Novavax, Nastech buck uptrend in flu names; NitroMed exec exits applauded; BioMarin off on deals

By Ronda Fears

Memphis, March 21 - Biotechs were battered Tuesday, which traders attributed to profit taking and a general reallocation of investments within the sector. Remaining true to recent trends, however, avian influenza vaccine names continued to fly, for the most part, amid increasing anxiety about the spread of the bird flu into the United States and the threat of a pandemic.

Flying awry of the bird flu flock were Novavax, Inc. and Nastech Pharmaceutical Co. Inc., both taking hard hits on Tuesday.

Novavax, which saw a string of new highs over the past two weeks, dipped Monday on news that it was getting ready to settle a $38 million direct placement of shares. The drop in Nastech, which also climbed sharply last week, was attributed to large call selling by a sellside trader.

The trader said 2,258 of Nastech $17.50 April calls traded Tuesday amid huge open interest. The April $17.50 calls ended lower by 70 cents to 50 cents with a wide bid/offer gap. Nastech shares (Nasdaq: NSTK) on Tuesday lost $1.30, or 7.31%, to close at $16.49.

"That [Nastech options activity], in my opinion, is the reason for the 5%-plus drop in the [Nastech] stock today. Somebody is selling a lot of calls and started early this morning, and, of course, somebody is buying a lot of out-of-the money April $17.50 calls as well," the sellsider said.

"The likelihood for another very positive news development before the April 21 options expiration is quite high, I think. Also, placing a straight bearish bet on a stock that could run on bird flu hype makes no sense either. Thus, the conclusion is that possibly the hedge funds that were involved in the warrant exercise are hedging that long share position through active calls. Of course, those buying would be confident that the call selling is a hedge and not a bearish bet and may be eager to take the other side of the trade."

Vaccine researchers such as Novavax and Generex Biotechnology Corp. are considered particularly attractive investments in the flu vaccine space, traders say, given the FDA's announcement that it has prohibited the use of human antiviral drugs on animals, which is seen as creating a special class of flu vaccines.

Novavax's stretch of new highs was knocked down, albeit in what many say is just a temporary setback because of another PIPEs deal, but Toronto-based Generex continued to skyrocket.

Generex shares (Nasdaq: GNBT) added another 90 cents, or 27.03%, to $4.23, blowing past the $3.33 new 52-week high set on Monday. In addition to continued gains seen in Generex, Philadelphia-based Hemispherx Biopharma, Inc. shares (Amex: HEB) rose 12 cents, or 3.1%, to $3.99, following a 13% rise on Monday. Portland, Ore.-based AVI BioPharma, Inc. shares (Nasdaq: AVII) added 18 cents, or 2.64%, to $7, after gaining 8% on Monday.

Novavax retraces 7% on deal

Novavax, which also develops products for several other health problems, broke its eight-day run of new highs on Tuesday as the Malvern, Pa.-based company announced it is getting ready to settle a $38 million direct placement of shares. Despite a whopping discount offered to investors in the PIPEs transaction, traders said the tone for Novavax remains highly positive.

The company intends to sell 5.2 million shares at $7.30 each to a group of institutional investors - a huge 12% discount to the closing price of $8.31 on Monday.

Novavax shares (Nasdaq: NVAX) on Tuesday lost 60 cents, or 7.22%, to close at $7.71.

"There was more buying than selling again today," said a sellside trader. "It is still under mass accumulation."

Novavax seen resuming rise

Moreover, the trader thought it was a smart move, and he believes the stock will resume its upward track once the maneuvering related to the new deal subsides.

"They thought this was the peak of the rally and it would be months before they got another chance," the trader said. "They didn't need the money unless there was a pressing opportunity. They already had a huge cash position and they knew their stock price was on an uptrend."

Indeed, just a matter of weeks ago, on Feb. 27, Novavax closed a separate direct placement with Kleiner Perkins Caufield & Byers and Prospect Venture Partners. In that offering, the two investors bought 4.6 million shares at $4.35 each. Novavax stock closed a $5.72 on Feb. 27.

Proceeds will be used for the clinical development of virus-like particles-based avian and seasonal influenza vaccines, internal research and development programs and the expansion of research and development facilities to comply with current general manufacturing practices and good laboratory practices. The rest will be used for general corporate purposes.

Novavax, which has mainly focused on drugs for women such as prenatal vitamins, contraceptives and hormone replacement therapies, is now working on creating a vaccine for the H5N1avian flu.

NitroMed shares end up by 3%

NitroMed Inc. shares were higher by around 7% during the noon hour Tuesday, as Michael Loberg resigned as chief executive officer and Lawrence Bloch resigned as chief financial officer. The stock saw a big bounce on the news, which traders largely attributed to short covering.

"The rats are jumping," said a sellside market source, referring to the NitroMed executive departure. The source, and the market in general, has been sour on the stock for weeks, since the Lexington, Mass.-based company - which has BiDil, an FDA approved heart medicine targeted specifically for black patients - reported disappointing 2005 results.

"I will be able to relax at $12 a share, just not here," said a sellside trader. "This stock makes me a stress case. No one wants to pay a premium for a company that has only a single, money-losing product."

At the opening, NitroMed was a standout exception to the beating in biotechs, shooting up 9% to $8.54, but the stock came sharply off that level; NitroMed shares (Nasdaq: NTMD) settled higher by 12 cents, or 3.1%, at $3.99.

NitroMed sets conference call

NitroMed gave no reason for the departures but has scheduled a conference call at 10 a.m. ET on Wednesday. Argeris Karabelas, NitroMed's chairman, will serve as interim CEO, while Kenneth Bate, formerly the CFO of Millennium Pharmaceuticals, has been named CFO.

The lack of clarity caused some traders to bail out altogether, though.

"I would not be long or short here," one trader said. "A buyout is a possibility, or a major restructuring. You don't know, so I say exit now."

Many onlookers expect a capital raising effort or that the company will be aggressively seeking a commercialization partner for BiDil, he added.

"If they do not successfully market and sell BiDil, either directly or through third parties, future revenue will be limited," said a buyside analyst. "That's from the horse's [company's] mouth. They know the company is at a critical turning point."

NitroMed said it has limited sales, marketing and distribution experience but has launched BiDil in the United States using a contract sales force. The company transitioned to a smaller sales force in first quarter and plans to internalize the contract sales force by third quarter.

"In order to develop our internal sales force or to contract for sales and marketing capabilities, we will have to invest significant amounts of money and management resources," the company said in a news release.

Bio Marin stock off nearly 5%

BioMarin Corp.'s shares fell again Tuesday ahead of its follow-on stock deal later this week in concert with a convertible bond deal. The Novato, Calif.-based biotech is selling 9 million common shares and $125 million of bonds, both slated to price Thursday.

"As I'd feared last week, BioMarin took advantage of the share-price run-up," said a buyside market source involved in the stock. But, he added, "[It's] good timing. This gets it out of the way. I expected they'd do this at the end of this year instead. I think this is positive given the size of the offering and certainly suggests that the discount is, or will be, favorable."

Last week, BioMarin Pharmaceutical Inc. shares shot up on positive study data for its Phenoptin for mild-to-moderate forms of phenylketonuria, or PKU, a metabolic disease caused by a deficiency of the enzyme phenylalanine hydroxylase.

BioMarin, and its partner, Serono SA, plan to apply for marketing approval for Phenoptin in the United States and European Union in 2007.

"It's dilutive financing of about 11% by my calculations," said a buysider involved with the stock. Tongue in cheek, he added, "I'm still profitable, but that early retirement will have to wait another year or so."

BioMarin shares (Nasdaq: BMRN) lost 65 cents, or 4.64%, to close Tuesday at $13.35, after dropping 3% Monday when the transactions were announced.

BioMarin's old bonds off 1.5 points

BioMarin's existing convertibles came in about 1.5 points on a neutral basis as a result of the new deal, as some of the proceeds are available for possible buybacks. In conjunction with the stock deal, BioMarin is selling $125 million convertibles talked to yield 2.5% to 3.0% with an initial conversion premium of 22.5% to 27.5%, which in general, convertible market sources said seems to be cheap terms.

Analysts, however, are split over how to assess the biotech's credit risk after the company recently reported positive drug trial results amid what most refer to as less-than-stellar financials. Other factors include call protection for life and no puts as well as dividend and takeover protection.

A sellside analyst said the convertibles modeled at 101 using a credit spread of Libor plus 800 basis points and stock volatility of 45%. Another sellside observer said the offering looks cheap using Libor plus 600 bps, or 500 bps, with a volatility input of around 40%.

BioMarin's existing 3.5% convertible was pegged Tuesday at about 107.5 with the stock at $13.76. BioMarin shares (Nasdaq: BMRN) closed Tuesday off by 65 cents, or 4.64%, at $13.35. On Monday, the convertibles were marked at 106.3 bid, 107.3 offered against the closing stock price of $14.

BioMarin may buy back bonds

BioMarin plans to use proceeds of the two offerings to fund the commercialization and additional clinical trials of products that include its metabolic disorder drug Phenoptin, and potential acquisitions. The company said it also may use proceeds to buy back some or all of the $125 million outstanding convertible bonds due 2008, which become callable on June 20 this year.

Last week, BioMarin's convertible bonds rose with the stock, but analysts said holders would not fare extremely well if the stock continued on the upward spike seen late in the week. Late last week the 3.5% convertible was seen at 113.75 bid, 114.5 offered versus a stock price of $15.

Onlookers said the bonds last week were trading at about a 7-point premium with the stock very close to the strike price of $14.21, which would increase the chances of the issue getting called and erasing the 7-point premium.

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