Mylan tops biotech activity with big stock buyback; King issues eyed; Invitrogen convertible on tap

By Ronda Fears

Nashville, June 14 - Generic drugmaker Mylan Laboratories Inc. was the spotlight of the biotech sector Tuesday as the company, dogged by billionaire investor Carl Icahn, announced that it will use some $500 million of cash and $775 million in new debt to fund a whopping $1.25 billion stock buyback that represents 25% of its outstanding equity. A new strategy of moving into more branded drugs also spurred Mylan higher.

The major biotech indexes settled Tuesday rather flatly, but in specific names there were some wild swings that turned heads. A few of the big movers on the Nasdaq included StemCells Inc., Third Wave Technologies Inc., Corcept Therapeutics Inc., ViroPharma Inc. and Curis Inc.

Shares of Edwards Lifesciences Inc. fell Tuesday, a day after the cardiovascular device maker said it suspended a clinical trial for an alternative procedure to open heart surgery to replace heart valves after about 10 patients developed complications, including death. The stock also was cut by First Albany to underperform from neutral on the news, and fell 4.15% to close at $43.17.

To the other extreme, Amylin Pharmaceuticals Inc. extended gains spanning the weekend, following a report Friday that its new diabetes drug Byetta had been shown to be effective in controlling Type 2 diabetes and in promoting progressive weight loss. Amylin developed the drug with Eli Lilly & Co., but Amylin reaped all the praise from investors. Amylin shares gained another 5.84% on Tuesday to end at $18.66. The name was active in the convertible market, too, with the 2.25% issue due 2008 up 2 points to 92 and the 2.5% issue adding 1.75 points to 85.

IPO activity picks up this week

After a notable absence of biotech or medical related names in the initial public offering market this year, there are a handful of names from those groups set to debut this week.

Hemosense Inc., a San Jose, Calif.-based firm that makes blood coagulation monitoring systems whose IPO is slated this week, has cut its price range to $8 to $10 from original plans to fetch $9 to $13 a share.

A sign that market conditions may be easing for issuers, though, is that CroyoCor Inc. has adjusted the terms of its Dutch auction IPO, narrowing the price range to $11 to $13 a share from $10 to $14. The San Diego catheter maker said investors William Blair Capital Partners, Healthcare Equity Partners LP, MPM Capital LP and OrbiMed Associates LLC are interested in buying up to $12 million worth of the IPO shares, which would be about one-third of the total offering.

The IPO market has not entirely turned the corner to more friendly pastures, however. Just on Monday, Synta Pharmaceuticals Corp. withdrew its filing for a sale proposed at $14 to $16, following Interactive Health's withdrawal last week of a stock offering proposed at $15 to $17.

But it's not as tough as it was in May, and sources said some offerings pulled in May could be preparing for a comeback. EpiCept Corp. had withdrawn its IPO via Wachovia Securities Inc. The Englewood Cliffs, N.J., firm, focused on topically delivered prescription pain management therapeutics, had proposed selling the stock at $11 to $13 a share in January, then dropped it to $6 to $7 before pulling it. Another being watched is Sound Surgical Technologies via Roth Capital Markets Inc. The Louisville, Colo.-based specialty medical device company, which makes ultrasonic-based products used to break up and remove fat, had filed the IPO in December at $7 to $9 a share.

Mylan stock zooms on buyback

Canonsburg, Pa., based Mylan blew the doors off the stock market Tuesday with news of a $1.25 billion share buyback plus a $250 million follow-on share repurchase program in the open market or otherwise, a boost to its earnings guidance and a new strategy to get more aggressive in the branded drug market.

For the stock buy backs, Mylan will venture into the debt markets, planning to fund the program with new debt. The company said it already has obtained a new $975 million credit facility commitment from Merrill Lynch consisting of a $775 million five-year senior secured term loan and a $200 million five-year revolver.

The modified Dutch auction self-tender is for up to 48.8 million shares, or $1 billion, on top of a $250 million share repurchase program. The repurchases, representing almost 25% of the company's outstanding shares, will give holders an opportunity to tender stock at $18.00 to $20.50 per share before 5 p.m. ET on July 15.

Mylan shares skyrocketed on the news, adding $1.88 on the day, or 10.62%, to $19.58. Volume was off the charts with 17.7 million shares changing hands, compared with the three-month running average of 1.5 million.

Mylan ups dividend, EPS outlook

Mylan also said it is doubling its annual dividend to $0.24 from $0.12 per share effective June 30, and bumped up its earnings guidance. Too, the company said it will "out-license" its nebivolol hypertension drug, an anticipated next-generation beta blocker that is awaiting final approval from the FDA.

"We view the current fiscal year as a restructuring and transitional year," said Mylan chief financial officer Edward Borkowski. "It is important to note that the spread in both the fiscal 2006 and 2007 guidance reflects the potential upside from the opportunities Mylan has before it."

Mylan said it expects adjusted diluted EPS guidance of $0.92 to $1.15 in fiscal 2006 and $1.20 to $1.74 in fiscal 2007. For fiscal 2006, the company is forecasting net revenues of $1.14 billion to $1.34 billion and for fiscal 2007 net revenues of $1.25 billion to $1.6 billion.

Over the longer term, or the next five years, Mylan is projecting a compounded annual growth rate in EPS of around 20%.

"As it relates to our business, the sheer magnitude of this buyback will enhance the impact to earnings per share going forward of any and all new opportunities that we add to our existing base," said Robert J. Coury, chief executive of Mylan.

Mylan, a pharmaceutical company with headquarters in Canonsburg, Pa., will additionally close its Mylan Bertek subsidiary in a cost-cutting effort.

Mylan still fighting off Icahn

Onlookers said that Mylan's move may be enough to stave off Icahn and his effort to assume control of the drug company for good. Icahn's reaction to the news was positive, anyway.

Mylan also reacted to a letter dated June 1 in which an entity controlled by Carl Icahn referred to its purported interest in acquiring the company at $20 per share, saying it was "simply a reiteration of a letter Icahn sent to the company last November." At that time, Mylan's board of directors concluded that "Icahn had not made a serious offer" and that discussions with him were not in the best interests of the company.

In view of the passage of time, Mylan said Tuesday that its board considered Icahn's latest letter and reached the same determination it came to in November.

Late Tuesday, Icahn said he was pleased to see Mylan take steps to enhance shareholder value. However, Icahn said in a statement that it was "a sad commentary" that it "needed the strong prodding of its largest shareholder" to take such action. Icahn also suggested Mylan's tender offer "is for the most part at a price below our acquisition proposal."

Mylan credit seen split-rated

On the credit side of the fence, Mylan is getting split views from the rating agencies with Standard & Poor's putting it in investment-grade territory and Moody's Investors Service considering it junk.

Moody's assigned a first-time senior implied rating of Ba1 to Mylan, whereas S&P assigned a BBB- corporate credit rating. Both have the credit on a stable outlook.

Moody's said its rating reflects an assumption that Mylan's cash flow during the current fiscal year ending March 31, 2006 will improve compared to fiscal year 2005 levels, driven in part by sales of transdermal fentanyl, which Mylan launched in January 2005. The rating also reflects Moody's expectation that Mylan will use a portion of free cash flow to deleverage over the next several years.

For the rating category, Moody's said it expects cash flow from operations to adjusted debt of 25% to 40%, and free cash flow to adjusted debt of 15% to 25%. Pro forma for the new debt, Moody's estimated Mylan's fiscal 2005 adjusted cash flow from operations to adjusted debt at 24% and free cash flow to adjusted debt at 9%.

After Mylan's aborted acquisition of specialty pharmaceutical company King Pharmaceuticals Inc., which would have added a large cardiovascular sales force and cardiovascular product Altace to Mylan's roster, S&P said it sees the outsourcing of Mylan's hypertension drug as a positive development as it relieves the company of having to acquire or hire a large and expensive sales force.

King Pharma stock, converts eyed

With King Pharma having survived a bloodbath after announcing financial restatements in December, which ultimately nixed the planned $4 billion merger with Mylan, a move that had been loudly protested by Icahn, and now with a string of new executives, a convertible trader said the King Pharma convertibles look good, as he sees the stock poised to take off.

"I think now is the time to own KG. The stock is ready to take off and the convert is a great way to play this story," he said. "It has tons of products on the market and makes money."

He said the convertibles have not been a big trade name on convertible desks, but the 2.75% issue has traded in the 94/95 area during the past week. King Pharma shares on Tuesday slipped by 2 cents to end at $9.78.

The King Pharma converts are basically hovering where they landed after a huge slide on the Mylan merger falling through. The 2021 issue had shot up last summer when the merger was announced, on the possibility that the notes would get taken out at par or that Mylan would want to keep its debt slate clean and redeem the issue as soon as possible

King Pharma also is still considered a prime acquisition target, the trader said, following the Mylan merger officially being called off in February. In a report last week, Deutsche Bank Securities analysts suggested King Pharma was obviously still on the sale block following the failed Mylan exercise, and may be more of an LBO candidate.

Invitrogen convert 1%-2.25% cheap

Three-time convertible issuer Invitrogen Inc. is returning yet again to tap convertible investors with a $300 million issue talked a 2.75% to 3.25% handle and 27.5% to 32.5% initial conversion premium, with proceeds earmarked to repay debt.

Specifically, the Carlsbad, Calif.-based company, which provides products to other research firms as well as its own R&D in genomics, proteomics, bioinformatics and cell biology, said it will use proceeds from the new convertible offering to repay a $124 million revolving line of credit with Bank of America, leaving remaining proceeds to pay down other debt.

Merrill Lynch convertible analysts put the Invitrogen issue 1.1% cheap at the middle of guidance, using a credit spread of 300 basis points above U.S. Treasures and a 22% stock volatility. Another sellside analyst put the deal at 2.5% cheap at the lower end of price talk, using a credit spread of 300 basis points above Libor and a 23% stock volatility. Yet another sellside analyst put it less than 1% cheap at midpoint of price talk, assuming a 300 basis point spread over Libor and a 27% stock volatility. At the cheap end of price talk, the same analyst put it 1.5% to 2% cheap.

A buyside analyst said that at the cheap end of price talk, the issue "looked OK." He was using a credit spread of 275 basis points and a 20% stock volatility.

Several sources said that the deal looked pretty cheap, but not cheap enough, however, given current market conditions.

But a buyside analyst said, "It looks decent. There will be outright interest." Traders and analysts at his Connecticut firm debated whether to buy the issue.

"We hemmed and hawed," the analyst said. "We won't buy a lot, and wait and see what happens to trade in the after market."

Invitrogen shares closed down $3.05, or 3.81%, at $76.98. And, the stock move tripped the compnay's existing convertible issues. Also of note, Invitrogen's 2005 investor meeting is scheduled Thursday at 11 a.m. ET.

Rebecca Melvin contributed to this report

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