AnorMED gains 5% as Genzyme bests Millennium bid; DOV sinks 9% on hiring HSBC, up after close

By Ronda Fears

Memphis, Oct. 10 - Biotech stocks were weaker Tuesday as players attempted to gauge Millennium Pharmaceuticals, Inc.'s reaction to Genzyme Corp. besting its bid for Canada-based AnorMED, Inc.

More pressure came from DOV Pharmaceutical Inc. taking the route of troubled Discovery Laboratories, Inc. in looking for alternatives such as a possible sale of the company. Amid the strained times for biotechs, even in light of the bidding war ensuing for AnorMED, traders said they are becoming skittish.

"There are lots of the mainstream biotechs really hurting right now. They may indeed find some sort of M&A deal, but the AnorMED situation is really extraordinary," said a sellside market source.

"DOV or Discovery Labs are not going to draw the same interest. AnorMED's market cap was about $92 million before this ordeal began, but they have a drug in phase 3 that is on the verge of getting launched. Discovery Labs has a market cap of $138 million but it is having trouble getting Surfaxin approved so it's not going to generate a big premium like AnorMED."

Genzyme down on upped bid

Genzyme shares were hammered after it boosted its bid for AnorMED to $580 million, or $13.50 per share, besting Millennium's accepted offer of $515 million, or $12 per share, and its previous bid of $380 million, or $8.55 per share. Yet, AnorMED shares zoomed past the bid.

"There is still a question about AnorMED's Mozobil, so this could be a stretch to justify such a big price tag," said a sellside trader.

Genzyme shares (Nasdaq: GENZ) fell $1.14, or 1.64%, to $68.36.

AnorMED shares (Nasdaq: ANOR) gained 68 cents, or 5.11%, to $13.98.

Genzyme announced its bid increase but it is not yet official, as it had been preparing to tender for AnorMED shares at the previous $8.55-per-share level. Cambridge, Mass.-based Genzyme said it would give AnorMED until Wednesday to determine if its offer constitutes a superior proposal to Cambridge, Mass.-based Millennium's $12-per-share offer and until Oct. 17 to execute a support agreement.

Onlookers have said the key objective the acquisition would be AnorMED's lead product candidate, Mozobil, which is in two pivotal phase 3 trials for increasing stem cell yield in stem cell transplants. But analysts say it is not a big catch.

Assuming Mozobil is launched in late 2008, Merrill Lynch & Co. estimates modest sales of $8 million in 2008, $50 million in 2009 and $92 million in 2010, with peak sales of about $200 million.

"We believe Genzyme would be paying a premium to AnorMED's fair value ... We believe $10 to $12 per share is more appropriate based on our worldwide Mozobil peak sales estimate," said Merrill analyst Eric Ende in a report Tuesday.

Moreover, Ende said that while phase 2 data for Mozobil is interesting, "study design flaws may overstate the drug's benefit." Phase 3 data on the drug are expected to be released in second quarter 2007.

Millennium seen bowing out

While AnorMED had favored Millennium's offer, at least before Genzyme's move Tuesday, many onlookers and players said they expect Millennium will concede the race, or should. In the interim of hearing anything definite from Millennium, traders said the stock was getting dumped.

Millennium shares (Nasdaq: MLNM) dropped 3 cents on the day, or 0.3%, to $10.01.

"While Mozobil is potentially synergistic with Millennium's Velcade franchise, the company already would be using most of its cash balance for the acquisition based on its $515 million bid," said Merrill analyst Tom McGahren in a report Tuesday. "Millennium is basically breakeven right now, but we estimate that the acquisition would be about $0.16 dilutive in 2007, $0.13 dilutive in 2008 and about breakeven in 2009, thus requiring three years to get back to near profitability."

McGahren said Millennium is already a diluted stock, with about 315 million shares outstanding - some 18% more than Genzyme - and an acquisition of AnorMED would likely require further dilutive financing in order to replenish cash.

While Millennium has about $525 million in cash on its books, according to a buyside analyst in Boston, Genzyme has about $1.4 billion in cash.

"I would be very surprised to see Millennium go head-to-head with Genzyme," the buysider said. "They just don't have the muscle. I don't think they should take on Genzyme."

Threshold of $14.50 seen

There were some players, however, who think that AnorMED would be a coup for Millennium, especially since sales of its cancer drug Velcade have been slipping. But there are concerns if the bidding continues much higher than $14.50 a share.

"Well, if, like me, you saw AnorMED as an inspired potential acquisition, you have to be quite disappointed in Genzyme's offer of $13.50 a share. After expenses associated with this acquisition, Millennium will end up with a lot less than $19.5 million extra cash [break-up fee if AnorMED sides with Genzyme], assuming they back out now. And I doubt they will find another acquisition which is as good a fit and also has as much upside potential as AnorMED," another buysider said.

"Of course that's the most likely outcome - that Millennium backs out now. At $12 a share I calculated that Millennium could barely get through the acquisition without raising any additional funds if they decided to. But not if they top Genzyme's offer at, say $14.50 a share. In that case - assuming the deal stays all cash - they will have to raise some cash in a market which will first punish them for offering so much for AnorMED.

"I think the market doesn't understand how good the acquisition would be for Millennium," said the Atlanta-based biotech fund manager. "Be that as it may, if Millennium offers $14.50 a share, I would expect the Millennium stock price to immediately drop to $9 or below. So the decision is pretty much a lose-lose for Millennium. That's too bad."

DOV hit on bankruptcy buzz

DOV Pharmaceutical rallied nearly 4% after announcing it had retained HSBC Securities to assist in identifying strategic options and saying it would reduce its cash outlays by refocusing its research programs. But the view quickly turned sour as fears that the Somerset, N.J., biotech would skid into bankruptcy.

In addition to the stock getting hit, DOV Pharma's convertible bonds were seen sharply lower as well. Beaten down by trouble in getting its painkiller bicifadine approved at the Food and Drug Administration, DOV Pharma shares have been punished by the struggle in getting approval for the sleeping pill Indiplon that it licensed to Neurocrine Biosciences, Inc. The pounding to the stock has also put it into jeopardy of losing its Nasdaq listing.

DOV Pharma shares (Nasdaq: DOVP) dropped 7 cents on the day, or 8.43%, to close at 76 cents. A source in the convertible market said the biotech's 2.5% notes due 2024 fell 5 points to the 40 area on Tuesday.

"It's either Chapter 11 or a PIPE and if a PIPE, a very dilutive one, at horrible terms. There isn't enough cash to buy out the bondholders. So, if they can't stay listed, expect either one or the other," said the convertible sellsider. "With a PIPE at least you're still afloat, after buying out the bondholders, but the dilution will be very bad. With Chapter 11, expect to lose it all. This stock smells like it's being shorted to death, for either of the above reasons."

The trouble with Indiplon, which began in mid-May, caused Pfizer, Inc. to back out of a marketing partnership and sent San Diego-based Neurocrine shares reeling along with DOV Pharma. Neurocrine let go around half of its sales force as a result of the Indiplon mess and in early September, began another study of Indiplon to address the FDA concerns.

Neurocrine shares (Nasdaq: NBIX) on Tuesday were unchanged at $12.52.

DOV cash preservation crucial

DOV Pharma said will reduce its cash expenditures by refocusing on phase 1 and 2 research programs for neuropsychiatric disorders, and has told Merck & Co., Inc. that it wishes to terminate their license agreement. This should at least keep the company afloat, one buyside holder said.

In April, DOV Pharma's bicifadine, aimed at treating chronic lower back pain, failed a phase 3 trial, but the company has been seeking a potential development partner for the drug, saying bicifadine was effective in treating other pain in three late-stage trials. In early July, the company's CEO resigned, and Nasdaq later warned the company it faced delisting over failure to meet several requirements.

DOV Pharma is scheduled to meet with a Nasdaq panel Oct. 19, but the stock still lags below the $1 minimum price level.

Amid the ordeal, players observe that DOV Pharma's operating cash is dwindling.

"I've been saying for months now the cash burn rate won't last for six months. Well, it's official now. DOV could finish the quarter with about $45 million in cash, having burned in my estimates some $15 million during this quarter," said a buyside source in Boston.

"I would expect the burn rate to get as low as $5 million to $7 million when concentrating the efforts in phase 1 and 2 trials. So the company could well survive at least six quarters with existing cash, this brings it to the first quarter of 2008. By that time they could already have the royalties from Indiplon IR and MR, if approved.

"In the meanwhile DOV could receive the cash injections if it gets a partnership for bicifadine or other early stage compounds. I believe (but I had no doubt about this) that DOV's move is made for the company to last, and that it is the correct move for the interest of shareholders.

"Furthermore I believe that DOV's strategy is more than a plan, basically we just have to wait and see how much bicifadine, diltiazem and eventually DOV 21,947 are worth and bring in as far as money. Now we can start speculation on how much a license agreement for bicifadine could be worth."

Discovery Labs spins out

Discovery Laboratories, in similar dire straits as DOV, continued to spiral lower Tuesday despite another positive press release from the company on Surfaxin, its respiratory antibiotic for premature infants, which is still struggling to get FDA approval because of manufacturing concerns at the agency.

"They are trying to generate a positive spin, a positive news flow, but it means nothing to the FDA," a sellside trader said. "It means nothing to another company that might be looking at the company, either. It means nothing, period."

Discovery Labs shares (Nasdaq: DSCO) dropped 5 cents, or 2.21%, to close at $2.21 and was lower in after-hours action.

Warrington, Pa.-based Discovery Labs said on Tuesday that infants using Surfaxin in a phase 3 trial required significantly less re-intubation compared with those treated on animal-derived alternatives.

In late June, Discovery Labs hired Jefferies & Co. to explore strategic alternatives. The biotech has lost in the neighborhood of 80% of its value since April when it failed to get approval for Surfaxin.

The company is slated to meet with the FDA about Surfaxin in fourth quarter.

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