Elan shares move up, credit lags, Connetics rises against the tide; Medicis, Inamed up; Millipore off

By Ronda Fears

Nashville, June 30 - The Federal Reserve meeting brought financing activity virtually to a halt across the board Thursday and biotechs were no exception, with only a handful of PIPEs deals in the market fetching altogether in the neighborhood of $10 million. In fact, volume in stocks also was dismally light and credit factors influenced trading activity.

As widely was anticipated, the Fed bumped up rates again by a quarter-point, and the impact on the capital markets was mixed.

"I think, at least as far as convertibles are concerned, issuers are getting more comfortable with the changing landscape terms that are prevailing in the market. I agree with some of the others who have said that business will pick up this summer," said an origination official with one of the larger shops underwriting convertibles, which has traditionally been a major source of funding for biotechs.

Stock issues by way of initial public offerings have had a particularly tough time of it in 2005, and it may not be such an easy reversal.

"We are really not seeing any better reception to IPOs, biotech or otherwise," said a syndicate official at one of the bulge bracket firms on Wall Street.

Mergers and acquisitions have been in the spotlight as a means for both small biotechs to fund ongoing research as well as Big Pharma concerns to tap into a future revenue stream. But with Big Pharma sitting on huge caches of cash, illustrated by Pfizer Inc.'s whopping $5 billion stock buyback plan announced last week, many sector players are wondering why they haven't been snapping up more small cap biotechs.

Merger and acquisition activity has been on the rise in 2005 but there are still a lot of Big Pharma names that will desperately need new products to maintain revenue streams, a buyside analyst remarked, echoing sentiments from the sellside as well. But merger activity within the biotech sector has been somewhat disappointing, players in the space say.

Medicis Pharmaceutical Corp., which is in the process of acquiring Inamed Corp., saw some action Thursday, however, on a new report praising the merger.

Elsewhere in trade, Elan Corp. plc took off on some positive drug data and stock upgrades were made on Connetics Corp. and Millipore Corp.

Elan, Biogen up on Tysabri data

Shares of Elan Corp. plc got a boost Thursday after the Irish pharmaceuticals giant and its U.S. partner Biogen Idec, Inc. said they were encouraged by positive results in a phase III clinical trial of their controversial Tysabri drug for the treatment of Crohn's disease.

Elan shares rose 15 cents, or 2.25%, to $6.82, but Biogen shares dipped 1.23%, or 43 cents, to $34.45.

Elan and Biogen in February halted sales and trials of the drug as a treatment for multiple sclerosis in combination with another drug after it emerged that some patients taking it contract a potentially fatal brain condition.

"We retain our view that safety concerns prohibit Tysabri approval for Crohn's," said Merrill Lynch analyst Erica Whittaker in a report Thursday. "Despite the positive clinical data in Crohn's disease, we cannot see a pathway for Tysabri to be approved for this indication given the risk-benefit."

Regarding Tysabri as a combination treatment for MS, a safety evaluation is on track for completion in July with a final decision by the U.S. Food and Drug Administration on the matter by late 2005 or early 2006.

Elan debtload still overhangs

Moreover, Elan's debtload is a major overhang to the stock story, which is hampered by the Tysabri matter. And it showed in trade Thursday, as the Elan 6.5% convertible due 2008 saw little to no traffic, according to traders, although the issue was marked 2 points higher at one big sellside shop to 118.25 bid, 119.25 offered on the back of the stock gain.

"Without Tysabri as a blockbuster product, we remain concerned that, unless there is more severe restructuring, Elan will have difficulty repaying its $2-billion-plus debt obligations in 2008 and 2011," Merrill's Whittaker said, saying she was keeping a sell rating on the stock.

Merrill's current forecasts assume that Tysabri will return to the market in early 2006 and achieve peak sales of $200 million to $350 million for MS only.

Under that scenario, Whittaker said Elan's worth is "negligible, assessed by discounted cash flow analysis." If Elan reduces non-Tysabri operating expenses by some 50% by 2007, she said fair value on the stock would only approach $2, "and it is still unclear how Elan's debt obligations would be met."

Millipore financials healthier

Millipore Corp. fell victim to the weakness in the broader markets Thursday, particularly tech and medtech shares but analysts are bullish on the story, particularly seeing stronger financials in place. With new top management, however, there remains some execution risk.

The stock slipped 14 cents, or 0.25%, to close at $56.70.

"Millipore's new CEO, confirmed that the company does not need a radical transformation of its business portfolio, but needs to execute more aggressively," said Merrill Lynch med tech analyst J. Darryl Pardi in a report.

"Management's plan is a step in the right direction, in our view," Pardi said, adding "Results can be volatile from period to period due to lumpy orders from biotech customers. In addition to potential volatility, investors face the risk that Millipore's new management team is unable to generate better returns. We think it will take several quarters before investors begin to see any real financial benefits."

Following an investor meeting by the company on Wednesday, though, Pardi said he sees potential for "invigorating growth at Millipore," and reiterated his buy rating on the stock with a higher target of $61 a share versus the previous $58. The analyst said he was especially impressed with company plans to broaden its product offerings through internal development, external licensing and selective acquisitions.

Pardi said Millipore's financials are improving and company management aims to accelerate organic revenue growth from 6% over the past three years to 8% to 10% by 2009. Millipore is forecasting EBITDA margins will surpass 25% in 2009, compared with 21% last year. The analyst said that would translate into mid-to-high teens annual EPS growth over the next five years.

Thomas Weisel Partners upgraded its view on the stock to peer perform from underperform following Millipore's presentation.

Medicis/Inamed wrinkle-free

In what one player described as the lack of anything else to do Thursday, the market jumped on Medicis Pharmaceutical Corp. on a new report praising its proposed merger with Inamed Corp., which actually was announced a couple of months ago and expected to be completed by year-end.

With the Inamed merger, Medicis is seen by analysts as making headway in the competition with Allergan Inc.'s Botox with their Reloxin and Restylane products.

"It was so blasted slow today, with the Fed, that just about any tidbit of news or mention from an analyst would move the market," said an equity trader at a bulge bracket firm on Wall Street, when asked about the move in Medicis and Inamed without any news on the tape about that situation.

A convertible trader, though, noted a small amount of activity in the Medicis convertible. He said the 1.5% bond traded 4 points higher at 97.125, but he too saw no real impetus for the move other than the gain in the underlying stock. Medicis shares rose 83 cents, or 2.66%, to close at $31.70 while Inamed gained 96 cents, or 1.45%, to close at $67, with both stocks seeing moderate volume.

"I suppose a 1.625% yield might look okay in this market, but I wouldn't be that keen to put position on," the trader said, panning the "paltry" yield and the fact that a new $650 million seven-year senior secured credit facility Medicis is working on to fund the acquisition will put more debt ahead of the convertible.

The only mention of the two companies on the wires Thursday was when Leerink Swann & Co. started coverage of Medicis shares with an outperform rating. Medicis, based in Scottsdale, Ariz., is a specialty pharmaceutical company focused primarily on products for the treatment of acne, eczema, rosacea and psoriasis as well fine lines and wrinkles.

Gary Nachman, Leerink Swann analyst, said his investment rating is based on the successful outcome of the proposed merger, which he believes would increase the company's exposure to the high-growth cosmetics market. He sees the merger as a strategically smart move for Medicis because it should help drive significant long-term growth at the combined company.

Connetics shrugs off bumps

Another dermatology name, Connetics Corp., was active Thursday, as well. Having largely recovered from an FDA setback in mid-June for its acne treatment Velac, Connetics saw another big bounce as analysts pointed to a "robust pipeline" of potential revenue-producing products despite the trouble with Velac.

On June 13, Connetics revised its earnings and revenue forecasts downward in response to the FDA's rejection of its experimental acne treatment, Velac gel, over concerns that the treatment could cause cancer. It came after the FDA rejected the Palo Alto, Calif.-based company's experimental treatment for fungal infections last year.

That news sent Connetics shares plunging 27% to $15.13 and its convertible bonds followed suit with the new 2% senior unsecured notes due 2015 falling to the 77.5 area and old 2.25% senior notes due 2008 in the 93 neighborhood.

By Thursday, the stock had climbed back over $17 and the Connetics convertibles had added back 5 to 6 points. Connetics shares on Thursday gained 26 cents, or 1.5%, to $17.64.

Leerink Swann's Nachman launched coverage of Connetics on Thursday, as well, with an outperform rating and said he believes Connetics' proprietary products and robust pipeline will produce solid earnings growth over the next several years. In fact, he said now is an attractive entry point after the selloff in the stock on the Velac disappointment.

The news in mid-June spurred Friedman Billings Ramsey to cut its stock rating on Connetics to market perform from outperform, and slash its price target to $18 from $30.

Mylan cuts spread

Meanwhile in the bank loan market Mylan Laboratories Inc. reverse flexed pricing on its $275 million term loan to Libor plus 150 basis points from Libor plus 175 basis points, according to a market source.

Merrill Lynch is the sole bookrunner on the $475 million five-year credit facility (Ba1/BBB-) that also contains a $200 million revolver.

Proceeds from the Canonsburg, Pa., pharmaceutical company's term loan will be used to help fund its Dutch auction self-tender offer for up to approximately 48.8 million shares, or up to $1 billion, of its common stock.

Under the tender offer shareholders will have the opportunity to tender some or all of their shares at a price not less than $18.00 per share or more than $20.50 per share.

Mylan also plans on issuing $500 million in 10-year unsecured senior notes via Merrill Lynch to fund the stock buyback.

Revolver borrowings will be available for general corporate purposes.

The tender offer is currently scheduled to expire on July 15.

Sara Rosenberg contributed to this report

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