Amylin stock, convertibles zoom on drug data; OSI rebounds; Merck credit finds buyers; Wyeth sold off

By Ronda Fears

Nashville, Aug. 23 - Credit issues were at the forefront of biotech names heavily traded Tuesday, with Amylin Pharmaceuticals Inc. convertible bonds moving sharply higher alongside the spike in the stock on positive trial data for a diabetes drug in development with Alkermes Inc. and Eli Lilly & Co.

Elsewhere on credit desks, buyers emerged for Merck & Co. bonds and credit default swaps in the wake of some serious widening after the Vioxx verdict last Friday. Yet, the verdict reminded players that Wyeth was still facing considerable overhang from its Phen-Fen - a pseudonym for the diet pills fenfluramine and phentermine - litigation that started six years ago, and its bonds took a big hit along with the stock.

Following a big sell-off in OSI Pharmaceuticals Inc. on Monday related to its purchase agreement to buy Eyetech Pharmaceuticals Inc. for $935 million, OSI shares and convertible bonds were on the rebound.

In primary market activity, a day after Isis Pharmaceuticals Inc. tapped the PIPEs market for $51 million, market chatter put Oscient Pharmaceuticals Inc. next in line for some sort of financing transaction. The deal was viewed as good news for the existing Isis convertible bonds, one market source said. Isis shares closed Tuesday off 8 cents, or 1.58%, at $4.97 but were seen in after-hours trading up 5 cents, or 1%. Oscient shares closed Tuesday off 13 cents, or 5.7%, at $2.15 and also were seen higher in after-hours trade by 7 cents, or 3.26%.

Isis is "a nice credit," the market source said, adding, "Oscient is next."

In the venture capital arena, there were a handful of deals totaling more than $100 million, with a headliner $50 million transaction from Cerexa Inc. - a spin out of Peninsula Pharmaceuticals Inc., which was acquired by a unit of Johnson & Johnson earlier this year amid a troubled initial public offering.

Also of note, Neurobiological Technologies Inc. closed a $10 million line of credit with Comerica Bank, which sent its shares up 25 cents on the day, or 8.2%, to end at $3.30.

Amylin, Lilly, Alkermes rise

Amylin is leading the collaboration with Alkermes and Lilly, and Amylin was out front of the partners in market reaction to their announcement of encouraging preliminary phase II data from a small study for exenatide LAR, a once-weekly formulation of the twice-daily injectable Byetta, being developed to treat type 2 diabetes.

As for Amylin, despite the sharp run-up Tuesday, a sellside market source said, "It's still not too late to buy it."

Amylin shares on Tuesday shot up $6.07, or 27.68%, to $28 on heavy volume, and its convertible bonds also saw heavy traffic with the 2.5% issue due 2011 gaining 12.75 points outright to 102 and the 2.25% issue due 2008 up 13.5 points to 105.625.

Alkermes Inc. shares rose $1.84, or 11.62%, to $17.67, and Lilly gained $1.01, or 1.92%, to $53.72.

Alkermes and Lilly pretty much were ignored by credit players, traders said. The Alkermes bonds were stuck at 129 on Tuesday with no trades seen, and among the various Lilly bond issues a sellside trader said the only activity of any note was in the 2.9% issue due 2008 with a 0.875-point drop to 96.5.

Diabetes competition sours data

Competition in the diabetes drug market, however, caused some analysts to resist pounding the table.

"We believe that Byetta may find a place in the treatment regimens of motivated and monitored type 2 diabetics," said Merrill Lynch analyst Thomas McGahren. "But market penetration with a twice-daily injectable will likely be challenging."

A once-weekly version of Byetta would be an improvement, he said, but assuming combined peak sales of $800 million for Byetta / Exenatide LAR, he is neutral on Amylin shares at current prices in view of "the increasingly complex competitive landscape."

Thomas Weisel Partners analyst Ian Somaiya agreed there is risk involved with Amylin's commercialization of Byetta and its other diabetes drug, Symlin. But, he said that even at a 20% discount rate to reflect the risk, Amylin shares would be fairly valued in the $30 to $34 range. Amylin shares jumped $6.07, or 27.68%, to close at $28.00.

Concern about competition is warranted, a buyside analyst said, given that Danish drug manufacturer Novo Nordisk AS is about to enter final phase III testing for its once-a-day diabetes drug. Novo shares declined Tuesday on the Byetta news, though, as its drug might be preferred over the current Byetta regimen of twice-daily injections but would likely be the second choice of treatment to the improved version of Byetta to once-weekly injections.

Novo shares in Copenhagen on Tuesday lost DKK 5.00, or 1.52%, to DKK 323.50 and similarly declined in the United States with a loss of 83 cents, or 1.54%, to $53.03.

OSI sell-off seen overdone

On Tuesday, OSI Pharma rebounded somewhat from the big sell-off on its $935 million acquisition of Eyetech, but analysts were still not too keen on the transaction.

Merrill Lynch analyst Eric Ende said that while he thought the merger was a bad deal, the sell-off in OSI Pharma was an overreaction as fundamentals remain intact.

On the news Monday, OSI Pharma shares plunged 22% and then on Tuesday added back 91 cents, or 2.85%, to $32.83. Eyetech meanwhile ended unchanged at $18.13, but with very heavy volume again Tuesday.

"We do not see the strategic benefit for OSI to acquire Eyetech, but we believe the stock is overreacting as investors are concerned that [Eyetech's] Macugen is going to cloud the investment thesis for OSIP," said Merrill's Ende in a report Tuesday.

"With the underlying fundamentals of OSIP still intact and yesterday's market cap loss almost equal to the EYET net purchase price, we maintain our buy."

Logic aside, the analyst said that the deal should be a positive event strictly from a financial perspective, even if Macugen sales flopped in the face of competition from Genentech Inc.'s Lucentis treatment for age-related macular degeneration.

"For the deal to no longer be accretive, we estimate Macugen sales/royalties would have to be less than expected by $138 million in 2006," Ende said. "While certainly possible, given the solid Lucentis data, we believe our estimates already reflect the risk via declining Macugen sales through 2009."

Merck bonds, CDSs firmer

Buyers stepped in Tuesday for Merck bonds and credit default swaps, a buyside trader said, on the widening fallout from the Vioxx verdict that came down Friday.

He said Merck five-year CDSs blew out by as much as 23 basis points and there were some "gutsy" purchases Tuesday of the bonds, which he said were off as much as 15 points from levels seen last Thursday before the Vioxx verdict.

Merck bond issues were up anywhere from 1 to 4 points on Tuesday, the bond trader said. Merck shares on Tuesday lost another 31 cents, or 1.11%, to $27.58.

"Merck paper has traded pretty tight this year relative to the markets, but since last Thursday they have cracked big time," said the buysider from a hedge fund based in Pennsylvania. "There was nothing but selling until today, [and] we saw some buyers step up, I figure from some of the big bulge bracket firms buying back what they have been selling where they can make a small margin."

He said buying on the dip at this point seems pretty risky in light of so many Vioxx lawsuits facing Merck.

Vioxx liability a wildcard

Credit analysts are skeptical about Merck paper, too, given the uncertainty about the impact of the Vioxx issue to its overall business. A Texas jury on Friday awarded $253 million to the widow of a man who took the anti-inflammatory arthritis pain drug Vioxx, which is feared to have set a precedent for some 4,200-and-growing lawsuits pending against Merck over the drug's use and side effects.

The verdict is almost certainly going to be reduced because of Texas law, and Merck is appealing the case, but the litigation is spread all over the country with the numbers of plaintiffs estimated upwards of 7,500.

"Nobody knows what the final figure encompassing Merck's Vioxx liability will be or when it might be paid," said Carol Levenson, director of research at GimmeCredit, an independent research house. "Still, it seems clear that the legal stakes for Merck just got a lot higher."

Levenson noted that by the stock market reaction, Merck's expected liability grew by nearly $5 billion on Friday in terms of loss of market cap, but Merck itself "has reserved exactly zero for potential damages." Meanwhile, she said Wall Street equity analysts have estimated the liability at $4 billion to $55 billion.

Moody's Investors Service affirmed Merck's Aa3 credit rating on Tuesday but put the credit on a negative outlook, citing good cash flow and very healthy cash coverage of debt against uncertainly of the ultimate potential liability.

Wyeth off on parallel to Merck

Merck's situation also served as a reminder to the markets that there remains considerable overhang for Wyeth regarding its Phen-Fen diet pills, which dates back to 1997, and traders said there was some heavy selling in that paper.

Wyeth shares dropped 75 cents, or 1.63%, to $45.28. The Wyeth convertible floater traded down 1.25 points early in the session, a sellside trader said, but the issue bounced off that to close lower by just a quarter-point at 111.75 bid, 112.25 offered. Wyeth's straight bonds were also weaker, by about a quarter-point, with the 5.5% issue due 2012 pegged at 103.75 at the close.

GimmeCredit's Levenson said Wyeth's situation regarding Phen-Fen "is not a pretty one" and is steadily growing. Wyeth recalled its diet pills in September 1997, the class was certified in 1999, and soon after that a settlement was reached.

"But six years later - long after investors took the initial 'hit' - the company continues to increase its reserves to cover plaintiffs who have 'opted out' of the settlement," Levenson said in a report Tuesday.

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