OSI Pharma off as Genentech reports Tarceva weakness; ImClone up at Abgenix expense

By Ronda Fears

Nashville, Oct. 11 - Earnings surprises sent some biotech names rocketing higher, like Genentech Inc., but in some cases the earnings news rocked smaller biotechs, like OSI Pharmaceuticals Inc. Moreover, players' sentiment suggested an October spook had reared its ugly head and many were scared off biotechs until they get a better grip on the events shaping the future for these companies.

"Bio-wreck!" remarked a manager at a huge fund with heavy interest in biotech stocks and convertibles.

When asked if the recent weakness had yet enticed him as a buyer, he continued: "I have not added to anything, [I'm] watching myself getting shorter and shorter."

Human Genome Sciences Inc. "really stunk up the place!" he added. At some point, he said he "might punt long" on Abgenix Inc. or consider adding to positions in CV Therapeutics Inc. or the new convertible bond of Cyberonics Inc.

Human Genome Sciences Inc. continued to spiral in the wake of news last week that its lupus drug showing disappointing trial results with the stock falling another 4% Tuesday on the heels of losing 1% on Columbus Day, which followed a 40% drop last week. Its convertible bonds were described around midday as lower by another 3 points or so.

Genentech surged Tuesday following strong third-quarter results attributed to higher-than-expected sales of cancer drugs Herceptin and Avastin. Late Monday the giant biotech reported third-quarter net income of $359.4 million, or 33 cents a share, up from $230.9 million or 21 cents, in third quarter 2004. Genentech shares shot up $2.59, or 3.16%, to $84.59.

But Genentech showed weakness in cancer drug Tarceva, which put pressure on drug partner OSI Pharma. Generic names were under pressure, as well.

From the primary side of the fence, the market is looking at the revived GTx Inc. follow-on stock offering in addition to follow-ons from Threshold Pharmaceuticals Inc. and Dynavax Technologies Corp. this week.

Elsewhere deal flow was slowly coming back from the holiday lull. In PIPEs, CepTor Corp. released details from a previously announced equity line for up to $20 million with Fusion Capital Fund II LLC. Based in Hunt Valley, Md., CepTor is focused on treatments for neuromuscular and neurodegenerative diseases like muscular dystrophy and multiple sclerosis. The stock was off Tuesday by $0.10, or 5.88%, to $1.60.

ImClone climbs on upgrade

There were a few gainers in the biotech space outside of Genentech's spike, however.

ImClone Systems Inc., for one, got a lift Tuesday that traders attributed to an upgrade in the stock to a buy from neutral by UBS Investment Bank based on a view that slowing U.S. sales of its colon cancer drug Erbitux and the threat of competition has been priced into the stock.

ImClone shares rose 44 cents on the day, or 1.42%, to $31.45.

There has been concern that Panitumumab, developed by Abgenix Inc. and Amgen Inc., will erode Erbitux sales. But, one buyside market source said, the UBS analyst suggested that Erbitux sales will rebound as healthier patients start treatment earlier and thus receive therapy for a longer time. The buysider said Goldman Sachs had also plugged ImClone stock on Monday.

Giant biotech Amgen saw little effect from the news, traders said, although it drifted south with the sector. Amgen shares lost 36 cents on the day, or 0.47%, to $76.34.

Abgenix off to ImClone's gain

But the ImClone news caused Abgenix Inc. - partner with Amgen in the development of Panitumumab - to take a big hit. The stock has been pulling back for a month after market chatter over the summer pegging it as a likely takeover candidate died out without any sign of a bidder for the company. The Abgenix convertible bonds also weakened, but traders said volume was very light as buyout risk has been priced into the paper.

Abgenix shares lost 82 cents on Tuesday, or 7.46%, to $10.17.

Like the fund manger who was looking to possibly add to his position in Abgenix, another buyside market source suggested the sell-off in Abgenix has been overdone.

"Let's look at this all with some common sense. The investment banks that put out the upgrades on ImClone have a fairly significant holding in that stock," the buyside analyst said.

"Both released nearly identical analyses in their reports to the effect, and I am paraphrasing, that 'Panitumumab results are probably good, but negative effect on ImClone because of decreased Erbitux sales has already been priced in.' I wouldn't be surprised if the upgrades for ImClone are last-ditch efforts at preventing a panic sell-off as soon as the Panitumumab data is released."

He also noted that there has been an elevated open interest in Abgenix options over the last few sessions, pushing implied volatility close to 135%. So, he said, it would be no surprise to see hedge funds flock to Abgenix ahead of its third-quarter results. The company is scheduled to report earnings on Oct. 25.

OSI Pharma hits new low

OSI Pharmaceuticals shares hit a new 52-week low in the wake of Genentech's results that showed a surprising slowdown in sales for the lung cancer drug Tarceva that it helped develop. The event also caused at least one downgrade to the stock, by Bear Stearns.

OSI Pharma shares fell $1.61, or 6.01%, to $25.18, eclipsing the 52-week low of $26.46 that was struck on Oct. 10.

Bear Stearns biotech analyst Akhtar Samad said that while the downside for OSI Pharma is limited near-term, he sees little upside into the second half of 2006 without robust Tarceva growth. So, the slip in Tarceva sales could be serious, but he added that Genentech and OSI Pharma are working to get approval for Tarceva in pancreatic cancer and Tarceva in combination with Avastin data in kidney cancer. A filing for pancreatic cancer use is expected in early November and more trial data on its use in kidney cancer by year-end.

Genentech reported third-quarter U.S. Tarceva sales of $73.2 million compared with the analysts' consensus estimate of roughly $82 million to $84 million.

Par Pharma slide blamed on Teva

Overall, traders said many biotechs just followed the market lower as a general shelter-seeking tone has surfaced among investors. For example, one trader commented of Par Pharma, "The entire market is down. This is not Par Pharma specific. Par Pharma will be much higher before and after earnings, I think. This price level may even be a buying opportunity."

Buyers were not showing up in large numbers, though.

Par Pharma shares lost 80 cents, or 3.33%, to $23.21.

Another sellside market source said Par Pharma's decline was related to a lawsuit against Teva Pharmaceutical Industries Ltd. India-based Ranbaxy Laboratories Ltd. announced Tuesday it has sued generic drug makers Barr Pharmaceuticals Inc. and Teva in a dispute over generic versions of the allergy medicine Allegra.

Teva shares closed off 8 cents, or 0.23%, to $34.25 while Barr stock added 13 cents, or 0.23%, to $55.70.

Ranbaxy and its partner in the suit, privately held Agvar Chemicals Inc., assert they were blindsided by a deal Barr made with Teva that effectively cut them out as suppliers of fexofenadine hydrochloride, the key active ingredient for generic Allegra.

Par Pharma had been moving north over the course of the summer on speculation that it would lure a merger offer in the wake of Teva Pharmaceutical Industries Ltd.'s $7.4 billion acquisition of Ivax Corp., perhaps from Teva. The Teva/Ivax deal united the top two generic drug names in the game, and among a string of mergers earlier this year. But merger activity has nearly died up in the biotech space as yearend approaches.

Par Pharma, formerly Pharmaceutical Resources Inc., bills itself as the fifth largest generic pharmaceutical company in the United States, with more than 85 prescription products.

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