BioMarin, King deals on deck; Cephalon poised to slide Friday; CombinatoRx off on PIPE deal

By Ronda Fears

Memphis, March 23 - A couple of deals were on deck Thursday, including two convertible bond offerings, but it was a PIPEs transaction from CombinatoRx, Inc. that biotech players were taking to heart as cause for optimism.

CombinatoRx shares dropped 5% on the PIPE deal, but the focal point was the run-up in the stock since the company went public last November after having to sweeten the initial public offering price range.

"The IPO market has been brutal for biotechs, and that [CombinatoRx] was no exception. The IPO was abysmal, but look at what the stock has done since," said a biotech fund manager based in Boston. "It begs one to ponder the idea that the climate is getting friendlier" for initial public offerings.

Boston-based CombinatoRx said Thursday it is gearing up to settle a $48 million PIPE with a group of institutional and accredited investors in which the investors agreed to buy 4.68 million shares at $10.25 each - a 7.6% discount to the company's closing stock price of $11.10 on Wednesday.

CombinatoRx shares (Nasdaq: CRXX) on Thursday fell 60 cents on the day, or 5.41%, to close at $10.50. In early November, CombinatoRx, Inc. priced its IPO of 6 million shares at $7.00 - at the low end of a sweetened guidance range of $7 to $9, reduced from original price talk of $10 to $12.

CombinatoRx develops treatments for cancer, immuno-inflammatory disease, metabolic disease and neurodegenerative disease.

BioMarin stock off 1.65%

BioMarin Pharmaceutical Inc. equity players were frustrated ahead of its follow-on deal for 9 million shares, on deck after Thursday's close concurrently with the sale of $125 million of convertible bonds, but upbeat overall.

"OK, now it will be a couple of weeks before it stabilizes from all the short selling, the hedge funds playing the convert," said a fund manager in Atlanta. "It's OK, though, because history tells us that the stock will go up after a deal like this in the long run. We just have to be patient."

BioMarin shares (Nasdaq: BMRN) lost 22 cents, or 1.65%, to close Thursday at $13.13.

The Novato, Calif.-based biotech saw huge gains in its stock on positive study data for its Phenoptin for mild-to-moderate forms of phenylketonuria, or PKU, a metabolic disease. BioMarin and partner Serono SA plan to apply for marketing approval for the drug next year.

BioMarin notes bid up in gray

BioMarin's new convertible was finding favor, with the issue seen bid up 1.25 points in the gray market early Thursday. The bonds are expected to price with a coupon of 2.5% to 3.0% and an initial conversion premium of 22.5% to 27.5%. Bookrunner is Merrill Lynch.

The company plans to use proceeds from the transactions to fund the commercialization and additional clinical trials of Phenoptin, and potential acquisitions, in addition to possible buybacks of some or all of its $125 million convertible bonds due 2008, which become callable on June 20 this year.

BioMarin's existing 3.5% convertible was pegged by one sellside shop Thursday at 104.375 bid, 105.375 offered with the stock at $13.13, where it closed.

Last week, the 3.5% issue gained with the underlying stock, but analysts said holders would not fare extremely well if the stock continued on the upward spike because that would erode the premium.

King stock player cheers deal

King Pharmaceuticals, Inc. equity players were cheering its offering of $400 million of 20-year senior unsecured convertible bonds that were on deck to price after Thursday's close.

King shares (NYSE: KG) took a big hit Thursday, settling lower by $1.67, or 8.78%, at $17.36, suggesting heavy hedge fund participation in the deal.

The Bristol, Tenn.-based pharmaceutical company plans to use proceeds to repurchase its 2.75% convertible debentures due 2021, of which $345 million currently remains outstanding, and general corporate purposes.

"[The] old conversion rate of $50.16 [on the older King convertible] was a problem. They [holders of the older issue] will openly bid on this [new deal], and that's good for us," as it should also cause a downdraft in the underlying stock and a buying opportunity on the weakness for stock players.

He added that in the company's most recent 10-K report the company put the market on notice that it might be conducting this sort of transaction so it should be "no surprise to anyone."

King convertible player pans deal

To the contrary of the equity player's view that current King convertible holders would buy into the new deal wholeheartedly, at least one buyside source didn't like it. The new convertible is talked to yield 0.75% to 1.25% with an initial conversion premium of 20% to 25%.

"I don't like it. [It] doesn't look that interesting. I'm using 175 [basis points] over Libor, but maybe I'm being aggressive - it's probably around 200, and 28% volatility," the buyside convertible source said. "At the very cheap end of talk, it's maybe fair valuish, around 97.5ish. I would think it would come in on the cheap end of talk, depending on how much outright interest, that may help. We got three new [convertible] deals coming in tonight. BioMarin is the cheapest, that one will do well."

"Maybe the [King] deal will take out the old ones. It makes sense, but it doesn't really matter to them [the current bondholders], they can still get the old bonds right around par, it doesn't necessarily mean the holders will necessarily put in for the new ones."

On management concerns: "They've had a spotty track record and inventory issues that seem to reoccur every other quarter, so they're definitely not spotless."

King's 2.75% convertibles were quoted at Thursday's close by one sellside shop at 100 bid, 100.5 offered, up from 97.5 on Wednesday. King shares (NYSE: KG) settled lower Thursday by $1.67, or 8.78%, at $17.36.

Cephalon fails to get FDA nod

Cephalon Corp. shares were halted Thursday as the Food and Drug Administration debated the fate of its attention deficit hypertension disorder drug Sparlon, proposed in children ages 6 to 17. After the close, the company said the panel voted unanimously not to recommend approval, and the company was holding a conference call on the matter.

The committee voted that Sparlon is effective for its intended use but recommended that the company collect additional data to support the safety of the drug in children and adolescents with ADHD, Cephalon said.

"We are obviously disappointed with the recommendation of the advisory committee. We will continue our discussions with the FDA to determine the next steps in the review of this drug application," said Paul Blake, executive vice president of Cephalon's worldwide medical and regulatory operations.

By Cephalon's description, Sparlon is a new formulation and proprietary dosage strength of modafinil, the active ingredient in Provigil - which is approved for the treatment of adults with excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome and shift work sleep disorder.

Frazer, Pa.-based Cephalon, which suffered a setback on the FDA review in late January, had hoped to launch Sparlon in second quarter, and those sales have been included in many analysts' estimates.

Cephalon amends 2006 sales

Cephalon said its previously issued 2006 earnings-per-share guidance of $3.80 to $4.00 remains unchanged, but it tweaked sales projections in light of the FDA committee's vote.

The company said it was reducing its 2006 sales guidance by $100 million to $1.45 billion to $1.50 billion. Consistent with that, the company added, guidance for CNS franchise sales also is reduced by $100 million to $665-715 million.

After a gain Wednesday, many expect the stock to react negatively Friday. Cephalon shares (Nasdaq: CEPH) closed Wednesday higher by $1.45, or 2.02%, at $73.31 but traded in a range of $65.04 to $73.97 on huge volume of 22.5 million shares compared to the three-month running average of 3 million shares.

On Wednesday, Cephalon's B tranche 0% convertibles due 2033 traded Wednesday at 127 on a stock price of $67.75 amid the uncertainty - about a half-point drop from Tuesday.

Cephalon player plans to buy

Onlookers are widely expecting that Cephalon shares will sink when they begin trading Friday, but many see that as a buying opportunity, so the decline may not be as drastic as some fear.

"I don't think this changes a whole lot," commented a buyside market source.

"I think everyone is missing the point. They did not say the drug was not safe. What they said was that they were not sure if the drug was unsafe. If I am reading the news reports correctly, they went on to say that further testing is needed to determine whether the drug actually causes skin rashes because the data is not sufficient to know one way or the other with any certainty.

"I predict that the company will conduct further tests and re-submit for approval in the future," the buysider continued. "This will be a huge buying opportunity tomorrow. It will drop and over sell. Do not forget all the other drugs they have in the pipeline. Their cash cow is Provigil, which is protected through 2011, with another to be approved in a few months and another in the pipeline."

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