Kos crashes on results, warning; GTC garroted by E.U. rejection; Nastech higher; Biovail mixed

By Ronda Fears

Memphis, Feb. 23 - Tiny Framingham, Mass.-based biotech GTC Biotherapeutics, Inc. was among the 10 most active stocks Thursday on the Nasdaq, plunging more than 40% amid volume nearly 30 times the norm after the company said it expected European regulators would not approve its lead drug candidate, the anticoagulant ATryn.

"Not getting approved in Europe is a disaster," and the market's reaction illustrates that, said a buyside market source in Florida, who was selling his GTC position. "Their [Europe] standards for approval are significantly lower than here in the U.S."

GTC shares (Nasdaq: GTCB) spiraled lower by as much as 52% but came off the lows of the session to close with a loss of 90 cents, or 40%, at $1.35. A whopping 22.8 million shares traded, versus the three-month running average of 764,219 shares.

Before the open, GTC said that based on conversations with regulators, it didn't expect an advisory committee of the European Medicines Agency to recommend approval of ATryn for a condition called antithrombin deficiency. Patients who have the condition are at risk of developing blood clots during such risky procedures as childbirth and surgery.

GTC said European regulators were concerned that an insufficient number of patients were enrolled in a key clinical trial, but it plans to appeal the decision and said it still plans to apply for U.S. regulatory approval of the drug in the first half of 2007. Also, the company said its partner in Europe, LEO Pharma AS, remains committed to the program.

"This is a tough moment for us. We are clearly disappointed," said GTC chief executive Geoffrey Cox on a conference call hosted by the company. "But there is no way with this company and our 15 years that we will allow this to block us from getting this product to market."

GTC debt to GE Capital weighs

GTC executives expressed confidence in their financial position, and obstacles for ATryn have been aired before, so traders said there were some buyers for the stock on the dip that accounted for the stock closing off the day's low. But there also were players expressing concern.

"The flaw [in ATryn] was well known. I'm not too concerned at this point," said a California fund manager. "I mean, the stock has dropped from $10 [in late 2001] to $1. This crash did not happen over night."

Jack Green, chief financial officer of GTC, said that at year-end 2005 the company estimated its cash position at $36 million. But by repaying a $2.4 million promissory note in January, he said the cash standing is now roughly $33.5 million. The company has some $12 million in debt owed to General Electric Capital Corp., he said.

Still, he said the company feels that it has sufficient cash to fund clinical studies and the Food and Drug Administration filing. Green said the company would provide an update on ATryn and official financial details in its 2005 and fourth-quarter earnings report, which is scheduled to be released March 6.

The buysider based in Florida was astounded that the company tried to downplay the situation.

"I can't imagine how you find this a bargain. I listened to it and these guys are full of [expletive]. At least they were honest, maybe, to admit a $12 million debt to GE Capital," he said.

"Unlike two weeks ago, when this dropped and bounced back, it did so [then] because of manipulation. Today's drop is just bad news."

On Feb. 8, GTC shares lost nearly 17%, but the company issued a statement saying it knew of no reason for the drop.

In defense of buying, a trader said, "After a correction like this, people stop talking and really take a hard look at buying. This company is a good buy at $1.36; that's why it is being bought. Obviously, there are many more buyers at $1.36 than $2.20, for now anyway."

Biovail reactions to suit mixed

Biovail Corp. players reacted in mixed fashion to news of its $4.6 billion suit against 22 defendants - mostly hedge funds and investment researchers - who the company alleges participated in a stock market manipulation scheme.

In the United States, the news from late Wednesday initially sent its stock reeling Thursday and sparked speculation of similar actions by small biotech concerns. But the stock reversed course and ended in the United States on higher ground. In Canada, however, the stock was underwater for the duration of the session.

"I think you will see a lot more of these types of suits," said a buyside market source, who is not involved in the suit or a holder of Biovail shares.

"Ask yourself this question, do you think Biovail was digging into this information on their own? There's more to this than just Biovail. The SEC [Securities and Exchange Commission] and OSC [Ontario Securities Commission] have been involved for the past three years. This is not the end yet. This story is just the beginning, the tip of the iceberg."

Biovail has been the subject of a formal investigation of its accounting practices by the SEC since 2003, he noted.

Biovail short selling speculated

The buysider, based in Connecticut, asserted that the dive in Biovail shares early on Thursday was short selling in reaction to the suit, "by and for the hedge funds" as a means of sort to "justify these type of practices, this type of trading scheme." He was quick to add, though, that he was not saying any of the defendants in the suit were involved in his speculation of the trading activity in Biovail on Thursday.

Biovail shares in the United States (NYSE: BVF) were lower by as much as 2.35% mid-morning but moved into higher territory around noon and settled the day higher by 15 cents, or 0.59%, at $25.72. In Canada, the stock (TSE: BVF) lost C$0.05, or 0.17%, to close at C$29.39.

On Wednesday, Biovail shares were higher, closing in the United States at $25.57 and in Toronto at C$29.44. The 52-week range on the stock in the United States is $13.74 to $27.28 and in Canada between C$17.25 and C$32.56.

Moreover, Biovail alleges it was the target of a "massive and fraudulent disinformation campaign" that involved biased analyst reports from purportedly independent sources hired to do "hatchet jobs." It also specifically attacks short sellers of the stock.

In addition to the high-profile SAC affiliates and principals named in the suit, defendants include Gradient Analytics, Inc., Camelback Research Alliance, Inc., Pinnacle Investment Advisors, LLC, Helios Equity Fund, LLC, Hallmark Funds and Gerson Lehrman Group. The suit accuses other hedge funds such as Perry Capital and Rocker Partners of profiting from the manipulation but they are not defendants.

"Ironically, Biovail short sellers have suffered losses in recent months," the buysider said, as a result of the company declaring a dividend of 50 cents and market chatter earlier this month that the company will settle a patent dispute over Wellbutrin XL with generic companies.

Kos plunges 17% on results

Kos Pharmaceuticals, Inc. dropped 17% amid a big sell-off after posting a big miss on fourth-quarter earnings and warning that first-quarter earnings would be sharply below analysts' forecasts.

Cranbury, N.J.-based Kos reported fourth-quarter earnings of $26.2 million, or 53 cents a share, on sales of $213.9 million, compared with earnings of $53 million, or $1.15 a share, a year earlier. Revenue increased 42% to $213.9 million. For 2006, Kos forecast a first-quarter loss of 5 cents to 10 cents a share, with sales of $170 million to $175 million.

Kos shares (Nasdaq: KOSP) fell $8.38, or 16.84%, to settle Thursday at $41.39.

"After the earnings conference call today, I have sold my entire position at a profit," said an Atlanta-based buysider. "Since 2006 earnings are supposed to be about $2.30 [per share] and 2007 earnings are predicted to be about $3, I feel that Kos is worth about 10 times 2007 earnings, or about $30 at this point.

"I not only sold all of my shares, I plan to purchase some puts since I think that Kos will go lower and I am bearish at these levels. Kos has been ineffective selling Niaspan [cholesterol drug] without any competition. If they get competition from Merck, then they may not even make their 2007 projections. The only positive future that I see is if Kos is bought out by Merck or another pharmaceutical company."

He said Kos stock has been in a downtrend since August, making it a "poor candidate for buy and hold. The only position that could be profitable in Kos is short. Kos is in extreme distribution meaning that traders are dumping it. All indications are that Kos has a ways to go on the downside, because the $30s range seems logical. Technical history for this stock shows that it probably will not bottom for at least four to six weeks."

Nastech up, other flu names off

Flu names were widely mixed Thursday on Nastech Pharmaceutical Co. Inc.'s news that it had acquired the RNAi intellectual property and other RNAi technologies of Galenea Corp. for an undisclosed amount. Nastech plans to target influenza and respiratory diseases.

That came on the heels of news earlier in the week from Alnylam Pharmaceuticals, Inc. about a collaboration with Novartis AG to conduct research along the same lines. Alnylam and Sirna Therapeutics Inc., another big RNAi story, were both lower by about 5% Thursday.

Nastech announced the expansion of its RNAi pipeline by initiating an RNAi therapeutics program targeting influenza and respiratory diseases. In connection with that, Bothell, Wash.-based Nastech is buying the RNAi intellectual property estate and other RNAi technologies of Cambridge, Mass.-based Galenea.

Nastech shares (Nasdaq: NSTK) gained $1.65 on the day, or 8.84%, to close at $20.32.

Alnylam inked a deal with Novartis earlier in the week to work on flu detection with RNAi technology. That news sent the stock shooting upward, but Alnylam shares recoiled Thursday, dropping 82 cents, or 5.23%, to $14.85.

"While I agree that Alnylam looks poised to do well, I think there needs to be a lot more human testing before we get too excited. Just because the treatment works in a rodent, does not mean that it will on people," said a sellside trader. "At this point, this stock is about 50% investment and 50% gamble. Don't get me wrong, I love this holding as a long-term speculative holding. I just want to see some more data."

Sirna's decline was characterized by the sellside trader merely at "consolidation."

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