Incyte pitches deeply discounted drive-by convertible; Genta down 32% on PIPE; Adolor rises

By Ronda Fears

Memphis, Sept. 20 - With hopes of an after-Labor Day lift to financing activities in the routine routes seeming dimmer and dimmer, players pointed to a couple of "desperate" deals - from Incyte Corp. and Genta, Inc. - as signs that recovery on the financing front may be tougher than they had anticipated.

"I really thought that there would be a stronger rotation out of the energy sector - people taking profits there - and a big surge in biotech as a result because biotech is a growth area," said a biotech fund manager in Boston.

"We are not seeing that, yet. I say yet, because I think that will happen before the end of the year. But we are not seeing the money flow into the sector that would really get the bankers fired up about bringing new deals. It has been a lousy year for biotech IPOs [initial public offerings] and stock deals have suffered.

"That is why we have seen a big surge in venture capital and the PIPEs, but those deals tend to be good only for the handful of players that get involved. The rest of us are pounded in the stampede that these things cause."

Incyte bond offered at 77-79

Incyte was in the Rule 144A market after the close with $132 million of 3.5% convertible senior notes due Feb. 15, 2011, talked to price at 77 to 79, versus par of 100, for a whopping yield to maturity of 9.45% to 10.12%.

The issue, led by Piper Jaffray, is slated to price before Thursday's open.

It will convert at $11.22, for a ratio of 89.1385 shares per bond, for an initial conversion premium of 126%. The issue will accrue original issue discount for tax purposes.

Incyte shares (Nasdaq: INCY) closed Wednesday at $4.96, a gain of 7 cents, or 1.43%. In after-hours action, the stock saw heavy activity, trading in a band from $4.94 to $4.50 before it was last seen at 5:08 p.m. ET at $4.54, a loss of 42 cents, or 8.47%, from the closing level.

An equity trader said that there will likely be a lot of interest in the issue despite the "mega conversion premium," because Incyte has a partnership with Pfizer, Inc. and there is ongoing chatter that the Big Pharma may be eying the biotech for a merger or expanded partnership deal.

"Pfizer has been looking at Incyte. Everyone knows they are discussing something," remarked the sellside trader.

Wilmington, Del.-based Incyte is developing in its most advanced program CCR2 antagonists under a collaborative research and license agreement with Pfizer. The lead compound from this program, INCB3284, is being tested in rheumatoid arthritis and diabetes. As part of the agreement with Pfizer, Incyte retained rights to certain CCR2 compounds and two indications, including multiple sclerosis.

Incyte's next program includes a sheddase inhibitor that is being developed to treat solid cancer tumors. It also has advanced two compounds into phase 1 studies, INCB13739 for type 2 diabetes and INCB9471 for HIV.

Incyte snaps back from upgrade

Earlier in Wednesday's session, Incyte shares had been higher by as much as 3%, which the sellside trader said was largely due to an upgrade to the stock based on the stock valuation along with the biotech's strong cash position.

UBS Investment Bank on Wednesday raised its rating on Incyte to neutral from reduce, citing valuation as the main reason. But, the trader - away from UBS - said the brokerage, which has a price target of $5 on the stock, also noted that Incyte has a cash balance of $353 million and a 2006 budget in the neighborhood of $88 million to $95 million, so it should be funded through 2009.

"This is a negative from the standpoint of a stockholder looking at the convertible deal," the trader said. "The big discount on the bond doesn't look good either. But straight stockholders have to just stay focused on the Pfizer angle."

Incyte said it would use proceeds from the new deal, estimated at about $98 million, to redeem its outstanding 5.5% convertible subordinated notes due Feb. 1, 2007. Any remaining proceeds will be added to working capital and used for general corporate purposes, the company said.

The new 3.5% notes will rank ahead of a $250 million issue of 3.5% convertible notes due Feb. 15, 2011, which were sold by the company in 2004, and equal to any future unsecured, unsubordinated debt the company might issue going forward.

A takeover or merger would trigger a par put to holders.

Genta plunges 32% on PIPE

Chatter that circulated Tuesday about Genta Inc. working on some sort of deal - either a takeover or financing transaction - came to fruition with a late-day announcement of a PIPE in which the Berkeley Heights, N.J., biotech pocketed $16 million. But while the stock was climbing on the rumor, it suffered heavy selling Wednesday on the news of the deal.

Genta shares (Nasdaq: GNTA) fell 35 cents, or 31.82%, to settle at 75 cents. Volume ran about six times the norm with an astounding 59 million shares changing hands.

"How easily folks forgot the news of yesterday and made little things big. It's fear of hardly anything," said a sellside trader, referring to a gain in the stock Tuesday on chatter of some sort of deal in the works.

"It was very loud chatter. There was mention of ImClone with a $1 billion war chest and shopping. Antisense is the next big thing in biotech. But there also was a lot of noise about a PIPE as a means to temporarily solve the cash flow problems. A pullback is no big surprise, but considering the news flow of late, there were a lot of folks backing up the truck."

Market sources said there were lots of holders bailing out of Genta but also a decent amount of buying amid the trouncing.

"The stock is getting a lot of support. Their Genasense drug is getting a lot of support," said a buyside source in Boston.

Also on Tuesday, Genta reported that a study confirmed a "strong relationship between patient survival and a biomarker that was prospectively studied in the randomized phase 3 trial of Genasense injection in patients with advanced melanoma." The results were presented at a scientific meeting in the Netherlands. Genasense is Genta's lead drug and is being testing in melanoma and leukemia.

But the rise in the Genta float was enough to sink not only the stock price but put some holders under for the last time.

"Today almost half the entire float changed hands. For sure yesterday a good part of the volume (some 32 million shares) was 20 million short sells. Today they covered and the newly printed shares were floated, thus volume of 59 million and only a narrow 7-cent trading range," said another buysider in Atlanta.

"When a stock loses 30% in one day on extreme volume, that decline means there is more to come, nine out of 10 times. The reason is there are shareholders that see this drop and they cut their loss as a knee-jerk reaction. Mid-60s [cents] tomorrow may or may not be the bottom. Friday's close could be in the high 50s. Nearly anyone that went long today is underwater."

Adolor sold into strong rally

To the upside, Adolor Corp. surged Wednesday on an upgrade in the stock by Merrill Lynch & Co. to a buy, saying the stock is trading at about a 35% discount to fair value - which the brokerage pegs at $18 a share - for Entereg in opioids related bowel dysfunction and post operative ileus. But traders said there was heavy selling into the surge.

Adolor shares (Nasdaq: ADLR) shot up $1.53 on the day, or 11.5%, to close at $14.84.

"I think the upgrade was irrational," said a buysider in Atlanta. "This company has negative earnings, no real product and they just failed on their trials. Plus, it will be at least a year before they conclude a new study, if that turns out to be necessary."

Earlier this month, Exton, Pa.-based Adolor lost nearly half its value as it reported that two out of three clinical studies for Entereg did not meet their primary endpoints. On discrepancies noted in the studies, Adolor and partner GlaxoSmithKline plc were further examining the data and said they hoped to meet soon with the FDA to discuss the matter.

Progenics Pharmaceuticals, Inc., which has methylnaltrexone in trials also for post-op bowel dysfunction, gained on Adolor's demise earlier this month but also was higher Wednesday. Tarrytown, N.Y.-based Progenics plans to file a New Drug Application for methylnaltrexone in early 2007.

Progenics shares (Nasdaq: PGNX) added 19 cents on the day, or 0.81%, to end at $23.62.

Vasogen off 4% on no news

Disappointed from the lack of any news from Vasogen, Inc.'s presentation at the A.G. Edwards Emerging Growth Conference Wednesday, players were selling the stock following a bounce ahead of the event.

Vasogen shares (Nasdaq: VSGN) dropped 3 cents on the day, or 4.29%, to close at 67 cents.

"I thought we would see something regarding today's meeting/presentation, but there was nothing, nothing new at all," said a sellside trader.

Mississauga, Ont.-based Vasogen reported from the conference news that already had been on the tape - that new data from a clinical trial of its drug Celacade in chronic heart failure showed that the average days spent in hospital for cardiovascular cause was reduced by 32%.

The trader said there was talk that Vasogen may be ready to make an application for approval for Celacade at the Food and Drug Administration, which could give it a lift. But, he added, that further delay would probably pressure the stock lower.

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