Epix up 21% on Predix buy; Incyte falls 41%; Medarex off; Inhibitex plunges 66%; StemCells dives

By Ronda Fears

Memphis, April 3 - Biotech stocks took a beating Monday as Merrill Lynch & Co. analysts circulated a report saying the bull cycle may have run its course, but there were some mavericks bucking the selling tide to buy on the weakness.

"I started the day off very, very fortunate, long many drillers, miners, etc. I took profits this morning, sat out the afternoon and then bought several biotechs," said a fund manager in Los Angeles who runs a value-oriented fund.

"This sector [biotech] was socked today, partly because of flows into commodities."

Celgene Corp., Cell Genesys, Inc., Dendreon Corp., StemCells Inc. and Geron Corp., several of which had news on the tape, were among the biotechs the fund manager said he picked up on the downswing. Celgene was off 3%, Cell Genesys was down 2%, StemCells fell 13%, Dendreon lost 5.5% and Geron declined 3%.

Merrill sees rally fizzling

After a longer-than-usual string of overall gains among biotech stocks, Merrill analysts see the long-running rally petering out, especially big biotechs.

"We believe that the bull cycle for large cap biotech stocks may already be over because the stocks are expensive on a historical basis, [and] money appears to be flowing into other S&P sectors, including large pharma, instead of large biotech," said Merrill analyst Eric Ende in a report Monday.

"We believe that large cap biotech stocks are particularly late in the most recent biotech bull cycle. The typical biotech bull cycle lasts two to three years with a range of returns of 125% - 640%. Large cap biotech stocks have been on the rise for almost four years with a return of about 200%."

The Nasdaq Biotech Index lost 1.44% on Monday, and the Amex Biotech Index lost 1.35%, while the Nasdaq slipped 0.13% and the Dow Jones Industrial Average gained 0.32%.

Inhibitex bludgeoned

One of the more dramatic examples of Monday's bombs was Inhibitex Inc., which plummeted 66% after it announced that its Veronate, an experimental drug for preventing staph infections, failed a phase 3 trial in premature babies. The company said it failed for primary and secondary endpoints.

"I just couldn't hold this after the news. I sold today and will buy back when, or if, it stabilizes," said a buysider in Atlanta.

Inhibitex shares (Nasdaq: INHX) fell $4.79, or 65.98%, to $2.47, hitting a new low. The previous 52-week low was $5.75. A whopping 14.8 million shares traded Monday, versus the three-month running average of 141,847 shares.

Epix boosted by Predix

Epix Pharmaceuticals Inc., a developer of drugs for magnetic resonance imaging, got lifted Monday after announcing its acquisition of closely held Predix Pharmaceuticals Holdings Inc. in a stock deal worth about $90 million.

"The FDA has been extremely cranky lately in failing to approve so many imaging applications. It has nothing to do with the merits of the agent, but more due to effective lobbying by insurance companies who don't want to pay for another contrast agent. These are high ticket tests run by stand alone radiology centers," a sellside market source remarked.

"Wall Street prefers therapeutics to diagnostics when assigning a valuation, so this diversity may help the merged companies in the short run."

Epix shares (Nasdaq: EPIX) soared on the news, settling higher by 73 cents, or 20.86%, at $4.23. The stock had hit a 52-week low of $3.33 last week.

Epix pipeline boosted

As part of the deal, which is expected to close around mid-year, Cambridge, Mass.-based Epix will assume about $7.8 million in Predix debt. Shareholders of Lexington, Mass.-based Predix will receive about 1.25 shares of Epix stock for each Predix share they own and will be eligible for a possible $35 million payment upon achievement of certain clinical or strategic milestones. Epix will issue about 23.3 million shares and have about 43.5 million shares outstanding after the merger.

Predix has three drug candidates in clinical trials, including a prospective Alzheimer's disease treatment. Epix has Vasovist, a blood pool imaging agent, which is expected to be marketed in Europe by Schering AG and is the subject of ongoing discussions with the FDA regarding its path forward in the United States.

The combined company will have about $125 million in cash and marketable securities at the end of the first quarter.

Medarex off 3% on deal

Medarex, Inc. launched a follow-on offering Monday morning for 10 million shares off the shelf, and players generally concurred that it was excellent timing.

"Now the market's receptive - several other biotechs have just come to the well - and they [Medarex] will raise an amount two times the best biotech IPO, and an amount that more than covers one year's cash burn," said a buyside market source in Boston early in the day.

"If Goldman runs a tight book and places these shares in strong hands with whom they can share the updated story, including Goldman's endorsement, these strong hands will be buyers as we go forward."

The stock was off on the deal, however, which was expected, but the buysider said he felt the broader slide in biotechs also could have been a factor. Medarex shares (Nasdaq: MEDX) slipped by 42 cents, or 3.18%, to close at $12.80.

Princeton, N.J.-based Medarex, which is focused on fully human antibody-based therapeutics to treat cancer, inflammation, autoimmune disorders and infectious diseases, said it would use proceeds to advance products to commercialization. Four of its 31 product candidates are in phase 3 clinical trials.

Incyte sold off on trial drop

Incyte Corp. was sold off sharply Monday after saying it would discontinue development of its HIV drug Reverset, or DFC, after observing an increase in hyperlipasemia, or pancreatic inflammation, in patients receiving certain doses without other drugs.

"This was not a high revenue drug and commercialization was two to four years out. While not great news for this drug, this is not a major impact on the pipeline and Incyte's future," said a sellside trader involved in Incyte.

"This has been expensive project, getting rid of the drug was smart. I think buying the stock today is a good idea," the trader continued, speaking around noon. "This is way oversold."

Incyte shares (Nasdaq: INCY) ended the day lower by $2.44, or 40.53%, at $3.58.

But not everyone thinks Incyte is a good story without the Reverset prospect.

"The only problem is what you would be buying today isn't the same proposition you bought yesterday," said a buysider in New York. "Just because the price is down doesn't magically turn it into a good buy. This is very bad news."

Pfizer pact keeps Incyte afloat

Incyte's recent deal with Pfizer is "the real confirmation of the potential of Incyte," the sellside trader remarked, adding also that at year-end 2005 the company had some $345 million in cash and equivalents.

The pact, announced in late 2005, gave Incyte a $40 million windfall upfront plus the prospects of up to $743 million in payments at future milestones.

Incyte is involved with Pfizer on a collaborative research and license agreement for the development and commercialization of CCR2 antagonists as a treatment for multiple sclerosis, rheumatoid arthritis and insulin-resistant obese patients, among other indications.

Incyte trims 2006 guidance

As a result of the Reverset news, however, Incyte reduced its 2006 guidance.

The company said cash use for 2006 would be cut to a range of $88 million to $95 million from $98 million to $105 million. The company also pointed out that the figure excludes the repurchase of any of its 5.5% convertible notes and any funds received from Pfizer for the CCR2 antagonists.

In addition, the company now expects its research and development expense to range from $82 million to $88 million versus its previous guidance of $92 million and $98 million. All other 2006 financial guidance remains unchanged.

Last month, the company projected 2006 revenue to be in the range of $20 million to $25 million.

StemCells bags $36 million

StemCells, Inc. will pocket some $35.8 million from a direct placement of 11.75 million shares at $3.05 apiece to institutional investors, and the news sent the stock reeling.

Proceeds will be used for capital expenses, strategic purposes, product development, working capital and general corporate purposes. Palo Alto, Calif.-based StemCells is a biotechnology company focused on developing stem cell treatments for nervous system diseases.

"The new [deal] would have been better if it was nearer to the close last week," said one buyside source, but he added that he was not overly concerned. Rather, he said he was pleased that the company now has "money in its pockets."

StemCells share (Nasdaq: STEM) dropped 46 cents on the day, or 12.85%, to $3.12 on heavy volume. Some 8.6 million shares changed hands, compared with the norm of 990,169 shares.

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