Access in talks to dodge a forced bankruptcy; Exelixis trades down to follow-on level; Insmed seesaws

By Ronda Fears

Nashville, Aug. 17 - The biotech sector Wednesday was sluggish in terms of the mid-August lull that hits the market, but the sector overall was slightly higher. Still, deal action was extremely light with a follow-on stock sale from Exelixis Inc. and a big private stock sale from Santarus Inc. plus a handful of smaller PIPEs transactions announced Wednesday.

Santarus Inc. shares climbed more than 7% on Wednesday to $5.00 on the direct stock sale, which fetched the gastrointestinal drug developer $31.2 million. The 7.35 million shares were sold at $4.25 each, off from Tuesday's close of $4.66, to a group of institutional investors.

Secondary activity was showing the signs of buying, moving slightly higher, but traders said it was a typical thin, summer market.

Access in talks to sell assets

Access Pharmaceuticals Inc. got a huge shot in the arm Wednesday on its announcement of being in talks with potential buyers to sell business units that are not part of its long-term strategy, as well as negotiating amended terms on its convertible debt in an attempt to provide for its intermediate cash flow needs. Moreover, the company said it is trying to avoid a default that would force it into bankruptcy.

Regarding the convertibles, Access Pharma said it was in discussions with investors and investment firms to renegotiate the length and terms of the bonds.

In July, Access received a notice of possible delisting from the American Stock Exchange because its stockholder equity had fallen below thresholds required to maintain the listing. The stock still trades on the Amex, however.

The Dallas-based company said the sale of non-strategic units could generate enough cash to provide satisfactory debt coverage and cash flow needs in the near future. In its quarterly report filed last week at the Securities and Exchange Commission, the company said it had enough liquid assets to continue operations just through Aug. 31.

Access talking to bondholders

Access Pharma also said in the SEC filing that it might not be able to pay its liabilities as they become due, namely on the convertibles.

"All of these convertibles are toxic convertibles, in my opinion, which is why I am not involved," said one buysider at a biotech equity fund.

The company has about $8 million of convertible subordinated notes due September 2005 plus about $1 million in interest, $5.5 million of convertible subordinated notes due September 2008 and $2.6 million in secured convertible notes due March 2006 with initial partial repayment beginning this coming November.

The company said default on the notes would allow the noteholders to foreclose on its assets and force it into bankruptcy.

In early April, the company negotiated a private equity line with Cornell Capital Partners LP for up to $15 million plus sold the $2.63 million of 7% convertible debentures to Cornell Capital and Highgate House Funds. Those bonds convert at $4.00 each. Under the two-year equity line, with a $1 million drawdown limit, Access would sell shares at a 2% discount.

Exelixis loses 5.5% to $7.75

Exelixis shares traded down 5.5% to $7.75, where it priced the follow-on that emerged early Wednesday.

The South San Francisco biotech, which develops products for the treatment of cancer, metabolic disorders, cardiovascular disease and other serious diseases, sold 6.5 million shares of common stock off the shelf at $7.75 per share, discounted from Tuesday's closing level of $8.20.

On Monday, the company said it has planned to begin phase II trials by year-end for its three most advanced compounds - XL999, XL647, which are two anticancer drugs, and XL784, a diabetes treatment.

Insmed buys time with petition

Insmed Inc.'s petition at the Food and Drug Administration against rival hormone drug maker Tercica Inc. will probably buy some time, and meanwhile onlookers said the stock has priced in too much risk. Amid heavy volume, traders said Insmed shares were "all over the map" Wednesday as the petition became available.

Insmed shares were higher by nearly 6% in morning trade, then came off that but stayed in positive territory for most of the afternoon yet ended off by 2 cents, or 1.64%, at $1.20. Then, a trader said the stock was seen in after-hours trade adding back 4 cents, or 3.33%.

Tercica shares, meanwhile, closed up a penny at $8.58 in light volume.

The two companies are the top contenders in a growth hormone insensitivity treatment for short stature syndrome.

The petition was announced over the weekend by Tercica, but its content was not available until Wednesday. Insmed is asking the FDA to deny approval of Tercica's new drug application for its growth hormone drug, Increlex, which would compete with Insmed's lead candidate, SomatoKine.

Insmed's SomatoKine is expected to be approved by Oct. 3, while Tercica's Increlex could have gained approval as early as Aug. 31. Sellside analysts say their independent queries indicate pediatric endocrinologists favor SomatoKine over Tercica's Increlex.

"Tercica has received no communication from the FDA regarding how this Citizen Petition will affect the Increlex NDA, if at all," said John Scarlett, chief executive of Tercica, in the statement Sunday.

Severe short stature, or growth hormone insensitivity, is a subset of the $2 billion worldwide market for growth hormone therapies, according to analysts.

Insmed seen needing cash soon

If Tercica's Increlex is approved first, then it would be given orphan drug designation ahead of SomatoKine, but one sellside analyst said patent litigation is not a big near-term risk to Insmed. He is more concerned about Insmed's funding needs.

Ahead of SomatoKine, the analyst estimated Insmed will likely need an infusion of capital by the first half of 2006 to fund operations - namely to launch the new drug.

Insmed has less than one year of cash by the analyst's calculation against a significant amount of convertible debt, a $35 million 5.5% senior convertible note due 2010.

That said, the analyst has a buy rating on Insmed shares, asserting too much risk has been priced into the stock.

With the uncertainly about which drug will be approved first, though, a buyside analyst said he sees Insmed as a buy.

"From the little I've been able to glean, it looks like additional time would be needed to address the questions raised in the petition," said a buyside analyst. "So, Tercica will not get approval on the 31st."

He said one stand-out excerpt from Insmed's 16-page petition states: "Insmed requests that the FDA immediately deny approval of the NDA for Increlex because Tercica has failed to adequately show the safety of its investigational new drug. Specifically, Insmed believes that Tercica's NDA does not include data that adequately ascertain and document the risk of hypoglycemia and other serious adverse effects."

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