Theravance rises; NPS Pharma off; Advanced Life Sciences IPO on for Thursday; Elan, Biogen slightly higher

By Ronda Fears

Nashville, July 27 - Earnings continued to be the driving force for activity in biotechs Wednesday, putting financing activity on the back burner. After Thursday's close, however, the market is looking for the Advanced Life Sciences Inc. initial public offering, proposed at $11 to $13 a share, to debut.

Before Thursday's open, Elan Corp. plc is due to report second-quarter results, but the securities were fairly quiet on Wednesday as players used caution in light of analysts' skepticism that multiple sclerosis drug Tysabri, in development with big biotech Biogen Idec Inc., will ever return to the market. The two companies pulled the drug in February after some patients in trials contracted a potentially fatal brain condition.

Meanwhile, Biogen gained Wednesday following its earnings report Tuesday, but a Merrill Lynch analyst warned that earnings per share growth could run out of steam in 2008 on lower royalties from Genentech Inc.

Royalties for Theravance Inc.'s antibiotic drugs are expected to be a big draw for potential partners, and the stock was up more than 2% ahead of second-quarter results slated for release after Wednesday's close.

NPS Pharmaceutical Inc. results sparked considerable debate among analysts looking at its Crohn's drug results within second-quarter earnings. The company's shares fell 4.5%, and the 3% convertible lost one-quarter point.

Theravance a partner magnet

Theravance Inc. was sharply higher ahead of reporting results after Wednesday's close but market sources said it was primarily due to an upgrade by Merrill Lynch analyst Eric Ende, who remarked that the company's antibiotic telavancin is likely to attract some hot competition among potential partners.

"We believe there are multiple potential partners vying for the telavancin marketing rights, which could result in a highly beneficial deal for Theravance," Ende said in his report.

"Pfizer announced it would acquire Vicuron, which is developing anti-infective drugs. According to Pfizer, there were multiple companies who were shut out of that deal and we believe that those suitors continue to search for antibiotics to market, with telavancin high on the list."

Merrill upgraded Theravance stock to a buy rating from neutral with a price target of $30, with Ende saying he anticipates positive phase III data in second-quarter 2006 for telavancin, which is being developed for complicated skin and soft tissue infections and hospital acquired pneumonia. Merrill projects U.S. sales for telavancin could reach $500 million to $800 million.

Theravance shares Wednesday gained 43 cents, or 2.22%, at $19.83.

Theravance net loss widens

After the close Wednesday, Theravance reported a second-quarter net loss of $31.7 million, widened from a net loss of $30.5 million for second-quarter 2004. Revenue increased, however, to $2.9 million in the second quarter of 2005 from $2.2 million because of higher payments from collaborations.

The company already has a strategic alliance with GlaxoSmithKline plc for its Beyond Advair bronchodilator, also in late-stage development, which was cited as a big factor in the company's revenue gain for second quarter.

Working against higher revenues were higher capital outlays. Theravance said expenses rose primarily due to increased research and development costs associated with the telavancin phase III clinical programs and phase I clinical studies for the overactive bladder and gastrointestinal motility programs.

Total external research and development spending was $14.4 million in second quarter, up from $6.9 million in second-quarter 2004.

Theravance recorded cash and equivalents of $202.4 million at June 30.

Elan quiet ahead of earnings

Elan was slightly higher ahead of its earnings, but volume was light in its securities on uncertainty surrounding its results without Tysabri, which was considered to be a blockbuster revenue generator for Elan before its trouble surfaced.

The Elan 6.5% convertibles were not seen trading at all, according to a bulge bracket sellside shop that traffics the issue. Elan shares were lightly traded and closed Wednesday up by a nickel, or 0.63%, at $7.99.

Before Thursday's open, the Irish drugmaker is scheduled to announce second-quarter results, and despite optimism expressed by Tysabri partner Biogen, analysts are leery about the drug's viability.

"We do not believe Tysabri will return," said Smith Barney Citigroup analyst Andrew Swanson in a report, adding that "current market prices for shares of Elan imply that the drug returns as a market-leading therapy for multiple sclerosis, which we believe is optimistic."

Biogen executives seem confident in the efforts to return Tysabri to the market. Biogen CEO James Mullen said in its earnings call that efforts to return Tysabri to the market are on track, with additional evaluations scheduled to be completed by the end of the summer.

Biogen royalties on the decline

Biogen Idec's second-quarter earnings, posted after the close Tuesday, handily beat Wall Street expectations, largely because of increased sales of another MS drug, Avonex, and its cancer drug Rituxan. But Merrill analyst Eric Ende warned in a report that Rituxan royalties are declining and that could begin to eat into earnings growth by 2008.

For second quarter, the big biotech name reported net income of $34.5 million, or 10 cents a share, compared with $827,000, or zero cents a share, last year. Revenue rose 12% to $606 million.

In its 10-Q report, Ende noted that Biogen detailed changes to its profit split agreement and royalties for Rituxan with Genentech. If a second-generation Rituxan is approved in late 2008 or 2009, the current Rituxan profit split will decline over time to 30% from 40%, he said, and royalties from ex-U.S. sales of Rituxan will end about the same time.

Ende said if that occurs, the net affect on Biogen's revenues could be as much as $200 million in 2009 and $500 million in 2010. On lower profit sharing and royalty revenues, he said the EPS impact could be as high as $0.27 in 2009 and $0.70 in 2010. Thus, Ende said Biogen's EPS growth could end in 2008 and begin declining in 2009.

Biogen reported revenues from Rituxan sales were $185 million in second quarter, up from $151 million a year ago.

NPS off on lack of visibility

Discrepancy on analysts' view of NPS Pharmaceuticals Inc.'s second-quarter results, particularly with regard to its osteoporosis drug Preos, resulted in a selloff in the stock. Analysts also cited financing risk, noting the absence of financial guidance from the company and, moreover, said concern about the balance sheet and cash burn could become an overhang toward the end of the year.

NPS Pharma shares lost 50 cents on the day, or 4.46%, to close at $10.70 and its convertible bonds followed suit, with the 3% issue due 2008 off a quarter-point to 84.75 bid, 85.5 offered.

On the positive side of the fence were JMP Securities analyst Charles Duncan, Jefferies analyst Adam Walsh and Smith Barney Citigroup analyst Andrew Swanson, among others, while Merrill Lynch analyst Eric Ende was a naysayer.

Ende cut his target price on the stock to $15 from $26 while Duncan maintained a $22 target, Swanson kept a $20 target, and Walsh has a $16 target on it.

Late Tuesday, NPS reported a quarterly loss of $1.09 a share, compared with $1.11 a share last year while revenues jumped to $2.2 million from $443,000 last year - beating Street expectations of a loss of $1.20 per share.

"The weakness today is attributable to Merrill lowering the price target, citing lower Preos sales estimates and financing risk," said a buyside convertible analyst. "Merrill says Preos is likely to lack a label for reducing non-vertebral fractures, unlike Forteo [made by Eli Lilly & Co.] which has it. Merrill also pushed back profitability to 2009 instead of 2008."

Preos approval is at least 10 months away, and other analysts were more optimistic about its promise.

JMP analyst Charles Duncan said, "Due to our conviction of Preos' approvability in 2Q06 and its potentially rapid penetration into the osteoporosis market given skills honed in marketing Kineret [a rheumatoid arthritis drug] by the NPS sales force, and data at the upcoming American Society for Bone and Mineral Research, we believe the stock's underperformance year to date (down 37% compared to 12% gain in the Nasdaq Biotech Index) presents a buying opportunity."

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