Pharmaxis off on stock dilution; Patheon refinancing bank paper; Serono up on sale news

By Ronda Fears

Nashville, Nov. 8 - Foreign biotech names were spotlighted in primary market activity with Australia-based Pharmaxis Ltd. sinking after a spot sale of stock and Canada-based Patheon Inc. set to launch a new bank facility later this week.

Pharmaxis, focused on respiratory products, priced a follow-on offering of 1.3 million American Depository Shares at $24.16 per share, discounted from Monday's close of $25.60, plus 19.9 million ordinary shares at A$2.20, discounted from Monday's close of A$2.30. In the United States, the stock dropped $1.44, or 5.63%, to close smack with the offering price of $24.16. In Australia, the stock was unchanged at A$2.30.

Vaccine maker Patheon, which among other things makes a treatment for overdose of rattlesnake bite serum, is scheduled to launch a $290 million credit facility with a U.S. bank meeting on Thursday, following a Canadian bank meeting that was on Nov. 4. The facility consists of a $75 million revolver talked at Libor plus 225 basis points, $65 million five-year term A loan talked at Libor plus 225 bps and $150 million six-year term B loan talked at Libor plus 225 to 250 bps.

Patheon, based in Mississauga, Ont., plans to use the funds to refinance existing bank debt, including that associated with the Mova Pharmaceutical Corp. acquisition in late-2004. Patheon shares on Tuesday gained C$0.08, or 1.16%, to C$6.95 on the Toronto Stock Exchange.

In U.S. trading circles, earnings continued to create opportunities for volatility players as well as merger and acquisition chatter.

Israel-based Teva Pharmaceutical Industries Ltd. added 64 cents, or 1.67%, to $38.99 after posting higher profits. Teva, which is acquiring peer generic drugmaker Ivax Corp., posted a net income of $267.1 million, or 40 cents a share, compared with $251.5 million, or 37 cents a share, for the same quarter last year. Revenue jumped to $1.32 billion from $1.25 billion in 2004. The Ivax transaction is expected to be completed in late-2005 or early 2006.

Serono shopping for suitors

Serono SA confirmed Tuesday a Wall Street Journal article that it has indeed retained Goldman Sachs & Co. Inc. to explore strategic alternatives such as a sale of the company. The Swiss drugmaker's stock rocketed upward in the United States, gaining $1.53 on the day, or 9.31%, to $17.97.

Geneva-based Serono said there were no assurances that any transaction will be consummated, however, and stressed it would make no further comment.

A seller on the spike said, "It's a desperate attempt for one last pump. This company is hitting the skids fast and, in my opinion, is run like a mafia organization." If a buyer is not located, he said, "One thing is for sure, they will close down some operations soon. The cuts are on the way." Thus, he was a seller.

Serono, which makes a variety of biologic drugs, is 62% owned by the Bertarelli family.

"I predict Pfizer will be the first company to take a look, but will they want Serono?" posed a buyer of Serono shares. "But that's been going around for over a week now, the Pfizer speculation. Talk about a buyout in general has been going around for a long time now. It seems more grounded now, though."

Momenta up as takeover play

Momenta Pharmaceuticals, Inc. adopted a shareholder rights plan, commonly referred to as a poison pill, and as would be expected, it immediately sparked takeover buzz.

"There is probably some activity that suggests that someone is trying to buy out Momenta," said a sellside trader. "The stock was in accumulation."

Momenta shares added 21 cents on the day, or 1.01%, to close at $21.02.

Cambridge, Mass.-based Momenta engages in structural analysis and design of complex sugars for the development of improved versions of existing drugs, the development of novel drugs, and the discovery of new biological processes. The company's products include M-Enoxaparin, a technology-enabled generic version of Lovenox and a low molecular weight heparin, which is used to for deep vein thrombosis and acute coronary syndromes.

The company specifically stated in a news release Tuesday that the rights agreement "was not adopted in response to any current third-party attempt to acquire the company," but that did not thwart the market's reaction.

"I understand the stock and its volatility. But a series of investor conferences that followed a good earnings conference call and is now followed by a poison pill provision suggest that the company knows more than it is telling us," said a buyside analyst.

"Momenta has enviable technologies and the few analysts who glimpsed at those technologies (again, Joe Public were not privy to that) of sugar sequencing have been smitten by it. Now we know that Momenta is valuable enough (even without any approved drugs) that the BOD decides to 'take charge' by adopting a poison pill provision."

Momenta seen with partner, too

The buysider continued, saying that he was a fan of Momenta in any event, as he expects at least a partnership agreement will surface for the company soon.

"I am suspicious that the company maintained that 'they have a lot of hurdles to overcome' with the M-Enoxaparin filing [in a conference call]. Perhaps there are hurdles and there must be, but why mention obvious hurdles. I think [an] M-Enoxaparin decision is coming sooner than expected. The company has demonstrated a coziness with analysts and tends to avoid giving out information in public," he said.

"The way we could take advantage of this is to be contrarian - i.e. buy now to take advantage of low price to be rewarded sooner than later. You never know, Eyetech Pharmaceuticals Inc. [a] adopted poison pill after they were beaten down by Lucentis hype and they were bought out soon after. On the conference call, they [Momenta] talked about partnership and partnership is what I really see soon."

Alpharma swings on volatility

Alpharma, Inc. shares were halted briefly early Tuesday due to an imbalance, traders said, and had been halted in after-hours trading late Monday as its earnings hit the tape. The stock was up by as much as 7% before sinking and finally ending Tuesday off by 4%.

After opening at $29.20, the stock went as high as $29.90 before retracing the gains. It traded as far down as $25.23 but came off the low to end Tuesday at $26.15, off $1.09 on the day, or 4%.

"I am glad I got out of this with just a small loss this morning," said a buysider in Atlanta.

Another in New York said, "Earnings were stellar with no garbage to distort them. But guidance sucked, so it should continue in a vicious sell-off."

After Monday's close, the Fort Lee, N.J.-based specialty drugmaker reported third-quarter net income of $17.8 million, or 34 cents per share, compared with a year-ago loss of $4.7 million, or 9 cents per share. Revenue gained 17% to $349.1 million from $279.5 million.

Sellside traders, though, said there were lots of hedge funds playing the volatility in Alpharma.

Abgenix up, ImClone off

Contrary to a sellside recommendation to the opposite, Abgenix, Inc. dropped Tuesday while Imclone Systems Inc. gained ground. Merrill Lynch was suggesting a buy on Abgenix coupled with a sell for Imclone to capture the value gap.

Abgenix lost 30 cents on the day, or 2.27%, to close at $12.93.

Imclone gained 17 cents on the day, or 0.53%, to end at $32.37.

Merrill Lynch analyst Eric Ende said the valuation gap is not justified. ImClone is trading at a 127% premium and has a $1.5 billion larger market cap than Abgenix but added the gap is not justified because Abgenix is likely to have a significant marketing advantage for panitumumab.

Despite being second to market, Ende said panitumumab - jointly developed by Abgenix and Amgen, Inc. - will have a significant marketing advantage versus Imclone's Erbitux, with potential to capture more than half the colorectal cancer market.

Imclone has more cash, greater incoming milestone payments and is profitable, Ende conceded, but the analyst said his estimate of incremental value for ImClone of $685 million "still isn't enough to explain the valuation discrepancy."

Vical up on Merck payment

Vical, Inc. took off Tuesday after reporting that it has received a $1 million payment from Merck & Co. Inc. to start a cancer DNA vaccine trial. The stock soared by 7.17%, adding 40 cents on the day to close at $5.98.

The San Diego-based vaccine maker said the milestone payment from Merck would go toward the initiation of a phase I clinical trial of a DNA cancer vaccine based on Vical's DNA gene delivery technology using plasmid DNA encoding human epidermal growth factor receptor 2 and carcinoembryonic antigen. The phase I trial, conducted by Merck, will evaluate the safety, tolerability and immunogenicity of the vaccine.

"While I am enjoying today's gains, they pale in comparison to where I believe this stock will be within two years," said a trader. "The U.S. Government has invested in Vical and the company has numerous projects in the pipeline, which should eventually generate significant revenue. The bottom line is there are not enough vaccine stocks in the market right now, so whatever is out there is going up on extremely high demand."

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