Connetics stock regains 3%; Anadys adds 8% on new exec, moves Idenix, Vertex up, too; Xoma rises 5%

By Ronda Fears

Memphis, July 11 - Biotech players were upbeat for the most part Tuesday but were somewhat disheartened by the lack of flow with the sector moving higher, albeit slightly, alongside the broader markets.

"You take what you can get," said a buyside market source in Boston. "It's summer, so a thin market doesn't really surprise you. There is still a lot of risk aversion in the biotech sector right now, but I have a pretty good feeling about how the summer is going to go. I will be glad to pick up some positions through the lull."

One example of nice volume Tuesday, and moving higher, was a small rebound in Connetics Corp. after crashing by more than 30% the day before as the company warned of missing its previous guidance and a cash offer to bondholders in order to buy time to file restated financial results. The company withdrew guidance altogether and also said that the restated results would be "material."

Connetics shares (Nasdaq: CNCT) on Tuesday added back 23 cents, or 2.96%, to settle the session at $7.99. Some 3 million shares traded, versus the norm of 706,122 shares.

Palo Alto, Calif.-based Connetics, which focuses on dermatology products, said it expects to update its business plan and have financials filed by August.

Analysts recommend caution

There were some plugs for Connetics shares on the idea that the stock was oversold, but wariness continued to surround the story.

"I feel good about selling out," said one buysider. "In fact, seeing the recommendation to buy today confirmed, in my mind, that I did the right thing."

In a report Tuesday, RBC Capital Markets analyst Ken Trbovich said Connetics shares appeared to be oversold even in a worst-case scenario based on the value of the company's assets, but admonished that the situation still involves a great deal of risk.

"There is no way to paint a pretty picture under the various scenarios suggested by yesterday's news; however, the stock appears to be oversold and should represent an attractive buying opportunity to deep value and special situation investors willing to ride out the current uncertainty," Trbovich said in the report.

"Some caution is warranted since it appears management continues to be less than forthcoming about its accounting issues and the circumstances that have resulted in the revised guidance."

RBC, in fact, upgraded Connetics stock to outperform from sector perform, with a speculative risk rating, but reduced its price target to $10 from $16.

Jefferies & Co. analyst David Windley has a hold rating on Connetics stock, saying that based on management's comments around wholesaler destocking, he does not foresee any revenue growth for the company this year. Beyond this year, he said growth in 2007 is contingent on several factors, so he was maintaining a hold on the stock and cutting his price target to $6.50.

Connetics convertibles see action

Connetics' convertible bonds came to life Tuesday in the wake of a $2.2 million initial cash payment offer, which would be followed by $6.9 million through the end of July with another $6.9 million possible if the company misses the self-imposed deadline to file its financials.

Trading in Connetics' 2% convertible due 2015 picked up, trading at 91.25 versus a stock price of $8.24 - mostly unchanged from the day before but about 4 points higher from the previous week's levels on an outright basis.

Connetics stock tumbled on Monday on the news, and a sellside convertible bond trader said, "That's exactly what you want to happen on converts. You make all your money when the stock goes down and the bonds hold up."

But the trader grumbled about lighter-than-expected volume in the convertible.

"That [the announcement] having happened yesterday, and no bonds traded I think is a reflection of how poor liquidity is right now. It's either lethargy or apathy."

Alnylam bounces nearly 4%

Alnylam Pharmaceuticals Inc. also saw a nice bounce Tuesday, but volume was low and players attributed the move to news from last week.

"Nice action, unfortunately on low volume, but it beat that sharp stick in the eye thing, which is the way it has felt over the past few days," said one market source.

Alnylam shares (Nasdaq: ALNY) gained 50 cents on the day, or 3.71%, to $13.99 with 185,632 shares traded versus the norm of 319,829 shares.

Another source on the buyside said the Merck news from last week was "powerful and confirming."

"It speaks of the acceleration in so-called proof of concept," the buysider said. "Clearly, Merck is moving to protect what it sees as very valuable future revenue streams, sooner rather than later. Novartis will likely try and match this action with an acceleration of its own. Make no mistake, this is very, very good news and given only a decent market in the coming week, I expect Alnylam to rally."

Last Thursday, Alnylam said that under a revised agreement Merck & Co. will take a more active role in developing RNAi compounds and return rights to an age-related macular degeneration drug - ALN-VEG01 - that is already in development. Under the new terms, the successful development and approval of three RNAi therapeutic products developed solely by Merck on a worldwide basis would result in milestone payments to Alnylam of more than $120 million.

Anadys spikes on new exec

A new chief medical officer at Anadys Pharmaceuticals, Inc., seen as a sign that the company's vaccine program is back on track, moved the stock sharply higher Tuesday.

San Diego-based Anadys said it has appointed James Freddo as chief medical officer to lead clinical operations, particularly its lead vaccine candidates ANA975, ANA380 and ANA773. He also will be a member of the Anadys-Novartis joint steering committee overseeing the development of ANA975 for hepatitis C and hepatitis B. ANA975 is being developed with Novartis AG. ANA380 is also for hepatitis B and ANA773 is a cancer vaccine.

Two weeks ago, the company suspended dosing in a phase 1b trial for ANA975 in hepatitis C patients after disappointing toxicology data in animal studies for the drug.

"This appointment just tells us that ANA975 is up and running and that it is not dead; far from it. With this appointment, we know that the programs will go on, and hopefully will be successful. This guy is loaded with clinical experience and should be able to revitalize the ANA programs," said a buyside market source. "This is the cheapest stock of the whole market."

A trader said that beyond the news of the day there was plenty of fundamental enthusiasm for a buy.

"Anadys has an $85.5 million market cap, $99.76 million in cash. It's crazy, man, just crazy," said a sellside trader. "This company is trading way below its cash value of $3.50. This makes no sense. There will be a nice run-up once the selling subsides."

Idenix up 13%, Vertex adds 2%

The Anadys news revived interest in other hepatitis vaccine names, as well, namely Idenix Pharmaceuticals, Inc. and Vertex Pharmaceuticals, Inc., which both rode Anadys' coattails higher.

Idenix shares (Nasdaq: IDIX) gained $1.21 on the day, or 13.17%, to close out at $10.40.

Vertex shares (Nasdaq: VRTX) added 62 cents, or 1.76%, to end at $35.84.

"One thing behind Idenix's strength is that Novartis owns 55% of the company," said a buyside analyst. "And rumor has it that Novartis will eventually buy the rest of Idenix ($14 price tag cited), especially considering that hepatitis C rival Anadys recently suspended its trial and Johnson & Johnson acquired the rights to the last good potential hepatitis drug from Vertex."

Xoma gains on government pact

Xoma Ltd. moved higher Tuesday, as well, after announcing it has expanded its focus on work with the U.S. government.

Berkeley, Calif.-based Xoma said it has expanded its effort to discover, develop and manufacture therapeutic antibodies and other proteins for the U.S. government. Also, the company announced the appointment of Patrick J. Scannon to lead this effort.

Xoma shares (Nasdaq: XOMA) rose 8 cents, or 4.79%, to $1.75.

At least one player thought the gain in Xoma stock was pretty amazing given the lack of information provided by the company.

"Xoma didn't say whether it had gotten any new paying contract from the government, nor did it say how the change in focus might affect its other business," the buysider said. "The dollar amount news will come out when they file with the SEC [Securities and Exchange Commission], thankfully."

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