Teva purchases Ivax, both higher; Endo Pharma climbs on possible sale of Ivax pain drug

By Ronda Fears

Nashville, July 25 - Teva Pharmaceutical Industries Ltd.'s $7.4 billion acquisition of Ivax Corp. joins the top two generic drug names in the game and sent ripples throughout the group on speculation of further contraction. But the reaction was broadly mixed. and moreover biotech and drug stocks were weaker in a lackluster session Monday.

"It [the Teva/Ivax news] should've been good news for biotech/pharmas, huh? But it wasn't. Sepracor got whacked. Amgen, Genentech, they were both hit, too. Overall, it wasn't such a great day," said a fund manager in New Jersey. "On the upside, it was a pretty slow day, in terms of volume, so that lessens the impact."

The pharmaceutical and biotech indices were notably lower Monday, following the broader markets.

Teva and Ivax were cheered on their news and there were a couple of other smaller generic names moving up on their news, but just as many, or more, declined on the event. Among the gainers, Endo Pharmaceuticals Holdings Inc. was the leader as it is seen as having a chance to close ranks in the competition for generic OxyContin if Ivax's generic version is put up for sale.

Noteworthy on the downside were genomics researcher Incyte Pharmaceuticals and Forest Laboratories Inc. Incyte plummeted 15% after releasing mixed Phase IIb data for its HIV drug Reverset, but some onlookers saw it as an over-reaction and time to put in buy orders. Forest Labs slipped after the U.S. Food and Drug Administration deemed its drug application for Namenda "un-approvable" to treat mild Alzheimer's disease.

Advanced Life Sciences on tap

Primary market activity wasn't entirely lifeless Monday. Advanced Life Sciences Inc.'s initial public offering, proposed at $11 to $13 per share, was on deck to price after the close, according to a buyside source.

Woodbridge, Ill.-based Advanced Life Sciences is focused on novel drugs in the areas of infectious disease, inflammation and oncology. Proceeds, together with existing cash, are earmarked to continue clinical trials, make related milestone and license payments to Abbott Laboratories and repay debt. Underwriters are C.E. Unterberg Towbin, ThinkEquity Partners LLC and Merriman Curhan Ford & Co.

Also, Avalon Pharmaceuticals Inc.'s IPO, proposed at $10 to $12 per share, has been expected for July's business but a status has not been available on that deal.

LabCyte raises $21 million

Closely held Labcyte Inc. said it closed on $21 million in series C financing led by Cross Atlantic Partners. Investors also included Hambrecht & Quist Capital Management, Bay Area Equity Fund, Abingworth Management, Alloy Ventures, Delphi Ventures and the Sprout Group.

"We are very pleased to bring additional high quality investors into Labcyte and anticipate their assistance in the accelerating commercialization of our technology," chief executive officer Elaine J. Heron said in a news release.

Labcyte said it will use these funds toward marketing the Echo 380 auditor, which allows rapid determination of solution volume and water content in compound collections, and to continue commercializing the company's technology in genomics and proteomics.

The company has marketed its Echo 550 compound reformatter, which transfers library compounds directly into assay plates and eliminates the need for tips, washing and intermediate dilutions.

Teva, Ivax combo cheered

Teva and Ivax were both cheered from the equity ranks, although debtholders in the convertible market were somewhat disoriented about the treatment of those securities in the structure of the proposed merger.

Ivax shares climbed $2.29, or 10%, to $25.17 on the news. Teva's bid is equivalent to roughly $26 in cash or 0.8471 Teva ADRs, subject to proration for a 50% cash/50% stock transaction, which would give Ivax holders about 15% of Teva equity on a fully diluted basis.

"The deal would accelerate the ongoing consolidation of the generics industry - a natural reaction to the deteriorating pricing environment, in our view," said Smith Barney Citigroup analyst Andrew Swanson in a report.

S&P credit analyst Arthur Wong had said last week that the next several years will hold less generic drug exclusivity opportunities and will be marked by greater competition. "This period will also see generic drug companies retrench and re-evaluate their specialty pharmaceutical ambitions," Wong said. "Given these developments, we expect pressure on the credit ratings of generic drug companies in the near term."

Teva said the cash portion will be funded using a combination of cash on hand and committed credit facilities. Teva shares added 7 cents on the day, or 0.22%, to close at $31.23.

Standard & Poor's placed its ratings for Teva, including the BBB corporate credit rating, on negative watch on the merger news, noting the deal would join the world's largest and second-largest generic drug companies and significantly expand Teva's positions in Latin America and Eastern Europe.

Teva, Ivax a breath of fresh air

Smith Barney's Swanson said it seems Teva is most interested in Ivax's respiratory assets - recognizing the respiratory market as one of the few remaining generic oligopolies.

Comments from the two companies indicated that Swanson's assessment was correct, in that Teva specifically noted Ivax's significant respiratory business and a "rich" pipeline of generic and proprietary products in the areas of respiratory, CNS, and oncology. Based on existing operations, Teva anticipates combined annual sales of more than $7 billion.

"Bringing our two companies together will vastly enhance our leadership position in the global generic industry," said Teva chief executive Israel Makov. "The combination of our two complementary businesses will allow Teva to expand and strengthen our global generic and branded businesses with additional products, a deeper pipeline, and a wider presence in new therapeutic areas and growth markets."

There are balance sheet hurdles, however.

Based on 12-month rolling results ended March 31 and assuming half the transaction is funded with debt, S&P's Wong estimated funds from operations to total debt is 24% and debt to EBITDA is 3.4x - neither of which is consistent with the current rating. Teva's ability to sustain its strong operating performance and improve credit protection measures will be key to preventing a potential rating downgrade.

S&P put Teva on negative watch, noting that while Ivax generated $303 million of funds from operations for the 12 months ended March 31, it has $337 million of cash against more than $1.1 billion of debt outstanding - mostly convertible bonds.

Ivax convert holders threatened

Teva's purchase of Ivax created widespread confusion centered on the treatment of the Ivax convertibles - four issues that total upward of $1.5 billion, only one of which has takeover protection of any kind.

At first blush, the reaction among holders of Ivax convertibles was to head for the doors on the threat of ending up with issues linked to an all-cash merger transaction, as suggested by Merrill Lynch convertible analyst Tatyana Hube.

On an outright basis, Teva's convertibles were off 0.25 to 0.50 point while the Ivax issues were up by several points, but traders said there was little to no activity in the Ivax bonds. Teva shares added 7 cents on the day, or 0.22%, to $31.23 while Ivax shares surged $2.29, or 10%, to end at $25.17 versus the merger terms that value Ivax shares roughly at $26.00 each.

On the other hand, an all-cash transaction would be disastrous for convertible arbitrageurs sitting on a short position in Ivax shares as the stock zoomed on the news, or looking at being involved in the Teva story because those shares also gained.

Some hedge guys even looked at putting on a risk arb position, but that circled back to an exit door, too. "Yeah, there was a risk arb trade but it was a 1 point spread and the annual return was less than 4%," said one buyside manager whose firm has both a convertible arb and risk arb strategy. "So, yeah, there was a trade there, but why bother. It was so small, if the wind blew the wrong way just a little bit it would screw you up."

Thus, the upshot, said one sellsider, was a sense that "you might be better off selling the bonds."

Ivax timing to sellout a surprise

Ivax has a strong pipeline, though, and fans of the story point to a future stream of revenues that make the sellout to Teva right now a bit perplexing.

"Well, it makes for one less company out there that could lower prices [and] broadens Teva's global reach and builds on the specialty branded therapeutics area," said a buyside analyst. "Strategically, it's probably a good deal for Teva, but curious that Ivax would sell now, ahead of a breakout year starting in 2006."

As for Teva's strategy it seems smarter to attack a large competitor rather than pick off the numerous smaller ones. Moreover, the pickings were slim outside of Ivax, as well, some onlookers said.

"The smaller ones didn't have as much to offer," said the buysider. "Teva is thinking global and the price paid for Ivax is not extreme, looking at 2006 Ivax EPS estimates."

Smith Barney's Swanson said combined, the two companies would control more than half of the generic Augmentin market and the number of generics would be reduced from 4 to 3. Not reflected in the available sales data is Ivax's recently launched authorized generic for OxyContin.

Teva and Ivax management also stated intentions to push forward with all of its drug candidates for the treatment of multiple sclerosis, including three oral products - laquinimod, Mylinax, and oral Copaxone - but Swanson said he suspects regulatory authorities will require them to divest at least one of these.

Divestures might be painful

One of the more interesting potential divestures - of Ivax's generic OxyContin - created momentum buying in Endo Pharmaceutical Holdings Inc., a sellside trader said.

Endo has been successful in litigating patent suits argued by OxyContin maker Purdue Pharma Ltd., a closely held biotech, that has opened a door for many others. And, Ivax's version of the drug is considered a big revenue generator.

"We expect Ivax to derive significant sales during the six-month exclusivity period that ends in December 2005, before the acquisition is expected to close, and the pending merger gives both companies an incentive to maintain rational pricing," Smith Barney's Swanson said. "We assume, however, that Teva would be required to relinquish the authorized generic after the acquisition and believe that another competitor is likely to emerge."

The generic pain drug could be a lucrative product or asset, said a buyside analyst.

"It has been gaining market share. That may be seen as a big loss in the Ivax pipeline, but then it also may be a good asset to have on the sale block," the buysider said.

Jefferies & Co. analyst David Windley pointed out in a report Monday that total prescriptions for Endo's Oxycodone increased 13% and its market share increased to 29.4% from 27.9% last week. Total prescriptions for Ivax's product increased 24% in the same period, he said, and its market share rose 300 basis points to 21.8%. Meanwhile, the Jefferies data showed the market share for Purdue's branded OxyContin fell to 41.3%.

Incyte selloff a chance to buy

Incyte Corp. fell sharply Monday after the company released phase IIb data on its HIV drug Reverset but some argue the dive is a buying opportunity.

On the data, Incyte shares plummeted $1.34, or 15.3%, to $7.42.

"We believe that today's sell-off is unwarranted and expect the stock to rise as people absorb the key takeaways of today's results," JMP Securities analyst Adam Cutler said. Moreover, he added, the "sell-off presents a buying opportunity."

Incyte released interim results of a phase IIb study of Reverset in treatment-experienced HIV patients, which Cutler interpreted as positive. But, he said investors may be concerned that one conclusion of the study was that Reverset should not be used in combination with ddI due to side effects, in addition to better results for Reverset when not used with 3TC or FTC, two other HIV drugs that are components of most first-line regimens.

Cutler dismissed both lines of thought, as other drugs are not supposed to be used with ddI for the same reason and ddI is not a widely used drug anyway. In addition, he noted that Reverset is in the same class of drugs as 3TC and FTC, so Reverset would be a replacement of those drugs rather than an addition to a regimen.

aaiPharma bounces on unit sale

aaiPharma Inc. securities got a bounce Monday, likely from the completed sale of the bankrupt company's pharmaceuticals division for $209 million to Xanodyne Pharmaceuticals Inc.

In addition, and as part of the sale transaction, aaiPharma will receive royalties based on future sales of pipeline products, if those products are successfully developed, approved and commercially launched. Xanodyne also committed to purchase a minimum of $30 million of services to be provided by aaiPharma's Development Services Division over the next three years, subject to certain conditions.

The aaiPharma 11.5% bonds due 2010 gained 3 points to 94 bid, 96 offered, and the common shares added 2 cents, or 2.86%, to close at 72 cents.

aaiPharma had previously received approval of the transaction in mid-July from the bankruptcy court. Under the terms of the agreement, Xanodyne paid $209.25 million upon closing of the transaction, with $8 million of that amount paid to an escrow account to satisfy aaiPharma's post-closing obligations.

A portion of the proceeds were used by aaiPharma to repay in full the $180 million term loan portion of its debtor-in-possession financing facility. A portion of the remaining proceeds is being used to pay fees and expenses arising from the transaction, including payments to cure defaults under contracts assigned to Xanodyne in the sale.

"This divestiture allows us to significantly decrease the debt burden on the organization. It also gives us the opportunity to focus on the re-emergence and growth of our product development services business," said aaiPharma chief executive Ludo Reynders. "Close collaborations with our customers, like the one we start today with Xanodyne, are key to the successful execution of our plan."

Fresenius shifts funds, cuts spread

In other news, Fresenius Medical Care AG recently shifted $500 million from its not-yet-launched term loan B into its term loan A and cut pricing on both its in-market pro rata tranches, according to a market source.

More specifically, the five-year term loan A was upsized to $2.0 billion from $1.5 billion and pricing on the paper was reduced to Libor plus 137.5 basis points from Libor plus 150 basis points, the source said.

Pricing on the $1 billion revolver (size unchanged) was also cut to Libor plus 137.5 basis points from Libor plus 150 basis points.

These pro rata tranches contained in the Fresenius deal were launched in Germany and the United States at the end of June with two separate bank meetings.

Meanwhile, the seven-year term loan B, which is not expected to launch into syndication until the fall, was reduced in size to $2.0 billion from $2.5 billion, the source added.

Bank of America and Deutsche Bank are the lead banks on the deal, with Bank of America the left lead.

Proceeds from the $5 billion credit facility will be used to finance the acquisition of Renal Care Group Inc. for about $3.5 billion, plus the assumption of about $500 million of Renal debt.

In addition to funding the acquisition, Fresenius will also use the new loan to replace its existing $1.2 billion credit agreement.

At closing, debt to EBITDA will be a little over 4x but the company hopes to bring that multiple down to 21/2x to 3x over the course of the next two to three years.

Under the acquisition agreement, Fresenius will pay $48.00 per Renal share in cash. The transaction, which is expected to close in the second half of the year, is subject to Renal Care shareholder approval and other customary closing conditions, including Hart-Scott Rodino.

Fresenius is a Bad Homburg, Germany-based dialysis products and services provider. Renal Care is a Nashville, Tenn.-based dialysis service provider.

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