Par shares plunge, convertible up with restatement; Savient up on new CFO; Gene Logic moves up

By Ronda Fears

Memphis, July 6 - Par Pharmaceutical Cos. Inc. shares eclipsed a five-year low Thursday after the generic drug maker said it will restate previously reported revenue downward by $55 million - going back to 2004 - and delay the filing of its second-quarter results.

"The conference call [Thursday at 8:30 a.m. ET] did more harm than good," said a buyside market source.

Par shares (NYSE: PRX) opened at $15 versus the $18.25 close on Wednesday before the news surfaced. The stock traded as low as $12.80 but recovered some of the day's losses to settle the session lower by $4.78, or 26.19%, at $13.47. A whopping 9 million shares traded, versus the three-month running average of 621,214 shares.

In the face of the stock's decline, however, Par Pharma's 2.875% convertible due 2010, which still carries the company's previous name, Pharmaceutical Resources, Inc., saw heavy activity and was quoted higher by 5 points - on an outright basis - at 86 with the underlying stock at $13.10.

Late Wednesday, the Spring Valley, N.J., company said it will restate financial results for fiscal years 2004 and 2005 and first-quarter 2006 after an internal review uncovered accounting errors. It expects the restatements will reduce revenue by up to $55 million over the periods, prior to any potential recoveries, and it also will write off $15 million in inventory.

Par convertible positioning seen

The Par Pharma convertibles gained on a combination of a couple of factors, a convertible sellsider told Prospect News. First, he said, there is always a possibility of a takeover on a distressed stock price.

"It's that much cheaper, but any buyer would have to be comfortable with all the...issues with the restatement," the sellsider said. Also, he added, "There's some thought that...there could be an issue with acceleration of the bonds, but there are a lot of viewpoints on the issue."

A convertible analyst said it was difficult to know if there was going to be any default event, noting that Par Pharmaceutical has until about September to report its finances and avoid a default on its debt.

"It could take a long time, but then it was an internal probe that discovered it, and they've already quantified the worst case scenario for everybody," the analyst said.

If the company fails to turn in its required filings on time, investors could get to put the convertibles at par. If not, the notes will probably retreat to their earlier levels, the analyst said.

"It was a great situation for hedge people," the analyst said. "The stock fell and the bond went up...It was probably good for outrights too, but the stock dropped so much that the hedge players were really happy."

Par sees material EPS impact

Par said it hasn't yet been able to determine the impact to past reported earnings, but it will be material. Thus, traders said the reaction to the news was devastating. But the company said it expects to remain in compliance with all its debt covenants and has $183 million in cash and cash equivalents.

The biotech equity buysider mentioned that at least one sellside investment firm was keeping a neutral view of Par because of disappointment after Par Pharma's conference call. He said he did not sit in on the call Thursday but would probably go to the replay while the market was closed.

"The firm said little new information was provided by the company during a conference call held earlier Thursday, and no questions were allowed," he added. The analyst "wrote in a research note that his firm has nothing to add on the topic, given the lack of disclosure from Par."

Amid the slide, though, another buyside source said there was "huge support at the bid and big block buying at the ask," noting an after-hour rise in the stock. At 5:21 p.m. ET, the stock was up 9 cents from the close, or 0.67%, at $13.56, and the buysider said he saw it trade as high as $13.69 in after-hours activity.

An internal review begun after the recent hiring of new key finance staff, including chief financial officer Gerard Martino, revealed an understatement of accounts receivable reserves due primarily to delays in recognizing customer credits and uncollectible customer deductions, Par Pharma said.

Savient rises by more than 6%

A change in financial officers was a big shot in the arm for Savient Pharmaceuticals Inc., however.

Savient announced Thursday that it has appointed Brian Hayden as chief financial officer and treasurer, effective immediately. Hayden was previously CFO of Bone Care International Inc. Savient said Gina Gutzeit, who has been serving as interim CFO, will continue with the company in a consulting role to ensure a smooth transition over the next few weeks.

Savient shares (Nasdaq: SVNT) added 34 cents on the day, or 6.38%, to close at $5.67.

East Brunswick, N.J.-based Savient markets Oxandrin, an oral synthetic derivative of testosterone used to promote weight gain following involuntary weight loss related to disease or medical condition. It also markets oral liquid formulations of dipyridamole, furosemide, dexamethasone, sulpiride, methadone and folic acids.

In April, Savient inked a distribution agreement for Cytogen Corp.'s Soltamox, a liquid tamoxifen, an estrogen blocker used in breast cancer treatment, for an upfront licensing fee of $2 million plus sales-based milestone payments totaling $4 million to Savient and its subsidiary, Leeds, U.K.-based Rosemont Pharmaceuticals Ltd. Princeton, N.J.-based Cytogen expects to launch Soltamox in third quarter.

Meanwhile, DOV Pharmaceuticals, Inc. continued to decline in the aftermath of news that its chief executive had resigned in the wake of setbacks with Food and Drug Administration approval for the sleeping pill indiplon it has licensed to Neurocrine Biosciences, Inc. and its own bicifadine for chronic lower back pain. DOV Pharma shares (Nasdaq: DOVP) lost 2 cents Thursday, or 0.915, to $2.18, while Neurocrine shares (Nasdaq: NBIX) added 8 cents on the day, or 0.77%, to $10.53.

Gene Logic gains 3%

After a routing two weeks ago that sent Gene Logic Inc. shares lower by 36% - after the company said second-quarter sales for its genomics division will fall short of expectations, which forced it to withdraw financial guidance for 2006 and 2007 - the stock rose sharply on buzz of a big buyer.

Gene Logic shares (Nasdaq: GLGC) gained 4 cents on the day, or 3.03%, to $1.36 and were seen in after-hours trade up by another nickel, or 3.68%, at $1.41.

A buyside source in New York said chatter Thursday that there was a "big buyer" for Gene Logic shares was speculated to refer to additional purchases by independent investor Lloyd I. Miller of Naples, Fla., although that was not confirmed. Miller disclosed in a 13-D filing at the Securities and Exchange Commission on June 23 that he had increased his holdings in Gene Logic to nearly 2 million shares, or roughly 6% of the company.

"Unfortunately, I am long since the $4s. This management seems to be a bunch of screw ups. The genomics division was the one part of the company that was doing well, but it now seems to be collapsing," the New York-based buysider said.

"They seem to be losing business, which makes me wonder if their intellectual property has any value. The drug repositioning business has made almost no money so far, and may never do so. The contracts don't mean much, as Gene Logic seems to have to pay for the research with any profits to be shared with the company that supplied the compound to be repositioned. There is no guarantee they will be able to reposition anything. As for the clinical services division, they overpaid for it, then had to take that goodwill impairment, and generally don't seem to be running it effectively. There is tons of competition in that business too.

"The genomics division was the cash cow that was supposed to keep the rest of this ship afloat (sorry about that mixed metaphor; have a laugh on me).

"Another thing I don't like is management's BS...making all sorts of vague statements and predictions that don't come true. Now I am wondering if they can do anything right, and if there really is any value in this company.

"I haven't sold because my shares have lost so much value I figure the educational benefit of sticking around and seeing what happens will be worth any possible future losses."

Miller's move encouraging

While the New York buysider expects further pain for Gene Logic shares, he said he was encouraged by the spike Thursday and Miller's investment in the company, whether it had anything to do with Thursday's gain or not.

"Still something good could happen. Right now, I think the best outcome may be a buyout, assuming Gene Logic has anything worth buying," he said. "Let a company or investor group that knows what it's doing buy it out, and either sell off Gene Logic's assets, or turn the company around with a new team. This Miller news is interesting. Maybe he can wring some value out of this company for us.

"Mr. Miller has a past of buying biotech companies which are trading under $2 and have a somewhat large amount of cash. I believe this is an extremely positive sign for shareholders, finally news we can move on."

Miller is an independent investor and has served on numerous corporate boards. He is a member of the Chicago Board of Trade and the Chicago Stock Exchange and traded actively on the floor of the CBOT from 1977 to 1992. He is a registered investment adviser.

Micrus up 5% on guidance

Medical device maker Micrus Endovascular Corp. moved up on its guidance, though.

Micrus said Thursday it expects fiscal first-quarter revenue to increase by 76% to 79% from last year on higher sales of its microcoil products used to treat aneurysms.

The San Jose, Calif.-based company said it expects revenue in the quarter ended June 30 to be between $12.5 million and $12.7 million, up from $7.1 million a year ago and well ahead of the Thomson First Call analyst average estimate of $10.3 million.

The company is scheduled to report quarterly results in early August.

Micrus shares (Nasdaq: MEND) added 59 cents on the day, or 5.15%, to $12.04.

The company went public in mid-June 2005 at $11, which was below price talk in a range of $12 to $14 a share.

Kenneth Lim contributed to this article.

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