Cubist players hedging bets with puts; Insmed follow-on emerges; Elan up; Titan zooms; LifeCell up

By Ronda Fears

Memphis, March 6 - Anticipated action from the Food and Drug Administration this week steered a lot of biotech stocks Monday, in both directions, but traders said the overall sentiment in the sector was negative.

Elan Corp. plc was very active and higher ahead of the FDA panel discussion Tuesday and Wednesday about the potential return of its multiple sclerosis drug Tysabri to the U.S. market, despite an indication from briefing documents from the agency on Monday suggesting there will be more studies required. Elan and Tysabri partner Biogen Idec Inc. pulled Tysabri from the market in February 2005 after the drug was linked to a rare but deadly brain condition, and later the FDA mandated the drug's withdrawal.

While the FDA panel is in session, Elan shares will be halted, which traders attributed to the high volume in the stock. Some 17.1 million shares changed hands, versus the norm of 10.6 million. Elan shares (NYSE: ELN) gained 20 cents, or 1.6%, to settle Monday at $12.70. Biogen shares added a penny to close at $45.51 but were seen in after-hours trade off by 30 cents, or 0.66%, at $45.21. Elan shares were higher in after-hours activity and last seen at 5:01 p.m. ET at $12.71.

"Elan is one pent up stock ready to spring upwards," said a sellside trader. "That is why it will not be surprising that Elan could have a pop on Thursday or Friday if the recommendation is approval, as this removes a lot of the uncertainty."

Novavax, Inc. was sharply higher Monday after announcing that it had formed an alliance with Bharat Biotech International Ltd. for the "rapid" development of a pandemic flu vaccine for India and other southern Asia markets. Under deal terms, Bharat Biotech will fund all preclinical and clinical studies and assist in developing an efficient manufacturing process for the vaccine, and Novavax will receive royalties. Novavax shares (Nasdaq: NVAX) gained 37 cents, or 6.85%, to $5.77.

NitroMed, Inc. continued to spiral, extending last week's losses after posting a much wider net loss for fourth quarter than anticipated amid weaker-than-anticipated sales for its new heart drug BiDil, which targets black patients. NitroMed shares dropped another 57 cents, or 6.54%, to $8.15.

Insmed off 8% as deal emerges

Insmed shares dropped sharply after the company announced Monday plans for a follow-on offering of 20 million shares off the shelf via bookrunner Lazard Capital Markets LLC, which the company estimates could net it some $50 million to launch its lead drug into commercialization.

Glen Allen, Va.-based Insmed is focused on drug candidates for the treatment of metabolic diseases and endocrine disorders. Its lead product, Iplex, was approved in December by the FDA as the only once-daily IGF-1 (Insulin-like Growth Factor-1) replacement therapy in children with severe growth hormone deficiency.

Insmed said proceeds also would help in its pursuit of marketing authorization for Iplex in Europe and further clinical studies to expand Iplex's indications to conditions such as Noonan's syndrome, muscular dystrophy, diabetes and HIV.

The stock pulled back on the development, which was predictable because of dilution. Insmed shares (Nasdaq: INSM) lost 18 cents on the day, or 7.59%, to end at $2.19 and were seen lower still in after-hours activity at $2.16.

Insmed deal slated for Thursday

Insmed's deal is not slated to price until Thursday, according to syndicate officials, but there was already a debate stirring among players in the story.

"I've heard people talking about $1.57, $1.70...blah, blah, blah. I don't buy it, not one bit. We all knew about the shelf on Feb. 3 and knew it could come any time, resulting in $75 million in dilution. Since then, we traded between $2.09 and $2.79," said a buyside market source. "The doom and gloom crap is garbage. Insmed is making a great showing, which is why it has the ability to publicly offer another 20 million shares to fund its commercialization of Iplex, fund its international strategy and develop its oncology pipeline. Giving this company, at this stage of the biotech game, anything less than a market cap of $500 million is ridiculous."

But another Insmed player who was selling referred to it as a "double whammy."

"We get whacked when they announce the shelf, then whacked again when they actually use it," the naysayer said. "We are selling half of our position. We still like the company and, when the time is right, we'll get back in."

Cubist halted on FDA panel

Cubist Pharmaceuticals, Inc. stock trading was halted Monday as an FDA advisory committee met to discuss its application to expand the use of its antibiotic Cubicin to treat other infections.

On Friday, Cubist shares (Nasdaq: CBST) closed at $23.44.

Lexington, Mass.-based Cubist is seeking approval to expand the indication for Cubicin to treat Staphylococcus aureus bacteremia, including those with known or suspected endocarditis. Cubicin is currently the only once-daily bactericidal antibiotic approved in the United States indicated for the treatment of complicated skin and skin structure infections caused by susceptible strains of Staphylococcus, Streptococcus, dysgalactiae and Enterococcus.

Several sellside analysts expect approval for label expansion of Cubicin to treat these infections but buysiders were less than certain.

A buyside analyst pointed to an industry piece that suggested the FDA will look to address a high proportion of relapsed infections in patients treated with Cubicin for bacteremia.

"Bacteremias have become harder to treat over the years, typically requiring longer courses of therapy. Persistent bacteremia could just reflect seeding from the lung (where there is an efficacy problem), or the bugs themselves," the buysider said. "Coupled with the unusually high number of resistance reports for such a new product, that is the big ding."

Cubist players hedging bets

Amid the uncertainty, traders pointed out high volume and open interest in Cubist $22.50 put options.

"It seems as if nobody knows for sure that the drug will be approved but the stock will fall to the $13 to $15 level, if not," said a sellside trader. "People are hedging. Look at the buy interest on the $22.5 puts insurance."

Open interest in the March $22.50 put option was 5,479 with volume of 6,973.

"Although I was surprised at the negative news about patient reactions and the subsequent drop in share price I frankly still expect a positive vote from the committee," the buyside analyst said.

To that end, he said Cubist has indicated that its understanding that an additional document from the FDA, with corrections and clarifications to the FDA briefing document, was being made available to the advisory committee.

"Hopefully this clarification will resolve the negative pre-meeting impressions," the buysider added.

Titan volume sparks sell-off

Sans any news of any sort, Titan Pharmaceuticals, Inc. opened higher Monday but soon went south in what traders referred to as a typical shake-out with the biotech sector's decline. By early afternoon, though, traders said the situation had gained huge momentum that fed on itself amid rampant speculation of "impending doom."

Titan shares (Amex: TTP) fell 78 cents, or 16.02%, to settle at $4.09, after trading as low as $3.90 during the session. The stock had opened at $4.90, up from Friday's close of $4.87.

"There is a three-month average volume of 300K shares, as of 2ish [afternoon, ET] the volume is 1.2 million, with a 2-to-1 sell versus buy," said one sellside trader. "This is attributed to many things. The recent volatility has made Titan show up on the radar for idiots."

The company saw big buying interest recently, he said, that has since "been scared away" by stagnant news flow in the story. "There are many people who believe that a $4 biotech company with three drugs late stage in the pipeline is a once-in-a-lifetime opportunity. You need to evaluate and know what you're dealing with."

There indeed was no news on the tape about South San Francisco-based Titan, which concentrates on treatments for central nervous system disorders such as Parkinson's, cardiovascular disease, bone diseases and other conditions such as addiction and schizophrenia. Probuphine is phase 3 clinical study for the treatment of opiate addiction and chronic pain.

The trader said there was the typical rumors afloat that Titan was the target of a takeover, to which he replied, "Pshaw." Yet, he said the big volume in the stock would seem to suggest that "something is up, and it doesn't look good."

LifeCell zooms ahead of results

LifeCell Corp. rocketed higher by more than 7% Monday, just ahead of its much anticipated earnings, which also sparked speculation that there would be some profit taking on Tuesday unless there are some negative surprises looming.

Branchburg, N.J.-based LifeCell is scheduled to report fourth-quarter results Tuesday at 8 a.m. ET, with a conference call following at 10 a.m. ET.

LifeCell shares (Nasdaq: LIFC) gained $1.61, or 7.21%, to settle Monday at $23.93.

"I won't be surprised to see it drop either after earnings," said a sellside biotech stock trader. "You can almost bet there will be some heavy profit taking if the news is as good as the company has forecast."

On Jan. 24, LifeCell said it expects fourth-quarter revenue to rise about 69%, as preliminary results show revenue gained to $27 million from $16 million, owing mostly to sales of AlloDerm, which rose 84% to $22 million. LifeCell estimated 2005 earnings per share in the range of 35 cents to 36 cents, on sales of $93.3 million, up 59% from a year ago.

For 2006, the company forecast earnings per share of 42 cents to 46 cents, or 59 cents to 63 cents excluding stock-based compensation, on revenue of $124 million to $130 million.

LifeCell, which sells extracts from human tissue for use in reconstructive surgery, harvests skin-graft materials from cadavers. The company was at the top of the Forbes fastest-growing tech stocks list for 2005 and when the 2006 list of 25 hot tech names was released in late January, it was the biggest 2005 winner with a whopping 134% gain over the one-year stretch. LifeCell ranks 22 on the Forbes 2006 list.

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