Arena gains in face of follow-on deal; deCODE spikes on diabetes discovery; Acadia, Sepracor firm

By Ronda Fears

Nashville, Jan. 17 - Biotech players' attentions Tuesday were largely on deals in the market, after going long over the long weekend to then watch the biotech indexes go south Tuesday.

"There weren't any disasters really, just a sloppy, sucky market overall," said a sellside biotech stock trader. "No one over-reacted too much. Really there wasn't a lot of biotech news on the tape, if you think about it."

Several buyside market sources said they were focused on new deals in the market, both mentioning initial public offerings.

"IPOs are starting to move up on the calendar and so far we're feeling pretty good about the year," said a biotech fund manager based in Los Angeles.

Next week there are three IPOs slated to price - from Altus Pharmaceuticals, Inc., Iomai Corp. and SGX Pharmaceuticals, Inc. - and price talk on Valera Pharmaceuticals, Inc.'s IPO was put into circulation on Tuesday.

Altus, formerly a subsidiary of Vertex Pharmaceuticals Inc., is planning to sell 6 million shares pitched at $14 to $16 per share. The Cambridge, Mass.-based company is focused on chronic gastrointestinal and metabolic disorders. Iomai is set to sell 6.25 million shares proposed at $11 to $13 per share. The Gaithersburg, Md.-based company concentrates on developing and commercializing vaccines and immunostimulants delivered to the skin. SGX is offering 4 million shares talked to price at $11 to $13 per share with the San Diego-based company earmarking most of the proceeds for research and development in its primary drug candidate, Troxatyl, as a third-line treatment of acute myelogenous leukemia.

Arena to fatten pockets

Arena Pharmaceuticals, Inc. launched a follow-on offering that could fetch in the neighborhood of $160 million at Tuesday's stock price, which moved up from Friday contrary to the typical downward trend because of dilution after such deals are announced.

Later in the week, Arena plans to sell 8.5 million shares, with a 1.275 million share greenshoe available, via joint bookrunners CIBC World Markets Corp. and UBS Investment Bank.

Arena shares (Nasdaq: ARNA) on Tuesday were seen off by as much as 2.5% to $15.34 in pre-market action but opened up from there at $15.49. The stock settled the session higher by 3.3%, or 52 cents, at $16.26.

Traders attributed the uncharacteristic rise in the face of a follow-on deal to short covering as well as holders adding to positions or buying in after selling out late in 2005.

"Well the shorts are covering now, because the down trend's been broken. Big boys want in; it's as simple as that. You have to love the strength of this stock today," said a buyside trader. "I had figured on $14.25 per share for the [follow-on] offering, then $15 and now it looks even higher. It will be interesting to see what they get."

San Diego-based Arena focuses on drugs in the areas of metabolic, cardiovascular, inflammatory and central nervous system diseases. It has APD356 in clinical trials for obesity and APD125 in clinical trials for insomnia, with research collaborations with Ortho-McNeil Pharmaceutical, Inc. - a unit of Johnson & Johnson - and Merck & Co., Inc. for various products.

Arena panned in obesity race

There have been recent sellers of Arena shares, however, and some selling continued Tuesday, which one seller attributed to a recent article in "Smart Money" about what he phrased as "the pharmaceutical race for the next miracle diet pill" and a contest for which he considers Arena late to the starting line.

"The article mentions that sanofi is within a month to have their drug approved. This will of course put any future small-time drug into serious revenue question. With regard to Arena, if and it's still a big if, any potential percentage on royalties of their drug will be two if not three years behind before hitting the market," the buysider said.

"It will also not have in place the manufacturing capabilities and sales people to push sales. The initial drug to market from a huge drug company with a three-year head start just won't make any other a viable alternative. Sanofi seems to be the company of choice along these lines. The [follow-on] deal does answer the question of how they'll [Arena] manufacture - spend heavily.

"The problem is that until any approvals come through, which is minimum two to three years, like I said, no revenue will be coming in to support the dilution. Extra cash means nothing unless you have the return. Arena does not yet, yes not yet, have the return so it's all dilution at this point and will hurt."

Arena fans pile on after dip

While there have been some folks who have cashed out of the Arena Pharma story, a manager based in Vancouver, B.C., said he is holding for now while others added to positions on the brief downdraft in the stock early Tuesday.

"There probably was a fair amount of short covering going on with Arena shares this morning but there also were a lot of real buyers. I would have been a buyer today but it started rising so fast. So, I am holding what I have right now and nothing more," the biotech fund manager said.

"The [Arena] stock has tripled this year and [its] obesity drug is a long way from facing a lot of competition. Besides and otherwise, I think their pipeline is great. I have to wait for a pullback now, if that comes."

Some strong believers were buying anyway.

"I figure Arena left 2005 with around $125 million in the bank. This offering will bring the cash to around $250 million, at least. This is enough cash to get both the diet drug and the insomnia drug through phase 3 trials," said a Connecticut-based hedge fund source.

With the greenshoe, Arena could pocket nearly $160 million at Tuesday's price but the follow-on will likely price at some discount, he said. He is figuring the company will raise in the area of $150 million from the deal, but to be on the safe side said he was calculating it would bringing $125 million because the stock would likely pull back once the short covering died down.

"Arena currently has two un-partnered drugs progressing through clinical trials. We all knew these clinical trials would have to be paid for, and that would be done either by partnering or by raising cash with debt or equity. For short-term traders with a long position, this is bad news. I would prefer the company raise cash on its own now and retain ownership of profits in the future. Acceptable secondary equity financing probably wasn't an option earlier, so they had to partner two drugs with Merck and J&J, and we should be somewhat heartened that their banking consortium now sees enough value in Arena's independent programs to raise $125 million or so."

Acadia, Sepracor rise together

Acadia Pharmaceuticals, Inc. and Sepracor, Inc. both gained modestly Tuesday after announcing a second private placement of Acadia stock with collaborator Sepracor - this one for $10 million.

Acadia shares (Nasdaq: ACAD) added 3 cents, or 0.28%, to $10.74 while Sepracor shares (Nasdaq: SEPR) gained 31 cents, or 0.61%, to $52.59. Sepracor's zero-coupon convertible also was active Tuesday, trading at 96.25 with the stock at $52.25.

Sepracor bought 813,393 shares of Acadia stock at $12.29 each, a 25% premium to the 30-day trailing average closing price as of the one-year anniversary of the collaboration. The collaboration between the two companies was struck in January 2005 to develop new drug candidates from Acadia's pre-clinical muscarinic receptor program for central nervous system disorders. In April 2005, Acadia settled a $36 million private placement of 5,277,621 shares at $6.82125 each with Sepracor.

There has been a lot of market chatter about Sepracor being a takeover target, one convertible trader noted, but now it seems more people are buying the stock on its own merits.

"I think the players who were making the takeover bets are out of the picture for now," he said. "Of course, there's always some of that going on in the biotech sector, but Sepracor has a lot going on."

A week ago, San Diego-based Neurocrine Biosciences, Inc. announced that the FDA is delaying the action date for its insomnia drug indiplon, a prospective competitor to Sepracor's Lunesta, and several sellside analysts took the news as a positive event for Sepracor.

Neurocrine shares (Nasdaq: NBIX) on Tuesday lost $1.85, or 3.05%, to $59.14, with no news on the tape. The company is due to report 2005 earnings on Monday.

deCODE spikes up 7%

deCODE genetics, Inc. announced Tuesday that it has discovered major genetic risk factor for type 2 diabetes and its stock shot up, but sellside traders attributed the spike to short covering.

"The news is huge," said one buysider. "The diabetes market is phenomenally large."

In a scientific paper published Sunday, a team of scientists from Iceland-based deCODE and colleagues reported the discovery of the most significant genetic risk factor for type 2 diabetes found to date. The original finding was made in Iceland and was subsequently confirmed in studies in Denmark and the United States.

But a sellsider said, "My guess is that deCODE was getting short covered [heavily] this morning. That drove the price up. The shorts will cover the next days if they haven't already done so. This news is great but it has no real short-term effect. It only helps decode long term.

deCODE shares (Nasdaq: DCGN) gained 62 cents, or 6.61%, to close Tuesday at $10.

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