Kosan deal revival speculated; SGX range for IPO emerges; Depomed zooms; PDLI up 5%

By Ronda Fears

Nashville, Jan. 4 - Biotech players were beginning to warm up to 2006, and some chatter about capital raising efforts was beginning to circulate. SGX Pharmaceuticals, Inc. set a price range for its planned initial public offering, while a rise in Kosan Biosciences Inc. shares sparked speculation that it may revive its follow-on offering that was canceled late in the summer.

Licensing deals also remain a hot spot for financing.

Protein Design Labs Inc. took a leap Wednesday after announcing at Tuesday's close that it has sold to Merck & Co. non-exclusive licenses for some of its antibody patents for an undisclosed amount. Also, Merck made an upfront payment for the licenses and will pay milestones and royalties, also at undisclosed amounts.

Fremont, Calif.-based Protein Design Labs concentrates on treatments for inflammatory and autoimmune diseases, acute cardiac disorders and cancer. It sells many of its products through its subsidiary ESP Pharma Inc. Protein Design Labs shares on Wednesday went as high as $30.44 before easing back to close up by $1.52, or 5.34%, at $29.96.

Depomed, Inc. also stirred a fair amount of speculation about potential partnering deals after the company announced positive phase 2 trial data on one of its pain drugs.

Pain Therapeutics, Inc. was pained, however, by a sell-off Wednesday as several traders cashed in after the company announced it had received a $150 million payment from King Pharmaceuticals, Inc. related to a pact inked in November that could fetch up to $400 million for Pain Therapeutics. South San Francisco-based Pain Therapeutics and Bristol, Tenn.-based King are jointly collaborating on the painkiller Remoxy as an abuse-resistant form of Purdue Pharma LP's Oxycontin painkiller.

"There was some doubt by some on the [King] deal closing, but I don't know why there were people bailing out right now," said a buyside market source. "Their prospects look better now than a year or two ago when the stock was at $9. I'm a very happy camper.

"Many traders value unprofitable companies using a formula that considers a multiple on cash," the buysider continued. "The $3 per share added yesterday at a multiple of two would add $6 to yesterday's price. The stock will be over $10 fast when it sinks in that the company has over $4 cash per share and no debt. The stock is way undervalued as I see it."

Kosan shares rise over 4%

Kosan Biosciences, Inc.'s rise Wednesday also was somewhat perplexing, but a biotech stock trader on the sellside speculated that it may be signaling that the company is preparing to revive its follow-on deal that was canceled back in the summer.

"The pop in the stock seems strange," the trader said. "It's apparently based 100% on the relatively small buy by the CEO and 10% owner [Daniel Santi], but, by definition, he can't be acting on inside info that's not already public. I think they are trying to set the company up for a secondary stock offering, reviving the one [that] was cancelled when the stock tanked earlier."

In mid-August, Hayward, Calif.-based Kosan cancelled a follow-on offering of 4.5 million shares just the day ahead of the scheduled closing. Kosan had priced the stock at $8.75 on Aug. 10, discounting it from the $9 close a day before. The company said it nixed the deal after its stock plunged Aug. 15 on news that patient enrollment in two cancer clinical trials will be delayed until changes can be made to the study protocols, which sent the stock spiraling by 17% to $7.35.

The trader said executive changes at Kosan might provide better investor psychology toward a revived stock sale, too. In early December, Kosan announced that its chief financial officer, Susan M. Kanaya, was leaving the company to pursue another opportunity.

Kosan CEO Santi said in August when canceling the stock sale that the company had considerable flexibility because of ending second quarter with $69 million in cash reserves and a $35 million credit line.

SGX talked at $11 to $13

SGX Pharmaceuticals, Inc. set the initial price talk for its planned IPO of 4 million shares at $11 to $13 each.

At the midpoint of price talk, gross proceeds from the offering would be $48 million, rising to $55.2 million if the greenshoe is fully exercised. At the midpoint of talk, the company estimated its net proceeds would be $42.6 million, rising to $49.3 million with the full greenshoe.

San Diego-based SGX said most of the money from the offering will be used for research and development. Its primary drug candidate is Troxatyl, currently in a phase 2/3 clinical trial for the third-line treatment of Acute Myelogenous Leukemia, or AML, a blood cancer.

DepoMed spikes by 11%

Depomed shot up sharply after announcing positive phase 2 clinical trial results for its pain medication Gabapentin GR, but traders said the big boost came from speculation on the company's prospects for partnering the commercialization of the drug.

Depomed said its Gabapentin GR extended release tablets showed "statistically significant safety and efficacy benefits" to treating patients with postherpetic neuralgia, a long-lasting pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. The company said the data strongly supports twice daily dosing and was very encouraging for once daily use.

A phase 3 program will start pivotal trials in the first half of this year, the company said.

Depomed shares gained 65 cents on the day, or 10.96%, to close at $6.58.

Depomed partnering chatter

A buyside market source said that Depomed's prospects for partnering the pain medication were greatly increased by the data although the company has suggested it may not seek a partner.

"Today was important information for shareholders but even more critical now is how DepoMed goes forward with Gabapentin GR," the fund manager said. "Earlier in 2005 the company indicated there was 'very strong interest' in partnering on Gabapentin GR and they most likely would partner starting with phase 3.

"Since then they have backed off that strategy and indicated they may go alone. Seems to me they did the same thing with Proquin and it worked very nicely in terms of the deal they got with Esprit. I think they are positioning to partner on Gabapentin GR and it will probably be a more significant partner this time around. Again, one more important day in the life of a company which has outstanding potential."

Depomed announced in late July that it had signed a deal with Esprit Pharma Inc. for its antibiotic Proquin, used in urinary tract infections, for which Depomed got a $50 million license fee ($30 million up front) plus 15% to 25% in royalties on sales.

"I hope Depomed does pursue a partner rather than a go-it-alone strategy," the buysider said. "Not only is establishing a sales force expensive, but it's a big distraction for a company that has little experience in this area."

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