Cyberonics convertible view mixed; Human Genome rises on update; Alkermes, Cephalon off on delay

By Ronda Fears

Nashville, Sept. 20 - Biotech names were battered for the most part amid the decline in the broader markets Tuesday in reaction to the Federal Reserve hiking interest rates by a quarter-point, for the eleventh time and signaling more increases are likely to follow.

Expectations of a healthier pace of deals were not expected to be impacted much, if at all, by the Fed's move, however.

"We're heading into fourth quarter when a lot of these companies will have to be going to the capital markets to raise money for next year's budget. They have been wavering, stalling all year but now they will have to do something," a sellside biotech analyst remarked.

"Now the cost of capital has risen yet again and they are not going to like it but they have no choice."

Indeed, bankers and syndicate sources have said for a couple of weeks now that they are preparing for a heavy deal calendar for the remainder of the year.

A banker working on several pending deals agreed that the Fed move will have little impact on the capital markets transactions already in the works, as those companies have few alternatives to funding their operations.

"It's a double-edged sword, though," the banker said.

"While on the one hand terms may be less appealing to the issuers than they have been, demand among potential buyers is on the rise. For some of the biotechs, those with really clean balance sheets or a nice pipeline of drug candidates, they will see better terms as well as a nice reaction from the markets."

Biotech players are awaiting follow-on stock offerings this week from GTx Inc. and Renovis Inc. as well as the possible initial public offerings of Sunesis Pharmaceuticals Inc. and Intarcia Therapeutics Inc., plus a bond offering from Cyberonics Inc. CoTherix Inc. also is planning a follow-on offering.

Meanwhile, PIPE transactions among biotech names remain light, but sources tell Prospect News that volume also is expected to pick up soon.

Cyberonics cheap to outrights

The Cyberonics convertible - talked with a coupon of 2.5% to 3.0% and initial conversion premium of 27.5% to 32.5% - was looking about 3% to 4% cheap for outright accounts but considerably more expensive for convertible arbitrageurs, a market source said.

That analysis was based on the issue pricing at the cheap end of guidance, using a credit spread of 500 basis points over Libor and a stock volatility of 43%.

Cyberonics shares on Tuesday closed down by $1.68, or 4.68%, at $34.22 but were seen off by as much as 8% during the session. The stock had plunged 5% in after-hours trade Monday as the deal hit the tape.

The Rule 144A seven-year non-callable senior subordinated bonds are scheduled to price after the close Wednesday via bookrunner Merrill Lynch & Co.

Proceeds from the $125 million offering, which also includes an $18.75 million greenshoe, after Cyberonics hedges the deal, are intended to fund the launch of its treatment-resistant depression product in the United States and Europe, re-launch its epilepsy product and expand its salesforce.

Cyberonics deal pricey to arbs

Cyberonics was making the offering on swap itself - using about $20 million of proceeds to buy back shares and purchase bond hedge warrants - and while the company appealed to convertible investors pretty much across the board, the tough stock borrow was prohibiting heavy participation from hedged players.

The company said the stock and hedge transactions will effectively boost the conversion premium on the issue to 50%.

From a convert arb perspective, at the cheap end of price talk the Cyberonics convertible was 2% to 3% rich, a market source said. That analysis also was based on a credit spread of 500 basis points over Libor and a stock volatility of 43%.

"I would have loved to have gotten involved. I love to buy volatile health care names; but I can't buy something that I can't hedge," a Connecticut-based buyside source said.

For holders, the issue has full dividend protection via a conversion ratio adjustment as well as takeover, or change-of-control, protection that includes a make-whole premium provision. Additionally, offering papers said that in the case of a takeover where common shareholders get to elect consideration to be received, bondholders will be entitled to same voting rights.

CuraGen bonds little changed

CuraGen Corp. announced after Tuesday's close that during August and September it repurchased $23.9 million face value of its 6% convertible notes due 2007 for a capital outlay of $23.8 million. Buybacks and market chatter to that effect had driven the bonds up in recent months, traders said.

The 6% convertibles were pegged Tuesday by a sellside trader at 97 bid, 98 offered, basically unchanged on the day.

Proceeds from CuraGen's stock offering on Aug. 10 were used to make the bond repurchases. With the transactions, CuraGen said it now has $66.2 million of 6% convertible due 2007 and $110 million of 4% convertible due 2011 outstanding.

The sellside trader put the CuraGen 4% convertibles off about a half-point at 75.5 bid, 76.5 offered at Tuesday's close.

CuraGen shares Tuesday dropped 8 cents, or 1.67%, to $4.72.

Human Genome shares gain

Human Genome Sciences Inc. shares rose over 2% on Tuesday in reaction to an update from the company the previous day at a Banc of America Securities conference, but the trade in its convertible bonds took place Monday as traders noted nothing in the bonds Tuesday.

"We didn't trade any [Human Genome converts] today but there were still some inquiries," one sellside trader said.

On Monday, another sellsider said there were a couple of trades in the old 2.25% convertibles due 2011 at 105.75 with the stock at $13.25 and the new 2.25% convertibles due 2012 were 97.625 versus the same stock price.

Human Genome shares on Tuesday added 29 cents, or 2.21%, to close at $13.40.

At the conference, analysts said, Human Genome management updated its clinical pipeline, providing onlookers with an improved view of its candidates in the coming months.

Xoma, Cubist mixed on pact

Xoma Ltd. and Cubist Pharmaceuticals Inc. announced an agreement to develop new manufacturing processes for creating adequate quantities of the two monoclonal antibodies that constitute HepeX-B for phase III trials.

Terms of the deal were not disclosed, but in reaction Xoma shares rose Tuesday by 5 cents, or 2.89%, to $1.78 while Cubist stock slipped by 6 cents, or 0.32%, to $18.45.

Xoma plans to initiate manufacturing immediately and negotiate for a longer-term agreement with Cubist by year-end.

If the phase III trials are successful, the companies said they may enter into a commercial supply agreement for HepeX-B launch.

Alkermes, Cephalon shot down

Alkermes Inc. and Cephalon Inc., partners in Vivitrex - a once-monthly shot to treat alcoholism, were knocked down in after-hours trading by word that the Food and Drug Administration has delayed a decision on their application until Dec. 30.

The agency had been expected to decide on the application by Sept. 30.

Despite the setback in the vote, Alkermes and Cephalon said in a joint statement that they still anticipate the launch of Vivitrex in the first half of 2006.

Alkermes shares ended Tuesday off 8 cents, or 0.43%, to $18.67, but in after-hours trade the stock lost another 74 cents, or 3.96%.

Cephalon shares closed up 31 cents, or 0.67%, on Tuesday at $46.31, but in after-hours activity the stock was down 51 cents, or 1.1%.

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