Vertex gains; SGX debuts higher; Angiotech up; Alnylam off; DUSA dives; Endo slides; Isis bounces

By Ronda Fears

Memphis, Feb. 1 - Vertex Pharmaceuticals, Inc. was a name of interest Wednesday in what traders are calling an ongoing rotation taking place within the biotech space, as the stock flirted with a new 52-week high a week in advance of its earnings report.

"It seems the rotation is still going on, to some extent, from what we are seeing today," said a sellside biotech stock trader. "It's the first of the month, so that accounts for some of it. Also, I think there was some people sitting on the sidelines in January, holding on to cash until a lot of earnings were out." He added, however, that trading volumes are remaining high, which makes it "a traders market right now."

Vertex was mentioned by the trader as a story particularly catching the eyes of players Wednesday, noting the stock tested and held above its previous 52-week high of $36.25 until just the final minutes of trade. Vertex shares (Nasdaq: VRTX) settled the day up by 33 cents, or 0.92%, at $36.05.

Cambridge, Mass.-based Vertex is scheduled to report fourth-quarter and 2005 results on Feb. 7, and analysts are looking for updates on data from the phase 2 study for VX-702 in rheumatoid arthritis, and clarity on the clinical development plans of VX-950, a protease inhibitor for hepatitis C, including the design of phase 2 studies.

Merrill Lynch & Co. analyst Hari Sambasivam though was holding to a neutral rating on Vertex stock, saying in a report Wednesday, "We would look to review our rating pending data disclosure including longer-term data for VX-950, added clarity on the regulatory and development timelines for VX-950 and VX-702, and additional data from competitors, including Schering-Plough's HCV protease inhibitor, and Idenix's valopicitabine."

Some sell Vertex into rally

"It was right down to the wire," the sellside trader said. "It looked like it was going to hold up for a new high, but then greed set in [resulting in profit taking] and it didn't make it."

Indeed some Vertex holders, however, were selling into the strength in the stock, thinking somewhat along the lines of the Merrill analyst.

"I think VX-750 has a good chance of approval and great things from the current clinical data. I'm not convinced, however, that this is the best entry point into the stock," said a buyside analyst, referring to new Vertex buyers on Wednesday.

"Many companies like Gilead Sciences and Amylin had development products that were hyped prior to approval. After approval, the stock went down because, well, it was hyped and high expectations are built into the price. The strength of product sales after approval then propelled the stocks to quadruple and double, respectively.

"Anyway, I feel if you believe in the product, buying after approval may be better than chasing the pre-approval pop. Much risk is gone after approval because you can base your valuation on real revenue. Rather, I see it as a sell at this point, into the rally."

The majority of activity during the session, though, was buying, traders said.

"I think the price of Vertex will be much higher than now once VX-950 is approved. The market is a multi billion dollar market for HCV [hepatitis C virus]," said a sellside trader. "If you look at the percentage of revenue interferon was and is for Schering-Plough relative to its market capitalization, you will get a good idea of the upside of Vertex. Furthermore, VX-702 has as much potential for Vertex as does VX-950."

SGX Pharma steady on debut

SGX Pharmaceuticals, Inc. stock traded up on its debut Wednesday but ended the day right back where it started. After Tuesday's close, the San Diego-based biotech priced its IPO of 4 million shares at $6.00 - at the low end of a reduced price range of $6 to $7, which had been lowered from $7 to $8 a share, which had been slashed from the original price range of $11 to $13.

In the immediate aftermarket, SGX shares opened at $6.05 and traded up to $6.30 but eased back to settle the day at $6.00, with 1.22 million shares changing hands.

SGX ended up netting $20.3 million in proceeds, which it said would mostly be used for research and development. Its primary drug candidate, Troxatyl, is in a phase 2 and 3 clinical trials for the third-line treatment of acute myelogenous leukemia, a blood cancer.

Via the IPO, Atlas Venture Associates cut its stake to 17.5% from 22.85% and BA Venture Partners trimmed its position to 17.93% from 22.61%. But the company said that Atlas and BA have expressed an interest in buying more stock following the IPO, along with Sprout Capital VIII, LP, which had a post-IPO stake of 9.91%.

Also, the company said that as a result of the IPO, the $6 million December 2004 convertible note held by Millennium Pharmaceuticals, Inc. will automatically convert into 1 million shares of common stock, and, thus, Millennium will have a 7.04% equity stake in SGX.

Endo pain seen short term

Endo Pharmaceuticals Holdings, Inc. suffered a blow Wednesday as many players bailed out of the story on news that an appeals court had reversed a previous decision that its oxycodone version of Purdue Pharmaceuticals Inc.'s controversial painkiller OxyContin was not in violation of Purdue patents.

Analysts referred to the ruling as an unprecedented development, and Endo shares plunged, although the company said it "intends to vigorously pursue its position that Purdue's patents are unenforceable."

Endo shares (Nasdaq: ENDP) fell $1.98, or 6.9%, to $26.72.

Endo last June began selling oxycodone after a U.S. District Court found Purdue liable for inequitable conduct and ruled Purdue's patent unenforceable. Now, however, on appeal by Purdue, a federal appeals court that had affirmed the lower court decision reversed itself and vacated the previous decision, remanding the case back to the circuit court for reconsideration.

Jefferies & Co. analyst David Windley estimates a 30 cent impact on 2006 earnings per share from the loss of oxycodone ER. But, he said the sell-off in the stock appears to have fully priced in this event.

"While certainly a negative development in the short-term, Endo's late stage pipeline should help soften the impact," Windley said in a report Wednesday, in which he recommends buying Endo shares with a price target of $33.50.

Endo has Oxymorphone ER and IR, the analyst said, which provide the closest new revenue opportunity. Strong clinical data suggests timely FDA approval and a launch in the second half of this year, he said, noting that Endo management has not yet included these two products in its guidance. Endo also plans to release results from a phase 3 study on Frova for menstrually related migraine in the first half of this year.

Angiotech up on short covering

Angiotech Pharmaceuticals, Inc. announced Wednesday that it has agreed to acquire privately held American Medical Instruments Holdings, Inc., a medical devices concern, for $785 million in cash. In response, Angiotech shares shot up more than 11%, which many traders attributed largely to short covering as a result of the surprise.

"What a nice surprise. This acquisition came totally out of left field," said a buyside source at a hedge fund, who added that short covering accounted for a fair portion of the rise in Angiotech shares Wednesday and which caught many in his strategy off guard.

"Talk about being wrong, just yesterday (!!!) I sold some covered Sept. 15 calls. Fortunately, I sold for a quarter of my total position."

Angiotech shares in the United States (Nasdaq: ANPI) climbed $1.42, or 11.29%, to settle Wednesday at $14.00.

Vancouver, B.C.-based Angiotech said the transaction provides it with a commercial platform to capitalize on its current product pipeline, supporting a wide range of specialty therapeutic areas, plus significantly diversifies its revenue base and gives it global manufacturing, marketing and sales capabilities. The transaction, anticipated to close in second quarter, is expected to be immediately accretive to Angiotech's 2006 and 2007 results.

Angiotech focuses on combining pharmaceutical compounds with medical devices and biomaterials to address complications associated with surgical procedures. Its chief product is a coronary stent system that incorporates the drug paclitaxel for the treatment of coronary artery disease.

American Medical Instruments is a leading specialty medical device manufacturer focused on three distinct medical device markets: interventional diagnostics, ophthalmology, and wound closure.

"Also, after the acquisition is completed, there's a chance that Angiotech, itself, will be in play," the hedgie remarked. "The medical device sector is a hotbed of M&A right now for speculators."

Angiotech taps banks, bonds

Angiotech plans a new $375 million credit facility and selling $300 million of bonds for the American Medical purchase, company officials said in a conference call Wednesday.

Following the transaction, Angiotech said its pro forma balance sheet will remain strong with $160 million remaining cash on hand and manageable levels of debt compared to pro forma EBITDA and free cash flow.

Merrill Lynch & Co. is acting as financial adviser, and Sullivan & Cromwell LLP is acting as legal counsel to Angiotech. Credit Suisse and Merrill Lynch have provided the necessary financing commitments to complete the transaction.

"This deal should go a long way to resolving a whole number of issues on various fronts, not the least of which is laying to rest forever that this company is a one-trick pony," the hedge fund manager continued. "If the acquired company is for real this could make me think a little higher in terms of price objective three years out."

American Medical Instruments' revenues are estimated to be $174 million for 2005, which Angiotech said would represents 46% of pro forma 2005 revenues of the two companies. In addition, Angiotech anticipates the transaction will be immediately accretive to 2006 adjusted earnings per share. For 2007, Angiotech expects "meaningful" accretion in adjusted EPS.

Angiotech sees 7%-7.5% handle

Angiotech officials said in the conference call that it expects the debt portion of the financing package will carry an average interest rate of 7.0% to 7.5%, with the rate veering toward the high-end of the assumption if the company opts to do the bond offering.

The credit facility is expected to consist of a $300 million term loan and a $75 million revolver.

Credit Suisse and Merrill Lynch have provided the company with the total debt commitment that actually is for $600 million is senior term loans, but the company anticipates having a final capital structure comprised of 50% term debt and 50% bonds, officials explained.

Post acquisition, or pro forma, the company sees its total debt-to-EBITDA ratio at 3.6 times, EBITDA to interest at 4 times, debt to equity of 130%, debt to total capitalization of 56% and net debt to total capitalization at 41%.

Debt to EBITDA is anticipated to drop to 3.2 times in 2006, 2.3 times in 2007 and 1.4 times in 2008, with the company hoping to have the senior term loan paid off in full by 2008, only leaving the $300 million of subordinated bonds outstanding.

Alnylam 'very' oversubscribed

Alnylam Pharmaceuticals, Inc. priced a follow-on offering at a small discount to Tuesday's close, and buyside sources said that the deal appeared to be "very" oversubscribed. The stock still lost more than 5% on the day, but fans were anticipating that it would be on the upswing once the shake-out passed.

The Cambridge, Mass.-based therapeutics biotech sold 5.1 million shares at $13 each, discounted from Tuesday's close of $13.44, and will pocket in the neighborhood of $66.5 million from the deal.

In secondary action on Wednesday, the stock sank 69 cents, or 5.13%, to $12.75 - an expected reaction because of the dilution.

"In my opinion, the stock is holding up pretty well," said a buyside market source who participated in the deal. "I was hoping for more of a dip to buy more."

Judging by allocations, the buyside source who participated in the Alnylam deal said allocations suggested the deal was at least three times oversubscribed.

"I received one-third of [my] requested order," the buysider said. "Everyone was very pleased with the pricing. This stock has a chance to be one of the best, if not the very best, story in biotech over the next five years. Stay tuned."

Alnylam said it will use proceeds for general corporate purposes.

DUSA dive seen 'over-reaction'

DUSA Pharmaceuticals, Inc. took a sharp dive Wednesday on news that a mid-stage study of its photodynamic acne therapy was not large enough for any significant results, meaning the company will have to run another trial with more patients.

Scott Lundahl, vice president of regulatory affairs and intellectual property at DUSA, said the company previously had said there was a possibility that another phase 2 study would be required because of changes to regulatory guidelines, but the stock hit a new 52-week low.

DUSA shares (Nasdaq: DUSA) settled out the day off by $2.28, or 22.4%, at $7.90 after opening at $9.40 versus Tuesday's close of $10.18. The stock actually came off the day's low of $6.72. Still, it sank below the previous 52-week low of $8.33.

"It looks like an over reaction and way oversold," said one market source. "Financials remain safe, [there's] no debt, and [the] float is small. You can make a buck or two as price stabilizes back upward."

Thus, he said buyers began easing back into the name late in the afternoon and propped it up.

Isis shares, convertibles rise

Isis Pharmaceuticals, Inc. got a bounce on heavy buying in the stock, and its convertible bonds, after it announced Wednesday that it has started human trials of a cancer drug, triggering a $750,000 payment from partner Eli Lilly & Co.

Lilly is funding the development of the drug, currently called LY2275796, and will make more payments to Isis if additional milestones are reached. The drug targets a protein associated with various cancers, including breast, head and neck, prostate, lung, bladder, colon, thyroid and non-Hodgkin's lymphomas.

Isis shares (Nasdaq: ISIS) added 21 cents on the day, or 3.88%, to $5.62, and its 5.5% convertible due 2009 climbed 3.375 points to 92.625.

"Someone is buying the poop out of it," said a convertible market source at a sellside shop, but he added that the milestone payment from Lilly was "meaningless."

"You know what? I think people are just waking up to the potential of antisense [Isis lead technology]," the convertible source said. "Genta, look at that. That is a total pig, yet up 90% year to date. Isis is a real company. Genta will end up like Aphton - dead."

Genta shares (Nasdaq: GNTA) on Wednesday added 14 cents, or 5.34%, to close at $2.76, after announcing that it had been granted a review in Europe for its marketing authorization application to use Genasense plus dacarbazine to treat advanced metastatic melanoma.

Aphton Corp. shares (Pink Sheets: APHT) dropped 4 cents, or 20%, to $0.16 on Wednesday. The Philadelphia company also makes monoclonal antibody technologies for the treatment of cancer and gastrointestinal diseases.

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