Chiron shares, convertibles gain on Novartis bid; Par Pharma up 1%; Cephalon up 5%, Abgenix up 9%

By Ronda Fears

Nashville, Sept. 1 - Merger chatter got a shot in the arm Thursday as influenza shot maker Chiron Corp. got a surprise $4.5 billion takeover bid from Novartis AG. Takeover buzz that had already been loud in the biotech sector became cacophonous as players attempted to guess who the next targets might be, sending biotech shares upward virtually across the board.

The Nasdaq biotech index gained 1.09% on the day and the Amex biotech index climbed 2.28%, while the broader stock markets were lower.

"It sure makes it seem like if Chiron gets taken over, anyone else is fair game," said a sellside market source. "If you have a drug on the market, a pipeline, you are fair game."

MedImmune Inc., maker of FluMist, slipped after the sharp spike Wednesday on its boosted earnings outlook as the result of taking over full marketing plans for its respiratory drug Synagis. It, too, had been seen as a takeover candidate, but onlookers were skeptical that it would be open to a merger offer. On Thursday, MedImmune shares lost 20 cents, or 0.67%, to $29.73 following a more than 10% surge the previous day.

Sepracor Inc., thought to be a prime takeover target for months, did not participate in the biotech rally at all, losing a penny on the day. Abgenix Inc., though, soared nearly 9% on takeover speculation. Par Pharmaceutical Cos. Inc. was another biotech mentioned in context of takeover buzz as contraction in generic drug names is expected to continue.

Cephalon Inc. rose sharply Thursday, too, but on a marketing agreement with McNeil Consumer and Specialty Pharmaceuticals to co-promote Attenace, its treatment for attention deficit hyperactivity disorder that is in the final review stages at the Food and Drug Administration.

Among primary market desks it remained quiet, but bankers said they were gearing up for an increased level of activity in fourth quarter. In the venture capital arena, Biolex Therapeutics announced $36 million in series B financing. And, on the initial public offering front, Sunesis Pharmaceuticals Inc. set price talk for its IPO at $9 to $11 per share.

Chiron bid a ploy to cash out?

Chiron shares zoomed on the Novartis offer, surpassing the $40 a share bid from Novartis, which onlookers said suggested the market is anticipating a rival bid. Chiron credit followed suit but refrained from any great over-enthusiasm.

Moreover, a buyside life sciences analyst said Novartis' bid for the remaining 57.8% of Chiron shares it doesn't already own at $40 a share bid - a mere 9.75% premium to Wednesday's closing price - might just be a fishing expedition.

"A 10% premium is peanuts compared to the [M&A] deals we've been seeing, so you have to wonder if Novartis maybe just wants to start a bidding war with the idea they will just cash out in the end," the analyst said. "Maybe they [Novartis] have their eye on some other acquisition and this is a means to pad their cash coffers."

Just last week, OSI Pharmaceuticals Inc. made a bid for Eyetech Pharmaceuticals Inc. in a cash-and-stock deal valued at $935 million, offering $20 a share - a 43% premium over Eyetech's closing price in the previous trading session.

Novartis had acquired its stake in Chiron through its merger with Ciba-Geigy in 1996 when the merger of Swiss drugmakers Ciba-Geigy and Sandoz created Novartis.

Based in Emeryville, Calif., Chiron was founded in 1981. The company markets a variety of biologic therapies and vaccines, including the multiple sclerosis drug Betseron with partner Schering AG.

Chiron, however, is best known for its flu vaccine, which was knocked out of the 2004-2005 flu season by contaminated batches at its plant in Liverpool, England. On Wednesday, Chiron had seen little reaction to first-stage approval to restart manufacturing for the U.S. market, while a GlaxoSmithKline plc unit won approval as a third flu vaccine supplier to the United States.

Chiron bonds rise 3 to 5 points

Chiron bonds joined the stock's rally, albeit to a lesser extent, with the convertible bonds gaining on expectations of a par put getting triggered by the acquisition.

The 1.625% issue rose to 98.625 on Thursday from 93.5 on Wednesday, a gain of 5.125 points for outright holders and a gain of 3.375 points for convertible arbitrageurs, a sellside trader said. The 2.75% issue also climbed to 98.625, he said, from 95.75, and that was a 3.25-point rise for outright holders but a 0.375-point loss for convert arbs.

Lehman Brothers convertible analysts said that while convertible holders need to consider whether or not exercising the change-of-control put is more valuable than continuing to hold the bonds despite the loss of optionality in an all-cash takeover, it seems exercising the par put is the best alternative.

For the 1.625% issue - which has no takeover protection but a standard change-of-control put feature - at Wednesday's price of 93.5, Lehman convertible analysts said that if the put is exercised then estimated upside for outright investors is around 6.5 points. For hedged investors, upside is estimated at around 4.71 points on an 18% hedge.

The 2.75% issue has takeover protection in the form of a premium make-whole payment upon conversion or repurchase associated with a change in control, but with a stock price threshold of $44.84. Thus, unless the stock runs up to $44.84 the premium make-whole payment is moot.

So, based on the exercise of the change-of-control put, the Lehman analysts estimate that off the Wednesday closing price for the 2.75% convertible of 95.75, the upside for outright investors is about 4.25 points. However, for hedged investors, upside is only around 0.69 points on a 35% hedge.

Sepracor fails to join party

M&A buzz did not really add any names to the roster of prime targets in the biotech sector, but one long-standing name that has been viewed as a mark - Sepracor Inc. - was a notable wallflower in the biotech rally on Thursday.

Sepracor shares ended off a penny at $50.19. A sellside convertible trader said, however, that the Sepracor zero-coupon bonds traded up about a half-point to 91.875.

"It is a biotech with a small float. The stock has pulled back from $60 on blowout numbers," the trader said. "There is an investor meeting next week, so that might move it somehow."

As recently as a month ago, Smith Barney Citigroup analyst Andrew Swanson reiterated a hold rating on Sepracor shares with a price target of $70, maintaining that the then-current valuation can only be supported by a takeout and said the price target on the stock reflected a 75% chance this happens. At that time, Sepracor shares were at $58.

Abgenix bonds price in takeover

Abgenix suitors have been a big roster of names, but a buyside market source said it seems the most likely would be biotech giant Amgen Inc. as the two companies are development partners in the colon cancer drug panitumumab, which is going head-to-head with ImClone Systems Inc. and Bristol-Myers Squibb Co.'s Erbitux.

Novartis has been among the suitors speculated to be eyeing Abgenix in recent weeks on the thinking that the Swiss drugmaker would be looking to add manufacturing capacity.

In any event, sources on various sides of the market see Abgenix as a prime target.

Abgenix shares on Thursday rocketed upward by $1.02, or 9.28%, to $12.01.

Its newest convertible bonds, the 1.75% issue, also soared as traders said the issue would fare very well in a takeover scenario. But one trader said the issue traded up Thursday to a point where all the takeover protection is now priced into the bonds, adding 3.25 points on the day to 102.25.

Par Pharma generically higher

Par Pharma again moved north on specific product news Thursday, but traders also noted that buyers have hoped a merger might develop for it in the wake of the $7.4 billion acquisition by Teva Pharmaceutical Industries Ltd. of Ivax Corp. in July .

Shares of Par Pharma gained 32 cents on the day, or 1.21%, to $24.49, and its convertible bonds were described as better by about 1.5 points.

On Thursday, Par Pharma said its licensing partner, Amide Pharmaceutical Inc., has received final marketing approval from the FDA for the generic version of Organon's depression treatment, Remeron SolTab. Under their agreement, Amide will manufacture, market, sell and distribute the mirtazapine orally disintegrating tablets in the United States and Par will receive a royalty on sales. Amide will begin shipping shortly, Par said.

The Teva/Ivax deal united the top two generic drug names in the game, and the post-merger company is seen perhaps as a suitor for Par Pharma. Par Pharma, formerly Pharmaceutical Resources Inc., bills itself as the fifth largest generic pharmaceutical company in the United States, with more than 85 prescription products.

Cephalon 2% bonds up 4.25 points

Cephalon announced Thursday that it has entered into an agreement with McNeil Consumer & Specialty Pharmaceuticals, a division of McNeil-PPC Inc., to co-promote the ADH drug Attenace, and while financial terms of the three-year pact were not disclosed, Cephalon securities took off sharply on the news.

The marketing pact will give Cephalon, which has a 400-person sales force, access to a 350-person sales team at McNeil, a subsidiary of Johnson & Johnson.

Cephalon anticiaptes a ruling from the FDA next month on its New Drug Application for Attenace, which targets youth aged 6 to 17 years. The drug contains the same active ingredient, modafinil, as its flagship product, Provigil, which is approved as a treatment for narcolepsy symptoms and other sleep disorders.

Cephalon shares shot up $2.02, or 4.99%, to $42.54 and its new 2% convertible "finally made it past par," as one sellside trader put it, gaining 4.25 points to 104.75. The convertible had been underwater since it was sold in June, the trader said.

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