Neurocrine, DOV dive; Novavax, Generex dive amid noise of exits; Adventrx slips modestly on deal

By Ronda Fears

Memphis, May 16 - The biotech sector resumed a downward path Tuesday as Neurocrine Biosciences, Inc. and DOV Pharmaceuticals, Inc. plunged lower and Pfizer, Inc. softened on news a Food and Drug Administration decision weakened the competitive prospects for the insomnia drug indiplon.

"It was mayhem," said a sellside trader. "I mean a potential $1 billion drug went to something like $100 million by some estimates. That is huge. It was a total disaster."

The news, however, boosted other sleeping pill makers like Sepracor, Inc., Sanofi-Aventis AS and King Pharmaceuticals, Inc.

Elsewhere, there were big declines in biodefense stories Novavax, Inc. and Generex Biotechnology Corp. that traders attributed to chatter that a big hedge fund was bailing out of both names.

"There are several of the same funds invested in Novavax and Generex Biotech. Both stocks were hard hit today because there was a rumor that these funds took profits," said a sellside biotech trader at one of the bulge bracket firms.

"I never heard any confirmation of that but it would make sense that they were selling down to bring their short positions into profit."

Novavax shares (Nasdaq: NVAX) lost 55 cents on the day, or 10.48%, to settle at $4.70. Generex shares (Nasdaq: GNBT) dropped 23 cents, or 10.9%, to close at $1.88.

The big news of the day, however, was regarding indiplon.

Neurocrine shares plunge 62%

The FDA decided to delay approval of the new sleep aid indiplon while determining that a higher dosage formulation of the drug is not approvable. Pfizer is the marketer of the drug owned by Neurocrine, which bought it from Wyeth in a cash-and-stock deal valued at $95 million in 2004. Indiplon is licensed from original developer DOV Pharma, which still is set to receive royalties on any sales of the drug.

Neurocrine shares (Nasdaq: NBIX) plummeted $33.87, or 62%, to $20.76 on the news, with a whopping 46.7 million shares moved versus the norm of 765,887 shares.

"It was a bloodbath," said one trader in the stock. "Not much else you can say about it."

At the crux of the issue, the FDA issued an approvable letter for indiplon immediate release capsules but a non-approvable for the more important long-acting capsules, which were supposed to be competitive with Sepracor's Lunesta and Sanofi-Aventis' Ambien CR. With that limitation, onlookers expect sales of indiplon would be far less than has been factored into the stock.

Merrill Lynch analysts are now saying the drug will likely have limited annual sales of no more than $100 million to $200 million, which would put Neurocrine stock worth about $15 to $20 a share.

Neurocrine said it will be discussing with the FDA what steps can be taken to get indiplon approved for both indications.

Analyst: Pfizer may return drug

One of perhaps the biggest dangers as a result of the situation, analysts said, is that Pfizer may boot indiplon back to Neurocrine, and without a Big Pharma sales team it could flounder.

Merrill Lynch analyst Eric Ende said in a report Tuesday that he estimates Pfizer needs to make about $200 million to $250 million in annual sales of indiplon to break even since it will pay a 30% royalty on sales and still needs to sell and market the drug.

"Without the competitive sleep maintenance dose, the drug will be less competitive and promotion spending will be reduced," Ende said in the report. "Thus, we do not believe the drug will be heavily marketed and may even be returned to Neurocrine."

Pfizer shares (NYSE: PFE) were only minimally impacted by the news, with the stock trading lower during the session but closing up by a penny at $24.90.

Without a sleep maintenance label, indiplon will compete head-to-head with Sanofi-Aventis' Ambien when it goes generic by the end of 2006, the analyst said, and it is likely to look more like King Pharma's Sonata, which has less than $100 million in annual sales.

Thus, Merrill puts fair value on Neurocrine shares at about $15 to $20 - $8 to $13 for the indiplon royalty based on sales of about $100 million to $200 million, plus another $7 for its full pipeline.

DOV may tap markets now

While Neurocrine would split the 30% royalty from Pfizer on indiplon sales with just 3.5% going to DOV Pharma, the latter took almost as big a hit on the news Tuesday. Moreover, market sources said the blow to DOV Pharma's revenue stream may mean that it will have to revisit the capital markets soon to fund its remaining pipeline.

"This is nothing less than a disaster for DOV. Margin calls will probably push it down again tomorrow, too," said one trader. "The big deal is that they need the money, as small as it was, from the indiplon sales, so the analysts are now saying they may be back in the market looking to raise cash. There's more pressure."

DOV Pharma shares (Nasdaq: DOVP) fell $4.03, or 57.16%, to $3.02, also on heavy volume with 11 million shares traded versus the norm of 685,856 shares.

DOV Pharma receives a 3.5% royalty on sales of indiplon, which provided support for the stock in light of other recent pipeline failures, Merrill Lynch analyst David Munno noted in a report Tuesday. With new estimates for indiplon sales at $100 million to $200 million, rather than the $1 billion peak previously forecast, the royalty stream to DOV Pharma would drop to around $25 million to $50 million from a prior expectation of something more like $225 million.

Thus, Munno said DOV Pharma stock could now be worth about $2 to $3.

DOV Pharma just a couple of weeks ago, in late April, took a huge blow on news that trials for its lead drug candidate bicifadine, for lower back pain, had failed, with the stock losing nearly half its value on that news.

Hackensack, N.J.-based DOV Pharma has been reviewing those phase 3 trials for bicifadine in lower back pain and also plans to pursue phase 2 trials of bicifadine in osteoarthritis and neuropathic pain.

Rivals rise on indiplon setback

Rising on the indiplon news, however, were Sepracor, King Pharmaceuticals and Sanofi-Aventis, all of which market rival insomnia medications.

"This is probably the best news for Sepracor because that is the newest sleeping pill out there," said a trader in the name. "They have ads splashed all over the place; the marketing costs could get let up a little now."

The market seemed to agree with the trader, as Sepracor's shares gained more than the other two. Sepracor makes the recently launched Lunesta. Sepracor shares (Nasdaq: SEPR) added $6.28, or 14.01%, to $51.10 on heavy volume with 18.35 million shares traded versus the norm of 2.37 million shares.

Sanofi-Aventis sells Ambien. Sanofi-Aventis shares (NYSE: SNY) gained $1.69, or 3.58%, to $48.90.

King Pharma makes Sonata. King Pharma shares (NYSE: KG) rose 32 cents, or 1.76%, to $18.48.

Distressed names getting eyed

A buyside market source based in Florida said that the news and similar setbacks in several biotech stories recently have made the stocks worth looking at, depending on one's mandate in fund management.

"For those who like distressed type situations, and have the right mandate, there are several biotechs, including Neurocrine now, that have fallen to a point where you could make a killing if you do your due diligence," the buysider said.

"Neurocrine is down more than 60% today on the indiplon news. The company has a pipeline of medium quality and $240 million or so in cash. It might continue to go on down in this panic, but we were piling in in the last few minutes of today's trading."

Discovery Laboratories, Inc. and Threshold Pharmaceuticals, Inc. are two more he said he was buying on recent cave-ins.

After Discovery Labs stock lost some 70% of its value since late March on an FDA delay for its respiratory drug Surfaxin, the company earlier this month cut its workforce by 34% and launched a reorganization of its corporate management to cut costs. The company continues to seek regulatory approval for Surfaxin, which in part hinges on manufacturing issues.

Discovery Labs shares (Nasdaq: DSCO) on Tuesday ended off 7 cents, or 2.69%, to settle at $2.53.

Threshold shares have dropped nearly 80% since Friday when the FDA put a partial hold on late-stage clinical trials for its drug TH-070, a treatment for enlarged prostate, because of safety concerns. Threshold shares (Nasdaq: THLD) added 3½ cents Tuesday, or 1.04%, to close at $3.40.

"It isn't too hard of a trade, but there are lots of funds that cannot do this because of their internal controls," the buysider said. "These are three which I think there is a rebound coming. Lots of biotechs get beaten up and make for a great day for me down the road sometime."

Adventrx slips 2% on new deal

Adventrx Pharmaceuticals, Inc. announced Tuesday it plans to sell 15.5 million common shares in a follow-on offering via bookrunner UBS Investment Bank.

"This news is TREMENDOUS!" said a buyside source in Atlanta. "$4.00 per share from the new offering would be a reasonable guess, I think. Having UBS on board is fantastic, a big plus, and they will certainly cover the company going forward. This is as good as it gets."

Adventrix shares (Amex: ANX) dropped 11 cents on the day, or 2.37%, to settle Tuesday at $4.53.

San Diego-based Adventrx said net proceeds, estimated at $81 million if the greenshoe is fully exercised and based on an offering price of $4.84 a share, will be used to fund preclinical and clinical testing and other product developments as well as possibly for commercial launch preparation.

Adventrx primarily focuses on technologies for anticancer and antiviral treatments that address drug metabolism, toxicity, bioavailability, or resistance problems. Its lead product is CoFactor, a folate-based 5-FU chemotherapy biomodulator drug for metastatic colorectal cancer, which is in phase 2 development in Europe, phase 2b in Europe and India and phase 3 in the United States.

Enzon drops 6% on convertible

Elsewhere of note, Enzon Pharmaceuticals, Inc. shares slipped 6% Tuesday on news of a new convertible with proceeds earmarked to take out its older 4.5% convertible bonds, but equity players were pleased with the development, noting much of the stock move was most likely convertible hedge funds setting up the stock to participate in the new issue.

The new seven-year convertible issue, for $175 million, was talked to price with a coupon of 3.5% to 4.0% and initial conversion premium of 25% to 30% via bookrunner Goldman Sachs & Co. It will be non-callable for three years, then with a provisional call threshold of 140%. The deal was slated to price after Wednesday's market close.

Enzon shares (Nasdaq: ENZN) ended Tuesday off by 53 cents, or 6.22%, at $7.99.

"It is good that they are addressing the 2008 convert. If they chose they could retire all of the 2008 convert with the proceeds of the new convert along with cash on hand. I don't think they will use the cash for that purpose but they could," said an equity buyside source in Boston. "For today, anyway, the common is down, but in the long run it should be a positive.

"With the company doing better, it's much cheaper doing a convert than straight debt. I think it is smart to start addressing this now. Unfortunately, the new conversion price will probably be around $11. I guess if it gets to $11 it will be good for all. Seems like a sweet deal for the new convert holders."

In connection with the offering, Enzon said Franklin Advisors Inc. has agreed to buy $75 million of the notes and subject to completion of the offering it agreed to sell $128 million of its 2008 convertible notes to Enzon, the biopharmaceutical company said in a news release.

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