Genentech slides, Xoma adds 8%; Genzyme eases; NitroMed sinks; Oscient gains; Northfield loses 3%

By Ronda Fears

Memphis, Oct. 11 - Biotech stocks were showing signs of stress as the earnings season builds, sources said, with Genentech, Inc. causing great concern. The sector also tracked the broader markets lower as stocks weakened on news of a fatal plane crash into a high-rise apartment building in upper Manhattan on Wednesday, although the event had no link to terrorism.

"There is just a lot of uncertainty in the [biotech] sector," said a sellside market source. "Genentech had a good quarter but there were some weak spots. If Genentech can go down with those numbers, then imagine what happens to the lesser biotechs. There just has been a lot of upheaval regarding drug approvals, too, and that is weighing on everyone."

San Francisco-based Genentech posted a 58% spike in third-quarter profits on a strong launch of the eye drug Lucentis but its cancer drugs Herceptin and Rituxan failed to meet market expectations. After Tuesday's close, Genentech reported net earnings of $568 million, or 53 cents a share, up from $359 million, or 33 cents a share, a year before, as revenues grew to $2.38 billion from $1.75 billion. The company said it expects 2006 non-GAAP earnings to gain 65% to 70% over 2005.

Genentech shares (NYSE: DNA) shed $1.45, or 1.69%, to settle Wednesday at $84.15.

Xoma Ltd., however, was boosted by the Lucentis results. Berkeley, Calif.-based Xoma also is a marketing partner with Genentech on Lucentis and the psoriasis treatment Raptiva. Lucentis, which was approved by the Food and Drug Administration in June, marked sales of $153 million in the quarter. Xoma is scheduled to report third-quarter results Nov. 9.

But, one sellside trader said he was selling into the rally "as fast as I can, because I think most of the upside is already baked into the Xoma price."

Xoma shares (Nasdaq: XOMA) gained 15 cents on the day, or 7.69%, to close at $2.10.

Genzyme quiet ahead of news

Genzyme, Inc. also was set to report earnings Thursday before the market opens and, meanwhile, AnorMED Inc. said Wednesday it is reviewing whether its sweetened takeover bid is superior to an accepted offer from Millennium Pharmaceuticals Inc.

For the most part, traders said, action in Genzyme was quiet, as it awaits word from AnorMED on the merger saga. The stock (Nasdaq: GENZ) ended off by 38 cents, or 0.56%, at $67.98 with some 2.6 million shares traded versus the norm of 2.1 million shares.

"The acquisition would be dilutive to earnings plus Genzyme is trading way above its earnings growth rate for 2007," said a sellside trader. "It's a powder keg if you ask me. Should the numbers disappoint, this stock will get slaughtered. If the AnorMED deal goes through, I think it will get even worse."

Genzyme bumped its hostile bid for AnorMED to $580 million, or $13.50 per share, besting Cambridge, Mass.-based Millennium's accepted offer of $515 million, or $12 per share, and its previous bid of $380 million, or $8.55 per share. Cambridge, Mass.-based Genzyme has been pursuing AnorMED, to no avail as yet, since at least October 2005.

AnorMED shares (Nasdaq: ANOR) gained a dime on the day, or 0.72%, to close Wednesday at $14.08.

Canada-based AnorMED, which has agreed to support Millennium's bid, has been given through Wednesday to verbally switch its support to Genzyme, and Genzyme said it would give AnorMED until Oct. 17 to execute a formal support agreement.

From a cash-on-hand basis, the trader said that while Genzyme has more resources, the AnorMED fit doesn't seem as logical as with Millennium. Millennium has about $525 million in cash on its books, while Genzyme has about $1.4 billion in cash. AnorMED's lead product candidate, Mozobil, which is in two pivotal phase 3 trials for increasing stem cell yield in stem cell transplants, is the big catch.

Millennium shares (Nasdaq: MLNM) on Wednesday added 2 cents, or 0.2%, to end at $10.03.

NitroMed off 9.5% to new low

In one of the day's biggest declines, NitroMed, Inc. hit a new low after shaking up its internal ranks Wednesday by firing its entire sales team. While the stock was dumped on the event, one trader said the news was encouraging.

"Another big shake-up is coming, and new lows," said a trader early in the day.

Sure enough, the stock (Nasdaq: NTMD) hit a new 52-week low, eclipsing the previous lower threshold of $2.38 as it lost 24 cents on the day, or 9.49%, to close at $2.29 on heavy volume. Some 1.25 million shares changed hands versus the norm of 348,389 shares.

Lexington, Mass.-based NitroMed said it plans to eliminate its sales force, cutting 120 jobs, as part of a strategy to accelerate development of an extended-release formulation of BiDil, its heart pill for black patients that gained FDA approval last year. The company said it will save $30 million a year from the job cuts and plans to replace the sales force with a small team of cardiovascular specialists to market BiDil. Preclinical results for BiDil XR have been positive, the company said, and clinical trails for the once-daily formulation are expected to begin within a month.

"This is the best news since BiDil was approved," the trader said after the conference call. "With no sales force the company will seek a partner sooner than later to market the drug. [The] company [is] basically selling for cash value and [there's] no premium for the drug that saves lives. It's an attractive buy at this point."

"This seems to be the right direction for NitroMed. It is not practical for a tiny company to maintain a sales force to promote only one small drug," the trader continued. "Instead, partnering a Big Pharma while keeping its co-promotion option is more viable."

Oscient rises on upbeat forecast

On a positive third-quarter forecast from Oscient Pharmaceuticals Corp., the stock got a big lift on a surge in buying interest, traders said. The company said it sees third-quarter revenues of slightly more than $11 million, which would handily beat the $8.5 million First Call consensus.

Oscient shares (Nasdaq: OSCI) gained 6 cents, or 5.56%, to $1.14.

Waltham, Mass.-based Oscient said it expects $4 million in revenue from the recently acquired cholesterol drug Antara and $4 million in revenue related to its respiratory tract antibiotic Factive. And, the company projects it will end the quarter with cash and investments of roughly $51 million.

"We knew when they bought Antara that that would be the catalyst for this stock, not Factive," said a buyside market source in Boston.

"With Factive and Antara out in the market and Ramoplanin [antibiotic for clostridium difficile-associated disease] moving through phase 3 trials, how can this stock seriously stay at these levels? If results are positive this fourth quarter maybe we'll see above $2 per share early 2007. Its just hard to believe that a little over two years ago its share price rocketed to over $7 with a hell of a lot less going for it then compared to now."

A sellside trader, though, said there is still some hesitation among potential new players for Oscient because of rumblings that the company will be tapping the capital markets soon.

"There is some apprehension that a stock deal of some sort is coming down the pike pretty soon, maybe before year-end," the trader said. "We know there are some people keeping their eye on this one, though."

Oscient bought Antara in July and said in a statement Wednesday that the move "has already had a significant positive impact on our revenues." The company bought Reliant Pharmaceuticals, Inc. for $78 million, plus a purchase of about $4 million in existing inventory.

Oscient used $12 million of its own cash for the acquisition, with Paul Capital Partners' Paul Royalty Fund II, LP providing $70 million of financing for the purchase.

Northfield bleeds on drug delay

Back to negative moves, Northfield Laboratories Inc. lost ground after it reported a wider quarterly net loss and said it would delay filing for fast-track status for its blood substitute PolyHeme until an endpoint is determined in ongoing trials.

Northfield Labs shares (Nasdaq: NFLD) lost 46 cents, or 3.04%, to close at $14.68.

Evanston, Ill.-based Northfield said after Tuesday's close that it has agreed to defer a decision on fast-track designation by the FDA until an endpoint in the PolyHeme trials is determined later this year but said it expects to seek approval of the artificial blood in the first half of 2007.

"Most of us were expecting an FT [fast-track status at the FDA] decision, yeah or nay, by today. Many attached importance to the FT announcement. We learned of a FT deferral yesterday, after the close," said a buyside source in Boston.

"Some felt betrayed by Northfield because this outcome was not discussed or anticipated. So, some sold because of the disappointing and unexpected deferral of FT status. For me, FT was not a big deal, one way or the other. Deferral and the reasons for it seem reasonable. To me this means the stock price has seen all the correction it will see with respect to the FT thing. I am bullish."

Also late Tuesday, Northfield reported a fiscal first-quarter net loss of $7.56 million, or 28 cents a share, compared with a net loss of $5.78 million, or 22 cents a share, a year prior, while revenue grew to $8.39 million from $6.48 million.

China Medical climbs 8.6%

In another upside move, China Medical Technologies, Inc. gained sharply on news that it has developed two new HIV diagnostic re-agents, or tools to diagnose HIV in a more rapid manner.

"CDC now recommends that HIV testing be done routinely for all teens and adults. Next will be WHO [World Health Organization]. It will become compulsory. HIV is very big business," said a buysider in New York.

"Now that the price has risen above the secondary and from what I see, had a terrific selloff, those that want out can get out without a loss and allow the price to stabilize and then move either via news or earnings. The HIV 'news' is short lived in that the technology is not new and knowing HIV test results faster doesn't really mean a whole lot as the disease is still incurable.

"But, cost of the test is going to be the deciding factor in China Med's bottom line. My own bet is that by Tuesday of next week the stock is back down to around $24 to $24.50 with no downside left. Then, by earnings day it might see $27.50."

In March, a secondary offering of 5 million China Medical Tech shares priced at $25.50 each, discounted from the previous day's closing level of $26.55. Beijing-based China Medical Tech went public in August 2005 with an upsized initial public offering of 6.4 million shares at $15 each - at the middle of the proposed range of $14 to $16 a share.

The stock (Nasdaq: CMED) gained $2.05 on Wednesday, or 8.58%, to $25.93.

China Medical concentrates on products using high intensity focused ultrasound, or HIFU, for the treatment of solid cancers and benign tumors.

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