Tanox soars 45% on Genentech buy; Targeted Genetics adds 26%, Pozen higher; Insmed, Tercica better

By Ronda Fears

Memphis, Nov. 10 - Amid an increasingly friendly environment for mergers in the biotech universe, Tanox Inc. took off Friday on news late the day before of its acquisition by drug partner biotech giant Genentech, Inc. for $20 a share, or nearly a billion dollars.

Yet, some onlookers were disappointed with the reaction in Genentech shares, as the company seemed to snap up Tanox at a hefty bargain to the going price tags in the sector.

"Genentech is paying a 47% premium and according to one report we have seen recently, the average premium in biotech buyouts over the past year is like 62%," said a sellside market source.

Genentech shares (NYSE: DNA) gained 24 cents on the day, or 0.3%, to close at $81.57.

Tanox shares (Nasdaq: TNOX) closed Thursday at $13.64 and rocketed up by $6.11 in heavy trade Friday, or 44.79%, to settle at $19.75.

San Francisco-based Genentech is paying $20 per share, or roughly $919 million, for Houston-based Tanox. The two have been working in collaboration with Novartis AG since 1996 to develop and commercialize Xolair, a monoclonal antibody approved by the FDA in 2003 for moderate-to-severe allergic asthma.

"This is the first acquisition that Genentech has done and is probably the lowest risk acquisition the company could have possibly done," said Merrill Lynch analyst Eric Ende in a report Friday. "But, the deal could signal less confidence in its organic growth prospects."

Upon closing, Genentech said it will improve its financial results for Xolair by eliminating the royalty it currently pays to Tanox and by obtaining Novartis' profit share and royalty payments to Tanox. Genentech will also acquire Tanox's product pipeline. Tanox's lead product candidate, TNX-355, is a viral-entry inhibitor antibody to treat HIV/AIDS currently in phase 2 trials.

The transaction, announced after the market close Thursday, is expected to be completed by the end of first-quarter 2007, and Genentech said it would fund the purchase with cash on hand.

"With Genentech getting into the buying game, the landscape is getting very interesting," the sellsider continued. "The dynamics could be shifting. Amgen and Genentech would step up the stakes, you'd think, because we know the Big Pharmas have deep pockets. But then they come out with what is really a low-ball acquisition price. So, it's pretty interesting."

Targeted Genetics still rising

In another deal that has sparked takeover noise, Targeted Genetics Corp. continued to rise Friday, traders said, on steam from news earlier in the week that it would restructure a pre-existing deal with Biogen Idec, Inc. In that deal, the companies agreed to restructure $8.15 million of debt owed by Targeted Genetics by boosting Biogen's stake in the Seattle-based biotech.

Targeted Genetics shares (Nasdaq: TGEN) added 85 cents on the day, or 26.32%, to settle Friday at $4.08, following a 28% gain the day before.

"Looks like people are calculating what Targeted Genetics was paid for those shares, and the implications of the stake in Targeted Genetics," said a sellside biotech equity trader.

"Biogen is paying $5.65 a share. Biogen clearly thinks Targeted Genetics will be headed for some kind of success. My short-term target is $3."

On Tuesday, Targeted Genetics and Biogen announced that under an amendment of terms, Cambridge, Mass.-based Biogen has agreed to convert $5.65 million of debt into 1 million shares of Targeted Genetics stock. Targeted Genetics will pay $500,000 of the remaining debt immediately and the remaining $2 million will be paid under to a new repayment schedule.

As a result of the new arrangement, Biogen's stake in Targeted Genetics will increase to 19.9% of the total outstanding common stock.

There was heavy short covering following the news and many buyers stepping into the story, the trader said, but also some people cashing out of the story on the view that Biogen was not interested in Targeted Genetics or it would be making a buyout bid.

"There is no change in fundamentals, other than some temporary financial relief. If you think about it, Biogen didn't have much choice, and they took a licking. It was either this or walk away. The fact that Biogen is not interested in buying out the company underscores what is going here," said a market source in Florida. "It looks like this may be the time to take money off the table and come back later, if you don't think the breakthrough product announcement is around the corner."

On Oct. 25, Targeted Genetics received an additional patent related to its adeno-associated virus vector technology that describes delivery of genes or delivery of small therapeutic genetic constructs or small therapeutic genetic constructs including therapeutic RNA molecules such as RNAi.

The trader said players are pumped about the prospects of a hefty price tag should Targeted Genetics become a takeover target. Recall, he said, Merck & Co. Inc.'s purchase last week of Sirna Therapeutics, Inc. for $13 a share, or $1.1 billion, was more than double where the stock was trading beforehand.

Pozen bounces back, adds 3%

Pozen Inc. bounced back Friday on optimism that further trials will not be required for its migraine drug candidate Trexima, traders said.

The stock (Nasdaq: POZN) added 40 cents on Friday, or 2.7%, to close at $15.24, after losing 7% the day before when the Chapel Hill, N.C.-based biotech said it had responded to safety concerns raised by the FDA.

"I knew it was only temporary [the drop Thursday]. Glaxo has been through the process many times. Plus, if there was something seriously wrong, AstraZeneca would not have signed a similar deal," said one sellside trader.

In September, Pozen Inc. received a $40 million payment from AstraZeneca plc related to a collaboration to develop pain and inflammation drugs for arthritis patients at risk of developing medication-related ulcers.

As for Trexima, Pozen said Thursday it had submitted a full response to the FDA's approvable letter for the drug - a combination of GlaxoSmithKline plc's Imitrex and naproxen sodium, or generic Aleve - in a single tablet to treat acute migraines. The FDA will have up to six months to review the information contained in the full response. The FDA in June issued an approvable letter for the drug but wanted more safety information on the drug.

"Supposedly, Pozen has addressed all the safety concerns, and the hope is that no further trials will be required," the trader said. "The FDA has 60 days to review the new information and then we will find out."

The fear, he added, was that the drug would end up like MT 100. In August, Pozen halted development of MT 100, another migraine drug, following an FDA committee's recommendation against approval because of safety concerns.

"I love it when a stock acts like this because when panic selling occurs it gives me the opportunity to add more shares at a steal," the trader said. "I look at this as another great opportunity."

Insmed, Tercica settlement buzz

Traders said ongoing noise that there was a settlement in the works between rival biotechs Tercica, Inc. and Insmed, Inc. - in the midst of a patent battle over their competing hormone growth deficiency drugs - pushed both stocks higher Friday.

Insmed shares (Nasdaq: INSM) added 5 cents, or 3.91%, to $1.33. Tercica shares gained 24 cents, or 4.75%, to $5.29.

"There was a rumor that began circulating Thursday that Tercica was offering to drop all suits if Insmed will agree to produce Increlex at 10% over cost with some quality assurance incentives and penalties. The scuttlebutt was that Insmed has accepted in principle, but will require Tercica to provide all manufacturing specifications and full indemnification," according to a sellside trader.

"Tercica estimates they can save about $500,000 per quarter getting away from Cambrex, but Insmed is concerned that they will not be able to make Increlex at the lower quality standard of Tercica."

Tercica has contracted Cambrex Corp., based in East Rutherford, N.J., to produce insulin-like growth factor-I used to make its Increlex. Insmed has the competing hormone growth deficiency drug Iplex on the market. Both are marketed to treat children with growth hormone deficiency.

They are in the middle of a patent dispute that is slated to go to trial later this month.

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