Gilead off on reports of deaths; Onyx deal at bat; Durect rises on upgrade, but some buyers hesitate

By Ronda Fears

Nashville, Nov. 17 - Gilead Sciences, Inc. on Thursday dropped sharply on reports of deaths in children taking Tamiflu, a lead vaccine against the avian flu, retracing gains from the day before on a settlement with Roche Holdings AG on their split for Tamiflu royalties. Amid the developments, some were thinking that Gilead might look for acquisitions, and that created buying interest on the weakness.

On the primary side of the market, which has been rather slow lately for biotechs, there were some rumblings Thursday as Reliant Pharmaceuticals Inc. withdrew its initial public offering, citing market conditions. The Liberty Corner, N.J.-based firm, which develops cardiovascular drugs, had hoped to raise $300 million with plans to use proceeds for acquisitions, to increase promotional activities and to fund clinical development projects.

Meanwhile, Onyx Pharmaceuticals Inc. was said to be at bat after the closing bell with its follow-on offering of 5 million shares, and one buyside source said the deal was a very good sign for developments at the company.

The stock sale "confirms that FDA approval is coming soon in my opinion," the fund manager said. When the deal was announced Monday, the buysider continued, it meant a 16% dilution and "for the stock to be down 4% to 5% really was pretty impressive. To me, that indicates investors were concerned about Onyx's cash level and this eases the concern. It also indicates that most investors were already anticipating an offering. I would say the skies are pretty blue going forward. The potential overhang of a share offering was just about the only thing you could complain about. Now that issue is lifted."

Onyx shares closed Thursday off 28 cents, or 1.09%, at $25.38.

Emeryville, Calif.-based Onyx develops therapies that target the molecular mechanisms that cause cancer. Its drugs include Nexavar, in collaboration with Bayer Pharmaceuticals Corp. Proceeds, estimated at $149.7 million (including the greenshoe) based on an offering price of $27.79 per share, are slated for clinical trials, the commercial launch of Nexavar and general corporate purposes, including working capital.

Voyager roadshow under way

Even as Reliant pulled its IPO, there was some positive feedback Thursday about the IPO of Voyager Pharmaceutical Corp., which kicked off a roadshow Wednesday.

The Raleigh, N.C.-based company plans to sell 5.9 million shares, pitched at $15 to $19 a share in the OpenIPO auction venue of bookrunner W.R. Hambrecht & Co. Voyager's most advanced product candidate, in phase 3 trials, is Memryte, a small, biodegradable implant used to treat mild to moderate Alzheimer's.

"I just got back from the Voyager roadshow" on Tuesday, said a buyside market source in Chicago. "It was awesome. They've got all the bases covered and an unbelievably promising drug."

The Voyager OpenIPO auction is expected to open on Friday, with roadshow presentations scheduled through Dec. 7.

Gilead shares drop 1.5%

Following several upgrades to Gilead after a settlement with Roche on the marketing strategy of Tamiflu, the stock on Thursday was pulling back sharply on reports of deaths in children that have taken the drug. United States regulators have asked Roche for more information about the deaths of a dozen children who took the flu vaccine Tamiflu, which was developed by Gilead and is now being used to treat the avian flu.

In documents released Thursday, the Food and Drug Administration said that the cause of the deaths was "extremely difficult to interpret" amid reports of 32 psychiatric events such as hallucinations and abnormal behavior, including 12 suicides, in children who took Tamiflu, mostly in Japan.

Officials from the FDA and Roche will present information about the cases to a meeting of an FDA advisory panel on Friday.

"A guest on CNBC from the Committee on Infectious Diseases says the rate of death from Tamiflu coming from Japan doesn't appear to be anything out of the ordinary, and the meeting tomorrow is a routine meeting. There are eight other drugs [that] are going to be discussed and it has been planned for months," said a sellside market source.

"There are more buy orders than sell."

Gilead shares closed lower by 88 cents, or 1.58%, at $54.75 after trading in a range of $51.68 to $56.51 during Thursday's session. Roche shares were lower as well, ending on the Xetra down by €6.10, or 4.44%, at €131.40.

Gilead may be on the hunt

A couple of analysts had reports out Thursday suggesting that Gilead's success from the Roche settlement might cause the company to seek acquisitions, and traders said that line of thought was the root of a lot of the buying interest.

"We believe that Gilead may pursue an acquisition sometime in the next 12 months, which could alter the near-term investment profile," said JMP Securities analyst Adam Cutler in a report Thursday.

UBS Investment Bank was saying the same thing, according to media reports.

Under the revised royalty structure for Tamiflu, Gilead will receive $80 million in additional royalty payments for Tamiflu sales back to the beginning of 2004 and the new royalty rate will be 14% for the first $200 million in Tamiflu sales, 18% for the next $200 million and 22% for sales above $400 million.

With that windfall of additional cash flow, analysts reason that Gilead may be actively seeking to acquire a company.

Durect shares rise 4%

Shares of Durect Corp., which recently made a follow-on offering of stock, were higher Thursday on an upgrade to the stock, but some biotech fund managers involved in the story said they were staying in the wings until the Voyager IPO gets off.

In reaction to the Morgan Stanley upgrade, a convertible sellsider at another shop said, "They are now talking about the 5 shots on goal we told people about when the stock was $1.50 and the bonds at 80."

Morgan resumed coverage of Durect with an equal-weight rating, improved from its previous rating of underweight, and set a price target of $6.75 on the stock, according to the sellsider.

Durect shares gained 21 cents, or 4.14%, to close at $5.28. The company has a 6.25% convertible bond due 2008 that is busted now, seen trading last week at 201.

The convert guy pointed to Morgan's statement that "Durect is a new company," having transformed itself from a one-product story with Chronogesic at the time of its IPO into a company that offers five delivery platforms, three meaningful product candidates and stable commercial partners in Endo Pharmaceutical Holdings, Inc., King Pharmaceuticals, Inc. and Pain Therapeutics, Inc.

Durect insight from Voyager

Durect also makes the delivery implant for Voyager's drug, Memryte.

"I'm still concerned that this [Durect] is a company with no profits, and twice as much debt as annual revenue. Maybe this will change in the near future," said one biotech fund manager.

The buysider added that he hopes to find out more details on Durect's relationship with Voyager as the Voyager IPO pricing nears.

"Durect's revenue from Voyager is hard to figure out," he said.

"My wild guess would be somewhere around $1.5 million per quarter for the Voyager phase 2 trials. The phase 3 trials involve 10 times more patients, so revenues from Voyager should be around 10 times higher per quarter, say $15 million or so." He said that in Durect's third-quarter report the company said "revenues from Voyager represented the highest amount, but they didn't provide exact numbers."

In Durect's last quarterly report, the company said total revenues of $8.6 million, up from $3.4 million a year previous, were largely due to a rise in collaborative funds from research and development, which came to $5.4 million versus $1.6 million a year before.

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