HemoSense IPO delayed yet again; Cephalon off, Alkermes up on pact for alcoholism shot; Genentech up

By Ronda Fears

Nashville, June 24 - HemoSense Inc.'s initial public offering was delayed again - after getting pushed back in the June 13 week - even after a fourth price revision, providing further evidence of the tough IPO climate for biotechs. Any companies flush with cash, however, seem to be on the hunt for acquisitions of whole companies or new drug partnerships to boost their revenue streams.

Such speculation has been extensive, and Pfizer Inc., which announced a whopping $5 billion stock buyback plan Thursday, is seen as a big buyer in the market.

"It must be nice to have that much cash," said a sellside convertible trader. "If these Big Pharmas can get around the laws against using this cash to buy companies, I think we would see quite a few."

As for targets, there is a huge crop of candidates but the trader said BioMarin Pharmaceutical Inc. was one trading Friday specifically on renewed takeover chatter. The Novarto, Calif., company develops drugs for several genetic diseases and childhood asthma. BioMarin shares gained $0.23, or 3.24%, on Friday to end at $7.33.

There were a couple of small biotechs caught in the downdraft of the broader markets - Enzon Pharmaceuticals Inc. and NPS Pharmaceuticals Inc., the trader said, and they were getting picked up on the weakness. Both also saw action in their convertible issues, he said. Enzon's 4.5% convert due 2008 ticked up to 88 bid, the trader said, while the stock lost $0.18 on the day, or 2.76%, to close at $6.35. The NPS 3% convertible due 2008 was lifted at 84.125, he said, while the stock dropped $0.09 to $11.63.

Cephalon Inc. also has been tagged as a buyer with ongoing buzz that it is looking for acquisitions, particularly earlier this month when it raised $800 million with a new convertible. On Friday, the company announced a partnership with Alkermes Inc. to market a new treatment for alcoholism but the market reaction was lopsided and somewhat tepid with Cephalon off while Alkermes was slightly higher.

Moving sharply higher against the market, however, was biotech giant Genentech Inc. as it outlined a plan to boost production to keep up with demand for its star cancer drug Avastin. Gilead Sciences Inc. also was a big riser Friday after announcing it would try to take back licenses for its flu pill from Roche Holdings AG.

HemoSense IPO now "day-to-day"

Amid the brutal IPO market for biotechs, HemoSense initial public offering is now on "day-to-day" status, according to David McMillan, syndicate official at Lazard Capital Markets, one of the underwriters of the IPO. The price range is still proposed at $6 to $8 per share.

The San Jose, Calif.-based maker of a handheld blood coagulation monitoring systems originally delayed the IPO pricing from the June 13 week when it was pitched at $8 to $10, as well. In the week just gone, the price range was lowered twice, from $7 to $9 to the current $6 to $8 guidance. Originally, the IPO was talked at $9 to $13.

Lazard Capital Markets, WR Hambrecht & Co. and Roth Capital Partners are underwriters for the IPO, for 3.5 million shares.

HemoSense plans to use $12 million of proceeds for sales and marketing initiatives to support the ongoing commercialization of products, $4 million for research and development activities and $1.5 million for repayment of promissory notes held by affiliates, working capital and general corporate purposes.

Cephalon, Alkermes form pact

Market reaction to the partnership between Cephalon and Alkermes to market an injection to treat alcoholism suggested that for Cephalon the glass was half empty while it was half full for Alkermes. Moreover, the reaction was described as lukewarm, although traders said short-covering drove huge volume in Alkermes shares.

Alkermes shares gained 11 cents, or 0.84%, to $13.21 after announcing the venture with Cephalon to market Alkermes' alcoholism drug Vivitrex, which is awaiting FDA approval. Vivitrex is a once-per-month injection that uses Alkermes's proprietary Medisorb delivery technology.

Cephalon shares were off 23 cents, or 0.60%, at $38.21.

Both companies also have bonds in circulation that traders reported saw little action on the news. Alkermes' converts were not seen trading Friday, traders said, but one sellside source said he saw the 3.75% convert due 2007 recently at 93; the company also has a 7% straight bond outstanding. Cephalon's new 2% convertible traded a little Friday and a sellside source quoted the issue at 97.25 bid, 97.75 offered as the market wrapped up.

Under the deal Cephalon will pay Alkermes $160 million up front and $110 million if the drug receives FDA approval. Alkermes could also stand to receive up to $220 million in milestone payments if certain sales levels of the drug are met. Alkermes submitted a New Drug Application for Vivitrex to the FDA on March 31, which has been granted priority review.

Cephalon will be primarily responsible for the commercialization effort, fielding a new sales force of some 120 people exclusively focused on Vivitrex and supported by a team of 30 treatment center specialists from Alkermes.

Alkermes will be responsible for certain development and registration costs, up to product approval, and for any cumulative losses up to $120 million until the later of Dec. 31, 2007, or 18 months after FDA approval. During this period, losses exceeding $120 million will be borne by Cephalon. After year-end 2007, any pretax profit or loss will be shared equally by Cephalon and Alkermes.

Alkermes management applauded

By some market watchers' account, Alkermes was the clear winner in the partnership with Cephalon, and one source - who is not a fan of the company at large - specifically attributed the coup to Alkermes' top management.

"ALKS has the smartest management," one sellsider commented. "Richard Pops [CEO] could sell ice to Eskimos. I don't like ALKS but do admire Richard for his ability to pull rabbits out of his ass."

Some analysts appeared to be taking a wait-and-see attitude, which was largely mirrored in the stock market reaction to the news.

"We believe that this is an attractive partnership for both companies," said Thomas Weisel partners analyst Donald Ellis. "As we have stated before, we believe that building a viable, rich pipeline is essential for Cephalon to realize longer-term revenue and earnings growth, and we believe that Cephalon's proven track record commercializing psychiatric drugs makes it an attractive and experienced partner for Alkermes. Therefore, we view this collaboration as an incremental positive for both Alkermes and Cephalon."

Ellis left ratings for both stocks unchanged - outperform for Cephalon and peer perform for Alkermes - but he anticipates forthcoming revisions as the news plays out.

Genentech at full-throttle pace

For Genentech, the race is on to get its colon cancer drug out front of the competition and meet demand. On Friday, the company outlined a plan to boost drug manufacturing and company officials said it will be running close to 100% capacity for the next several years with little room for error in order to meet its own internal forecasts.

In particular, Genentech, majority owned by Roche Holding AG, is scrambling to keep up with rising demand for its brightest star, the cancer drug Avastin, which has been approved in colon cancer but also shows promise in lung and breast cancer. Other contenders with a colon cancer drug are Amgen Inc. and Abgenix Inc. with a partnership to develop panitumumab, a drug similar to Erbitux, which is in development in collaboration between ImClone Systems Inc. and Bristol-Myers Squibb Co.

"I do not like to run at 100% capacity for an extended period of time," said Patrick Yang, senior vice president of product operations on a conference call with analysts. "We have a plan to do it but it comes with some risk."

Genentech just completed the purchase of a drug manufacturing facility from Biogen Idec Inc. for about $417 million to expand its manufacturing capacity and the company now expects capital expenditures in 2005 to be around $1.7 billion. Also, Genentech said it has now agreed to pay $30 million to Amgen Inc. to get out of an agreement to manufacture some of Amgen's arthritis drug Enbrel and instead will use the plant for its own drugs. It is also expanding other plants.

Genentech now anticipates that cost of sales will be around 19% of net sales for 2005.

Genentech shares came off an intraday high of $81.23 to end Friday up by 98 cents, or 1.23%, at $80.70.

Gilead coughs up Roche flu pact

Gilead Sciences Inc. zoomed in trade Friday after announcing is was seeking to regain licensing rights to its flu pill Tamiflu from Roche Holding AG because the Swiss drugmaker has failed to adequately promote the drug.

Gilead accused Roche in a statement late Thursday of a material breach of their 1996 development and licensing deal for Tamiflu. The drug was launched in the United States in 1999 and had sales of $257 million last year. Roche in April said sales could total nearly $630 million this year due in part to orders from governments stockpiling the drug for a flu pandemic.

"Over the last three years, we've become very vocal with Roche about their failure to boost marketing efforts," said Mark Perry, Gilead's senior business adviser. He said Roche agreed to make improvements, but failed to follow through.

Roche paid $50 million in licensing fees to Gilead and another $86 million in royalties through the first quarter of this year, although Gilead claims that it is due at least another $18 million in royalties.

In a statement, Roche said it disagreed with Gilead's decision but would work to resolve the matter.

Gilead, based in Foster City, Calif., has annual revenue of about $1.5 billion, mostly from sales of treatments for HIV, the virus that causes AIDS, making it one of the most successful biotechs. Gilead chief financial officer John Milligan said the Roche dispute will have no impact on its 2005 earnings expectations.

Gilead also came off intraday highs, hitting $43 at one point of the session, to close higher by 33 cents, or 0.80%, at $41.75.

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