Sanofi flu news pushes smaller biotechs lower; BioDelivery off 10%; Curis slips on R&D shift

By Ronda Fears

Memphis, Sept. 1 - Biotech stocks were firmly higher Friday while trading remained thin ahead of the long Labor Day weekend, but players continue to expect deal flow to pick up after the holiday, echoing the sentiment in the debt markets as well.

In the race to create a new influenza vaccine before the oncoming flu season, Sanofi-Aventis had news that it is beginning shipments of its flu vaccine. The news, for the most part, pushed smaller biotechs working on competing flu vaccines lower.

Paris-based Sanofi was shipping to the U.S. market for the 2006-2007 season - the first of about 50 million doses planned for production this year. The news renewed thoughts on work for a new vaccine for the avian flu, or H5N1 strain, which Sanofi and London-based GlaxoSmithKline plc are out front with. Sanofi shares (NYSE: SNY) gained 44 cents on the day, or 0.98%, to $45.39. Glaxo shares (NYSE: GSK) were up by 6 cents to $56.84.

Several small biotechs are working on flu vaccines, too, however, and Gilead Sciences, Inc. developed Tamiflu, which is being marketed by Roche Holdings AG for regular flu strains as well as the bird flu. Gilead shares (Nasdaq: GILD) were basically unaffected by the Sanofi news, edging up by 6 cents to $63.46.

But other, smaller biotechs were mostly lower: Novavax, Inc. (Nasdaq: NVAX), which lost 12 cents, or 2.84%, to $4.11, Generex Biotechnology Corp. (Nasdaq: GNBT), which fell 13 cents, or 7.95%, to $1.51 and BioCryst Pharmaceuticals, Inc. (Nasdaq: BCRX), which dropped 29 cents, or 2.84%, to $9.93. There were a couple of gainers in that niche, though: AVI BioPharma, Inc. (Nasdaq: AVII), which added 2 cents to $4.15 and Hemispherx Biopharma, Inc. (Amex: HEB), which was higher by 5 cents, or 2.19%, to $2.33.

Elsewhere, another trader remarked of solid accumulation in several biotechs, naming Alnylam Pharmaceuticals, Inc. (Nasdaq: ALNY), up $1.26, or 9.86%, to $14.28, Favrille, Inc. (Nasdaq: FVRL), up 29 cents, or 6.97%, to $4.45, Celgene Corp. (Nasdaq: CELG), up $2.07, or 5.09%, to $42.76 and Ariad Pharmaceuticals, Inc. (Nasdaq: ARIA), up 8 cents, or 1.68%, to $4.83.

"You know what they say; where there's smoke, there's fire, and Alnylam was smokin' today," the trader said. "Some of these are over-sold, under-valued, what have you. Ariad we saw up all week; today was the least of its gains this past week."

BioDelivery plunges 10%

There were some sizable declines in the biotech pack Friday, however. BioDelivery Sciences International Inc. took a dive, a day after revealing that a large shareholder, Clinical Development Capital (CDC), that had helped finance its cancer pain patch, had accused it of breaching a 2005 funding agreement and terminated the pact. In turn, BioDelivery alleges CDC has breached the development agreement for the patch.

"One more speed bump and BDSI goes to the junk yard," said a sellside trader.

BioDelivery shares (Nasdaq: BDSI) fell 23 cents, or 10.09%, to $2.05.

But a buyside source in Boston referred to CDC's action as posturing.

"CDC it appears to me is trying to make a grab to up their take in the BioDelivery fentanyl agreement. As I understand it, in May, CDC converted a $7 million repayable loan into BioDelivery stock at $3 a share with royalty payments. Now BioDelivery and CDC are both claiming a breach in the agreement. Looks like a cat fight which may forebode poorly for the stock price short term," the fund manager said.

"On the positive side CDC has to know that the trials are going well or they wouldn't be tempted to derail this thing. They have $7 million in BioDelivery equity they will want to preserve. My guess is that they will want to try to increase their royalty take in arbitration. They have a history of being aggressive financial snakes in pharmaceutical financing. They're not fools, however, and they likely won't want to sink a boat their in, as they hold approximately 20% of BioDelivery's equity.

"I'll stand pat and ride it out. I think picking up stock on a short term dip looks interesting," the buysider continued. "Their recent international agreements and the addition of an ex-Glaxo president are looking pretty savvy. If this CDC thing doesn't go nuclear I'm optimistic long for the next couple of years."

In July 2005, BioDelivery received a commitment from CDC for $7 million to fund the clinical development of its cancer pain patch, BEMA Fentanyl, which is in clinical trials. In May, the commitment was converted into equity, giving CDC 2 million shares, making it one of the largest shareholders in BioDelivery.

On Aug. 30, CDC alleged that BioDelivery failed to comply with laws and protocols in California with respect to the clinical trials involving the BEMA Fentanyl product. In a separate filing, BioDelivery claims CDC, among other things, violated the agreement by making an offer to buy the remaining interest in BEMA Fentanyl and the BEMA technology in May.

Curis sees buying on weakness

In another decline, though mitigated by buying on the weakness, Curis, Inc. lost ground after announcing it has decided to opt out of a co-development agreement with Genentech, Inc. for a basal cell carcinoma drug candidate, which had already been a disappointment in trials.

Curis shares (Nasdaq: CRIS) traded as low as $1.15, but buying on the downdraft propped the stock up to close near the day's high, settling with a decline of 2 cents, or 1.59%, at $1.24. Genentech shares (NYSE: DNA) added 17 cents on the day to $82.69.

"This morning was a buying opportunity. Any dips due to idiot traders that panic on news that isn't necessarily bad is always a buying opportunity," said a buyside market source.

"The performance seems to indicate that the market interprets this news as not bad, and possibly good. After the sharp rise yesterday, it was due for a bit or a pullback and that is basically all we got. I agree that it is probably good news but I really didn't think the market would see it that way."

By backing out of co-developing the drug, he added, Curis management is saving money that can be spent in other ways.

"They're not giving up their rights to the drug, nor are they abandoning it. If Genentech moves forward and hits milestones they still get payments, and ultimately shares of revenue if anything goes to market," the buysider said.

"The development decisions are now Genentech's alone, and they know what to do with cancer drug candidates a lot more than Curis does."

Curis and Genentech had previously announced they were halting enrollment in the phase 1 clinical trial for the drug and had made a decision not to move forward with the molecule in its current formulation. To date, under the agreement that dates back to 2003, Curis said it has incurred about $8.4 million in co-development costs. By nixing the program, it will be saving its shares of the phase 2 trials, or around $20 million.

Also, Curis said that if Genentech proceeds with development of a topically administered Hedgehog antagonist for the treatment of basal cell carcinoma, Curis would be eligible for cash payments on the achievement of certain future clinical development objectives, if any, as well as royalties.

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