Gene Logic plunges 36%; ISTA off; MedImmune convertible on deck; American Medical issues higher

By Ronda Fears

Memphis, June 22 - Traders observed generalized nervousness in the biotech sector Thursday after Gene Logic, Inc. on Thursday withdrew its forecast for 2006 and 2007, saying revenue for its genomics division will be sharply lower than previously anticipated and that the head of that division has resigned.

In pre-market activity the stock was lower by 14%, and the slide continued in the regular session on heavy volume.

"It was a shock. A lot of folks just tossed it," said a sellside trader. "You see, a huge smelly cash loss bomb is coming and there is a fear that they could be in big, big trouble. They are burning $20 million of cash a quarter and that puts you in a bind very quickly."

At March 31, the company posted $63.9 million in cash and equivalents, down from $82.1 million at Dec. 31.

Gaithersburg, Md.-based Gene Logic said revenues for the genomics division would be "significantly" lower and that would hurt operating results for the division in second quarter and all of 2006 as well as the "foreseeable future."

As a result, the company rescinded its previous financial guidance. In April, the company reaffirmed its 2006 guidance for revenue growth from 2005's $79.4 million and said it expected to narrow the $48.3 million loss in 2005, with profits anticipated sometime in 2007. Gene Logic said it is reviewing its strategy for the genomics division and expects to announce any relevant decisions in the next 90 days.

However, Gene Logic said the performance for its drug repositioning division remains on track and its preclinical division is expected to show substantial sequential improvement in second-quarter results.

The company also said the senior vice president and general manager of its genomics division has resigned for personal reasons to pursue other career opportunities, and interim leadership for the division has been established.

Gene Logic shares (Nasdaq: GLGC) settled the day with a loss of 72 cents, or 35.64%, at $1.30 with some 3 million shares changing hands, versus the norm of 182,772 shares.

MedImmune shares lose 7%

MedImmune, Inc. was on deck after the close with a two-part $1 billion deal, and traders saw no gray market to speak of for it, although with the par put coming up on the 1% convertible, it was higher and getting a fair amount of play. Meanwhile, the underlying stock took a hit for about 7% because of arbitrageurs setting up the convertible.

"There is no coupon to speak of, talk is up 20% to 25% and there is not a lot of vol [stock volatility] in the name," said a buyside convertible trader. "MedImmune's deal is maybe interesting on the cheaps, but only on the cheaps."

MedImmune is pitching the bonds in $500 million segments with price talk on a five-year tranche for a coupon of 0.875% to 1.375% and initial conversion premium of 20% to 25%, and a seven-year tranche talked to yield 1.125% to 1.635%, also up of 20% to 25%.

About half of the proceeds are expected to go to repurchase its existing 1% convertible senior notes that are expected to be put back to the company at par on July 15. Those convertibles moved up to and were hovering at around par, traders said.

MedImmune shares (Nasdaq: MEDI), however, fell $1.99, or 6.81%, to close at $27.24 on Thursday.

"The offering of the convertible is not so bad," said a biotech stock trader at one of the bulge bracket firms. "And from an equity standpoint the stock buybacks would be positive, but there really is not a lot to further your cause in this event. That said, there were lots of buyers because this is a popular story."

MedImmune also plans to use up to $150 million to buy back shares from shorters playing the convertible, and intends to enter into convertible note hedge transactions to limit dilution from potential future note conversions.

Remaining proceeds will be added to working capital and used for general corporate purposes, including potential acquisitions, in-licensing and collaboration opportunities, and additional share repurchases, pursuant to the company's recently announced $500 million share buyback program.

American Med convertible up

With a fat coupon compared to other sizable deals to hit the convertible market recently, medtech concern American Medical Systems Holdings Inc.'s new 3.25% convertible saw heavy activity and moved up about a point Thursday out of the gate. The stock headed south in typical response as convertible players set the issue up, but equity players were split on whether it would be quick to recover.

The medical devices concern priced $325 million of 30-year convertible senior subordinated notes to yield 3.25% with an initial conversion premium of 27.5% - at the mid-point of talk for a coupon of 3% to 3.5%, up 25% to 30%.

"This is the best of the lot today," said a buyside convertible trader. "There is a nice handle and a little volatility."

American Medical shares (Nasdaq: AMMD) added 6 cents on the day, or 0.39%, to $15.28.

"The stock should firm up on the increasing amount of penile implants being installed," said a sellside market source, referring to American Medical's product line-up.

Minnetonka, Minn.-based American Medical products target the urology, gynecology and urogynecology markets.

The company is using proceeds toward its acquisition of San Diego-based LaserScope, Inc. announced earlier this year, which has not been especially popular, another buyside source said. LaserScope develops medical laser systems and related energy delivery devices for the urology, dermatology and aesthetic surgery markets.

"I am still doing due diligence, but so far I think American Medical management will have the same problem that LaserScope people had - how to speed up the growth of the international (underpenetrated) market," the biotech fund manager said. "LaserScope has not done all that great in my opinion internationally, but American Medical numbers are not all that great either."

ISTA bags $40 million

On a smaller scale, as tends to be the case with biotechs, ISTA Pharmaceuticals, Inc. raised $40 million from the private placement of five-year senior subordinated convertible notes. Because it was a PIPE, it produced more buyer-friendly terms with an 8% coupon and 22% initial conversion premium, but being a PIPE also tends to constrain liquidity in the bonds.

The stock sank on the news, which traders attributed to hedge fund participation in the deal. While a sellsider was basically pleased with the financing and terms as well as plans by the company to use funds to launch a product next year, a buysider panned the story and event altogether.

ISTA shares (Nasdaq: ISTA) lost 14 cents on the day, or 2.21%, to end at $6.20.

"Obviously, some big players believe in this stock," said an equity trader.

Investors in the offering include HBK Master Fund LP, Deerfield Partners, LP and affiliates, Sprout Capital IX, LP and affiliates, Visium Balanced Fund, LP and affiliates, Atlas Master Fund, Ltd., LBI Group, Inc. and Highbridge International LLC.

"I know the company and am not a fan of their programs," said a buyside market source. "I think they did the deal out of desperation. That's my two cents."

Irvine, Calif.-based ISTA, focused on treatments for eye conditions such as dry eye and glaucoma, plans to use proceeds for the commercialization of its prednisolone acetate and tobramycin combination product for steroid-responsive inflammatory ocular conditions. Launch is expected to coincide with the company's filing of a New Drug Application with the Food and Drug Administration later this year.

Analysts said the FDA filing is anticipated soon with a possible launch of the product as early as second quarter 2007.

NeoPharm shares fall 16%

NeoPharm, Inc. took a hit Thursday after announcing that it will continue the phase 3 trial of its brain cancer drug, cintredekin besudotox, to a final efficacy analysis at 215 deaths rather than wrap up the study early.

"The news wasn't positive, as everyone wanted an early submission. That's why the stock went negative. It leaves uncertainty open for the final analysis," said a buyside analyst.

"The news that the statistical result was not significant enough to halt the trial and recommend approval was not good, but the statistical result necessary had a high hurdle rate. The trial continues, and the final results expected in first quarter 2007 could still be sufficient to win ultimate approval."

NeoPharm shares (Nasdaq: NEOL) fell $1.03, or 15.85%, to close at $5.47.

Waukegan, Ill.-based NeoPharm said an independent panel had looked at ending the study after 160 deaths, but the preliminary data was not sufficient to conclude the study.

"We knew that reaching the interim efficacy endpoint was an extremely high statistical hurdle and we look forward to the final study endpoint, which we currently expect to occur in the first quarter of 2007," said chief executive Guillermo Herrera in a statement.

The studies compare NeoPharm's brain cancer drug with Bloomington, Minn.-based MGI Pharma Inc.'s Gliadel.

MGI rises on NeoPharm news

On the NeoPharma news, MGI Pharma saw a nice bounce Thursday as it created more questions of competition for its Gliadel, or at least was seen as delaying any competition.

MGI Pharma shares (Nasdaq: MOGN) added 59 cents on the day, or 2.94%, to settle Thursday at $20.64.

"The earliest they [NeoPharm] can complete the trials is first quarter 2007, then there would be six months of analysis and they would submit to the FDA late in 2007 with approval maybe in 2008 and a launch in early 2009," said a sellside trader in MGI.

"So, that means MGI would have at least two years or about $100 million in more sales. It looks like their [NeoPharm] drug may not be better and they may need money next year just to get through the trial. This is good news for MGI."

MGI's Gliadel Wafer provides localized delivery of chemotherapy directly to the site of the tumor and, according to the company, is the only FDA approved brain cancer treatment capable of doing so. The Gliadel Wafer is a white, dime-sized wafer made up of a biocompatible polymer that contains the cancer chemotherapy drug, carmustine, and is implanted in the cavity of the brain where the tumor is removed.

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