Pfizer purchase spurs speculative buying; Cubist advances; ev3, Micrus, Gentium IPOs discounted

By Ronda Fears

Nashville, June 16 - Pfizer Inc., the world's biggest drugmaker, announced Thursday it is buying Vicuron Pharmaceuticals Inc., a biopharma focused on new antibiotics, for $1.9 billion in cash, and it set off a round of speculative buying in biotechs, particularly any involved in antibiotics like Cubist Pharmaceuticals Inc.

Big Pharma snapping up small biotechs is a recurring theme, as many of the bigger firms are flush with cash, and the steady stream of deals is not expected to let up anytime soon. With a lull in biotech stocks this year, many players are scouring the field for bargains given the whopping premiums Big Parma is often willing to pay - but onlookers warn of hasty decisions.

"Today's deal is another point of evidence that strategic buyers are not only interested but willing to pay a premium for small-mid cap biotech companies," said Steven Harr, head of Morgan Stanley's biotech research. "We expect continued consolidation in the biotech sector as large cap biotech/pharmaceutical companies attempt to deploy their balance sheets to replenish pipelines, especially now that small-cap valuations have come in meaningfully thus far in 2005."

Moreover, the news was a much-needed shot in the arm for the biotech sector on whole.

"They [Big Pharma] just have to pay up for the R&D work if they don't want to do it," said John Siebel, a risk arbitrage trader at Silverado Capital Management getting involved in the Pfizer/Vicuron situation, hoping to make some money by buying on intraday dips in Vicuron shares. "That's the way the game is played."

Risk arbs were largely responsible for Vicuron share volume soaring nearly 100-fold Thursday.

HemoSense delays its IPO

Meanwhile, to say the initial public offering market for biotech and medical devices companies is tough seems an understatement. A trio of IPOs priced Wednesday night and all were discounted from guidance. Plus, all but one of the three stocks broke out Thursday underwater.

To boot, a fourth IPO on this week's roster was delayed, market sources said, on slack response.

HemoSense Inc., a San Jose, Calif.-based maker of a handheld blood coagulation monitoring systems, has postponed its initial public offering from this week to next, according to market sources. The IPO had already been reduced to 2.6 million from 3.5 million shares and the price range narrowed to $8 to $10 a share from original plans at $9 to $13, sources said.

As of Thursday after the market close, sources said it did not appear there had been any further revisions to the HemoSense guidance.

ev3, Micrus, Gentium discounted

The three discounted IPOs were still struggling out of the gate, but one managed to hold on to a very slight gain of a penny and another ended the day back where it priced.

ev3 Inc. sold 11.765 million shares at $14 each, discounted from the proposed price range of $16 to $18 and Micrus Endovascular Corp. priced its 3.25 million shares at $11 a share, which was below its estimate of $12 to $14 a share.

ev3 - a Plymouth, Minn.-based maker of stents and other endovascular surgical products - opened at $13.50 and with 3.16 million shares trading managed to end the session back at $14.

Micrus - a Sunnyvale, Calif.-based medical devices maker - opened at $11.06 and managed to stay above the offering price, barely, closing at $11.01, with 1.14 million shares changing hands.

Gentium SpA downsized its IPO as well as discounting the offering. The Italy-based biopharmaceutical company, focused on drugs to treat a variety of vascular diseases and conditions related to cancer, sold 2.4 million American Depositary Shares, down from a planned 2.7 million shares; for $9 each - at the low end of the proposed range of $9 to $1.

Gentium opened at $8.50 and traded below the IPO level throughout the day, ending at $8.90.

Vicuron skyrockets on Pfizer news

Pfizer seemed more than willing to pay up for Vicuron, though. Its purchase at $29.10 a share - at an 84% premium to Wednesday's close and a 74% premium to the three-month average - sent Vicuron shares skyrocketing in the wake of the news, along with a slew of biotechs. But a sellside market source cautioned about snap purchases.

"You should really be looking at what you own. Buy good biotechs - hold them - they go up and they go down but in the long run you will be happy if you buy the right company," the sellsider said. "I look for good management - a pipeline - and cash. Don't rely on a one-hit wonder."

The numbers can be very tempting, though.

"Look at the MICU [Vicuron] chart. Less than one year ago you could have bought this for less than $10. The takeover price is $29.10," the sellside market source said. "When it dipped down, it was a gift from God."

Vicuron shares in pre-market activity were indicated up 76.7% and the gains held, and then some. The stock closed Thursday up $12.41 on the day, or 78.54%, at $28.21. There were 30 million shares traded, versus the three-month running average of 337,598.

"By acquiring Vicuron, we can help bring two very important new medicines to patients around the world," said Hank McKinnell, Pfizer chief executive, in a news release.

"This transaction builds on Pfizer's extensive experience in anti-infectives and demonstrates our commitment to strengthen and broaden our pharmaceutical business through strategic product acquisitions."

King of Prussia, Pa.-based Vicuron has two anti-infection drugs under review by the U.S. Food and Drug Administration, one designed to treat fungal infections and the other for skin and soft tissue infections. Sales of Pfizer's anti-fungal Diflucan are down following expiration of its U.S. patent last year and the two companies were already collaborating on next-generation antibiotics.

Cubist zooms on speculation

Cubist Pharmaceuticals Inc., which markets Cubicin, a first-in-class injectable bacteria killer it licensed from Eli Lilly &Co., was one of the biotechs taking off on the Pfizer news as the Vicuron deal was interpreted as a big reversal in the industry regarding bacteria-fighting drugs.

Cubist shares shot up 64 cents on the day, a 6.16% gain, to end at $11.03. Its 5.5% convertible due 2008 found interest as well with "a nibble or two," as one trader put it, with the bond moving up 2 points to end at 89.25 bid, 90.25 offered.

At almost the same time the Pfizer news hit the tape, Wyeth said it has received approval for Tygacil, a new antibiotic that it is touting as a potential blockbuster. Over the past few decades, many of the biggest drug firms, including Lilly, Wyeth and Roche, seemed to back away from antibiotic development, closing plants and shuttering programs. With Big Pharma in many cases absent from the game, biotech entered the field.

But the refocus on antibiotics is evident in many corners, onlookers said, and acquisitions of smaller biotechs are a leading way for growth in this area.

Johnson & Johnson's purchase of Peninsula Pharmaceuticals Inc. in April - mentioned Wednesday in the context of biotech IPOs having trouble and Big Pharma stepping in as a buyer - was another example of expansion in antibiotics development. And then there's Wyeth. Many industry watchers thought the company was exiting the antibiotic area when it shut down a crucial plant, but then came the Tygacil news.

Players getting involved in the converts are looking to pick up significant yield as many of the biotech converts are trading well below par, and some were issued back when coupons were much fatter, as they would expect reactions similar to the spike in Corixa Corp. convertibles to par in early May on news of its takeover by GlaxoSmithKline plc.

European firms on the hunt, too

In addition to British drug giant GlaxoSmithKline plc chasing small biotechs, such as its purchase of Corixa in May, there are several developments brewing abroad.

British medical equipment maker Gyrus Group plc announced Thursday that it is buying U.S. peer American Cystoscope Makers Inc. for $333 million, plus $164 million in debt, to provide a platform for expansion into general surgery. Gyrus said it was raising £116 million pounds in a private share offering at 250p each. The firm also signed a new $250 million debt facility.

Another British concern, biotech firm ML Laboratories plc announced Thursday it was buying Quadrant Technologies Ltd. for £46.7 million as it focuses on its inhaled drug business. ML Labs will pay £19.5 million in cash for Quadrant, after having raised £26 million through a share offering at 19p each.

The deal represents a bet on the future of respiratory and other medicines that can be delivered into the body through the lungs. While asthma dominates the market, many drug companies are investigating inhaled delivery in new disease areas. Quadrant, for example, has a partnership with Bristol-Myers Squibb Co. researching inhaled insulin.

ML Labs is also buying the outstanding 18.75% of Innovata Biomed it does not own in a £1.85 million cash and share offer. Following the transactions, ML Labs said it will change its name to Innovata plc.

Quadrant was spun out of Elan Corp. plc in a management buyout two years ago.

Elan a wallflower at biotech party

Elan, embattled by trouble with its multiple sclerosis drug Tysabri being developed with U.S. partner Biogen Idec, was at the party in biotechs for a while Thursday. Its participation was rather tepid amid some trepidation about Tysabri, though, and, as a result, the name exited the rally before the close.

Elan shares were slightly higher for a good portion of the day, but the stock settled out off by 7 cents, or 0.99%, at $7.02.

For Elan, some onlookers suggest the Irish concern needs to find a way to expand its horizon - away from Tysabri. In late February, three months after receiving U.S. approval, it voluntarily withdrew Tysabri from the market after a patient contracted a rare and frequently fatal brain disease; now there are five patients with complications.

The reaction from the drug companies was unusual, one buyside research analyst observed, and likely more extreme than MS patients would want. From Elan's business model perspective, analysts are concerned that it has all its eggs in the Tysabri basket.

Elan and Biogen expect to complete patient evaluations by the end of June and in late summer meet with the FDA to discuss the possible return of Tysabri to the market.

Analyst: Wait to buy Elan bonds

With the uncertainty surrounding Tysabri, analysts expressed hesitation in recommending purchases now in Elan's bonds, which have been largely supported by recent company buybacks.

Elan's 6.5% convertible due 2008 were described by traders as virtually unchanged on the day at 115. Elan also has two straight bonds - a 7.25% due 2008 and 7.75% due 2011 - trading at yields in the neighborhood of 10%, according to market sources, but even below par analysts are leery of the credit.

"There's a lot riding on the FDA's decision as Elan is counting on the success of Tysabri to return the company to profitability. While Elan has slashed costs by 29% to be prudent, it continues to invest in the Tysabri sales and marketing infrastructure," said bond analyst Evan Mann with the independent research shop Gimme Credit.

"But if Tysabri doesn't return to market more severe cost reductions and asset sales are likely. A sizeable cash position affords Elan time to take a wait-and-see approach [but] with each new case of a rare and potentially fatal brain infection possibly linked to Tysabri, hope of the drug's return to market fades."

At March 31, Elan had $1.4 billion of cash. Earlier this month, the company repurchased $206 million of its 6.5% convertibles and $36.8 million of its 7.25% senior notes, both due in 2008, for $82.4 million in cash and stock, which cut total debt maturing in 2008 to $867 million and annual interest expense by $16 million.

Mann said he would wait for a more attractive entry point before buying the credit.

ViroPharma rally triggers interest

ViroPharma Inc. shares have been on a tear over the past six weeks or so, although the stock was off slightly on Thursday. Still, as of Wednesday interest stepped up another notch, at least among players picking its convertible bonds to play the story. The 6% convertible senior notes due 2009 are especially in the spotlight.

Once the stock finished Wednesday above a $3.75 per share threshold for 20 of 30 trading days, the company can now force conversion of up to 25% of the issued amount. A convertible market source pointed out that the conversion applies to the issued amount of $75 million, not the amount outstanding because there has been a frenzy of voluntary conversions since the stock began its run. After the latest conversion notices on Tuesday, ViroPharma said there was $40.35 million outstanding on the 2009 notes.

Holders will get three years of coupon make-whole payments, less any interest already paid. If holders voluntarily convert, the company must pay the make-whole in cash; but if the company forces conversion it can pay it in cash or stock.

ViroPharma shares slipped by 5 cents, or 0.78%, to end Thursday at $6.38.

Exton, Pa.-based ViroPharma, which is focused on treatments for viral diseases such as herpes and hepatitis, has partnerships with GlaxoSmithKline and Wyeth.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.