Encore cheered as it goes private on Blackstone buyout at a 36% premium; Siemens, Bayer up

By Ronda Fears

Memphis, July 3 - Light volume along with light crews on trading desks made for a dull and uneventful abbreviated session Monday ahead of the day off to observe Independence Day in the United States. After the holiday, traders were not expecting any lingering fireworks, either.

Most of the movements Monday, in fact, were reactions to news from late Friday, including a 31% spike in medtech Encore Medical Corp. shares.

Encore has agreed to an $870 million buyout offer from Blackstone Group that will take it private by a newly formed company controlled by Blackstone Capital Partners V that will pay $6.55 a share in cash - a 36% premium to Friday's close of $4.81 - for the Austin, Texas, orthopedic devices maker.

"Encore had two strategic greats - one being replacing drugs with devices, the other leveraging the surgical contact to sell more than just implants," said a buyside source in Dallas. "Too bad they could not develop a real story and 'roadmap' to communicate this. Given that, the price is not too bad."

On the news, Encore shares (Nasdaq: ENMC) opened strong and traded in a tight band of $6.25 to $6.321 on heavy volume before settling the day higher by $1.49, or 30.98%, at $6.30.

Traders said players in the Encore story were delighted with the deal.

"Look, if you are a trader you love Encore. As an investor, you know this thing is a dog. Except for a spike a couple of years ago, the stock has done nothing. It came out $5 in 1997 and it's there today. Technicals, forget it - valuations, why bother - Encore has mundane products, the financials are constantly obscured by the churn of the latest deal," said a sellside trader. "Not to be greedy but I had hoped for more. However, I will not argue one bit."

Some foresee Encore returning

While Encore players said they did not expect a bidding war for Encore to emerge, thus boosting what they might get, but some think Blackstone will eventually bring it back to the public markets.

"I would be surprised - pleasantly surprised, but surprised nonetheless - if Encore were to go for more than $6.55," the Dallas-based buysider remarked.

"Obviously, Blackstone and the current management (who will be part owners and still managing) believe the company's prospects are good enough to increase in value beyond the $6.55 going price, but any other company out there that may have been looking at Encore will have to contend with a management that now has increased vested interest in the company and so will likely make it more difficult for a competing offer.

"Besides, the going-private price is a 36% premium over Friday's close. I can't complain, having bought my shares in April in the low $5s and in May in the high $4s. I don't expect a competing bid. Of course, if someone comes in at $7 or $8, that would be nice. But I'm not holding out for that."

Members of Encore's existing senior management team will retain their current positions after the transaction closes and will have ownership in the remaining company.

Another buyside source in Atlanta said he could foresee Blackstone bringing Encore back to the public markets if there is not another suitor for the company.

"The absolute worst type of merger is with private equity, in my opinion. They have no synergy to offer unless they have rehab/surgery already in their portfolio. The only advantage is cheaper debt, maybe," the buysider commented.

"But, the way I see it, Blackstone will need an exit, so they will float Encore again in a few years. I think it's a real crappy outcome if major shareholders succumb to this offer but I am sure many were canvassed and they have already indicated they will. Actually, for Blackstone's part, it's great timing. There was the Nasdaq correction and Encore was trading Friday near the 52-week low."

Encore closed Friday at $4.81 versus the 52-week range of $4.41 to $6.45.

Siemens, Bayer up on deal

Siemens AG's €4.2 billion acquisition of Bayer AG's diagnostics unit; following its purchase of Diagnostics Products Corp. in April, puts Siemens is a leading position for both laboratory diagnostics and its traditional imaging businesses, but the news failed to drum up much activity outside of the two major names.

In the United States, Siemens shares (NYSE: SI) gained 82 cents, or 0.94%, to $87.64 while Bayer shares (NYSE: BAY) added 62 cents, or 1.35%, to $46.53.

A trader at a bulge bracket firm said he thought the news would generate some activity in smaller imaging stock stories but he did not see anything of note Monday. He mentioned CTI Molecular Imaging, Inc., E-Z-EM, Inc. and Biophan Technologies, Inc.

CTI Molecular Imaging shares (Nasdaq: CTMI) were unmoved at $25.01. Based in Knoxville, Tenn., CTI is a leading supplier of products and services for positron emission tomography - a diagnostic imaging technology used in the detection and treatment of cancer, cardiac disease and neurological disorders.

E-Z-EM shares (Nasdaq: EZEM) were off 8 cents on the day, or 0.59%, at $13.52. The Lake Success, N.Y., firm is a leading manufacturer of contrast agents for gastrointestinal radiology.

Biophan Technologies shares (OTCBB: BIPH) lost 3 cents, or 2.73%, to $1.07. Biophan, based in West Henrietta, N.Y., is a developer of next-generation magnetic resonance imaging technologies.

Genentech up, OSI lower

Genentech, Inc.'s announcement from Friday that it had won Food and Drug Administration approval for Lucentis - the first drug to restore vision in patients with severe age-related macular degeneration - boosted its stock Monday while pressuring competitors in that race like OSI Pharmaceuticals, Inc.

On the news, Genentech shares (NYSE: DNA) gained $1.02, or 1.25%, to $82.82.

"A lot of the news was baked into the cake," said the sellside trader at a major brokerage. "And that goes for OSI as well as Genentech."

OSI Pharma shares (Nasdaq: OSIP) lost 16 cents, or 0.49%, to $32.80.

Lucentis will cost $9,750 to $13,650 a year and it is thought it could reach sales of $700 million by 2010. Lucentis will compete against OSI Pharmaceutical's Macugen injection, which is partnered with Pfizer Inc. Pfizer shares (NYSE: PFE) were up 11 cents on the day, or 0.47%, at $23.58.

Ceragenics, Repligen eyed

While the merger and acquisition related news did not spur a lot of activity Monday, the buyside source in Atlanta said it did give him cause to look at niche biotechs that might have something to offer Big Pharma in their potential efforts to boost peripheral business lines. Ceragenix Pharmaceuticals, Inc. and Repligen Corp. were two he mentioned directly.

"Ceragenics more than doubled Friday but there was nothing today," he remarked. "I don't know what that's about. I haven't done anything but snoop around and I think it is worth a look."

Ceragenics shares (OTCBB: CGXP) were unchanged Monday at $2.25. The Denver-based biotech concentrates on dermatology, oncology and infectious disease applications. It develops two topical creams, EpiCeram - for xerotic skin conditions - and NeoCeram - a pediatric barrier repair cream to reduce excessive water loss through the fragile skin of premature infants.

Repligen shares (Nasdaq: RGEN) were off 3 cents, or 1.03%, to $2.89. The company develops therapeutics to treat diseases of the central nervous system. The Waltham, Mass., biotech also manufactures Protein A products, which are used in the production of monoclonal antibodies and SecreFlo, a synthetic form of the hormone secretin, which is used as an aid in the diagnosis of certain pancreatic disorders.

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