Solexa up 20.5%, Illumina down 12% on stock merger; Nabi slips; Favrille falls 22%; Ariad steady

By Ronda Fears

Memphis, Nov. 10 - Solexa Inc. shares soared Monday while Illumina Inc. sank on news of an all-stock merger of the two genetic analysis firms. Solexa stockholders will receive, subject to certain collar provisions, shares of Illumina common stock valued at $14 per Solexa share, or roughly $600 million.

In addition, San Diego-based Illumina has also agreed to invest $50 million in Solexa in exchange for newly issued Solexa shares. The deal is expected to close by the end of first quarter 2007. Illumina said it expects the deal to be modestly accretive in 2008 and significantly thereafter.

Both companies develop technologies that genetics researchers use in sequencing, the decoding process that reveals the genetic code in a strand of DNA. Illumina makes tools that can analyze huge amounts of genomic data; Solexa's technology helps researchers ramp up the pace of their analysis of greater amounts of genomic data.

The market opportunity in sequencing is estimated at $1 billion, creating a market opportunity for the combined company in excess of $2.25 billion, the companies said in a statement.

Hayward, Calif.-based Solexa hit a new 52-week high on the news, with the stock (Nasdaq: SLXA) settling at $12.56 by a gain of $2.86, or 29.48%, after trading as high as $13.27.

Illumina shares (Nasdaq: ILMN), however, fell on the news, losing $5.14 on the day, or 11.67%, to close at $38.91 after dropping as low as $37.63.

Also Monday, Solexa reported a third-quarter net loss of $9.9 million, or 27 cents a share, compared with a loss of $10.8 million, or 43 cents a share, a year before. Revenue declined to $569,000 from $844,000. The company said third-quarter revenues do not reflect any contribution from the Solexa Genome Analysis System, which is expected to generate more than 1 billion bases of DNA sequence at a time and enable human genome re-sequencing below $100,000 per sample.

Nabi settles with Third Point

Nabi Biopharmaceuticals and Third Point LLC announced Monday they have reached a settlement under which Nabi appointed two hedge fund nominees to its board and will establish a strategic action committee, including the two nominees, to continue the process of exploring strategic alternatives.

Also, Nabi will pay up to $250,000 in expenses to Third Point for deferring a proxy contest until Nabi's 2007 annual meeting. Appointed to its board and the new strategic action committee were Third Point nominees, Jason Aryeh, founder and general partner of JALAA Equities, LP, and Tim Lynch, president and chief executive of NeuroStat Pharmaceuticals, Inc.

In late September, Boca Raton, Fla.-based Nabi retained Banc of America Securities LLC to assist with its exploration of the full range of strategic alternatives to further enhance shareholder value, including but not limited to licensing or development arrangements, joint ventures, strategic alliances, a recapitalization and the sale or merger of all or part of the company.

Nabi shares have seesawed dramatically since Third Point began a campaign with Nabi to effect changes geared to boost stockholder value in the company in February. But traders said the stock has moved steadily higher since the crusade began, and the volatility has created interesting trades in the name.

The stock (Nasdaq: NABI) ended Monday off by 3 cents, or 0.45%, at $6.57.

"A lot of this [Nabi shares] is tied up with Harvest, Third Point, Knott, a handful of hedge funds," said a sellside trader.

Knott Partners Management joined Third Point's campaign around April and in May, Harvest Management LLC got involved. Each hedge fund owns roughly 9.5% of Nabi shares, or together just shy of 30% of the company.

"We are pleased to be able to work constructively with Nabi Biopharmaceuticals with the shared goal of enhancing the value of the company," said Daniel Loeb, chief executive of Third Point, in a prepared statement.

Boca Raton, Fla.-based Nabi has three products on the market: PhosLo, Nabi-HB - a Hepatitis B vaccine - and Aloprim. Its core business areas are Hepatitis and transplant, Gram-positive bacterial infections and nicotine addiction. The company has an alliance with Chiron Corp. for four vaccines, including a vaccine for hepatitis C that would be used in the development of Civacir.

On Oct. 12, Nabi said it was selling PhosLo and related assets to a U.S. subsidiary of Fresenius Medical Care for up to $150 million, which the company said would cut its cash burn for 2006 and 2007 to less than $30 million each. Under the agreement with Fresenius, Nabi will receive $65 million in up front cash, $20 million of milestone payments and royalties on a new product formulation for 10 years.

In March, Nabi said it will continue development of its Gram-positive program, led by StaphVAX and Altastaph, after an outside panel review of phase 3 trial data. StaphVAX was stalled in November 2005 after it failed to meet primary endpoints in a phase 3 clinical trial.

Favrille falls on trial miss

Favrille Inc. fell 22% after reporting Monday that its cancer drug FavId did not meet its secondary goal in a phase 3 trial.

The stock (Nasdaq: FVRL) lost $1.08, or 21.77%, to close at $3.88.

"This was a big blow," said a sellside trader. "A lot of the PIPE buyers are pissed."

The San Diego biotech said an interim analysis did not show that FavId was significantly better than a placebo, both in combination with Rituxan, for the secondary endpoint of response improvement. Rituxan is a non-Hodgkins lymphoma drug made by Genentech Inc. and Biogen Idec Inc.

Favrille also develops FAV-201 for the treatment of T-cell lymphoma. In addition, the company plans to initiate pre-clinical studies to identify additional product candidates for the treatment of autoimmune diseases, with an initial focus on multiple sclerosis.

In March, Favrille raised $45.2 million from a PIPEs transaction led by MPM BioEquities Adviser, LLC involving the sale of 8.6 million shares at $5.26 each, plus five-year warrants for another 3 million shares with a strike price at the same level. The placement also included investors among the likes of Federated Kaufmann Fund, T. Rowe Price Associates, Tang Capital Management, ProMed Management, Forward Ventures, Sanderling Ventures, Alloy Ventures and William Blair Partners.

Ariad searching for partner

Ariad Pharmaceuticals, Inc. was steady in trade Monday while the company's top executive said its top priority is finding a partner outside the United States for its lead product candidate, AP23573, or Ariad 573, and the company expects news on that front late this year or early next year.

"At the heart of our path forward is our need to leverage the extensive corporate experience that we have with respect to strategic partnerships moving toward profitability," Dr. Harvey J. Berger, Ariad's chief executive, said Monday at the JPMorgan Small/Mid Cap Conference in Boston.

Ariad shares (Nasdaq: ARIA) ended Monday unchanged at $4.67 in heavy trade. Some 675,501 shares changed hands, versus the norm of 417,124, in a band of $4.61 to $4.75.

Cambridge, Mass.-based Ariad expects to announce a partnership with a non-U.S. company for Ariad 573 late this year or early in 2007, he said. Also in that timeframe, Ariad plans to launch the phase 3 registration trail for Ariad 573 in advanced sarcomas, which the company considers a gateway indication into oncology, Berger said, but he stressed that the drug is not just for sarcomas.

"We see opportunity to commercialize [Ariad] 573 across a wide range of cancer indications," he said.

Ariad will announce guidance on additional indications for Ariad 573 once the company has a partnership deal in place, he said. Ariad's internal objective is to be ready to launch Ariad 573 for sarcomas by the end of 2008; however, if approved, the drug will likely be launched early in 2009, Berger said.

Berger also said Ariad will announce its next oncology development candidate at the American Society of Hematology 48th Annual Meeting, scheduled for Dec. 9-12.

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