Illumina gains after spot sale; Neurocrine, DOV mixed; Pozen pounded; Alkermes dips, settles higher

By Ronda Fears

Memphis, May 19 - The biotech sector settled Friday in positive territory, but traders said what with light volume and the options expiry factor they were not putting much stock in the mild upswing. Moreover, traders said they were skittish about holding long positions going into the weekend.

"Everyone is asking, 'Is the correction over?' In my opinion, no. I'd love to be wrong, but I don't think we've seen the bottom yet," said a buyside market source in New York.

"Right now the markets in general are in decline and in particular, the biotech index is in a freefall [down 8% in the last 10 days, and 15% since the beginning of March]. So many funds are exiting the biotech sector. I don't think the tide has rolled out completely yet. But when it does, I'm in."

The two high-profile "bio-wrecks" of the week - Neurocrine Biosciences, Inc. and DOV Pharmaceutical, Inc. - suffering losses of 70% and upward as the result of trouble Monday with Food and Drug Administration approval for the sleeping pill indiplon, only partly recovered by Friday.

Neurocrine shares (Nasdaq: NBIX) ended with a gain of 10 cents Friday, or 0.51%, to close at $19.60. The stock was at about $55 on Monday ahead of the FDA action, which delayed approval on indiplon in a lower dosage form while rejecting a higher dosage of the drug. Essentially the action put the drug out of competing for a larger sleeping pill market and severely curtailed potential revenues from it with estimates of annual sales now running around $200 million versus a previous forecast of $1 billion.

DOV Pharma shares (Nasdaq: DOVP), however, lost 6 cents on Friday, or another 1.96%, to settle at $3. The stock had opened the week in the neighborhood of $7. Indiplon developer DOV will receive a 3.5% royalty on its sales. Pfizer, Inc. is set to be the marketer of indiplon, but in light of the FDA action some analysts think it may abandon it back to Neurocrine.

Pozen pounced on nerves

With the severe reactions toward unfavorable FDA actions, many biotechs with applications pending at the agency were among the hardest hit in this week's slide, traders said. One still spiraling on such a possibility Friday, even as the broader sector moved up, was Pozen, Inc.

Pozen shares (Nasdaq: POZN) lost 80 cents on the day, or 6.16%, to end at $12.19.

"I took my profits at $14.50 [earlier in the week] after considering the impact on the stock should Trexima [a migraine drug in development with GlaxoSmithKline plc] not get approved. If that happens, there will be a 50% drop in value immediately and the path back up will be long and painful," said a buyside trader.

"Based on the decline of the stock, I can sense I'm not alone. I do believe, however, that Trexima will be approved and plan on getting back in after the announcement. I know I'll forfeit some gain by waiting, but I am sleeping better at night not having so much capital tied into the stock. Once Trexima is approved, I'm sure it will jump to $20 in a hurry. If I can get in at $15 post-approval, I'm still satisfied. Until then, I'll be watching daily."

Glaxo sees Trexima as a potential replacement for its blockbuster migraine drug Imitrex, which is due to lose patent protection in 2009. Imitrex is considered the gold standard for treating migraines, with 56% of the market and $1.1 billion in sales in 2005.

An FDA decision is anticipated in June and, if approved, Trexima could be available to patients as early as second-half 2006.

Illumina up 3% after deal

Although not a pure biotech, the new stock deal - a spot transaction - from Illumina, Inc. was heartening as it was just slightly discounted to get off, market sources said.

"The buyers [of the follow-on] were looking at being in the money by the close," said a sellside market source. "You can't beat that with a stick. Not only is it unusual in these types of deals, but in this market climate. I think it is very good news."

San Diego-based Illumina, which makes tools for the analysis of genetic variation and function, raised $89.25 million in proceeds from a follow-on offering of 3.5 million shares priced at $25.50 each, discounted from Thursday's close of $25.90.

As a result of the nice pricing, Illumina shares (Nasdaq: ILMN) gained 79 cents on the day, or 3.05%, to close at $26.69. The stock traded in a band of $25.39 to $27.75 on heavy volume of 1.9 million shares versus the norm of 660,248 shares.

Joint lead managing bookrunners of the offering were Goldman Sachs & Co. and Merrill Lynch & Co. Cowen & Co. also was a co-lead manager.

Illumina said it plans to use proceeds to fund research and development, to continue expanding manufacturing capacity as required and for working capital.

Still, despite the Illumina offering, three deals that had been hoped for this week's business - follow-ons from Adventrx Pharmaceuticals Inc. and Sirna Therapeutics Inc., plus the initial public offering of Quatrx Pharmaceuticals Co. - are now pushed to next week's calendar.

Alkermes ends slightly higher

Alkermes, Inc. weakened as players positioned for options expiration Friday and digested a weaker-than-expected forecast from the company, but settled the day higher as buyers stepped in after the company posted its first profitable year and a more than twofold spike in revenues even before its newly approved drug Vivitrol has hit the market.

"The reason for the huge volume is some one exiting at the same time some are entering," said a trader in New Jersey. "The shorts and the longs always meet on options expiration days."

Beyond that, an analyst at the New Jersey shop said the decline was in partly due to the company's forecast not meeting analysts' expectations, compounded by the options expiry.

Alkermes shares (Nasdaq: ALKS) traded as low as $18.83 before climbing in the last hour of the session to close up by 27 cents, or 1.37%, at $19.93.

"The CFO [James Frates] projected earnings in 2007 to be 5 to 10 cents. This projection is below analysts' projections of 17 cents," the buyside analyst said. "Truthfully, I expected much higher guidance. It appears that management is taking an extremely conservative position because of the uncertainty of Vivitrol sales for the near term. If, and this is a big if, health providers go along with the Vivitrol price we could be pleasantly surprised."

Vivitrol is Alkermes recently approved once-monthly shot to treat alcoholism. It is to be marketed with Cephalon, Inc.

Cambridge, Mass.-based Alkermes posted fiscal 2006 net income of $3.8 million, or 4 cents per diluted share, up from a net loss of $73.9 million, 82 cents per diluted share, in fiscal 2005. Revenues were $166.6 million, more than double the $76.1 million for fiscal 2005. At March 31, Alkermes had total cash and total investments of $303.1 million, up from $207.5 million a year before.

Preparing for the launch of Vivitrol and advancing diabetes product candidates are among the company's priorities for fiscal 2007.

"I am still bullish on Alkermes long term, but the conference call was extremely disappointing regarding guidance and a questionable $695 wholesale cost for each dosage of Vivitrol," the analyst said.

"The CFO projected $45 to $50 million in Vivitrol sales in fiscal 2007. The top end of sales will require approximately 25,000 participants for a minimum of three treatments. I am not saying that the sales projection won't be reached but I do have concerns about health providers paying what they're asking. So, I feel a bit empty but will remain in a holding mode until there is more visibility. The pipeline is moving as per schedule and still looks promising."

The company anticipates total revenues for fiscal 2007 to range from $200 million to $222 million and operating income to range from $15 million to $20 million.

Oscient seen as rare gem

During the downturn, which in fact has sidelined many players, there is a scramble to identify any bargains among the wreckage. Oscient Pharmaceuticals, Inc. was one discussed Friday by one fund manager.

"It seems we have finally found a bottom, and I think now is a great time to load up on more shares before the big buying begins," remarked the Chicago fund manager.

The market seemed to agree. Oscient shares (Nasdaq: OSCI) shot up 12 cents, or 10.62%, to settle at $1.25.

"The current market cap of Oscient was approximately $88 million, which is also approximately the amount of cash they have on hand at this time. This is crazy! They have a product [the antibiotic Factive for chronic bronchitis] that will do $45 to $50 million in revenue this year, and a second [the testosterone gel Testim] that will bring in $4 to $6 million, and the stock is selling at price of cash on hand," he said.

"Look at all the other biopharms that have no product on market, no revenue, but are selling at much higher premiums, all based on speculation. The recent price decline has unfortunately been the result of institutional selling. However, that is now done, and it is time to wake up and see the diamond in the rough here."

In addition, he said Oscient's ramoplanin - a phase 2 clinical trial completed product for the treatment of clostridium difficile-associated disease - has a better than good chance of success and will be huge if it does succeed.

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