Forest Labs up sharply; King sees buying; Avalon sets IPO range; Salix dives; Xoma, ViaCell bounce

By Ronda Fears

Nashville, June 23 - Funding for biotechnology concerns remains an uphill effort, although onlookers are hopeful of a hot summer in more ways than one with issuance picking up even during the typical midyear lull. In the meantime, difficulty in the capital markets has increased the spotlight on merger and acquisition activity and speculation is rampant, spreading even beyond upstart concerns to the more establish pharmaceutical players like Forest Laboratories Inc.

Forest Labs became the fixation of the market Thursday as a potential target for Pfizer Inc. Even Pfizer's announced plan of a whopping $5 billion stock buyback did not cool the enthusiasm by much although Forest Labs' shares did close off the intraday highs. There was some selling into the rally and one such Forest seller was buying King Pharmaceuticals Inc., another player seen as a hot buyout target despite the foiled merger with Mylan Laboratories Inc.

On a reality plane, Salix Pharmaceuticals Ltd. announced after Thursday's closing bell that it is buying InKine Pharmaceutical Co. in a $190 million stock deal that put a 63.5% premium on InKine stock. Salix shares, which ended the day lower, took another dive in after-hours trading. InKine shares extended gains Thursday with a 53% rise in after-hours action.

Meanwhile, funding operations remains an issue for the smaller biotechs still in early research and development phases. Initial public offerings continue to flag but there have been a few pop onto the calendar, the latest from Avalon Pharmaceuticals Inc. On deck Thursday were offerings from HemoSense Inc. and Celldex Therapeutics Inc., but IPO watchers said both were having trouble. On the debt front, CV Therapeutics Inc. has a new convertible and stock offering slated for next week's business.

Back to stock market action, Xoma Ltd. and ViaCell Inc. were both higher on better views from analysts.

Forest Labs spikes on takeover buzz

An upgrade to Forest Labs shares sent the stock soaring and traders said the market's focus was on comments that the company might be a takeover target for the likes of Big Pharma concern Pfizer. On the other side of the fence, however, one holder said he was selling into the rally because there is another view that Forest is a hunter rather than target in the hot M&A activity in the sector.

Forest Labs shares shot up as much as 4% intraday, but eased back to settle up $1.05 on the session, or 2.76%, at $39.15.

Reports on the tape cited Prudential Equity Group upgrading Forest Laboratories Inc. to overweight from neutral weight, noting low earnings expectations and a stabilizing market for depression drugs. In addition, the brokerage reportedly told clients that should Forest Labs run out of in-licensing opportunities or not achieve positive results with pipeline drugs, it would seem logical for Pfizer to buy Forest Labs.

In April, Forest Labs provided a soft earnings outlook for EPS in fiscal 2006, ending March 31, of $2.30 a share with net revenue up slightly from the $3.16 billion in fiscal 2005. For fiscal 2005, the company posted net income of $838.8 million, or $2.25 a share.

The Forest Labs seller said, however, that a recent Deutsche Bank Securities report pegged the company as a likely buyer, citing no activity along those lines on a big scale in a decade.

"With the run up in Forest Labs, it takes them farther away from being a target because the acquirer would have to pay up even more. So, I'm a seller on the strength today," the buysider said.

Forest seller buying King Pharma

Rather, the Forest Labs seller said he was buying King Pharmaceuticals on a dip early Thursday. The stock recovered somewhat during the session to end higher by 4 cents, or 0.4%, at $10.04.

King Pharma survived a market routing after announcing financial restatements in December, which ultimately killed its planned $4 billion takeover by Mylan Labs. It now has a bank of new executives and is considered by some as poised to take off.

King Pharma is still considered a prime acquisition target, the equity fund manager said, noting that the Deutsche analysts suggested King Pharma may be a leveraged buyout candidate. He said the King Pharma convertible may also be a great way to play the story, but the matter of takeover protection would be a major factor. The 2.75% convert, a thinly traded issue, traded earlier this week at 95.5.

"I'm not sure what those [King Pharma] bonds are really worth," he said. "They were issued back before the cash takeover language became standard, so that would be something I'd have to investigate."

The King Pharma converts are basically hovering where they landed after a huge slide on the Mylan merger falling through. The 2021 issue had shot up last summer when the Mylan merger was announced.

Salix dives on InKine purchase

Salix's purchase of InKine for $190 million in stock sent its shares lower in after-hours trading with the decline matching losses seen for the day. Analysts, however, initially were keeping their view on the stock as the merger was expected to be neutral to 2005 results and accretive thereafter.

Describing the deal as one that will create the "largest specialty pharmaceutical company focused exclusively on gastroenterology," Salix said InKine stockholders will receive Salix common stock valued at $3.55 per share of InKine common stock, or $190 million in equity value. InKine shares ended up 7 cents on the day, or 3.33%, at $2.17 and in after-hours trading was seen up another $1.15, or 53%.

Salix shares ended Thursday down by 45 cents, or 2.38%, to close at $18.44 and in after-hours trading the stock was sent lower by another 43 cents, or 2.33%.

Thomas Weisel Partners analyst Donald Ellis said he was maintaining a peer performance on Salix shares, noting in a research note that the merger brings together two complementary companies that will be marketing six gastroenterology products, plus a product pipeline of numerous candidates and projects.

"We continue to believe the company [Salix] is entering a new revenue growth phase driven by the recent launch of Xifaxan and continued strength in the base business," Ellis said.

Salix expects the deal to be neutral to its 2006 earnings on a GAAP basis but significantly add to profits after that. For first quarter, the company posted net income of $3.4 million, or $0.09 per diluted share.

"The combination of Salix and InKine provides an unparalleled opportunity for each company to capitalize on their assets in the short-term and strengthen their prospects for continued growth over the long-term," said Salix chief executive officer Carolyn J. Logan in a press release, noting that the acquisition will add some 100 sales people for Salix.

Avalon files IPO at $10-$12 a share

There has been market chatter that the IPO market will heat up this summer, an IPO trader in New York said, but thus far the signs are not pointing that direction, with HemoSense Inc. and Celldex Inc. struggling ahead of pricings slated after Thursday's market close.

Meanwhile, there was an update filed Thursday by Avalon Pharmaceuticals Inc. for its IPO, giving a price range for the 4.5 million shares. The Germantown, Md.-based clinical stage biopharmaceutical company is proposing the stock at $10 to $12 per share.

HemoSense, a San Jose, Calif.-based maker of a handheld blood coagulation monitoring systems, launched its IPO in a similar range at $9 to $13 per share but after four price cuts and delays, the IPO is on tap at $6 to $8 per share.

Avalon's timing is anticipated in late July, according to a source at Legg Mason Wood Walker Inc., one of the underwriters of the offering.

Avalon is focused on the discovery and development of small molecule therapeutics for the treatment of cancer. Proceeds will be used to fund clinical trials, development and selection of additional drug candidates, licensing, acquisitions, working capital, capital expenditures and general corporate purposes.

Adherex, RegeneRx tap PIPEs

Funding sources for biotechs not on the radar screen of companies on the merger hunt have seen alternatives narrow with the tap for IPO and debt markets declining to barely a trickle. Micro-cap concerns RegeneRx Biopharmaceuticals Inc. and Adherex Technologies Inc. have joined the ranks of biotech firms tapping the PIPEs market for funding, both announcing deals on Thursday.

"I think they are all raising money as the window is open," a sellside market source remarked to Prospect News.

The window hasn't sprung wide open, though, as investment bankers see it.

"As the public market falls off, so does the PIPEs market," said Julie Levenson, managing director of the PIPE team at Houlihan Lokey Howard & Zukin.

RegeneRx raised roughly $5 million in a private placement of 1,538,000 shares at $3.25 each to its European partner Defiante Farmaceutica Lda, a subsidiary of Sigma-Tau Group, and two of its affiliates. In response to the news, RegeneRx shares were up sharply, gaining $0.30 on the day, or 11.54%, to $2.90.

Neil Lyons, RegeneRx chief financial officer, said the company's shelf registration for an offering of up to $60 million, filed last week, will be maintained until the market is considered more receptive.

Convertible market warms up

The debt markets have not been all that friendly this year, either, but the convertible market has traditionally welcomed biotech issuers. Many biotech convertible issuers have a string of issues in play, such as CV Therapeutics Inc., which is currently pitching its fourth convert. It comes on the heels of Invitrogen Inc. bringing its fifth convert to market last week.

Some convertible market pros hope for a hot summer in terms of convertible issuance, as well. Thus far, the biotech convert deals have been met warmly by investors, the banker types say.

"Since the secondary market has stabilized and fund flows redemptions, at least for June 30, seem to be manageable, it is not surprising that investors would step up and look for paper with strong future growth dynamics and the biotechs seems to be a solid fit," said Richard Ng-Yow, co-head of convertible origination at UBS Investment Bank. "The IVGN and CVTX deals could well signal a trend to many more of these companies receiving favorable reception in the convertible market."

Buyside market sources said the CV Therapeutics and Invitrogen deals had to be structured smartly to sell, however. One noted that Invitrogen's newest convert had its first put scheduled a year ahead of the nearest put on its existing issues; another noted that CV Therapeutics is collateralizing coupon payments for three years.

Xoma spin turns heads, heads up

With a new collaboration strategy at Xoma Ltd. the story is getting more attention and with Wells Fargo Securities picking up coverage at a buy rating on Thursday the stock was up 5% midday before trailing off with the broader markets. The Berkeley, Calif., biotech concern also has a convertible that is considered an equity surrogate with a conversion premium in the neighborhood of 6%, and moving on a delta of roughly 90%, that rose in tandem with the stock.

Xoma shares on Thursday added 7 cents, or 3.93%, to settle at $1.85, which a couple of traders attributed to short covering. The 6.5% convertible due 2012 was quoted at 100 bid, 102 offered with the stock at $1.78. Hedged on a 90% delta, a sellside trader explained that every nickel move in the stock would move the bond 2.5 points. He added that the stock borrow is freeing up, too.

The business model of Xoma depends heavily on collaboration and earlier this year the company tweaked it to limit capital outlays even further by only developing products up to Phase I studies and then licensing products to partners, with milestones and royalties coming in as programs advance to later clinical stage development. Previously, Xoma worked through Phase II studies, which are more costly than Phase I.

Another way Xoma collaborates is by manufacturing biologics for other companies, as it shows excess manufacturing capacity after Genentech Inc. took over psoriasis treatment Raptiva production. Xoma develops antibodies for treatments of cancer, immunological and inflammatory diseases and disorders.

Xoma also has collaboration agreements with Zephyr Sciences; Millennium Pharmaceuticals and Chiron, among others, but the Genentech deal is a cornerstone as the company works toward its stated goal of becoming profitable by 2008.

In February, Xoma sold the $60 million convertible and, with a cash burn rate of about $40 million in 2005, estimates that it now has sufficient cash resources through at least the end of 2008.

ViaCell advances on new coverage

Controversial stem cell research concerns continue to get a fresh look, too, with congressional debates in Washington, D.C., coming up next month on the issue and lobbying for the research effort is expected to include the likes of former first lady Nancy Reagan. Specifically on Thursday, ViaCell Inc., one of the less controversial names in the batch, was sharply higher on Leerink Swann initiating coverage with a buy rating.

ViaCell shares on Thursday rose 20 cents, or 2.18%, to end at $9.39.

Fans point out that not only does ViaCell, based in Cambridge, Mass., have the backing of big-name biotechs like Amgen Inc. and Genzyme Corp., it also has a revenue stream from allowing parents to store blood from their children's umbilical cords for later use.

At the core of the debate on stem cell research is the means of harvesting stem cells - from embryonic tissue and umbilical cords. In late May, the House of Representatives passed a bill that would loosen current federal funding restrictions on embryonic stem-cell research and the Senate is expected to vote on a companion bill by the end of July. However, President George W. Bush has threatened a veto.

Stem cell technology offers hopes for treatment in several widespread diseases such as diabetes, Parkinson's disease, spinal cord injuries and others like Alzheimer's. Other stem cell research companies include StemCells Inc., based in Palo Alto, Calif., Aastrom Biosciences Inc., based in Ann Arbor, Mich. and Geron Corp., based in Menlo Park, Calif.

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