Critical gains 5% on sale signals; Advancis warns, eyes new deal; Pharmacopeia rises 4% on PIPE

By Ronda Fears

Memphis, Oct. 13 - In the wake of a couple of high-profile mergers in the biotech sector at rather whopping premiums, Critical Therapeutics Inc. on Friday announced top level board of director changes that were heartily cheered by the market, and one observer said it is a strong signal that the company is open to asset sales or a merger.

"This is the kind of thing I was expecting, but I honestly did not expect this so soon. Changes at the board level are obviously a good start in developing a new plan to create shareholder value. But in particular, the real message to this press release is here: 'Zwerling will chair a Strategic Advisory Committee established by the board.' Perfect," said a buyside analyst in Boston.

Critical Therapeutics said Friday that executive chairman Robert H. Zeiger has stepped down from the top spot but will remain as director. Richard W. Dugan, a member of the board since April 2004, has been named as lead independent director. H. Shaw Warren, M.D. has resigned from the board and will be replaced by M. Cory Zwerling. Zwerling, with a 19-year tenure at Bristol-Meyers Squibb Co., will serve the remainder of Warren's term until 2008.

"Arguably, this is a sign of a willingness to sell assets, or get acquired. The longer Critical keeps the ex-CFO as the acting CEO and does not find a new professional CEO to take his place, the more probable a major structural change becomes such as sale or acquisition," the Boston-based analyst said.

"Also, as I expected, these announcements can only serve as positives (although granted that they are not groundbreaking). However, the fact that the company is shifting perspective by making board level changes and looking at strategic options is exactly what shareholders should be expecting."

Critical Therapeutics shares (Nasdaq: CRTX) gained 12 cents on the day, or 5.26%, to settle Friday at $2.40.

The Lexington, Mass.-based biotech, which focuses on respiratory and inflammatory diseases, has collaborations with MedImmune, Inc. and Beckman Coulter, Inc. Critical Therapeutics owns worldwide rights to the asthma drug Zyflo, as well as other formulations of the drug.

Critical 3Q results critical

Critical Therapeutics is expected to report third-quarter results in about three weeks, the buysider said, and while the company has had recent setbacks with its anti-inflammatory drug CTI-01, he expects the numbers to be encouraging.

"I think sales in the last quarter will speak volumes. If we see a significant sequential increase, it will change the investment horizon for Critical. If sales are flat or just a bit higher, it might invalidate the past business plan that called for building a salesforce to sell the 4x version [of Zyflo] and building critical mass before rolling out the 2x version," he said.

"No doubt they will need more funding in the next six months, in some form or fashion. If it is a PIPE or secondary stock offering, the cost (dilution) will be directly related to how well the company is doing. In any event, something is brewing, and at this price the risk/reward ratio is too good not to buy."

Last month, Critical set a series of 52-week lows, hitting $2.08 Sept. 25, after it halted a phase 2 trial for CTI-01 because it showed no trends that the drug was effective. However, the study had been restarted after being suspended in March because a manufacturing issue arose surrounding the drug's container closure, and could be resumed again.

Critical Therapeutics said Sept. 15 when it halted the phase 2 trial that it was considering a partner or out-licensing CTI-01.

Advancis shares plunge 20%

There was a massive sell-off in Advancis Pharmaceutical Corp., however, after the company slashed its 2006 guidance for sales of the respiratory antibiotic Keflex and widened its projected net loss for the year. In addition, the company said it may be tapping the capital markets soon, which spooked players.

"This is ugly," said a sellside trader. "How the hell are their sales HALF of what they thought they would be? Everyone was outraged."

Advancis shares (Nasdaq: AVNC) fell $1.04 on the day, or 19.89%, to close at $4.19 with some 1.09 million shares traded, compared with the norm of 183,197 shares.

Germantown, Md.-based Advancis said Friday that it now expects total revenue for 2006 from sales of Keflex products in the neighborhood of $7 million to $10 million versus its previous expectation of $16 million to $17 million. At the same time, the company widened its estimate of the year's losses to a range of $1.21 to $1.31 per share from its prior guidance for a net loss of $1.05 to $1.25 per share.

"Given suitable market conditions and favorable financing terms, the company may consider raising additional capital during 2006 or 2007," Advancis said in a prepared statement.

The company announced that retail pharmacy stocking of Keflex 750 was lower than expected in August and September of 2006, and, in late September, commenced specific initiatives to significantly increase the number of pharmacies stocking Keflex 750. Based on these initiatives, the company said it believes more than 20,000 pharmacies will carry Keflex 750 by the end of October, including several major retail pharmacy chains that will stock Keflex 750 in a majority of their stores.

Advancis took a beating earlier this month on that news but had gotten a bounce on word from the company that it had arranged for financial covenants in its credit agreements to be eased.

Meanwhile, the company is preparing to file a marketing application for its Amoxicillin Pulsys for strep throat in December or January.

Pharmacopeia bags $25 million

On news of a big equity PIPE transaction that priced pat with the market, Pharmacopeia Drug Discovery, Inc. shares surged in trade Friday.

The Princeton, N.J., biotech, which develops compounds for rheumatoid arthritis, asthma and other inflammatory diseases, said it is gearing up to close a $24.8 million private placement with a group of institutional investors who are buying 5.8 million shares at $4.28 each - even with the stock close on Thursday. The investors also will receive five-year warrants for 1.45 million shares with a strike price of $5.14.

"The offering was very cheap, but I don't understand why management did not wait until more deals were done. They talked about one to two more deals in their third quarter conference call by year-end," said a sellside trader.

"They must be having problems getting the up-front cash that they want. This is good, though, because now they will be protecting their interest. I don't see the stock trading down at all on this news."

Pharmacopeia shares (Nasdaq: PCOP) on Friday gained 17 cents, or 3.97%, to close at $4.45.

The company said proceeds will be used for general corporate purposes and working capital. Pharmacopeia has collaborations with Bristol Myers Squibb Co., Daiichi Pharmaceutical Corp., Schering-Plough Corp., GlaxoSmithKline plc and Cephalon, Inc.

Hollis-Eden up on data

Hollis-Eden Pharmaceuticals, Inc. got a nice bounce, too, Friday after announcing positive new clinical data on the radiation treatment Neumune from a study designed to evaluate the safety and hematopoietic activity of the drug.

"Sweet, but it was not much bang for the buck here on what is really great news, in my opinion," said a sellside trader. "At some point, the light bulb is going to come on, probably right after a larger position is taken by someone who already holds the stock."

Hollis-Eden shares (Nasdaq: HEPH) added 33 cents on the day, or 5.49%, to close at $6.34.

"We are looking for some big contract news and that may be a catalyst for another spike," the trader said.

San Diego-based Hollis-Eden said in late September that it has granted a request from the Department of Health and Human Services to extend through Nov. 30 its offer submitted under request for proposal to treat symptoms associated with acute radiation syndrome with its lead product candidate, Neumune. The news was interpreted that the company was still in the running for the contract.

In collaboration with the U.S. Department of Defense, the company is developing Neumune for the treatment of Acute Radiation Syndrome resulting from exposure to radiation following a nuclear or radiological incident, but is also studying it for use in combating hospital-acquired infections.

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