ImClone slammed after it ditches deal search; Oscient rises 12.5%; Vical sinks

By Ronda Fears

Memphis, Aug. 10 - ImClone Systems, Inc. told the market Thursday that it will abandon efforts to find a buyer or merger candidate and remain independent, causing many onlookers to read between the lines and conclude that there were no good bids and a new round of angst for holders in other biotechs looking for buyers, like Discovery Laboratories, Inc.

"That, ImClone not getting any decent bids, was a kick in the teeth for a lot of biotechs," said a sellside market source.

"Take Discovery Labs, for example. How are they going to find premium bids when they are not nearly as far along as ImClone in getting a drug to market. Needless to say, the anxiety meter is running into overtime."

Discovery Labs also has been exploring strategic alternatives since late June - the catchphrase for putting a company on the auction block - to no avail as yet. The biotech has been battered since failing to get approval for its respiratory antibiotic Surfaxin in premature infants because of manufacturing issues that surfaced at the Food and Drug Administration. After losing in the neighborhood of 80% of its market cap, the company hired Jefferies & Co. Meanwhile, the company is scheduled to meet with the FDA in fourth quarter about Surfaxin.

"Unless news is released that is somewhat positive, I think Discovery Labs will test the $1.50 mark," the sellsider continued.

"I would probably take a loss if it breaks to that point. Of course, momentum can change on a dime but at this juncture, I see stagnation for a few more trading sessions."

Discovery Labs shares (Nasdaq: DSCO) dropped 6 cents on the day, or 3.57%, to $1.62.

Still, there are Discovery Labs fans willing to hold on a little longer.

"No one wants to give away the farm. If you now know the cause of the manufacturing problem, and you're only eight weeks from an FDA meeting that could clarify everything, why would you possibly do a deal now while you're at a disadvantage?" said a buyside source in Florida.

"You have to think this out logically? If it goes well, you hold all the cards, if it does not go well, you get no better deal than now when you have nothing but uncertainty."

ImClone dives over 13%

ImClone's news sent the stock reeling in reaction to several sell recommendations by sellside shops, but there was a surge in buying in the last hour of the session, traders said.

After an eight-month review of strategic alternatives, ImClone said Thursday it has decided to remain independent, which onlookers said clearly indicates that bids for the company came in well below its current market value.

With at least two potentially negative events ahead of ImClone in the next two to three months, including Amgen, Inc.'s Panitumumab colorectal cancer drug approval by late September and a court decision in the Yeda Research & Development Co. Ltd. patent ownership case, many analysts think there could be downside for the stock to the mid-$20s.

ImClone shares (Nasdaq: IMCL) fell as low as $27.42 but were lifted late in the day to settle off by $4.32, or 13.35%, at $28.05 amid whopping volume of 10.3 million share versus the norm of 2 million shares.

"No buyout, so what," remarked a biotech fund manager in Boston.

"ImClone can stand alone. They have a reasonable pipeline. The search is on for a new CEO and [they] have a drug [Erbitux] selling close to $1 billion for colorectal and head and neck cancer. They have a good cash and cash equivalent position," the buysider said.

"This sell-off is overdone. I support the decision if the offers were low-balls. I suspect the good in-house talent will stick around with re-greening of stock options. This is a good company and a good stock purchase entry point."

Indeed, another buysider agreed, adding that the price drop also might make the company a more appealing buyout target.

"This is a HUGE discount. I'm in! I hope they kick the hell out of it tomorrow again," the Atlanta-based fund manager said.

"I always wanted to own this stock. But the price was prohibitive to grab enough to make it worth my while, as there wasn't too much movement in the stock. I wonder if, ironically, the value at this price DOES make it a buyout candidate!"

Analysts see ImClone downside

There is significant overhang for ImClone stock, however, according to sellside onlookers.

Merrill Lynch biotech analyst Eric Ende said in a report Thursday that he expects at least two potentially negative events in the near term to continue to put pressure on ImClone stock. The first is that approval for Amgen/Abgenix Inc.'s Panitumumab for third-line colorectal cancer is expected in late September, and widely expected to be deeply discounted - as much as 50% - from Erbitux.

Also, Merrill expects ImClone and Aventis are likely to lose the patent inventorship case, and Yeda Research & Development Co. Ltd. is likely to be named at least a co-inventor, on the patent covering methods of using EGF-R antibodies in combo with chemotherapy. Yeda is responsible for technology transfer from the Weizmann Institute of Science, Israel's leading center of research and graduate education.

Beyond that, Merrill feels ImClone may have lost its focus. Last week, Ron Martell, head of commercial operations for Erbitux at ImClone left the company. In addition, ImClone has been running without a permanent CEO since January. Merrill believes that ImClone's inability to find a strategic alternative over the tumultuous last eight months may make it difficult to attract senior leadership capable of running ImClone as an independent company.

ImClone also has a patent dispute with the Massachusetts Institute of Technology and Repligen Corp. over the colon cancer drug Erbitux - its sole source of revenues. ImClone has previously reported that it produced some $1 billion worth of Erbitux prior to the expiration of the patent in 2004 and that partner Bristol-Myers Squibb Co. has paid $900 million in upfront and milestone payments plus a 39% royalty on the sales of Erbitux in the United States.

Oscient up on Abbott deal

Despite the downer on the biotech sector from the ImClone news, Oscient Pharmaceuticals Corp. continues to extend its run and got a big shot in the arm after inking a marketing deal to sell its respiratory antibiotic Factive in Canada with an affiliate of Abbot Labs.

Oscient shares (Nasdaq: OSCI) gained 12 cents, or 11.21%, to close at $1.19.

The stock has been on a tear for several sessions now, and the company announced a deal to market Factive in Mexico with Pfizer, Inc. last week, a sellside onlooker remarked Thursday.

In July, Oscient was boosted by its acquisition of the drug Antara from Reliant Pharmaceuticals, Inc. for $78 million. Oscient got $70 million in acquisition financing from a deal with Paul Capital Partners' Paul Royalty Fund II, LP in which the investor gets $40 million in revenue interest for royalties on sales of Antara and Factive. Also involved was $20 million in debt due in 2010 and a $10 million equity stake at 90 cents a share plus warrants to purchase 2.3 million shares at 86.8 cents each. Oscient shares were trading at about 83 cents at that time.

Antara, used to treat high cholesterol and high triglycerides, is part of the growing $1 billion fenofibrate market, according to Oscient, and will be commercialized by its existing sales force, which are to be deployed to market Factive in the Unites States and its Testim testosterone gel.

Vical deal seen a victory

In a financing deal, Vical Inc. settled a $10 million direct placement of 2.1 million shares at $4.77 each - pat with the closing price on Tuesday - to a single institutional investor and that was seen as a vote of confidence that boosted the stock sharply.

Vical shares (Nasdaq: VICL) added 24 cents on the day, or 5.07%, to close Thursday at $4.97.

Proceeds will be used for ongoing programs and general corporate purposes. The San Diego-based biotech develops DNA-based vaccines for infectious diseases, including one targeting the avian flu H5N1 strain, and cancer.

"Vijay [Vical chief executive Vijay Samant] is letting us know what the company is really worth," said a trader.

"Of course, let's give him another couple of years to bring a product to market. But from my understanding things are progressing OK still and the bets are out. We will see what Vical's future is in the next two or three years. I categorized in major bets and small hopes. There are seven major drug bets - many of those are due with an update [in the] next one to two years."

Cytori slips on PIPE deal

News of a $17.8 million private placement by Cytori Therapeutics, Inc. caused it to slip in trade Thursday, however.

Cytori shares (Nasdaq: CYTX) dropped 6 cents, or 1.04%, to $5.69.

The San Diego-based biotech is gearing up to close the deal with a group of new and existing institutional investors, including Olympus Corp., that have agreed to buy 2,918,255 shares at $5.75 each. Olympus will purchase 1,913,043 of the shares.

The price per share is on par with the $5.75 closing stock price on Wednesday.

"We like [Cytori]," said one buyside source familiar with the issuer.

"This [offering] looks good. It will be good for their business. We think they have some decent products and that they'll eventually have a solid pipeline. They're still developing though."

Cytori develops cell-based therapeutics using adult stem cell and regenerative cells derived from adipose tissue to treat cardiovascular disease, gastrointestinal disorders and other ailments.

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