Teva shares, convertibles gain on Zocor ruling; NeoPharm off amid downsizing; Alnylam, Idenix drop

By Ronda Fears

Memphis, May 1 - Biotech stocks continued to feel somewhat bearish, traders said, although they were reluctant to cry "May Day." While the majority of the components of the major biotech indexes were in the red, there were some nice gains on the day, including Teva Pharmaceutical Industries Ltd., which won a blow in the fight to market a generic version of Merck & Co.'s cholesterol drug Zocor.

Moreover, though, the sector was "starting to flush out," as one biotech stock trader put it.

"The market has been churning for over a week on high volume. That has been bearish. Today, we were up in the morning, down in the afternoon. That is bearish," the trader remarked.

"Watch fear levels over the next one to three weeks. It will take fear to get to a tradeable bottom. You have to watch the market and swim in the direction of the market. If you don't know the direction of the current, pick up your surfboard and get out of the water. Cash is not a bad place to be."

One of the biggest observations over the past week, he said, was speculative money getting taken off the table. Some were pocketing profits and moving money elsewhere; others were merely shifting focus within the biotech sector, he said.

Amid the bearish tone, Idenix Pharmaceuticals, Inc. took a hit just ahead of its first-quarter results, which are scheduled to be reported before Tuesday's open. The company has posted positive results over the weekend from an ongoing phase 2b trial for its hepatitis C drug valopicitabine. On Monday, though, Idenix shares (Nasdaq: IDIX) dropped 65 cents, or 6.77%, to $9.39.

Teva shares up nearly 4%

Teva shares, and to a milder extent its bonds, rose on news of winning a blow in the court battle to market a generic version of Merck's cholesterol drug Zocor, but traders said the reaction was a little stilted in that it was unclear if the Food and Drug Administration would agree with the district court.

Regardless, traders said the market sees Teva as a good holding right now. One trader said there was virtually no reaction to an unsolicited tender offer Friday to buy up to 2.5 million shares at $37.80 each from TRC Capital Corp.

Teva shares (Nasdaq: TEVA) gained $1.61 on the day, or 3.98%, to $42.11.

On Monday, Israel-based Teva announced that the U.S. District Court for the District of Columbia has granted its motion for summary judgment on the issue of whether unit Ivax Corp.'s application at the FDA for generic Zocor should get statutory exclusivity. The court found unlawful the FDA's Oct. 24 decision denying Ivax's petition and, thus, has remanded the matter back to the FDA.

Because Zocor is a blockbuster drug, with some $4 billion in annual sales, the trader said it is very good news for Teva. But the downside is that the FDA might continue to fight the ruling. In any event, Merck's patent on Zocor expires in June, but that will open the door to rampant competition.

Merck shares (NYSE: MRK) slipped 18 cents on the day, or 0.52%, to $34.18.

Teva convertibles improve

Teva's credit moved up with the stock but at a slower pace as the credit is already extremely tight.

Early on Monday, the convertibles were higher as the stock climbed to $42.50 and held steady even as the stock eased back toward the close. The stock traded in a band of $41.70 to $42.93 on Monday.

Teva's 1.75% convertibles due 2026 were 100.75 bid, 101 offered with the stock at $42.65, and the 0.25% convertibles due 2026 were 101.25 versus a $40.50 stock price.

"It's not really a credit story, it's more of a stock story," remarked a sellside source in the convertible market. "The equity analysts would probably have modeled this to hell."

On the impact of the news to Teva's credit, the source added, "The credit is already so tight, I don't know if it can tighten any more. You'd have to go with U.S. Treasuries to get a better interest rate."

NeoPharm slides over 6%

NeoPharm, Inc. took a dive Monday in the face of a "cost rationalization" program announced by the company on Friday. The company said the restructuring is expected to reduce expenses by $7 million a year, half of which should be realized in 2006, but players in the name said there was concern about a drastic cut in the company's workforce and research programs.

The Waukegan, Ill.-based biotech said it slashed its workforce by 23% to affect the cost savings.

"The goal of this program is to balance and achieve efficiencies which adequately support the company's business strategy," the company said.

With enrollment complete for a phase 3 clinical trial for its lead drug product candidate, cintredekin besudotox to treat cancer tumors, NeoPharm said it is now focused on preparing for a possible FDA submission on the drug, completing a manufacturing program, reprioritizing its NeoLipid delivery program and completing ongoing clinical trials.

NeoPharm shares (Nasdaq: NEOL) dropped 49 cents Monday, or 6.13%, to $7.50.

"The fear here is that they are going to go at this alone and may not really have the resources to do it," said a buyside trader. "If they have no possible partners in this, which this move seems to suggest, that's not good news, either."

He noted that in NeoPharm's research activity has been shrinking for over a year now, which would infer that growth potential is petering out. He said the company's 2005 annual report showed research and development expense decreased by $12.7 million from 2004 due to a previous "cost rationalization" program adopted toward the end of 2004 that led to a scaled back number of clinical trials.

Alnylam shares off 4.5%

Alnylam Pharmaceuticals, Inc. also took a dive Monday even as the company reported positive data from a phase 1 clinical safety trial for its respiratory RNA interference therapy, ALN-RSV01. Traders said the early results were already priced into the stock and, in general, the selloff was the result of profit taking.

"I'm not surprised. These phase 1 trials were simply intended to measure safety of the product. Note it was tested on healthy volunteers. Expectations were already built in that it would be shown to be safe and hence, it doesn't bring in buyers," a sellside trader commented.

"It was another milestone and also bodes well for the flu studies later this year. People need to be patient on this one. It will be over a year before ALN-RSV01 is going to phase 3. Maybe at that time people can start betting on revenues from the treatment. For now, it is simply a long-term play on RNAi or on the hype surrounding pandemic flu.

Alnylam shares (Nasdaq: ALNY) on Monday fell 70 cents, or 4.55%, to $14.68.

The company announced that ALN-RSV01 was found to be safe and well tolerated when administered intranasally in two phase 1 clinical studies evaluating the treatment on respiratory syncytial virus infections. The company said it is the first RNAi therapeutic in human clinical development for an infectious disease.

"I'd definitely buy here," the trader continued, "because I think the markets are truly underestimating this technology. I think the biggest issue is how to allocate funds between Alnylam and RNAI [Sirna Therapeutics, Inc.]. It's hard to say which one, if either, will dominate, yet it does seem as if these two are going to be the big players in the space."

Sirna shares (Nasdaq: RNAI) on Monday were higher by 10 cents, or 1.32%, at $7.66.

"What encourages me is the overwhelming number of studies from disparate quarters, all with positive results. I agree that it sure seems that if a warning flag were going to be raised regarding the technology, we would have certainly detected some hint of it by now. Add to this the coming together of nanotechnology-type delivery systems, and we are approaching a critical mass," the trader added.

"And yet the markets are so asleep at the switch and caught up in companies like CELG [Celgene Corp.] that great news can come our way on a day like today, and a handful of traders still have the power to take the thing down on a few hundred thousand measly shares. When the wake up call comes, I think it will be very loud."

Celgene quietly eases back

Celgene has been a high-profile riser in the biotech sector this year as its products reach maturity, the trader said. The stock was pulling back Monday, after last week's pleasing first-quarter report, but on light volume.

Last week the company reported first-quarter earnings that were mixed, meeting internal targets but slightly missing consensus analyst estimates. More importantly, many analysts were impressed with sharply better-than-expected sales for its Revlimid - a drug used to treat transfusion-dependent anemia.

Furthermore, analysts said sales of Celgene's Thalomid - used to treat erythema nodosum leprosum, a form of leprosy - were surprisingly solid. Based on the quarterly numbers, several analysts boosted their revenue expectations through 2010.

Celgene shares (Nasdaq: CELG) on Monday slipped by 34 cents, or 0.81%, to $41.82 with 3 million shares changing hands versus the norm of 3.5 million shares.

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