with Eli Lilly & Co. DOV, based in Hackensack, N.J., has six product candidates in clinical trials targeting insomnia, anxiety disorders, pain, depression, and angina and hypertension, with collaborative arrangements with Pfizer Inc. and others. Abgenix, based in Fremont, Calif., is directing its focus on the potential commercial opportunity of its lead product candidate, panitumumab, developed with partner Amgen, which is being evaluated both alone and in combination with other drugs as a treatment for various types of cancer, including colorectal, lung and kidney.

"ABGX has a very reasonable premium for a bond trading around 90, plus its takeover make-whole feature could make it a home run," the manager said, referring to the Abgenix 1.75% convert due 2011.

Abgenix shares on Friday slipped by 7 cents, or 0.82%, to close at $8.51. The 1.75% converts were pegged by a sellside shop at 88 bid, 88.5 offered.

"ICOS yields nearly 9% on an improving credit situation, with basically a free long-term out-of-the-money call on a biotech company (always worth something) plus a potential huge home run in the event of a takeover because of the poison put (not make-whole, which they don't have, but busted converts don't need takeover make-wholes)," he added, referring to the Icos 2% convert due 2023.

Icos shares on Friday added 62 cents, or 2.93%, to close at $21.79, while the convert was quoted by a sellside shop at 73.5 bid, 74 offered.

"DOVP are extremely cheap, lend themselves well to hedging with stock - stock has significant upside volatility potential and these too would play out well in a takeover because of the make-whole feature," he said, referring to the DOV 2.5% convert due 2025.

DOV shares on Friday added a penny to close at $18.67 and the convert was pegged at 105 bid, 106 offered by a sellside trader.

"ABGX and DOVP are two of the many bonds issues with make-wholes last year that have cheapened greatly since the make-whole [feature became standard on convertible issues]," he continued. "If a takeover happens, it essentially restores all the damage the market did earlier this year.

On Pfizer news, Altana crashes

Big Pharma is sitting on huge caches of cash, too, illustrated most recently by Pfizer's whopping $5 billion stock buyback plan announced last week. But many sector players are wondering why they haven't been snapping up more small-cap biotechs. Pfizer's news Friday to discontinue its investment in two drug candidates caused some onlookers to speculate that it will instead steer the money to more lucrative revenue-producing ventures.

Pfizer announced it is discontinuing development of capravirine, a non-nucleoside reverse transcriptase inhibitor under study for patients with HIV/AIDS who have failed on currently available antiretroviral therapies and that it and Altana AG have mutually agreed to terminate a collaboration regarding the development of Daxas, a phosphodiesterase-4 inhibitor for chronic obstructive pulmonary disease and asthma.

As a result, Altana shares tumbled over 16% as investors bailed out in large fashion. The stock plunged $9.32 on the day, or 16.25%, to close at $48.05 with heavy volume of 155,100 shares versus the three-month running average of 15,952.

But some fans of Altana were buying into the dip.

"Last year, Altana said that it was having trouble recruiting patients for its trials of daxas. Now Pfizer has ended their joint effort and returned all development rights to Altana. So, that is a disappointment, but why the crushing reaction?" the equity fund manager, based in Atlanta, said.

"I bought more today and will hold it. The company already makes $3.5 billion in revenue, has cash up its wazoo and is profitable without this drug anyway. Looks like too good an opportunity to pass up."

Millennium may be in play, too

The Pfizer news also caused some speculation that it might include Millennium Pharmaceuticals Inc. in any hunt for acquisition targets, the buysider remarked.

"Millenium's going to have a lot of suitors," he said. "They're a valuable and wanted company right now. I really didn't figure Pfizer would be one of the players, but with them abandoning trials on two more of their drugs this morning, even their pipeline is starting to look weak and they'll be on the prowl to add more companies with products and potential products."

In any event, he added, "A new CEO [at Millennium] who, while at Novartis, developed and launched products such as Zometa, Femara and Gleevec and had strong annual sales growth rates ... [and] gained experience in overseeing mergers. An experienced Big Pharma exec with experience in mergers is a very interesting development there."

Millennium shares dropped a dime on Friday, or 1.08%, to close at $9.17.

Merrill analyst Thomas McGahren applauded the new CEO, too, in a report earlier this week, saying the executive, Deborah Dunsire, will likely be focusing on reducing the cost structure of Millennium in order to achieve its goal of non-GAAP profitability next year. However he seemed to see Millennium more as a suitor.

"But in order to achieve real growth we believe the company requires additional revenue sources beyond sales of Velcade, co-promotion revenue from Integrilin sales and strategic alliance revenues. While we view Velcade as making progress commercially ... Millennium's pipeline does not appear ready to provide near-term commercial candidates," McGahren said in the report.

"We would look for the company to in-license or acquire products or late-stage product candidates, particularly in the oncology area, which we view as the strength of the company." The analyst also noted Dunsire's experience in managing the merger of Sandoz Pharmaceuticals and the Ciba-Geigy oncology businesses.

Cubist speculation spotlighted

Rampant speculation has been fueled by recent announcements, too, such as Pfizer's $1.9 billion bid for Vicuron Pharmaceuticals, which came on the heels of Johnson & Johnson's purchase of Peninsula Pharmaceuticals Inc. in April as it was having trouble getting an IPO off the ground.

"The price tags just make your eyes pop out," said a convertible trader who handles several biotech issues, noting that Pfizer paid a 74% premium for Vicuron.

Antibiotics maker Cubist Pharmaceuticals Inc. was spotlighted in a Forbes piece during the week as possibly the next biotech firm to be scooped up by a large drug company, but that was nothing new to the markets as the chatter has been circulating for some time.

Cubist's positive trial data earlier in the week spurred its securities higher, but the name retreated Friday. The shares added 2 cents on Friday, or 0.15%, to close at $13.19. It too, has a convertible in circulation, a 5.5% bond due 2008, which on Friday was quoted at 87.5 bid, 89.5 offered.

Cubist said results for its Cubicin could double the market for the new antibiotic, potentially propelling it to blockbuster status. Cubist said a Phase III clinical trial had shown the antibiotic was effective in treating heart infections and bacteria in the bloodstream, and now the company hopes to file for expanded approval of the drug, already approved to fight complicated skin infections, before the end of the year.

Corixa/Glaxo union in jeopardy

Troubled merger plans were causing some anxiety, however, such as the case with Corixa Corp., which is the subject of GlaxoSmithKline plc's $300 million bid that has been contested by an investor. A special stockholder meeting is set for 1 p.m. ET on July 12 to consider the merger

MPM BioEquities Adviser LLC, however, which owns 1.1 million shares of Corixa, said the bid at $4.40 per share offer for Corixa is about 32% too low. MPM values the company at about $6.50 per share in an acquisition and plans to vote its shares against the deal.

At the time of Glaxo's offer, it represented a 48% premium to Corixa's closing share price of $2.98 the day before the deal was announced. Corixa, which was founded in 1994, went public in 1997.

Corixa shares on Friday also gained 2 cents, or 0.46%, to close at $4.40 - smack at the Glaxo bid price. The Corixa convertible bonds are trading right around par, sellside traders say.

One analyst couched the opposition to the Glaxo bid as "greedy," and speculated the merger would be approved. He noted that Glaxo and Corixa have worked together to develop drugs such as Bexxar, a treatment for non-Hodgkin's lymphoma, and the purchase makes sense both for Glaxo and Corixa.

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