United Therapeutics climbs 9%; Vanda gains to another new high; Titan flat; Critical retreats by 8%

By Ronda Fears

Memphis, Oct. 24 - With a $210 million convertible issue on deck to price after Tuesday's close, traders said United Therapeutics Corp. stock was propelled by plans to buy back shares with some of the proceeds, but there was a fair amount of selling into the rally as earnings coming down the pike are not that impressive.

"In this particular case, I don't think this buyback is particularly good for the shareholder, as they are buying back shares with borrowed money," said a biotech fund manager in Boston.

"I'm not sorry I'm out of this one, though I wish I would have waited a few weeks. I don't trust them. I can't believe how diluted the stock has become through the granting and sale of vast quantities of stock options that these people feel entitled to, and which will have to be expensed at some point in time. That's when the s--t will hit the fan. At the same time I wouldn't short them either. They seem like they are willing to pull rabbits out of the hat when it suits their purposes."

United Therapeutics shares (Nasdaq: UTHR) gained $5.16 on the day, or 9.05%, to close at $62.17 with some 2.5 million shares traded versus the norm of 638,008 shares.

Typically, there would be a great deal of shorting in the stock on the convertible news, which would create a downdraft. Convertible market sources told Prospect News that the low coupon on the issue and the rally in the stock were big deterrents.

The $210 million of five-year convertible senior notes, slated to price after the market close Tuesday, were talked to yield 0% to 0.5% with an initial conversion premium of 20% to 24%. The issue will be non-callable with no puts, and provide holders with dividend and takeover protection.

"There's just no protection...this is no better than bat guano...the day comes that the stock goes down 20% on the day, the question is, are they going to stick? No," a sellside convertible bond trader said. "It's not going to justify for a crossover outright player to return. With the stock already up, the juice is out of it."

A convertible bond analyst in Connecticut noted that the deal seemed like a tough sell to both outright and hedge investors. There was also concern that there does not appear to be many news catalysts expected until a year later that could fuel volatility in the stock, the analyst said.

The Silver Spring, Md.-based company also said it anticipates that its third-quarter results will mirror its second-quarter earnings. Excluding one-time expenses, United Therapeutics posted 2006 second-quarter net income of $17.3 million, or 73 cents per share, on $40.2 million in revenue. The First Call analyst consensus was for EPS of 54 cents and $38.37 million in revenue.

United Therapeutics is scheduled to release third-quarter earnings Oct. 31.

The company said it will use $100 million to $125 million of proceeds to buy back its common stock and remaining proceeds to fund convertible note hedge and warrant transactions, and general purposes.

United Therapeutics, which is focused on cardiovascular, cancer and infectious diseases, said it will buy back as much as 4 million shares over the next two years.

Vanda seen outperforming

Elsewhere in the biotech group, earnings were typically weighing on sentiment, but there were a few other notable gainers, such as Vanda Pharmaceuticals, Inc., which hit the fourth straight new high on Tuesday.

The Rockville, Md., biotech doesn't report earnings until Nov. 2 and the only news on the tape was that it had tapped Human Genome Sciences Inc.'s chief executive and president H. Thomas Watkins to its board.

A sellside trader in the stock said there was chatter circulating Tuesday, however, that there were some big buyers for Vanda among its already prestigious lineup. He noted current heavyweight ownership in the stock by Rho Capital Parnters, Soros Funds and Citadel.

Vanda shares (Nasdaq: VNDA) gained 66 cents, or 5.47%, to settle Tuesday at $12.73.

The trader said there seemed to be some solid support for Vanda, but he sees more opportunity in the South San Francisco, Calif., biotech's partner for Iloperidone, which is in phase 3 trials for schizophrenia and bipolar disorder.

"Vanda seems to be the better play, but they don't seem to be able to hold a gain."

"I think Vanda will continue to outperform, but now that Vanda is moving, we can speculate that the Iloperidone results are coming in as expected, but that is just speculation."

Titan seen undervalued

Titan Pharmaceuticals, Inc. is Vanda's partner on Iloperidone, with a market cap one-third the size of Vanda's, the trader pointed out.

"That is quite a difference. Given Titan's royalty of 8% on the first $200 million in sales and 10% of sales over $200 million, I think the bottom line profit for both companies contributed by Iloperidone will be roughly the same. In other words, if Iloperidone hits $1 billion in sales, Titan will be paid basically $100 million in royalty with no expenses attached to it," the source said.

"Vanda will then have $900 million to pay off the other royalty to Novartis, which I think is close to 30%, then Vanda has manufacturing, distributing and marketing costs, so if they have a 15% net profit margin after royalties they too will earn about $100 million on their bottom line.

"So why does Vanda have three times the market cap of Titan? Does their pipeline deserve more value than Titan?"

He noted that Vanda's other products are in early stage development: VEC-162, in phase 3 trials for insomnia, and VSF-173, a compound for excessive daytime sleepiness. VEC-162 also is being studied in depression.

Titan concentrates on central nervous system disorders, cardiovascular disease and bone disease. In addition to the Vanda partnership, Titan is working with Schering AG for Spheramine in phase 2b trials for advanced Parkinson's. Titan also has Probuphine in phase 3 trials for opioid dependence, DITPA in phase 2 trials for congestive heart failure and hyperlipidemia and Gallium maltolate in phase 1 trials for bone related diseases, chronic bacterial infections and cancer.

"I would argue that Titan pipeline is at least equal in potential value to Vanda's pipeline. Therefore Titan deserves equal market cap value for Iloperidone," the sellsider said.

"Try to find a biotech with a partner, that is completing a confirmatory phase 3 trial, in a very large market opportunity like schizophrenia, basically a FAT 10% royalty, and their partner is made up of past executives from a large cap pharma like Novartis and still trades at a market cap less than $100 million. You won't be able to find one. I think Titan remains the most undervalued biotech out there."

Titan shares (Amex: TTP) ended unchanged Tuesday at $2.38 with 95,400 shares traded versus the norm of 112,188.

Critical Therapeutics retraces

With waning optimism of a merger deal for Critical Therapeutics Inc., traders said buyers from two weeks ago were beginning to back-peddle fast.

"There was a lot of hope, or a lot more hope I should say, two weeks ago," one sellside trader said. "Now, with earnings reports neck deep, it will be awhile probably, if anything ever really does materialize."

Critical Therapeutics shares (Nasdaq: CRTX) fell 22 cents, or 7.94%, to $2.55.

On Oct. 13, the Lexington, Mass., biotech announced top level board of director changes and a newly established Strategic Advisory Committee that were heartily cheered and interpreted as a strong signal that the company is open to asset sales or a merger.

That news had pushed the stock to $2.40, and it has gained from there, but the trader said some players were taking profits "while they can these days." The stock had suffered recently from setbacks with the company's anti-inflammatory drug CTI-01.

Critical Therapeutics focuses on respiratory and inflammatory diseases. In addition to CTI-01, it has collaborations with MedImmune, Inc. and Beckman Coulter, Inc., and owns worldwide rights to the asthma drug Zyflo, as well as other formulations of the drug.

The company is expected to report third-quarter results in early November, and onlookers are somewhat optimistic but many say the company will need funding in the next six months or so.

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