Nuvelo, Tercica toss hats in ring; Serono plunges on lack of suitors; Imclone results miss, seeks merger

By Ronda Fears

Memphis, Jan. 24 - Deal flow in the biotech arena heated up as many players were expecting, with Nuvelo, Inc. and Tercica, Inc. tossing their hats into the ring on Tuesday. In trading action, earnings was the driving force, but Imclone Systems Inc. bucked a downdraft on weaker-than-expected results after announcing that it may hit the sale block.

"Indeed, it was another crazy day," one market source quipped.

Contrary to the market reaction to Imclone's news, Swiss biotech Serono SA was sharply lower Tuesday on an article in The Wall Street Journal to the effect that several Big Pharma companies have stepped away from the situation without making any offers. Serono has been looking for a buyer for weeks, to no avail yet, with an initial bidding deadline set for Friday.

ImClone on Tuesday posted fourth-quarter earnings that fell short of analysts' expectations. Even though the company posted a profit of $13.1 million, reversing a loss of $13.2 million in the year-ago quarter, revenue fell 9% to $98.2 million from $107.3 million while royalties from sales of its colorectal cancer drug Erbitux, marketed with partners Bristol-Myers Squibb Co. and a division of Merck & Co., Inc., rose 38% to $52.6 million.

The kicker that buoyed ImClone shares, though, was that at the same time Imclone also announced it would consider a sale of itself or a merger with a complementary partner. Reportedly, the firm hired investment bank Lazard as an adviser. Bristol-Myers, which already owns 20% of Imclone, was an obvious candidate for a merger.

"It would certainly make sense for Bristol-Myers," said a sellside biotech stock trader. "It would make more sense for ImClone, because outside of Erbitux, and they are sharing those dollars with Bristol-Myers and Merck already, they don't have much except manufacturing facilities."

ImClone expects to bolster Erbitux sales with the anticipated approval next month for its use in head and neck cancer, which would trigger a $250 million payment from Bristol-Myers, and is testing Erbitux in pancreatic and lung cancer. The company faces competition from Amgen Inc. and Abgenix Inc.'s rival panitumumab, which could reach the market and begin generating sales later this year, so traders said Imclone's Erbitux partners Bristol-Myers or Merck might want to step in with a stronger offense.

ImClone shares [Nasdaq: IMCL] gained $1.30 on the day, or 3.82%, to close at $35.36 but were pulling back slightly in after-hours activity.

ImClone convertibles climb

ImClone's news also sent its debt higher with its convertible bonds bid up in a flurry of trading early in the session, before tailing off on skepticism about its prospects for a merger, but the paper still closed the day higher.

"ImClone was busy. There was a flurry of trading this morning. They were bidding the stuff up on the change-of-control put," a Connecticut-based sellside convertible trader said.

The ImClone 1.375% convertibles traded up about 3.5 to 4 points to 90 early on and then tailed back to 88 offered, compared to trades on Monday at 85.

"They came back in about 2 points," the sellsider said shortly after noon.

But att the end of the day the bonds were still well up on the day, with one sellside shop putting the close at 88.5 bid, 89 offered.

"It's not going to be a quick sale," the sellsider added about the potential sale of ImClone. "It will be like Serono; they put themselves up for sale last November and have gotten no bids for the company."

Merrill Lynch biotech analyst Eric Ende also had a report in circulation late Tuesday holding to a sell recommendation on the stock, saying he believes it will be difficult to find a buyer for ImClone.

Serono tumbles nearly 10%

Contrary to the reaction to ImClone's possible search for a buyer, for which many see as viable, Swiss biotech Serono SA tumbled Tuesday after several large drug companies have reportedly decided not to bid on the company.

In the United States, Serono shares [NYSE: SRA] lost $2.04, or 9.58%, to $19.25.

Serono had put itself on the market for as much as $15 billion in cash and had set a Friday deadline for offers. According to a Wall Street Journal report, however, the lack of interest from many of the world's biggest drug companies means Serono, a maker of fertility treatments and a popular multiple sclerosis drug, might be forced to lower its asking price.

Serono had held talks in recent months with Novartis AG, another Swiss concern, and British drug giant GlaxoSmithKline plc and New York-based Pfizer, Inc., according the Journal article. But those Big Pharmas, and some others, declined to submit bids, mostly citing the high cost of a takeover.

Nuvelo shares end off 2.4%

In addition to the earnings watch, biotech players also were busy contemplating the deals lined up for this week, which is a growing list. Nuvelo, Inc. on Tuesday launched a follow-on offering of 5 million shares, which the company estimated could net it upward of $80 million, and the stock opened lower by 5% but quickly rebounded and ended off by about half that measurement.

San Carlos, Calif.-based Nuvelo focuses on cardiovascular and cancer therapies. Its pipeline includes alfimeprase in phase 3 clinical trials for thrombotic-related disorders and rNAPc2, an anticoagulant in phase 2 clinical development. Nuvelo also has NU206 in trials for the potential treatment of radiation and chemotherapy-induced mucositis in the gastrointestinal tract.

On Monday, the company announced that alfimeprase had been granted fast-track status by the Food and Drug Administration to treat blood clots in the legs. Fast-track status speeds the regulatory review process, allowing the submission of study data as it becomes available rather than waiting to present it all at once.

Nuvelo estimated net proceeds from the deal at $80 million, based on a price of $15.57 per share, or some $92.1 million if the greenshoe is fully exercised. The stock closed Monday at $15.39.

Nuvelo shares (Nasdaq: NUVO) on Tuesday dropped 37 cents, or 2.4%, to $15.02.

In addition to using the proceeds for clinical trials and other operations, the company said that under its lease agreement with The Irvine Co. for facilities in Sunnyvale, Calif., it must pay the realty company the lesser of 10% of proceeds or deferred rent - which was $7.2 million at Sept. 30 - from any capital-raising transaction over $75 million.

Nuvelo player sells calls

A buyside market source involved in Nuvelo said the stock was propped up after the initial opening dive as more bidders stepped up to get "on the cheap" than sellers. He was selling near-term calls on the dip but is anticipating a post-deal run-up.

"The Bayer deal was great, but didn't give them enough money. I sold the February and March [calls], but wouldn't sell the Julys because I expect the stock to be up by this summer. They would have been foolish not to offer more shares after such a run-up," the buysider said.

Earlier this month, Nuvelo announced that Bayer AG would become its partner in alfimeprase with patient enrollment in two ongoing trials expected to be complete in the second half of 2006 and two more trials set to start before July. That news sent Nuvelo shares zooming by more than 40%.

"The run-up and sustained plateau showed that there was a real demand for their shares. It will be easy to sell this secondary through JP Morgan, Deutsche Bank and Lehman, all white shoe houses," the buysider continued.

"I expect it will sell quickly. The fast track [for alfimeprase] was the clincher and this is a relatively low risk deal. There will be around 50 million shares outstanding after the deal, which is fine for a biotech going after a big market. If Nuvelo were going after a niche market, it would be harder on the deal. I would expect demand to be strong, bringing in aftermarket participation."

Tercica eyed suspiciously

Tercica, Inc. on Tuesday announced a spot sale of 5 million shares, from which it will pocket around $30 million to market its first commercial product, the insulin-related drug Increlex, and the stock was sold off as expected. But one buyside market source said there also were sellers who thought that maybe the company was not so bullish on Increlex.

Traders suggested the deal was placed in just a few hands, if not carried entirely by bookrunner Lehman Brothers Inc. The stock was priced at $6.40 a share. By comparison, Monday's close was $6.96 and Tercica shares (Nasdaq: TRCA) dropped 45 cents on the day, or 6.47%, to $6.51.

"The timing seems strange to me. It suggests that they do not foresee revenues from their product or at least not enough to pay upcoming bills," the buysider said. "Also, they probably believe the share price is heading lower and need to go for more money now as opposed to later."

Brisbane, Calif.-based Tercica focuses on endocrine-related drugs and Increlex, or recombinant human insulin-like growth factor-1 (rhIGF-1), is approved by the FDA for the long-term treatment of severe primary IGF-1 deficiency, or primary IGFD. The company also is conducting a phase 3b clinical study to evaluate the safety and efficacy of Increlex in children with primary IGFD. Tercica licensed worldwide rights to develop, manufacture, and commercialize rhIGF-1 products to Genentech, Inc.

The buysider added that he has heard negative outlooks for Increlex on the pediatric front.

"Tercica has no hope on sales of Increlex to meet Wall Street's expectations," he said. "Talk to a pediatrician you know, and you will find the answer. Tercica will trade at its cash value."

Alnylam plunges over 7%

Alnylam Pharmaceuticals, Inc. on Tuesday launched a follow-on offering of 5.1 million shares, and some players were looking at the dive in the stock price on the news as a buying opportunity.

"I know this was announced previously, so it was expected," said a buyside source. "If there is a sell-off today, it's a great opportunity to load up."

A sellside trader agreed, adding, "Dilution is modest. Their market cap is getting to a point where institutions will be all over this offering. Liquidity is what they seek in a stock like this. It could be an excellent entry point for many new players."

Cambridge, Mass.-based Alnylam develops therapeutic products based on RNA interference (RNAi) to treat ocular, central nervous system and respiratory diseases.

Also Tuesday, the company announced that the U.S. Patent and Trademark Office has allowed it a second patent application for preparing small interfering RNAs, the molecules that mediate RNAi, which it expects to result in a final patent issuance within three months.

Alnylam estimated proceeds from the deal at $70.3 million, which it intends to use for research and development, clinical trials, general and administrative expenses and potential acquisitions.

Alnylam shares [Nasdaq: ALNY] on Tuesday fell $1.04, or 7.09%, to $13.62.

Arena off a tad ahead of deal

Arena was slightly pressured, traders said, by news that GlaxoSmithKline plc had received an FDA panel recommendation for approval of its over-the-counter diet pill orlistat, a version of Roche Holding AG's prescription diet pill Xenical.

It would be the first over-the-counter diet drug to win approval from the FDA, however, so some traders said the news could actually bode well for other diet pill makers like Arena.

San Diego-based Arena also plans to sell 8.5 million shares. The company focuses on drugs in the areas of metabolic, cardiovascular, inflammatory and central nervous system diseases but the market has honed in on its APD356, which is in clinical trials for obesity. The company also has APD125 in clinical trials for insomnia. Arena has research collaborations with Ortho-McNeil Pharmaceutical, Inc. - a unit of Johnson & Johnson - and Merck & Co., Inc. for various products.

Arena shares (Nasdaq: ARNA) slipped by 4 cents, or 0.24%, to close at $16.61, but onlookers were anticipating a sharp discounting to the follow-on price.

"I am guessing the secondary will price around $15.50. I think the deal is perfectly timed," said a sellside market source. "But there now is less interest because people are understandably worried about the Xenical news until more news is known about the next phase. I think that while there's no doubt OTC Xenical will eventually have some market share, it will be a small, outdoors market share."

Genitope ends slightly higher

There were still buyers for Genitope Corp. shares ahead of its follow-on after the stock took a hard hit on the deal news Monday, traders said.

Redwood City, Calif.-based Genitope launched a follow-on offering of 4.5 million shares Monday, and the stock lost nearly 10% on the day.

The company is focused on cancer treatments. Its lead product candidate, MyVax Personalized Immunotherapy, is a patient-specific active immunotherapy based on the unique genetic makeup of a patient's tumor and is designed to activate the patient's immune system to attack cancer cells.

"The dilution is approximately 6%, but the stock has fallen 13%. Moreover, we have known for several months that the trigger was going to be pulled. There should have been a certain amount of the dilution already in the price," said a buyside market source. "Nothing but promising news has been coming from the company in the last week. I think the price should move back to about $9 in short order."

Genitope shares (Nasdaq: GTOP) on Tuesday added 2 cents on the day, or 0.24%, to settle at $8.32.

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