Lexicon drops 5%; Genitope stays steady; Vivus, Arena decline amid their respective obesity drug news

By Ronda Fears

Memphis, June 13 - As many biotech players have expected, the downdraft in the sector - mirroring the broader market - has yet to show strong signs of easing up. Tuesday was a particularly brutal day, traders said, because of the sheer volume of decliners in the biotech sector.

"The [Nasdaq Biotechnology Index] was down 9.19 points [1.27%] to the Nasdaq's 18.85 [0.9% decline], but by the looks of it upward of 90% of the components were in the red," said a biotech stock trader at one of the bulge bracket firms.

"Inflation worries are not a big deal to the biotechs but cost of money, or interest rates, is. The bigger factor is that investors are just pulling money out of the market. Cash is king right now. The sidelines are packed, as you'd expect, but they will start dipping their toes back in before the summer is up, I think."

Lexicon drops on equity line

In a tough market for new deals, biotech players applauded Lexicon Genetics Inc.'s $75 million equity line and remarked the stock treaded water until mid-afternoon when it succumbed to pressures from the broader markets.

Over the next 18 months, Azimuth Opportunity Ltd. can buy Lexicon stock at discounts ranging from 3.75% to 5.5% with a $3.00-per-share floor and amount limit of $6 million in a single draw. Proceeds will be used for research, drug discovery and development activities, including preclinical and clinical development of Lexicon's lead programs - LX-6171 for cognitive disorders like Alzheimer's and LX-1031 for irritable bowel syndrome.

"I am fine with this since it makes it seem that phase trials are getting closer. Note that the cost of these trials could have been done via partnerships and it is interesting that they are choosing this method. Overall, I would say it's bullish but I do know others will scream dilution," said a buyside source in Atlanta.

"Taking on a parter for the trials would also be dilution. At least this is a private placement and the shares will not be sold at large into the market. I am still planning to add to my position. I just want to see it bounce off the bottom first."

A sellside trader said that the market seemed to be reacting to news rather favorably, with only a minor dip by noon. But in afternoon trade the stock took a dive with the sector as it followed the broader market south.

Lexicon shares (Nasdaq: LEXG) lost 24 cents on the day, or 5.31%, to settle Tuesday at $4.28.

"Some deep pockets are willing to put $75 million on the table. One point to keep in mind is that Azimuth needs the common to pan out or they lose the whole show," the trader said. "If the common falls flat with them as owners they would be in no better position than everyone else. They could have asked for convertible preferreds but I gather didn't so this may be as good as Lexicon could get at this point and in these markets."

Lexicon, based in The Woodlands, Texas, is focused on treatments for diabetes, obesity, cardiovascular disease, neurological disorders, cancer, immune system disorders and ophthalmic disease.

Genitope solid on MyVax news

Genitope Corp. managed, however, to stay steady against the tide of red in the biotech sector on news that the Food and Drug Administration granted fast-track review status for its MyVax personalized immunotherapy treatment for follicular non-Hodgkin's lymphoma.

"Securing fast-track designation for MyVax personalized immunotherapy in advance of the phase 3 study interim analysis this summer is especially meaningful and puts us one step further down our pathway toward commercialization," said Dan Denney, chief executive of Genitope, in a news release.

Redwood City, Calif.-based Genitope started a phase 3 pivotal trial evaluating MyVax in Stage 3/ 4 follicular non-Hodgkin's lymphoma patients following results in December from three separate phase 2 trials evaluating the long-term efficacy of this treatment.

"Seems like everybody else has come up with a greater than 50% chance it [MyVax] goes this time, while the market is certainly betting heavily against it," said a trader around noon.

"The stock should be at its early pre-market level of $7, but it was worked down quickly."

Genitope shares (Nasdaq: GTOP) traded in a band of $6.40 to $6.74 with some 455,740 shares traded versus the norm of 215,838 shares but closed out the session unchanged at $6.42.

"What remains to be seen is if the hedge funds, after kicking our teeth in for the last couple of months, will cover before late July. Knowing that there is a 50/50 shot at the goal and the upside is extremely limited (unless the longs all bail, which is not going to happen), while the short's downside is a whopping ass whipping possibly as high as in the $20s, you would think we would start to see some covering," said the trader.

"As far as fast track, though a great status to have, it's not a big deal, really. All cancer therapies get fast track. Fast track is granted solely by the fact that the drug possibly can save lives and has proven that it has a viable chance."

Vivus drops 2% despite patent

Ahead of a presentation Wednesday, Vivus, Inc. failed to get a rise on its news that the U.S. Patent and Trademark Office has issued the company's first patent for its diet pill Qnexa.

Vivus said the patent broadly covers the Qnexa product for obesity and extends to 2019.

Mountain View, Calif.-based Vivus recently announced positive results from a phase 2 study of Qnexa, which combines the diet drug phentermine and the active ingredient in Topamax (topiramate) - a drug used to prevent migraines and treat seizures. The company also has several sexual health drugs in trials such as Alista, which is in a phase 2b program for female sexual arousal disorder.

A trader said Vivus' decline was a signal that players are not overly confident the company can get Qnexa to market.

"Phentermine is still on the market but it was part of the controversial Fen-phen combo, which was pulled from the market," because it was thought to cause or aggravate heart trouble, the trader said.

"As for topiramate, J&J's [Johnson & Johnson] patent covers weight-loss as well as the other indications. Vivus obviously hopes to avoid patent issues, but it is by no means a certainty. I would think J&J will fight it. The obesity market is huge."

Vivus shares (Nasdaq: VVUS) lost 9 cents, or 2.21%, to close Tuesday at $3.99.

Vivus chief financial officer Timothy Morris is scheduled to present at the Pacific Growth Equities 2006 Life Sciences Growth Conference in San Francisco on Wednesday.

Arena shares reduced on data

Arena Pharmaceuticals, Inc. also is scheduled to present at the Pacific Growth Equities conference on Wednesday and the Needham & Co. LLC Biotechnology & Medical Technology Conference in New York on Thursday. In advance, the company released some information on its diet pill Lorcaserin, too, and also saw its stock decline with the sector.

Arena also had presented information on Lorcaserin at the American Diabetes Association meeting in Washington, D.C., Monday. That conference was winding down Tuesday.

"I know the market sucks big-time now, but I'm really surprised that Arena didn't show some green today," said a sellside trader. "Things were very promising in the pre-market this morning."

Arena shares (Nasdaq: ARNA) fell 85 cents, or 6.66%, to end Tuesday at $11.91.

Arena reported positive mid-stage trial data for Lorcaserin and expects to begin phase 3 trials in the second half of the year. It, too, is linked to Wyeth's Fen-phen diet pill but Arena, however, is confident its drug stimulates the 5-HT2C receptor and not the closely related 5-HT2B, which the company believes is associated with cardiac valvulopathy.

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