Pfizer, other Big Pharmas zoom; generic names Barr, Teva plunge; Cubist, Rigel, Xoma, Lexicon off

By Ronda Fears

Nashville, Dec. 19 - Shares of Pfizer, Inc. and other Big Pharma stocks rose sharply Monday on Pfizer's court win in the patent dispute over its blockbuster drug, cholesterol-buster Lipitor. On the flipside, generic drugmakers like Barr Pharmaceuticals, Inc. and Teva Pharmaceutical Industries Ltd. fell on the news.

Analysts said Pfizer's patent win against Indian drug maker Ranbaxy Laboratories Ltd. was a positive sign for the entire drug sector. The court decision allows Pfizer to maintain patent protection on Lipitor, which has annual sales of about $12 billion, through June 2011. Merck & Co., Inc., Schering-Plough Corp. and Bristol-Myers Squibb Co. all rose on the news, as they market cholesterol drugs and face similar challenges.

Pfizer and Merck were the biggest gainers among Big Pharma names with Pfizer shares adding $1.74 on the day, or 7.71%, to $24.32 and Merck up $2.24, or 7.5%, to $32.25.

Meanwhile, deal flow was expected to be very light what with the holidays coming up. There was a modest sized PIPE transaction on the tape Monday, however, and more scuttlebutt on mergers and acquisitions.

On the M&A front, Novartis AG said it was considering a counter bid to Crucell NV's $450 million offer for Swiss vaccine maker Berna Biotech NV, thinking of a combination of it with Chiron Corp. Berna shares surged on the Xetra by 15.5%, or CHF 1.30, to CHF 9.65. Novartis gained 76 cents, or 1.5%, to $52.65.

San Diego-based cancer drug researcher Inovio Biomedical Corp. announced a $15.8 million PIPE transaction with institutional investors and Merck, which sent Inovio's stock up 14 cents, or 6%, to $2.49.

The major biotech indexes, however, were significantly lower under selling pressure.

Xoma plunges nearly 8%

Berkeley, Calif.-based Xoma Ltd. dropped nearly 8% Monday on short selling in the face of an announcement from the company that it planned to propose an exchange offer for its currently outstanding 6.50% convertible senior notes due 2012, plus issue $10 million more of the exchange notes.

"They need the money. Raptiva [its Psoriasis treatment] sales are probably not very good," said a trader on the sellside of the market.

Xoma shares dropped 14 cents on the day, or 7.73%, to $1.67.

"Aside from the short sellers involved in the convertible deal, it turned off everyone else because the company had indicated it would not be needing any more capital until 2008 and now they are back in the cash markets," the trader said.

For the past two or three months it's been oscillating between $1.50 and $1.90 on a variety of "noise," one buysider commented. "Maybe the recent 'big buyer' that the traders were talking about will come back in at these 'bargain' prices. I'm out one way or the other."

In the proposed exchange offer, Xoma said it would issue $60 million of new 6.5% convertible SNAPs due 2012 for up to all of the $60 million of its currently outstanding 6.5% convertible senior notes due 2012 plus offer another $10 million of the new convertible SNAPs.

Xoma offer a snap

While the sellsider said it was difficult to gauge the reception of Xoma's offer, it seemed that the reaction in the stock suggested holders were going to participate in a big way.

"Looks to me like the primary difference between the existing and new notes are the more flexible options that Xoma has to convert the notes to shares on the basis of stock price appreciation, and, of course, the additional $10 million just to tide them over," the sellsider said. "I've not read it closely but I think the price for the convertible is about 6 or 7 points above Friday's close."

The trader said he personally was bullish on the Xoma story as a potential takeover target if nothing else, in light of the Amgen, Inc. buyout of Abgenix, Inc. last week for $2.2 billion plus the assumption of debt.

"Well, it's another $10 million worth of stock likely to be issued and the arbitrage for the notes affecting the stock price," he said. "It's not a matter of gun-shy stockholders selling off. It's just the way that this sort of financing is likely to affect stock price."

The buysider who has exited the Xoma story, however, argued that "if current bond holders take the bait the lowest Xoma gives shares up is $1.87 no matter what the share price. So, there's no way to play this baby. Whoever made this SNAP is a genius. Xoma had to pay interest till 2008 anyway if there was no voluntary conversion. Four years of interest is a good chunk of cheese."

Rigel routed further by 4%

Rigel Pharmaceuticals, Inc. continued to decline in the wake of recent ill-boding clinical trial results last week for its allergy drug. The South San Francisco-based company hosted an analyst day last week but has steadily declined since then.

The stock Monday lost another 39 cents, or 4.42%, to $8.43.

Rigel has a fairly broad research effort with programs in the works to treat allergy, asthma, rheumatoid arthritis and hepatitis C, but a sellside market source said that because its pipeline is in the early stages of trials, with its most advanced drug entering phase 2 in the first half of 2006, and the lack of news forthcoming in the immediate future, more investors are bailing out.

But the sellsider noted that there was "decent" buying on the decline Monday, quipping that some of the bigger players were "Stepping over dollars to pick up pennies." Moreover, he thought the sell-off was overdone and was looking for a rebound soon.

On Dec. 1, Rigel announced that its allergy drug failed in a mid-stage clinical trial and the company said it would not likely pursue the drug but, instead, focus on other candidates in its pipeline.

In July, Rigel fetched $75.7 in gross proceeds with a follow-on offering of an upsized 3.65 million shares of common stock at $20.75 per share. The news earlier this month sent the stock to a new 52-week low of $7.43.

Lexicon deal fate debated

Lexicon Genetics, Inc. was weaker Monday as players contemplated whether a capital-raising effort would be forthcoming, a trader said. The stock ended off by 6 cents, or 1.6%, at $3.70.

"They have a shelf of $150 million from over a year ago. With the influx of collaboration cash, it is gathering dust. Should several candidates move into later trials at once it may be activated, in my opinion," the trader said.

But, he added, the likelihood of a new deal could probably be argued either way.

"Lexicon also borrowed $4 million from Genentech at 8%, which can be paid back at anytime through stock or cash. Genentech just deferred payment until the end of 2006. The other debt is a mortgage," he said.

"They have a base estimated income of about $56 million in already contracted income for next year, with new orders from the NIH [National Institute of Health] not counted, nor any license renewal fees, nor milestones, or any new contracts or collaborations, nor out-licensing; all of which are likely. Lexicon is in better shape now than when the [stock] price was much higher."

The Woodlands, Texas-based Lexicon announced Dec. 1 it reached a deal with biotech giant Genentech, Inc. to expand their alliance into researching and developing biologic drugs, under which Lexicon will receive $25 million upfront and in milestone payments plus research funding for three years. Genentech also has an option to develop and commercialize drugs under a cost and profit sharing arrangement, with Lexicon having some conditional rights to co-promote drugs on a worldwide basis.

Cubist off amid clouded view

A trader characterized the slide in Cubist Pharmaceuticals, Inc. as a typical sell-on-the-news event, namely data on its antibiotic Cubicin last week, noting that analysts were at odds over whether the data was positive or not.

Cubist shares Monday dropped $1.67, or 7.5%, to $20.56.

"This is pretty typical with the small- to mid-cap biotechs [with] news of the trial results, and people sell on the news to take profits, especially this time of year," said a sellside equity trader.

JMP Securities reiterated a strong buy on the stock, saying that the news on a phase 3 trial for Cubicin from last week was "impressive and should lead to an expanded label." JMP expects a supplemental New Drug Application approval by late March 24 and Cubicin approval in the European Union sometime in the first half of 2006.

But The Associated Press reported Monday that a Morgan Stanley analyst cautioned that resistance to the antibiotic could drag sales below Wall Street expectations for Cubist over the next few years as competition grows with new drugs anticipated in 2006 and 2007.

Cubist said Friday that a phase 3 trial of Cubicin showed it works as well as current treatments against staph infections of the bloodstream and heart. The stock declined Friday and Cubist chief executive Michael Bonney attributed it to a tendency of investors to take profits once anticipated data has been announced.

Bonney said the most significant findings of the study included a 40% higher success rate in the subgroup of patients with staph resistant to the methicillin antibiotic, a category of staph known as "superbug." Staph that is resistant to existing antibiotics has become increasingly common, he added.

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