Alnylam, CytRx gain with Sirna; Antigenics gains; Viragen sinks; ZymoGenetics off ahead of results

By Ronda Fears

Memphis, Oct. 31 - In light of some skeptical views on Merck & Co. Inc.'s purchase of Sirna Therapeutics, Inc. for $13 a share, more than double where the stock was trading beforehand, the stock stalled considerably short of the purchase price.

"There was a lot of folks taking their profits now," said a sellside trader.

"A lot of criticism came down on Merck. They think they are paying too much."

Merck shares (NYSE: MRK) slipped by 22 cents, or 0.48%, to settle Tuesday at $45.42.

Sirna shares (Nasdaq: RNAI), after closing lower Monday at $6.45, zoomed in after-hours activity on the merger news, which hit the tape after the close, and went further in trade Tuesday but stopped short of the purchase price. The stock ended Tuesday higher by $6.18, or 95.81%, at $12.63 after trading in a band of $12.60 to $12.73 with some 15 million shares changing hands versus the norm or 382,363 shares.

San Francisco-based Sirna has been described as a biotech at the forefront of the emerging niche of RNAi-based therapeutics, particularly short interfering RNA, or siRNA, technology.

But sellside critics of Merck's strategy with the Sirna purchase point to Merck's acquisition of Rosetta Inpharmatics, Inc. in 2001 with no results from that deal to date. Rosetta specializes in a targeted type of RNAi technology.

Yet, holders of Sirna, while happy with an easy double to their profits, were not altogether pleased.

"This is very disappointing. This is horrible news," said a buysider in Boston. "This stock had a lot more potential than $13 a share. This was a once-in-a-lifetime stock and they sold it for a pittance. I own a lot of this stock and I just made a lot of money but I am very disappointed."

Alnylam spike seen unrealistic

In the wake of Merck's $1.1 billion buyout of Sirna, Alnylam Pharmaceuticals, Inc. was the big winner, but sources said there were skeptics selling heavily into the rally.

Alnylam shares (Nasdaq: ALNY) zoomed to $21.49 intraday before easing back to close at $19.72 for a gain of $3.12, or 18.8%. But the stock still hit a new 52-week high, eclipsing the $18.39 level hit March 29. Some 3.8 million shares traded, versus the norm of 215,706 shares.

"Alnylam is enjoying a pop today due to the Sirna success, and anyone looking for a profit is wise to take what the market gives today," said a buyside trader in New York.

"Tomorrow, the reality begins to set in. Alnylam is positioned for the future; but face it, they are a bit behind Sirna. Alnylam will be a likely success in the future. But tomorrow, look for the gap to begin to fill instead of more upside. The valuation at these prices is a bit heady for a phase 1 company. The price premium for this stage is somewhat excessive. The question is: What is the upside versus downside? Betting on an acquisition is never a good strategy. Entry at a lower price point is the smarter move."

Cambridge, Mass.-based Alnylam focuses on drugs that work through RNA interference system. Its lead drug candidate, ALN-RSV01, is in phase 1 trials for lung infections caused by respiratory syncytial virus. The company has alliances with Merck, Novartis AG and Medtronic, Inc.

Novartis owns roughly 20% of Alnylam.

CytRx also better by over 21%

Another winner in the Sirna fallout was CytRx Corp., but it also had news of its own on the tape. The Los Angeles-based biotech announced Tuesday that its arimoclomol had been granted orphan-drug designation in Europe for amyotrophic lateral sclerosis, or Lou Gehrig's disease.

CytRx shares (Nasdaq: CYTR) shot up on heavy volume, adding 28 cents on the day, or 21.37%, to end at $1.59 with some 6.4 million shares traded versus the norm of 1.18 million shares.

Arimoclomol, CytRx's lead drug candidate, received orphan-drug status in the United States in May 2005. The company said it plans to launch a phase 2b trial for arimoclomol in the United States and Canada in mid-2007.

"Compare CytRx and Sirna's pipeline. CytRx is more advanced in their stages than Sirna," said a buyside market source in New York.

"CytRx is definitely undervalued and a large pharma will pick up CytRx for a song and a dance. I will hold on for the steady ride up."

Sirna's lead clinical development candidate, Sirna-027, however, is a chemically optimized, short interfering RNA, or siRNA, in phase 2 trials for wet age-related macular degeneration in a collaboration with Allergan, Inc. Sirna also has a strategic alliance with GlaxoSmithKline plc for the development of siRNA compounds for the treatment of respiratory diseases.

Viragen off 12.5% on unit deal

Viragen, Inc. raised $17.42 million from the sale of units, and players were selling out of the story on the news. The Plantation, Fla., biotech sold 67 million units at 26 cents each, consisting of one share of common stock and a warrant to purchase one share of common stock at a strike price of 31 cents.

Viragen common shares (Amex: VRA) closed Monday at $0.32 and on the news lost 4 cents, or 12.53%, to close Tuesday at 28 cents.

The units will trade on the American Stock Exchange under the ticker "VRA.U." The warrants will become exercisable on the date of separation from the unit, which will be April 30, 2007, or earlier if so determined by the underwriter, and will expire on Oct. 29, 2011.

In trade Tuesday, some 2.95 million of the units moved in a band of 26 cents to 29 cents but settled unchanged from the opening level of 27 cents.

"First, I don't know who would want to buy them given this will dilute existing shares by 150%. They should have priced the units around $0.10 based on the dilutive effect," said a Viragen holder who was selling Tuesday.

"This is just enough money to last them one more year. Glow-in-the-dark chicken eggs won't be commercially viable for at least another four years. Imagine the multiple millions of shares to be sold over the next four years. I say run away."

Viragen concentrates on cancers and viral diseases. Its product candidates are Multiferon for malignant melanoma, VG101 for malignant melanoma tumors and VG102 for solid tumors. The company also is developing the OVA System with the renowned Roslin Institute, creators of cloned sheep Dolly, as a revolutionary manufacturing platform for the large-scale, efficient and economical production of human therapeutic proteins and antibodies, by expressing these products in the egg whites of transgenic hens.

In addition to the offering and greenshoe, Viragen said it also has agreed to sell to the underwriter, Dawson James, for $100, an option to purchase up to 4.02 million units identical to those offered publicly except that the exercise price per unit is $0.29, and per warrant underlying such unit is $0.39.

Proceeds are earmarked to redeem preferred shares, to make interest payments on debt, for research and sales activities, for working capital and for general corporate purposes.

Antigenics up on results, PIPE

In another deal, Antigenics Inc. said Tuesday it was gearing up to close a $25 million private placement of senior convertible notes with a group of investors, including Ingalls & Snyder Value Partners LP and Penrith Ltd., and it posted third-quarter results that pleased The Street. On the news, however, traders said there was considerable profit taking.

Antigenics shares (Nasdaq: AGEN) gained 18 cents, or 8.96%, to close at $2.19.

The New York biotech reported a third-quarter net loss of $11.2 million, or 24 cents a share, narrowed from a loss of $17.5 million, or 38 cents a share, a year before.

"With today's announcement of our $25 million financing and our ongoing cost containment efforts, we expect to be better positioned to explore the value of our portfolio," said Garo Armen, chief executive of Antigenics, in a news release.

"We are committed to prudently seeking additional financing opportunities and advancing our internal pipeline, including Aroplatin, AG-707, and Oncophage for glioma and in combination with other agents in metastatic solid tumors."

"I was long with a lot of shares when the phase 3 test [for Oncophage] did not work out and still have a small position. I really believe this company has something the world needs," said a buyside source in New York, who said he was holding his position.

"I hope [CEO Armen] Garo will be able to jump through all of the hoops to get the various products approved and produced. This should be a great takeover prospect. Unfortunately, it could probably be taken over now and I would still be in the hole."

The 8% notes due Aug. 30, 2011, are convertible at $3.50 each, a 74% premium to the $2.01 closing price Monday. The notes may also be converted into a 30% interest in Antigenics MA, a subsidiary of the company. Antigenics may call the notes after Oct. 30, 2009 if the average trading price of its stock for any 30-day trading period is $7.00 or higher.

Antigenics develops treatments for cancers, infectious diseases and autoimmune disorders.

ZymoGenetics slides by 2%

In another deal of sorts, ZymoGenetics, Inc. announced a licensing deal with Dyax Corp. in which ZymoGenetics purchased the rights to Dyax's proprietary antibody phage display libraries. Both Cambridge, Mass., biotechs were lower for much of the session, however.

Financial details were not disclosed, but under the terms of the collaboration, ZymoGenetics will pay Dyax upfront and annual technology license fees, clinical milestone payments and royalties on net sales of products generated.

ZymoGenetics shares (Nasdaq: ZGEN) lost 27 cents on the day, or 1.65%, to close at $16.05.

Dyax shares (Nasdaq: DYAX) managed to end the day with a slight gain of 2 cents, or 0.67%, at $3.02 but spent most of the day lower.

Analysts and players are expecting a hefty net loss for ZymoGenetics when the company's financials are reported Wednesday but also are looking for an update on the expected Biologics License Application filing for rhThrombin by year-end and an update on its commercialization strategy.

In particular, however, onlookers are hoping to glean something about ZymoGenetics' strategy in light of Omrix Biopharmaceuticals, Inc.'s plans to file a BLA for its human thrombin by Nov. 15 following positive results from a phase 3 clinical trial earlier this month.

Omrix shares (Nasdaq: OMRI) lost 20 cents on the day, or 0.98%, to settle at $20.30. The San Francisco-based biotech is slated to report third-quarter results Nov. 7.

A buyside analyst, however, said ZymoGenetics' real show-stopper is its Interleukin 21, or IL-21.

"IL-21 will be ZymoGenetics' first blockbuster drug," the buysider said. "rhThrombin will help pay the bills, but IL-21 will make this company profitable."

The Food and Drug Administration granted orphan-drug designation for Interleukin 21 earlier in October, and the company has the drug in phase 1b clinical trials for melanoma and renal cell carcinoma.

Meanwhile, Merrill Lynch analyst Hari Sambasivam maintained a buy rating on ZymoGenetics, given the pending catalysts for the stock. He said in a recent report that he expects a BLA filing by late 2006 and approval by third-quarter 2007 with possible additional studies for label expansion and potential partnering in Europe in the coming months.

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