Xenoport deal emerges; Human Genome up 4%; Anadys, Idenix drop on HGSI news; Onyx up

By Ronda Fears

Memphis, June 6 - Biotech stocks on whole were off with the broader markets, and while some players were watching with bated breath for signs of a bottom, many felt like they would be sidelined for most of the summer. Meanwhile, Human Genome Sciences, Inc. was a leader among those moving up, on news of a bigger collaboration with Novartis AG.

"There are lots of volume ants out there looking for low-lying fruit, chasing scared money, etc.," said a sellside biotech stock trader. "With volume looking pretty good in a lot of cases, you could argue the market has the feel of a bottoming test but there isn't a lot of conviction."

A fund manager in Atlanta confirmed that view, saying that while he was looking for bargains among the wreckage he was willing to wait.

"The biotech and Pharma sectors are oversold and there are literally dozens of companies that offer huge opportunities for profit," the buysider said.

"But don't worry; there are plenty of people willing to hold through inclement weather."

Aside from Human Genome's new collaboration deal with Novartis for the hepatitis C drug Albuferon, which moved Anadys Pharmaceuticals, Inc. and Idenix Pharmaceuticals, Inc. lower, there were several cancer drug names moving on the wrap-up of the 2006 American Society of Clinical Oncology (ASCO) Annual Meeting being held in Atlanta.

XenoPort declines over 4%

As XenoPort, Inc. announced a new stock deal, the shares settled Tuesday lower by more than 4%, which traders attributed to the general malaise in the sector.

XenoPort announced after Tuesday's closing bell plans to sell 4.5 million shares in a follow-on offering via bookrunner Morgan Stanley & Co. Inc.

XenoPort shares (Nasdaq: XNPT) lost 92 cents on the day, or 4.28%, to settle Tuesday at $20.58.

Santa Clara, Calif.-based XenoPort is focused on developing a portfolio of product candidates that use the body's natural nutrient transport mechanisms to improve the therapeutic benefits of existing drugs.

XenoPort's most advanced product candidate, XP13512, has begun a phase 3 trial for the treatment of Restless Legs Syndrome and has successfully completed a phase 2a trial for the management of post-herpetic neuralgia. XenoPort has also completed two phase 1 trials of its second product candidate, XP19986, and reported preliminary positive results of a phase 2a clinical trial of XP19986 in Gastroesphageal Reflux Disease, or GERD, patients.

Buysider expects autumn low

But players in the biotech space said they were bracing themselves for a long, dry summer but see opportunity in trading on the dips before placing long-term bets in the fall.

"As I have said recently, I think the 2,135 low on the Nasdaq will be the intermediate low, or close to it. I also said it would be tested within two to four weeks after being set. We are doing that now, in my opinion," said the Atlanta-based fund manager.

"This is setting up like last March and April where the April 2005 low slightly undercut the March 2005 low on the Nasdaq. Take a look at a three-month period from spring 2005 and look at the daily trading patterns [now]. That 'undercut' scared the bejeebees out of investors and created an intermediate term bottom.

"This past Friday was a short term sell signal. The market rallied in pre-market and sold off. It was overbought after the short steep rise then and people were looking for a way to cash out short term. They have, and the selling continues today. For the most part, strong up mornings are an opportunity to sell (like today's pre-market).

"I think we are backing and filling from the 2,135 Nasdaq low. A couple of very smart [sellside] folks I follow are more bearish than I (as I have mentioned). I am more concerned about a strong down move in the late summer and fall. But could we get that in the summer? Anything is possible. That is why they created protective stops and stop losses.

"I'm in cash and looking for a retest of the bottom (or slight undercut) to go long on a short-term trade. This is a time to trade, not a time to buy and hold like a deer in the headlights. I believe we will set a more significant (and lower) bottom in the fall."

Human Genome up on Novartis deal

Human Genome was up 8% early and eased back to a 4% gain on a new and improved collaboration deal with Novartis for the commercialization of its hepatitis C drug Albuferon worth up to $507.5 million.

A trader said a good portion of the Human Genome rise was due to short-covering, but he said the deal seemed to shift the tide on the story, noting a couple of upgrades to the stock by sellside analysts.

Human Genome shares (Nasdaq: HGSI) gained 41 cents on the day, or 4.02%, to settle at $10.60 after trading as high as $11.12 on the news. Some 18.75 million shares traded versus the norm of 3.3 million shares.

"They have plenty of cash, and the Novartis deal gives them 50% of U.S. profits plus royalties outside U.S. with bulk manufacturing done by HGSI," the trader said. "HGSI is inexpensive today."

Under the new deal, Novartis will pay Human Genome up to $507.5 million, including an upfront payment of $45 million. If the drug makes it to market, Human Genome will split U.S. profits 50/50 with Novartis and earn royalties on overseas sales.

Human Genome said it expects Albuferon to enter into phase 3 clinical trials later this year.

Anadys off 6%, Idenix down 3%

The Human Genome agreement follows a deal by Novartis in March worth $525 million with Idenix for another hepatitis C drug. Idenix shares were off Tuesday along with Anadys, which has a deal with Novartis for a Hepatitis C drug as well.

Idenix shares (Nasdaq: IDIX) dropped 32 cents on the day, or 3.3%, to close at $9.37. Novartis is a majority shareholder of Idenix because of their collaborations.

Anadys shares (Nasdaq: ANDS) fell 58 cents, or 5.74%, to end at $9.52.

Novartis shares (NYSE: NVS) lost 82 cents, or 1.47%, to settle at $55.08.

Traders said there were some buyers on the decline in Anadys, noting that the stock was off as much as 10% at one point of the session before bouncing back as buyers stepped in.

"Give me an opportunity to buy some cheap ANDS shares and I will take it, [Anadys' hepatitis C drug] ANA975 will be used in a combination cocktail with other hep C drugs, Novartis'long-term strategy is now in place with all the hep C deals it has done," said a buyside analyst at a biotech fund based in Florida.

"It'll be either ANA975 or Albuferon for the immunomodulator component of Novartis' cocktail. It won't be both, and that's why Anadys is down today."

Analysts plug Anadys equity

But the buyside analyst, along with some sellside analysts, said he is more confident with Anadys' drug.

"ANA975 was designed to replace peg-interferon or work with peg-interferon or a new class of drug like Vertex's [Vertex Pharmaceuticals, Inc.] VTX-950 P-inhibitors. Albuferon sounds like a new more potent and safer version of peglated-interferon," he said.

"And I'll be a buyer [of Anadys shares] under $8.50. They have $4 per share in cash and a hep B drug [ANA380] worth $8 as it looks like the next 'Gold Standard' for that indication."

Vertex shares (Nasdaq: VRTX) gained 45 cents, or 1.43%, to $31.89 on Tuesday.

JMP Securities analyst Adam Cutler also said in a report Tuesday that the Human Genome deal with Novartis was not altogether bad news for Anadys, and he reiterated a strong buy rating on the stock.

"Anadys has a partnership with Novartis for ANA975 for hepatitis C. While some investors may view the Novartis/HGS partnership as a negative for Anadys, we do not agree," Cutler said in a report.

"While ANA975 may eventually be an oral replacement for interferon, it is currently in phase 1b (Albuferon is entering phase 3 soon). Novartis is making big investments in HCV [hepatits C vaccine], and an interferon product is a key strategic asset. Given the different product profiles and phases of development, we do not believe that Novartis has any reason to favor one product over the other.

"We believe that the stronger the foothold that Novartis establishes in the hepatology marketplace, the better partner it becomes for ANA975 when it reaches the market. We view Anadys as one the most exciting investment opportunities in small-cap biotechnology."

Onyx adds back by 2.5%

Onyx Pharmaceuticals, Inc. was rebounding Tuesday from the day before as buyers stepped in after the stock tumbled a day before on worries that its kidney cancer drug could soon be facing formidable competition.

"Onyx and the biotech sector are oversold and set for a rally," said a buysider in Florida. "There are some stocks out there that have really been hammered and offer a great opportunity to profit."

Onyx shares (Nasdaq: ONXX) rose by 43 cents, or 2.56%, to $17.25 on Tuesday after a 15% drop on Monday.

The stock was upgraded by Janney Montgomery Scott to buy from neutral, he said, based on a belief that the selloff was overly harsh and implicitly ignores what they believe is a solid long-term future for Onyx's Nexavar for advanced kidney cancer.

"The stock reached new 52 week low on heavy volume," the buysider said. "That's a sign to me that bargain hunters are coming."

A trader said, however, that he thought it was a gamble.

"Onyx is now a very risky play. If they don't hit it big, this stock will go nowhere, ever," the trader said. "I am in, but am a little antsy."

On Monday, Onyx dived after Pfizer, Inc. presented positive data on its kidney cancer drug Sutent at the ASCO meeting. Onyx markets Nexavar with partner Bayer AG.

Trio of convertible deals pop up

A trio of convertible deals from biotech and related concerns - Charles River Laboratories International, Inc., Millipore Corp. and Advanced Medical Optics, Inc. - was added to this week's business with a couple on tap to price after Tuesday's close.

Billerica, Mass.-based Millipore, which provides products and services for biopharmaceutical manufacturing, clinical, analytical and research laboratories, was pitching $550 million of 20-year convertibles talked to yield 3.25% to 3.75% with a 37.5% to 42.5% initial conversion premium. Millipore shares (NYSE: MIL) lost $3.80 on the day, or 5.55%, to settle at $64.65. The deal is slated to price Tuesday.

Santa Ana, Calif.-based Advanced Medical Optics, which designs and sells ophthalmic surgical and eyecare products, was marketing $450 million of 20-year convertibles talked to yield 2.875% to 3.375%, up 27.5%-32.5%, to price Wednesday after the close. Advanced Medical Optics shares (NYSE: EYE) closed off 93 cents, or 2.07%, at $43.97.

Charles River Labs' $300 million of seven-year convertibles, talked to yield 2.0% to 2.5%, up 22.5% to 27.5%, was set to price Tuesday.

Charles River reactions mixed

The Charles River Labs deal drew mixed reactions ahead of its post-market pricing, with the deal described as fairly priced but hampered by a lackluster stock story.

"It's a pretty decent credit," a sellside convertible trader said.

Charles River, a Wilmington, Mass.-based provider of animal research models for the biotechnology sector, said it will use proceeds to buy back $125 million of its common stock from purchasers of the notes and to pay for convertible note hedge and warrant transactions. Remaining proceeds will be used for general corporate purposes, including buying back shares from the open market.

"Of the three deals [that were pricing Tuesday after the market closed], the only one that looks relatively interesting is the Charles River," a convertible analyst said. "But I'm using about 175 basis points over Libor and 25% volatility and getting it only about 0.5 point cheap at the mids. None of them look great."

Another sellside convertible analyst also modeled Charles River's deal about 0.5 point cheap at the mid-point of price talk, describing the deal as "coming pretty tight, fair at my spread and volatility."

Charles River shares edge up

But the sellsider noted that a number of equity analysts were neutral on the stock; and with the convertible modeling just modestly north of fair value, the sellsider saw little in the convertible that would be exciting for outright investors.

Charles River shares (NYSE: CRL) added 9 cents on the day, or 0.23%, to close Tuesday at $39.95.

Indeed, one biotech stock trader said he was "pretty unexcited" about Charles River Labs.

"The discontinuation of services because of staffing problems, the selloff of non-competitive subdivisions and internal problems are evident. Anyone who caught the last spike and sold is lucky," the stock trader said. "Now all people can do is wait and see if the company can reconstitute and redirect itself.

"They say that Mother Nature and Father Time can remedy most ills. But this company is going to have to get re-involved with R&D and not just from a service roll. They have to develop their own novel ideas to remain competitive."

Millipore merger a wildcard

Millipore's deal also received mixed reviews on Tuesday before it priced in the evening.

The notes were offered at par and talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 37.5% to 42.5%.

Millipore said it will use proceeds to pay part of the consideration in its merger with Serologicals Corp., which was announced in April. Any remaining proceeds will be used as working capital.

A sellside convertible analyst said the deal was only fairly valued using an assumption of 200 basis points over Libor and a volatility of 26%.

"Maybe my spread is a little wider than what others are using; the bookrunners were using 150 bps over Libor, which I thought was too aggressive based on the acquisition," the analyst said. "The proceeds are for a cash acquisition, so the credit is going to have to push out a little."

But another convertible analyst modeled the Millipore deal cheaper than the Charles River Labs deal, and noted that there have been some positive views on Millipore stock.

"I have money for one of these two deals [Millipore and Charles River Labs], why not go for the one that's cheap and has upside on the stock," the analyst said.

But the analyst said The Street is split over whether the Serologicals merger is good for Millipore, and although Millipore expects to reduce its leverage by the end of 2007, the company's current debt level remains high.

"My concern is that it's going to be a highly levered company today and there's not going to be a lot of free cash flow today," the analyst said.

Kenneth Lim contributed to this article.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.