Icos gains 16% on Lilly buyout; Millennium forfeits AnorMED; InterMune rises 25%; OSI better

By Ronda Fears

Memphis, Oct. 17 - The biotech indexes bucked the lower trend in the broader markets Tuesday, buoyed by a spike in optimism for deals as Icos Corp. agreed to a takeover by Eli Lilly & Co. for roughly $2.5 billion and Millennium Pharmaceuticals, Inc. bowed out as expected from the race with Genzyme, Inc. to purchase the Canadian biotech AnorMED, Inc.

In addition, InterMune, Inc. rocketed higher after announcing late Monday that it has inked a partnership with Swiss biotech Roche Holdings AG to develop products from its hepatitis C program, headed by ITMN-191, which is expected to begin clinical trials by the end of the year.

"Merger Monday has been replaced as a catchphrase with Takeover Tuesday," remarked a biotech fund manager in Boston.

"It's very exciting but at the same time a little scary. Some of the premiums we are seeing seem to be out of touch with reality, whether on the cheap side or expensive side."

The Icos price tag was considered cheap to many onlookers, particularly in comparison with the AnorMED premium and Gilead Sciences, Inc.'s 50% premium to buy out Myogen, Inc. for $2.5 billion. Gilead shares (Nasdaq: GILD) gained 49 cents Tuesday, or 0.73%, to $68 while Myogen shares (Nasdaq: MYOG) were unchanged at $52, a half-dollar short of the $52.50-per-share takeover price.

"The upshot is that we are really stuck here," said the buysider. "You may have a good handle on some of the takeover targets, but then what? Where are you going to peg the premium? It could be a situation where you start with something reasonable and the story plays out like AnorMED and a bidding war pushes it over the top. I, for one, am just not comfortable playing this game. I will leave that to the hedge funds."

Merrill Lynch & Co. analysts agreed that mergers and acquisitions have become a focal point - particularly among biotechs that have standing partnerships with Big Pharmas such as OSI Pharmaceuticals Corp., which works with Roche on the cancer drug Tarceva.

"The Eli Lilly acquisition of Icos, as well as the recent Gilead acquisition of Myogen and Genzyme acquisition of AnorMED should reinvigorate the M&A theme in small- to mid-cap biotechs," said Merrill analysts in a report Tuesday. "We believe this deal could bring three key M&A themes into focus: 1) acquisition of small-mid cap biotechs whose products are already partnered with large pharma or large biotech; 2) acquisition of small-mid cap biotechs with late-stage or on-the market drugs; and 3) execution of deals that could be accretive in the near-term."

Icos price tag debated

Eli Lilly's accepted offer for Icos at $32 per share in cash was a price that players in the Icos story found debatable. It was a premium of about 18% over Monday's closing price and a 32% premium to the average over the past 90 days, according to the companies.

Icos shares (Nasdaq: ICOS) spiked on the news but settle short of the buyout price, gaining $4.38 on the day, or 16.15%, to close at $31.50.

"This seems like a reasonable price," said a sellside market source. "What a shame though - six years ago it looked as if Icos could be the next Amgen."

Another source thought it was criminally cheap, however.

"Gilead pays $2.5 billion for an unapproved PAH [pulmonary arterial hypertension] drug and we get $2.1 billion for a billion dollar approved drug with a built in pipeline. Lilly is stealing this company. $32 is too cheap. Icos is worth $3 billion," said a buyside source in Boston.

"The gap between what Icos was trading at and what it was worth was too wide. Cialis is gaining market share and proving to be a blockbuster. Current EBITDA to Icos from the Lilly partnership is $150 million a year. At $32, Icos is valued at 14x EBITDA. So, the minimum should be 17x, or $39/share. It's been a very long wait for some of us. I, along with many, thought that we were looking at least a $50-plus stock with a great future and pipeline. $32 - what a joke! Oh well, Eli Lilly's job is to make money for their shareholders, and that's what they are doing. In fact, Lilly looks a little pricey now."

Indianapolis-based Lilly and Bothell, Wash.-based Icos launched Cialis in 2003 after working on the drug for five years. Cialis sales rose 34% in the first half of 2006 to $456 million, and the drug is estimated to hold about a 25% share of the erectile dysfunction market in the United States.

Lilly said the deal will be dilutive to its 2007 earnings but boost profits and revenues thereafter. Some layoffs are expected at Icos, as well. Lilly shares (NYSE: LLY) slipped 11 cents on the day, or 0.19%, to close at $57.55.

AnorMED retreats by 3%

As many expected, Millennium withdrew from the bidding war for AnorMED, leaving Genzyme the victor in a union it has chased for roughly a year with no encouragement from AnorMED. Many players in the Millennium story were relieved, traders said, while AnorMED shares pulled back with no impetus for a better bid to show up.

Millennium shares (Nasdaq: MLNM) added 39 cents on the day, or 3.81%, to settle at $10.62.

AnorMED shares (Nasdaq: ANOR) eased by 42 cents, or 3.04% on the day, to close at $13.38 - short of Genzyme's winning bid of $13.50 per share.

There were some, too, who thought that Millennium may become a takeover target itself. Meanwhile, Genzyme was weaker on the turn of events, as many still see the AnorMED price tag as steep.

"Genzyme won the bidding war. I expect Millennium to move into the $11s soon. Millennium has now become a takeover target," said a buyside source in New York.

"Millennium gets a $19 million breakup fee from AnorMED. This has been Millennium's easiest buck. It seems that Genzyme just got played. AnorMED doesn't have that good of a pipeline. In my view, thank goodness Millennium lost the bidding war."

Genzyme shares (Nasdaq: GENZ) were weaker for much of Tuesday's session but ended the day better by 46 cents, or 0.67%, at $69.08.

Mozobil is AnorMED's lead drug candidate, currently in phase 3 trials to be used in stem cell transplants for patients with multiple myeloma, a blood cancer, and non-Hodgkin's lymphoma. In the case of Cambridge, Mass.-based Genzyme, the merger would expand its work beyond renal, autoimmune and genetic diseases.

Cambridge, Mass.-based Millennium said it determined that to increase its $12-per-share offer would not be in the best interests of its shareholders.

"Our agreement with AnorMED and its largest shareholder [Baker Brothers Biotech Fund] was based on constructive dialogue and a value proposition that we firmly believed was fair to both companies," said Deborah Dunsire, chief executive of Millennium.

"Millennium remains in a strong position as we continue to drive Velcade, advance our pipeline, focus investment and evaluate in-licensing and acquisition opportunities to complement our internal growth."

Vancouver, B.C.-based AnorMED had deemed Genzyme's latest bid of $13.50 per share superior to Millennium's previously accepted offer from Millennium but had snubbed Genzyme's bid of $8.55 per share that emerged Sept. 1. Genzyme, however, has been pursuing a deal with AnorMED for around a year.

OSI Pharma seen as target

OSI Pharma was a hot stock Tuesday amid the rampant speculation, traders said, fueled by analyst comments.

"The Lilly-Icos acquisition has sparked interest for companies, such as OSI, with partnered drugs that are cash flow positive and could be accretive to the partner," said Merrill analyst Eric Ende in a report Tuesday.

OSI Pharma shares (Nasdaq: OSIP) gained $1.73 on the day, or 4.61%, to close at $39.23.

Merrill raised its price target for OSI Pharma stock to $47 from $40 based on higher royalties and sales on products it partners with Roche and Merck & Co., Inc. Roche reported stronger-than-expected ex-U.S. Tarceva sales, Merrill noted, and Merck received approval for the diabetes drug Januvia, the sales of which OSI Pharma will receive 2.5% royalties.

Moreover, Merrill suggested OSI Pharma will divest its eye business and may be sold.

Melville, N.Y.-based OSI Pharma acquired Eyetech Pharmaceuticals, Inc. last year to get the Macugen product, but the deal was widely criticized.

InterMune inks Roche deal

On news of a $530 million collaboration with Roche, InterMune shares rocketed Tuesday.

After Monday's close, the Brisbane, Calif., biotech said it had inked a deal with Roche to collaborate on the research, development and commercialization of hepatitis C protease inhibitors.

InterMune shares (Nasdaq: ITMN) gained $4.29, or 25.49%, to close at $21.12.

"With the $60 million upfront payment, that alone should bring the market cap above $1 billion," said a sellside trader. "The additional estimated $480 million should bring it much higher."

Intermune will get $60 million upfront and up to $470 million in additional milestone payments as the compound is developed. Roche will also fund 67% of the global development costs and the companies will co-commercialize the product in the United States with a 50-50 profit agreement. Intermune will receive royalties on sales outside the United States.

"It's very interesting that InterMune got Roche to pay two-thirds of development costs - usually it is half," remarked a buyside source in Florida. "My take is that InterMune wants to hold on to the co-promote/development option and since once the trials get larger it will be expensive (for a company InterMune's size). This keeps them in without draining their resources too much."

Too, InterMune said the same terms could apply to additional compounds developed in the collaboration.

DOV, Discovery Labs rise

On a surge of optimism for M&A deals, DOV Pharmaceuticals, Inc. and Discovery Laboratories, Inc. - both of which are officially exploring strategic alternatives, including possible M&A type transactions - saw nice gains Tuesday with heavy volume.

"DOV has a number of drugs in the pipeline, one in phase 3 which is a huge market and the company has an extension until April allowing them plenty of time to get the stock price up to near $2 which they need to satisfy the market cap eligibility rule," a sellside trader said. "If you don't think they will make a push for that then you are crazy, especially since the shares out and in the float are very small for a Nasdaq company."

DOV Pharma shares (Nasdaq: DOVP) added 12 cents, or 16.9%, to end at 83 cents with 2.14 million shares traded versus the norm of 557,300 shares.

Johnson & Johnson's earnings helped propel Discovery Labs, one trader commented, as the profit growth there underscores the deep pockets available for deals.

Discovery Labs shares (Nasdaq: DSCO) added 28 cents, or 10.14%, to $3.04 with 2.5 million shares traded versus the norm of 599,971 shares.

"The price action suggests something is up as does the major uptick in volume," the sellside trader said. "Only an idiot would stand in front of this freight train given the fact Big Pharma's pipeline is dry and many buyouts of small biotechs are strong possibilities. The chart has two big open gaps begging to be filled. This seems a slam dunk given the action. I am holding and glad I bought more back at $2!"

Johnson & Johnson reported an 8.7% spike in third-quarter earnings Tuesday, marked by solid growth in all three of the company's health care divisions that helped propel its blue chip shares to a 52-week high. The New Brunswick, N.J., pharmaceutical giant reported net income of $2.8 billion, or 94 cents a share, compared with $2.5 billion, or 85 cents, a year before and revenue grew 7.9% to $13.3 billion from $12.3 billion.

Johnson & Johnson shares (NYSE: JNJ) gained $1.15 on the day, or 1.77%, to close at $66.08.

Acorda expands sales force

Also of note, Acorda Therapeutics, Inc. announced it would more than double its sales staff, to 65, to promote its Zanaflex anti-spasticity drug and the stock got another bounce.

"This second expansion will allow us to reach a much greater number of specialists with increased frequency and efficiency," the company said in a prepared statement.

Acorda shares (Nasdaq: ACOR) added 60 cents, or 3.67%, to $16.95.

Hawthorne, N.Y.-based Acorda shares have skyrocketed from $2.20 since announcing Sept. 25 that in a phase 3 trial its Fampridine-SR achieved its primary goal of improving walking speed in multiple sclerosis patients.

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