Allergan rolls out $700 million note; Discovery falls on FDA request for more data; Human Genome up

By Ronda Fears

Memphis, April 5 - Allergan, Inc. rolled out a $700 million convertible note offering after the closing bell, sending the stock lower from a negative close. Players liked that the company was taking out its older zero-coupon convertible issue with the proceeds as well as buying back stock.

The Irvine, Calif.-based drug maker, which focuses on the ophthalmic, neurological, medical aesthetics, medical dermatological and other specialty markets, was pitching the issue for Thursday's business, but the stock took a hit in after-hours activity.

Allergan shares (NYSE:AGN) had closed lower by $1.44, or 1.33%, at $107.15 and were seen at 4:15 p.m. ET down by another 85 cents, or 0.79%, to $106.30.

"The hedge funds will push the stock down while they set up the convertible, but after the dust settles there will be a nice bounce," mostly because of the stock buybacks, said a biotech stock trader at one of the bulge bracket firms. "The convertible guys have got to be loving this one. And, we're happy to wait [for the stock to bounce]."

The convertibles were being pitched with a coupon of 1.0% to 1.5% and initial conversion premium of 20% to 25% and a load of change-of-control, or takeover, protection as well as dividend protection for holders.

Discovery Labs dives 29%

Discovery Laboratories, Inc. took a huge hit Wednesday after getting yet another delay in Food and Drug Administration approval for its respiratory drug for premature infants, Surfaxin, losing nearly 30% on the day.

"This situation is as frustrating as it gets. Part of me wishes that Surfaxin had been flat-out rejected, because at least we'd officially know where we stood and could cash out and move on," said a buysider in Philadelphia.

"But now we have to wait again for more news, news that could make everything OK or might possibly be worse than today's. And, on top of it, we have no idea when this critical news is coming. It's torture."

Warrington, Pa.-based Discovery Labs said in the second approvable letter for its lead product candidate, Surfaxin for the prevention of Respiratory Distress Syndrome in premature infants, the FDA is requesting information primarily focused on further tightening of active ingredient and drug product specifications and related controls prior to approval.

Discovery Labs shares (Nasdaq: DSCO) settled lower by $2.07, or 29.2%, at $5.02 after trading in a band of $4.94 to $5.33 amid eye-popping volume of 10.4 million shares, versus the three-month running average of 557,605 shares.

Holders look for exit point

Discovery Labs says it is arranging a meeting with the FDA regarding conditions for final approval and anticipates this will clarify timelines with respect to its response to the FDA. But a Milwaukee-based fund manager said he is looking to exit the story altogether, although the news is probably just a setback ahead of approval for Surfaxin.

"Beleaguered Discovery Labs again hit another major snag today with the revelation that the FDA has issued them yet again another 'approvable letter.' With this letter in hand the company again has to go back to the drawing boards and tighten it's scientific explanation, etc., but my point is this: The company is going get approved someday and now probably sooner rather than later, so each time these shares have gone thru a rather sudden collapse, they have at least rebounded up toward the $8-$9 area," he said.

"Now this time might be a bit more sedate but I would not count on that because this outfit can still draw down on approximately $75-$80 million and they may yet either pull off this approval, finally, or maybe get a big daddy pharma, and the route to an exit strategy may yet be in sight for us beleaguered investors."

Alnylam sold to buy Sirna

Alnylam Pharmaceuticals, Inc. was feeling pain from competitor Sirna Therapeutics, Inc.'s news earlier in the week of a more than $700 million deal with GlaxoSmithKline plc, traders said.

"Alnylam was down because of selling to buy into Sirna on the dip over there," one sellside trader said. "I am holding."

Cambridge, Mass.-based Alnylam is focused on drugs that work through RNA interference system; its principal drug candidate, ALN-RSV01, is in phase 1 clinical trials for lung infections caused by respiratory syncytial virus. The company also is working on a pandemic flu indication with Novartis AG.

Alnylam shares (Nasdaq: ALNY) dropped 73 cents on Wednesday, or 4.22%, to $16.57.

"My money is 100% on Alnylam since they have a number of significant advantages: They can use an RNAi cocktail approach to overcome mutation. They have freedom to operate with RNAi in this area. They have Novartis money, development and marketing support," the trader said.

"It's a no-brainer really. Initial Alnylam RNAi therapeutics are being used to target viral diseases such as pandemic flu (bird flu) and RSV (a specific childhood viral infection). Alnylam has a lot more to offer though. The technology may represent a new class of drugs. If this is the case, well, this truly will be a mega cap company one day."

Sirna off as shorts rethink

Sirna Therapeutics, Inc. was retreating Wednesday after a run up in the early part of the week on inking a deal worth more than $700 million with GlaxoSmithKline plc. Traders said that the spike was two-fold since the deal was announced Monday - short covering and those adding to positions outright.

On Wednesday, a sellside market source said much of the short covering was completed, so the stock began retracing some of the gains seen on the Glaxo deal, but he said the story seems to be a positive catalyst for Sirna shares long term.

"Shorts are getting set up because today there was some fear that the short trap is being slammed shut," the trader said. "There was an immediate scramble to buy and immediately cover shorts. The overall sentiment though is still leaning toward buying, so look for this [decline] to be short-lived."

Sirna shares (Nasdaq: RNAI) lost 14 cents, or 1.72%, to close at $7.99 after trading as low as $7.76.

On Monday, Glaxo and Sirna announced a strategic alliance to develop therapies for respiratory diseases under which Sirna will receive an initial payment of $12 million, including cash and purchase of Sirna common stock at $8.36 a share, plus payments in excess of $700 million for clinical milestones and royalties. Sirna shares had closed Friday at $6.74, so the Glaxo price was a 24% premium.

Sirna shares hit a new 52-week high of $8.30 on Monday in response to the deal.

The Glaxo purchase of stock was a negotiated payment, the trader pointed out. It could have been $6 million in cash just as easily.

"While I applaud management for making this type of deal and getting an above market price for the stock, I think it is more window dressing than anything else," the trader said. "Glaxo looks at it as a small gift - about $1 million over market price. It is better than giving them $6 million outright. But I don't think the market will support that price [$8.36] for a while."

Human Genome gains 3%

Human Genome Sciences, Inc. shares have pulled back by 26% since mid-March, and traders said the stock finally has drifted to a point where buyers were stepping in because of the weakness.

Shares are weaker since the March 14 release of interim phase 2b results of Albuferon versus Roche's Pegasys due to disappointment that Albuferon, dosed every 4 weeks, was not equivalent to Pegasys, dosed weekly. A sellside source said the market is skeptical that Human Genome will be able to find a development partner for this drug but recent information from analysts has shed a little better light on the situation.

"Bank on a nice move higher today. Biotechs in general are looking good today. I look for 25-plus-cents back up; possibly adding 40 cents a share. I know that's not much, but it's sure better than what has been going on the past few days," the sellsider said.

"The trading has been very negative, and it is clear that the momentum favors a downward trend. To buy here seems prudent, yet risky. This company needs something to spark enthusiasm."

Human Genome shares (Nasdaq: HGSI) closed up 33 cents, or 3.26%, at $10.45 on Wednesday.

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