Pozen pumped by partnership; Biovail battered by patent loss; Gene Logic gains on layoffs

By Ronda Fears

Memphis, Aug. 2 - Confirming what traders have been saying over the last week or so, Merrill Lynch & Co.'s biotech research team observed in a report Wednesday that money flow into biotech and health care funds turned positive at the end of July after outflows throughout June and most of July.

Biotechs were stronger in trade Wednesday, and the Merrill team also discussed a short-term rally in the sector, but players were less enthusiastic about a summer bounce.

"The market right now is a piss-poor judge of valuation. We might, and I emphasize might, be seeing a little summer rally, but the low volume subtracts from my excitement," said a biotech fund manager in New York.

"Everyone is more concerned with hedging to reduce risk, which suggests that first and foremost the lingering sentiment is negative. But in the midst of that, small caps suffer and that creates major opportunities."

Merrill's biotech team, headed up by Eric Ende, said, however, that improved small cap valuations, a positive reversal of fund flows at the end of July and potential seasonal strength during August contributed to their expectation for a short-term biotech rally.

"In addition, investors are shifting towards stable growth stocks and Merrill Lynch's technical analyst is looking for a 'tradable rally,'" the analysts said in the report.

"But, upside could be limited due to massive potential stock supply and because the sector remains in a secular downtrend."

Pozen gains 39%

Pozen, Inc. got another huge boost Wednesday by its announcement of a potentially $375 million partnership with AstraZeneca plc for a new painkiller, but there were some skeptics ahead of the company's second-quarter results due to hit the tape Thursday.

"This is a little scary, this big a reaction," said a buyside market source in Boston.

"You love it on the one hand, but a P/E of 300 times is frightening. All I have to say is the [second-quarter] numbers better be good or this is heading for the dumpsters."

Pozen shares (Nasdaq: POZN) rocketed upward by $2.95, or 39.39%, to settle Wednesday at $10.44.

Most onlookers, though, were extremely impressed with the event.

Pozen and AstraZeneca agreed to co-develop and commercialize fixed-dose combinations of esomeprazole magnesium - AstraZeneca's Nexium for heartburn - with the non-steroidal anti-inflammatory drug naproxen - most commonly known under the label Aleve - in a single tablet. The product will be indicated for the management of pain and inflammation associated with conditions such as osteoarthritis and rheumatoid arthritis in patients who are at risk for developing Nsaid-associated gastric ulcers, Pozen said.

AstraZeneca will pay Pozen $40 million upfront plus up to $160 million if and when the drug meets certain development and regulatory milestones, and another $175 million if certain sales thresholds are met. AstraZeneca said that phase 3 trials are expected to start in 2007.

On Monday, Pozen shares got a big shot in the arm on word from the company that it would submit a full response to the FDA approvable letter on its migraine drug Trexima - a combination of naproxen and sumitriptan (GlaxoSmithKline plc's migraine drug Imitrex) - in fourth quarter - signaling that former safety concerns are well in hand. Pozen also has an arthritis drug, Lornoxicam, in clinical trials.

Glaxo is Pozen's partner on Trexima.

"Most importantly, the ability to attract a major pharmaceutical partner validates the PN program and supports the potential of this product to reach blockbuster potential," said RBC Capital Markets analyst Ken Trbovich in a report Wednesday. "As a result, Pozen now has two products with greater than $1 billion potential partnered with major pharmaceutical companies that have the marketing expertise and muscle to drive sales once Pozen has completed the development necessary to gain FDA marketing approval."

Biovail plunges 25%

Canadian concern Biovail Corp. - which has pending legal claims against the hedge fund SAC Capital Management for shorting its stock and research firm Gradient Analytics for conspiring to bring down its stock price - took a beating Wednesday after news that it has all but lost its legal battle with Anchen Pharmaceutical Inc. to block a generic form of its antidepressant Wellbutrin XL.

In addition to facing competition considerably earlier than previously thought, the event also prompted Biovail to rethink its financial outlook for 2006, saying it would update those projections when it reports second-quarter results on Aug. 10.

After being halted for nearly two hours in the United States, Biovail shares (Nasdaq: BVF) fell $5.18, or 24.73%, to $15.77. In Canada, the stock (Toronto: BVF) lost C$6.06, or 25.5%, to C$17.70.

"Ha! It turns out that Gradient and SAC were right along" in shorting Biovail stock on the potential generic competition for Wellbutrin XL, remarked one buyside source.

"I have a four letter word for Biovail, sell."

Under a summary judgment issued late Tuesday, a California district judge denied Biovail's allegations that Anchen's generic version of Wellbutrin XL would be a patent infringement, subject to a final order. Anchen is a private biotech based in Irvine, Calif.

Biovail is reassessing its previously issued financial guidance for 2006 and is assessing the impact the ruling may have on the timing of when Anchen may be in a position to launch a generic version of Wellbutrin XL. Analysts said it seems Anchen will be in a position to launch it over the next few months, potentially as early as late August or September 2006, in contrast to previous forecasts of second-quarter 2007.

The timing of when Anchen may be in a position to enter the market may be impacted by Biovail's appeal and/of FDA approval for Anchen's drug, as well as Anchen's ability to manufacture commercial quantities, Biovail said.

Gene Logic adds 5.5%

Gene Logic, Inc. was lifted Wednesday on news from late the day before that the company has eliminated about 80 employees in its troubled genomics division and related corporate staff, effective Oct. 5.

"I'm not sure it's good news, as letting 80 people go indicates a lack of business," said a buysider in Chicago. "But it stems the bleeding from that division anyway."

Gene Logic shares (Nasdaq: GLGC) gained 7 cents on the day, or 5.51%, to close at $1.34.

Last month, Gene Logic plunged after the company warned second-quarter sales for its genomics division will fall short of Wall Street expectations, and because of the shortfall it withdrew financial projections for 2006 and 2007.

The Gaithersburg, Md., company said Tuesday that staff in its preclinical and drug repositioning divisions will not be affected by the layoffs. Once fully implemented, the company said the staff reductions will reduce its annual salary and fringe-benefit costs by about $8 million.

Ligand lifted 2% by CEO exit

David Robinson's resignation as Ligand Pharmaceuticals, Inc.'s chairman, president, chief executive officer and director provided a bounce in the stock as it seemed to "signal a serious effort at a turnaround," one sellside trader said.

Ligand shares (Nasdaq: LGND) added 16.5 cents, or 1.84%, to end at $9.155.

The company spent much of last year in a bitter battle with shareholder Third Point, LLC - a prominent New York-based hedge fund - over his suggestions of dramatic changes to turn the company around, such as a sale or merger. The battle came to an end in December when Third Point agreed not to pursue a proxy fight in exchange for three board seats.

"This looks like Loeb [Daniel Loeb, chief executive of Third Point] got his way eventually," the trader said.

Ligand said it will immediately begin a search for a new chief executive and has named Henry Blissenbach interim CEO and chairman, effective immediately. In a related action, the company's board of directors appointed director John Kozarich to the audit committee of the company's board of directors to replace Blissenbach. In addition, Alexander D. Cross has replaced Blissenbach on the compensation committee and the nominating committee, and John Groom has been named chairman of the compensation committee.

San Diego-based Ligand is scheduled to report second-quarter results Aug. 9.

Nabi shares rise 4%

Nabi Biopharmaceuticals, another name in which Third Point is involved, took off on the Ligand news as well, according to the sellside trader.

"Time for a missive (preferably delivered by missile) from the bark and bite boys - David Knott, Harvest Management, Daniel Loeb," he remarked.

"I think the captains are right. We'd all do well to side with the hedge funds and force a sale."

Nabi shares have been boosted this year in spates after Third Point called for the Boca Raton, Fla.-based company to sell itself in a public auction. Harvest Management and Knott Partners have joined that pursuit. Each of the three hedge funds own roughly 10% of Nabi shares, or nearly 30% together.

Iomai snapped up, gains 28%

In bargain basement hunting mode, Iomai Corp. zoomed Wednesday by nearly 28% - recouping more than half of its losses since debuting earlier this year and becoming one of the worst-performing initial public offerings of the year so far.

"Iomai listed on the worst IPOs list is actually good for this stock. Bargain hunters see it and buy it with the idea that it can only go up from here," said a sellside trader. "If you believe in Iomai then it's time to buy. If not, now's a good time to cash out."

Among the 11 biotech initial public offerings this year publicized in recent reports, Iomai was getting a lot of attention as it was the absolute worst performer of the pack with a 53% decline as of July 31 from where it debuted in February. Only two are not underwater from where they priced - Omrix Bio-Pharmaceuticals, Inc. and Novacea, Inc.

On Feb. 2, Iomai priced 5 million shares at $7 apiece - the low end of the reduced price range of $7 to $9, which had been cut from original guidance of $11 to $13. Gaithersburg, Md.-based Iomai concentrates on developing and commercializing vaccines and immunostimulants delivered to the skin.

Iomai shares (IOMI) on Wednesday climbed 82 cents, or 27.61%, to $3.79.

Omrix, Novacea gain slightly

The two biotech IPOs in positive territory since debuting earlier this year - Omrix and Novacea, both on April 22 - reacted dividedly Wednesday to the focus on IPO performance.

Omrix priced 3.4 million common shares at $10 each - below the indicative range of $15 to $17. As of July 31, at $12.50, the stock had risen 4%. New York-based Omrix makes biosurgical and passive immunotherapy products.

After spending much of the day slightly higher, Omrix shares (Nasdaq: OMRI) ended off by 3 cents, or 0.24%, at $12.35.

Novacea sold 6.25 million shares at $6.50 - deeply discounted from the price range of $11 to $13 a share. South San Francisco, Calif.-based Novacea is focused on cancer treatments with DN-101 for prostate cancer, vinorelbine for metastatic breast cancer and AQ4N for glioblastoma multiforme.

Novacea shares (Nasdaq: NOVC) closed up by 9 cents, or 1.14%, at $7.99.

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