Mylan Labs bond deal surfaces; Vertex up, Merck lags; Genentech rises; stem cell names watched

By Ronda Fears

Nashville, June 17 - Mylan Laboratories Inc. shares remained quiet Friday, a day after the $1.25 billion Dutch auction was kicked off, but the story showed up on credit screens as plans for a $500 million junk bond and $475 million bank facility hit the tape. Reactions were somewhat stilted as the market tries to get a grip on the credit story.

Invitrogen Corp.'s convertible bonds continued to find favor, though, as players elbowed in to get a chunk of the fourth and latest helping from the company, which makes a broad range of products used in genetic and other biotech research.

In the equity arena biotech stocks were in the green Friday, albeit mostly with small gains in line with the broader market, with several bits of positive news providing a helping hand.

Controversial stem cell research names, however, did not get a lift from an Associated Press report Friday that former first lady Nancy Reagan is preparing to lobby the Senate for the passage of embryonic stem cell legislation currently shadowed by president Bush's veto threat. However two big biotech names less directly associated with the issue, Amgen Inc. and Genzyme Corp., were both up a bit.

Mylan plans $500 million junk bond

Mylan Labs is planning a $500 million 10-year bond (BB+) and a new $475 million credit facility (BBB-) to help fund its stock buyback auction - with Merrill Lynch as bookrunner on both transactions, market sources told Prospect News on Friday.

A buyside source at a fixed-income fund said chatter in the market put the BB+ bonds pricing at a spread of around 250 to 300 basis points over Treasuries. Another buyside source said he expects market reaction will be "interesting," but was not willing to make the call one way or the other.

"Some people may be wanting something more, a premium, because they've demonstrated they are not squeamish," about protecting shareholder value, a buyside analyst said, referring to the stock buyback plan, which is viewed by many onlookers as a means to stave off overtures from Carl Icahn.

The Canonsburg, Pa., pharmaceutical company's five-year bank facility will consist of a $200 million revolver and a $275 million term loan. Revolver borrowings will be available for general corporate purposes. Mylan Labs said it has received a commitment for as much as $775 million in funded loan debt but that amount reduces dollar for dollar by the amount of the bond deal, which is why the term loan is at $275 million.

Timing on both the credit facility and the bonds is still to be determined, sellside market sources said.

The tender offer, in a range of $18 to $20.50, was kicked off Thursday and is currently scheduled to expire July 15. Mylan shares closed Friday off a penny at $19.68.

Invitrogen 3.25% convert popular

Invitrogen's newest convertible continued to turn heads, with the 3.25% issue extending an upward path Friday. The bond was seen at 104.375 bid, 104.875 offered on Friday after ending Thursday at 102 bid.

"We like Invitrogen and bought the new issue, we own some of the older ones, too," said a portfolio manager at a fixed-income fund based in New York, who echoed comments from other buyers that the new deal structure was particularly interesting in that the first put on the newest convert is a year before any put on Invitrogen's older convertibles.

"Of course, anytime you have a serial issuer with three or four issues, and this is Invitrogen's fourth convert, then you have to stop and wonder about what's going on. They can't just keep piling it [debt] up."

Invitrogen shares closed Friday up 31 cents, or 0.39%, at $78.89.

Vertex gains, Merck languishes

Vertex Pharmaceuticals Inc., based in Cambridge, Mass., shot up Friday on positive results in its new drug in development to treat leukemia, but Big Pharma partner Merck & Co. Inc. saw little reaction to the news. Rather, Merck was held back by its news that before it can proceed with getting new drug approval for its painkiller Arcoxia it will have to compile further safety and efficacy data in ongoing clinical trials.

Also, Vertex and Merck announced they have initiated an additional Phase I clinical study in hematologic cancers with Aurora kinase inhibitor VX-680. With the start of this clinical study, Merck and Vertex now have three clinical studies underway using the drug to treat cancer.

One holder in Vertex shares and its convertible bonds said it seemed an over-reaction, considering the nature of the news, although he said he continues to like the Vertex story. He said he was a bidder for Vertex convertibles Friday but got no hits.

Vertex shares climbed $1.35, or 9.68%, to end at $15.30 on Friday. Both the Vertex 5% convertible due 2007 and 5.75% convertible due 2011 are hovering just below par, the holder said.

Merck was lower for most of Friday, after announcing that the FDA's Data Safety Monitoring Board has recommended studies continue for its painkiller Arcoxia. In October, the panel informed Merck that the agency needed additional safety and efficacy data before allowing a new drug application for it.

Merck shares ended slightly higher Friday, adding 22 cents, or 0.69%, to $32.22.

Stem-cell names still flagging

With stem-cell research on the congressional agenda, companies specializing in the field recaptured the attention of investors, onlookers said, but the news on support from Nancy Reagan did not help much.

Four companies trading on a leading exchange are considered pure plays in stem-cell research - StemCells Inc., based in Palo Alto, Calif., Aastrom Biosciences Inc., based in Ann Arbor, Mich., ViaCell Inc., based in Cambridge, Mass., and Geron Corp., based in Menlo Park, Calif.

All but Geron - considered one of the pioneers in embryonic stem cell research, with an early stage cancer vaccine program and a spinal cord injury program in Phase I clinical trials - were lower in light trade Friday. Geron shares edged up 4 cents to $7.61.

At the core of the controversy is the manner in which stem cells are obtained - from embryonic tissue and from umbilical cords. The technology offers hopes for treatment in several widespread diseases such as diabetes, Parkinson's disease, spinal cord injuries and others like Alzheimer's, which afflicted former president Ronald Reagan, which brings in his widow, former first lady Nancy. Actor Christopher Reeve, paralyzed in an equestrian accident in 1995, was another high-profile advocate before his death in October.

Late last month, the House of Representatives passed a bill that would loosen current federal funding restrictions on embryonic stem-cell research and the Senate is expected to vote on a companion bill by the end of July. If it makes it through the Senate, however, president George W. Bush has threatened a veto. Bush has banned the use of federal funds for research on stem cell lines created after Aug. 9, 2001.

Amgen, Genzyme in background

There are two far bigger players behind the scenes in stem cell research, however, as Amgen Inc. and Genzyme Corp. are big backers for ViaCell, which is considered one of the less controversial companies. Not only does ViaCell, based in Cambridge, Mass., have the backing of the big-name biotechs, it also has a revenue stream from allowing parents to store blood from their children's umbilical cords for later use.

Genzyme shares on Friday added $0.46, or 0.74%, to end at $62.94. Amgen shares added $0.35, or 0.58%, to $60.62.

Amgen is more notably a contender in the race against the colon cancer drug Erbitux, in development by Bristol-Myers Squibb Co. and ImClone Systems Inc. Amgen's partner in developing its panitumumab, a drug similar to Erbitux, is Abgenix.

Abgenix higher as takeover target

Abgenix, also considered a takeover target according to stock traders, rose sharply Friday. The stock gained 62, or 7.46%, to end at $8.93.

"Abgenix is considered to be on the [acquisition target] list," one trader said, but quickly added, "But, then, there are lots of names on that list. You can't really pay a lot of attention to that. Today there is just a lot of retail action in the biotech stocks."

Abgenix also has a collaboration agreement with AstraZeneca for the development of antibody therapeutics in cancer treatments. And, Amgen and Abgenix are also conducting a study comparing their medicine combined with chemotherapy versus Avastin, Genentechs' domain.

Genentech up on Biogen buy

Genentech's cancer treatment Avastin has met with large success and the company's purchase of a new plant from Biogen Idec was applauded on several fronts Friday as Genentech plans to use the plant to produce Avastin.

The deal will boost Genentech's manufacturing capacity by 32%. The company will use the plant to produce Avastin with hopes that operations will begin in 2006 with full FDA approval by the first half of 2007.

"We expect Genentech will stockpile its Avastin made at the facility in 2006, which could be released for commercial sales following FDA approval," said Piper Jaffray analyst Thomas Wei.

In a report Friday, Piper maintained an outperform rating and $93 price target on Genentech stock. The firm said it expects the Biogen deal will add over $2.5 billion in annual Avastin sales. Piper currently projects Avastin sales of $938 million in 2005, $1.9 billion in 2006 and $2.7 billion in 2007.

Genentech credit gets better view

Standard & Poor's on Friday put the A long-term rating on Genentech Inc. on positive watch, citing brighter business prospects that enhance the biotech's ability to adhere to conservative financial policies. S&P said the company's rapid progress is highlighted by the Biogen purchase, noting that Avastin in its first 12 months of sales generated more than $700 million.

And, S&P credit analyst David Lugg said recent clinical trial results should encourage a rapid expansion of Avastin use into other cancer types. Overall, he said Genentech's product portfolio is now significantly more diversified and mature than when the A rating was originally assigned.

Remaining uncertainties include how growth will be funded in the face of significant near-term cash needs. In addition to the cash needed for the Biogen plant purchase, Genentech faces the termination of a roughly $400 million lease obligation on another plant next year.

Too, the company also announced an expansion of its share repurchase program to $4 billion. Due to its 57% ownership by Hoffmann-La Roche, Genentech is required to repurchase shares to offset the dilutive effects of employee option exercises.

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