Vertex soars 15% on J&J deal; Cephalon climbs over 10% on Fentora nod; Barr off slightly

By Ronda Fears

Memphis, June 30 - Biotech stocks were firmly in positive territory amid heavy activity Friday while the broader market flirted with gains but ended slightly lower. Traders remarked that recent positive news on the Food and Drug Administration front for biotechs helped players bolster their nerve to buy, particularly noting new buyers in light of the recent positive signals in the sector.

"One can argue that trending indicators not only indicate but define the psychology of the market rather than the underlying fundamentals," said a buyside market source in Boston. "When looked at this way, the most popular indicators will be the most reliable in predicting future movement, but only because they predict the actions of the herd."

He said that there probably are some new players getting into biotechs right now, with enthusiasm fueled by news earlier this week that famed investor Warren Buffet has pledged some $37 billion in Berkshire Hathaway Inc. stock to the Bill and Melinda Gates Foundation, which is heavily involved in health care and biotech investing. But he said existing biotech investors are the ones who benefit most.

"The trending indicators have to be interpreted as what the herd will do when they see this or that. The simplest herd indicators are well known analysts and newsletter authors," the buysider said. "Beat the herd there and you can make money. Know when the herd starts to question the leader and you can make money. Know when to reverse direction before the herd runs off the cliff and you can make money."

Traders are not expecting much once the end-of-month trading rage ends, however.

"The entire month of July is a great time to find something else to obsess on," said one sellside trader. "Even the scientists, doctors and FDA personnel take vacations. I'm getting the fly rods out."

Vertex inks $545 million deal

There was a big boost to Vertex Pharmaceuticals Inc. on Friday after it announced a $545 million deal under which Johnson & Johnson bought the rights to market its hepatitis C drug VX-950 in Europe and certain parts of Asia with Vertex retaining rights in the United States.

Vertex shares (Nasdaq: VRTX) zoomed higher by $4.68, or 14.61%, to settle Friday at $36.71 - near the day's high. Some 10.3 million shares changed hands, versus the norm of 1.7 million shares, trading in a band of $34.13 to $36.75. Some were hesitant to dive in, however.

"I would like to accumulate but will have to wait until the frenzy dies down a little," said a buysider in Atlanta. "It's already above my next buy area."

But the enthusiasm for VX-950 by Vertex, backed by J&J's investment, encouraged many others.

The drug, currently in phase 2 testing, has been shown in clinical trials to reduce levels of hepatitis C by more than 99% with no difficult side effects, Vertex said, and the data suggest it could be used in a chemotherapy cocktail to eliminate the virus within a few months - far less time than the typical year-long course of standard therapies.

"Interferon success rate is low, less than 50%, but with this new VX-950 in conjunction with interferon the success rate is over 90% to reducing Hep C to undetectable levels," said a buyside analyst in Boston. "This is money in the bank, a no-brainer. Hep C is a huge market and no one else can touch it."

The deal gives J&J's Janssen Pharmaceutica NV division exclusive rights in Europe, South America, the Middle East, Africa and Australia. Tibotec Pharmaceuticals, Ltd., another J&J unit, will lead the development and commercialization of VX-950 for Janssen.

Vertex will receive an upfront payment of $165 million upon signing the contract, plus another $380 million on successful launch of VX-950 and royalties in the mid 20% range on sales. Development costs will be split between the two with Vertex retaining the U.S. front.

Under an agreement announced June 14, Vertex has licensed VX-950 to Mitsubishi Pharma Corp. for marketing in Japan and other parts of Asia. Vertex said it expected pre-commercialization payments of up to $33 million from Mitsubishi by the end of 2006 and said further cost-sharing beyond phase 2 clinical trials would will be determined later based on the design of those studies.

Cephalon shorts scramble

With an approvable letter from the FDA for its pain medication Fentora that suggests no further trials, Cephalon Inc. shares surged Friday, and while the news was widely anticipated, traders said a great deal of the day's gain was due to last-minute short covering.

"I knew this thing was about to turn. I wish I could have got more cheap shares," said a trader. "There has been so much bad news from the FDA that there were a lot of guys holding back on covering their short positions. It was pretty much in the bag, though, and so today they were frantic."

Cephalon shares (Nasdaq: CEPH) shot up $5.84 on the day, or 10.76%, to close at $60.10. Its convertible bonds rose in tandem, with the two zero-coupon tranches adding 10 points on an outright basis. The series A tranche was seen bid at 114.25 with the stock at $61 and the series B tranche bid at 117.875. The stock traded as high as $61.40 during the session, with some 7.96 million shares moving versus the norm of 1.86 million shares.

Late Thursday, Cephalon said it plans to submit a response by the end of July and expects the FDA to classify its response as a class I resubmission under which it will seek to complete its review within 60 days. The FDA has indicated no additional safety or efficacy data are required and that labeling has been essentially finalized, Cephalon said. Fentora is indicated to treat breakthrough pain in opioid-tolerant patients with cancer.

Merrill Lynch analyst Gregg Gilbert said in a report Friday that Cephalon shares could trade up to $62 near term, in anticipation of a launch in fourth quarter. A caveat to that estimate, he said, however, is looming generic competition for its Actiq - another cancer pain drug - on Fentora's launch.

"A caveat is that our [Cephalon] estimates assume that Fentora is favorably differentiated from Actiq," Gilbert said. "We will be better able to assess this assumption once the Fentora label is available."

Jefferies & Co. analyst David Windley was less elated, even though the news clears the way for a Fentora launch six months sooner than he expected. He said offsetting the Fentora news was renewed uncertainty around its sleep disorder drug Provigil as a result of generic drugmaker Apotex Corp.'s lawsuit against Cephalon and other drugmakers filed June 26 challenging its patent.

Barr's Pliva bid bars a lift

Barr Pharmaceuticals, Inc. can start selling a generic version of Actiq simultaneously with Fentora's launch per a previous license and supply agreement with Cephalon, but traders said any gain on the Fentora news was quashed by Barr's boosted takeover bid for Pliva d.d. to $2.3 billion in cash.

"After the Pliva deal is resolved this [Barr] will head up again," said a sellside trader. "Meanwhile there may still be some more downside."

Barr said Friday it has increased its offer to purchase Pliva d.d. based in Croatia to about $2.3 billion in cash from $2.2 billion. Under the terms of its enhanced proposal, Pliva shareholders would receive HRK 743 per share in cash, which is about $25.73 per share at current exchange rates.

Barr shares (NYSE: BRL) closed Friday off by 16 cents, or 0.33%, to $47.69 - near the day's low of $47.67 although the stock traded as high as $48.38. Volume was light, though, at 749,800 shares versus the norm of 1.26 million shares, a buyside market source pointed out.

The buysider agreed that once the Pliva development is resolved, Barr should be on the upswing.

"We have confidence in the proven management, the viability of the generic sector, Barr's ability to serve its marketplace and even in their recent strategy to venture into proprietary drugs. Unfortunately the only options for the majority of us bulls, who are already heavily committed to the stock, is to hold or sell since a lot players are out of ammo," the buysider said.

"Barr will not be able to sustain a rally because it will run into collective selling pressure when it tries to rear its head. One of three events has to take place in order for us who are already in Barr to see profits in our recent purchases," he continued.

"All three require time. The first is capitulation by weak holders. The other two require good fundamentals - either favorable earnings or winning a patent challenge - and would bring in new buyers. In my opinion capitulation is close at hand and I believe that long-term fundamentals remain favorable. I am hanging in there with the full knowledge that, in the near term, I am foregoing other undervalued opportunities."

Celgene selling limits upside

Traders said profit taking limited gains for Celgene Corp. after it announced FDA approval for its cancer drug Revlimid in combination with dexamethasone to expand its label to treat multiple myeloma, as the news was widely anticipated.

Celgene shares (Nasdaq: CELG) closed the session higher by 20 cents, or 0.42%, at $47.43 but traded in a band of $46.27 to $48.40 on volume of 6.9 million shares versus the norm of 3.9 million shares.

"The news was priced into the stock already, for the most part," one sellside trader commented. "We saw the big buying on Monday really. Today those guys were sellers."

Revlimid was previously approved to treat patients with transfusion-dependent anemia due to low-or intermediate-risk myelodysplastic syndromes associated with a deletion 5q cytogenetic abnormality, with or without additional cytogenetic abnormalities.

Multiple myeloma is the second most common blood cancer in the United States, affecting about 50,000 people, Celgene said.

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