Cougar Biotech goes public via reverse merger, PIPE; Hythiam hammered; Serono sinks by 10%

By Ronda Fears

Memphis, April 10 - Cougar Biotechnology, Inc. is going public by way of a reverse merger with the blank check company SRPK 4, Inc., a shell formed by the Los Angeles-based brokerage firm Westpark Capital, Inc., and as part of the transaction inked a $47.5 million private placement.

Meanwhile, there are three initial public offerings on the table for this week and players were uncertain about how they would go, or not go, as a result of recent weakness in the sector. Omrix Pharmaceuticals, Inc., Targacept, Inc. and Vanda Pharmaceuticals, Inc. all have IPOs on the table this week.

"The biowreck continues, especially stocks without powerful cash flow. In some ways it's the normal weird market action caused by conflicting signals. Some of it is just profit taking after a strong market," said a buyside biotech fund manager in Boston.

"Let's hope it is not big funds going to cash. Historically, markets correct when short-term interest rates push S&P price to earnings. I think the S&P 500 aggregate PE is now 18 - a 5.5% return. The Fed is expected to push rates to nearly that level. Also, biotechs may be down hard this week if oil stays high."

A sellside trader seemed to agree that the biotech sector was suffering at the hands of a basic rotation as some fringe players cashed out profits.

"From my perspective, it looks like a rotation out of biotech and into [general] tech. The idea about profit taking after a great biotech index run-up is probably the cause, and the underperforming of tech last year is why money is flowing there," the sellsider said. "It's a flushing cycle."

Cougar players applaud deal

Cougar Biotech has pocketed $47.5 million in a PIPE transaction conducted along with its reverse merger with SRKP 4, Inc., a shell or blank check company. In the deal, Cougar sold 27.5 million shares at $1.73 each to a group of institutional and accredited investors led by Adage Capital Management, LP.

Other key participants in the PIPE were Brookside Capital, funds managed by T. Rowe Price Associates, Merlin Biomed Group, RA Capital Management and Tavistock Life Sciences.

Under the terms of the reverse merger, Cougar will remain as the surviving company and wholly-owned operating subsidiary of SRKP 4. SRKP 4 was renamed Cougar.

"We are first time investors, but believe the value of Abiretarone, their testosterone synthesis inhibitor, is an outstanding compound that will generate PSA responders in prostate cancer later this year," said one buysider who participated in the deal. "It's a solid company now with a fundamental investor base."

Proceeds will be used for the clinical development of Cougar's clinical drug candidates, as well as the development of other drug candidates. The remainder will be used for working capital and general corporate purposes.

Los Angeles-based Cougar is focused on tumor therapies. In October, the company was approved to conduct a phase 1/2 clinical trial of CB7630 for the treatment of advanced prostate cancer in the United Kingdom. CB3304 is currently being tested in a phase 1 trial in non-Hodgkin's lymphoma and CB1089 has been clinically tested in a number of solid tumor types.

Before the SRKP 4 deal came along, Cougar had a merger agreement with a subsidiary of GVC Venture, but that deal was nixed in late February. The SRKP 4 merger was effective April 3.

Serono saps merger hopes

Serono SA shares were slammed Monday after it said the search for a buyer has been put to rest because of the lack of any adequate bids and, instead, would now focus on growth through acquisitions of its own.

The situation had long been speculated to be souring but traders said there had been some last-gaspers hoping that something would come along. Now, analysts intimated Serono's aspiration to be the acquirer may be even bleaker, as there is a lot of competition to buy up smaller biotechs.

Serono shares (NYSE: SRA) fell $1.83 on the day, or 10.37%, to settle Monday at $15.81.

"Dirty laundry is only good if you are in the cleaners business," remarked a biotech stock trader at a bulge bracket firm. "There was no positive spin on this really."

Published reports had indicated that bids for Europe's largest biotech from suitors including GlaxoSmithKline plc and Novartis AG were closer to $12 billion than the $15 billion that Serono had sought. Serono said that the Bertarelli family, which owns 62% of the company, has terminated all discussions regarding a sale of the company, as the offers it received were too low.

"Serono intends to acquire companies that will be earnings accretive within two to three years, potentially with a therapeutic focus in cancer, autoimmune disease (arthritis, etc.) or neurology," said Merrill Lynch analyst Erica Whittaker in a report Monday.

"However, we understand that it is a very competitive market; many companies, potentially those with greater resources than Serono, are seeking similar targets."

Serono has a leading multiple sclerosis drug, Rebif, and Gonal-f for ovulation disorders. Its focus has been on the reproductive health, neurology and metabolism markets.

Hythiam buying kicks in

Hythiam, Inc. was hammered Monday in reaction to a critical article in the New York Post that appeared last week, but traders referred to the piece as hype and noted afternoon buying stemmed the bleeding.

After trading lower by more than 9%, Hythiam shares (Nasdaq: HYTM) settled Monday lower by 69 cents, or 7.89%, at $8.05. A sellside trader pointed to a huge band in which the stock traded Monday - from $7.81 to $8.68 - and whopping volume with 1.28 million shares changing hands versus the norm of 456,902.

"This article is crap piled upon crap," said a trader in Denver, adding that he was buying on the downswing. "It was hype and besides, it ran last Wednesday. The [Hythiam] ads starting running last Monday. The stock drifted lower when the Post article came out, but the volume didn't kick in until today for some reason. It's funny, actually."

The article referred to Hythiam as a company "surrounded by a bizarre mix of convicted swindlers, shady financiers and legit investors such as 'Sopranos' star James Gandolfini, according to documents reviewed by The Post."

Hythiam describes itself as a company focused on physiological treatment protocols with products to treat dependencies to alcohol, cocaine, and methamphetamine, as well as combinations of these drugs. Its Prometa treatment protocols include medically supervised treatments to address both the neurochemical imbalances in the brain and the nutritional deficits caused or worsened by substance dependence, according to the company.

Moreover, the article criticized Hythiam for off-label usage of the drugs Flumazenil and Gabapentin in alcohol and cocaine dependency treatment, saying that neither drug has been approved by the FDA for those specific uses.

Hythiam in a statement last week said the article contained several inaccuracies. "In particular, it implied an association between a different entity and individuals associated with it, and Hythiam's Prometa addiction treatment protocol. These implications are inaccurate and misleading."

MedImmune gains on data

MedImmune, Inc. got lifted Monday after releasing data that showed additional preclinical and clinical results indicate its Abegrin may offer a three-pronged approach to cancer therapy. Companies affiliated with MedImmune such as Critical Therapeutics, Inc. also were getting eyed on the news.

The Gaithersburg, Md.-based company said it has collected additional preclinical and clinical data showing that Abegrin, formerly known as Vitaxin, may provide a new three-pronged approach to treating solid tumors. The new data provides additional insight into the drug's mechanism of action, which is believed to inhibit tumor growth, bone metastases and angiogenesis.

MedImmune said the data support the encouraging overall survival results produced in a previously announced phase 2 trial with metastatic melanoma patients, and provide impetus o to move ahead with a confirmatory phase 3 trial.

"My take is that it is a more natural route to immunity, safer than the shot, and more protective. Regardless of the FluMist controversy, which I sense will win out in the end, there is a lot more to MedImmune than FluMist, as attested by today's announcement of Vitaxin going forward into phase 3," said a buyside analyst at a shop in New York.

MedImmune shares rose 34 cents, or 1.01%, to close at $34.16.

Critical Therapeutics edges up

Critical Therapeutics, Inc. was seeing lot of action if not a great deal of price move, a sellside trader said, attributing the company getting attention from the MedImmune news.

"There wasn't any news specific to Critical Therapeutics," the trader said. "They just were getting some people's attention" because of the association with MedImmune.

Critical Therapeutics shares (Nasdaq: CRTX) added a penny on the day, or 0.23%, to end at $4.31. Some 499,726 shares traded, though, compared with the norm of 60,482.

Based in Lexington, Mass., is focused on drugs to treat respiratory, inflammatory, and critical care diseases through the regulation of the body's inflammatory response. Its primary product, Zyflo, a tablet formulation of zileuton, is used for the prevention and chronic treatment of asthma.

It also has HMGB1, a preclinical product, to treat inflammation mediated diseases and collaborations with MedImmune and Beckman Coulter, Inc. for the development of HMGB1.

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