Serologicals, Millipore both up; other services names dip; DOV, Discovery dive; Neurocrine off

By Ronda Fears

Memphis, April 25 - Biotech services concern Serologicals Corp.'s stock spiked more than 33% Tuesday to near the price tag of its $1.4 billion cash takeover by Millipore Corp. But the market saw the $31.55-a-share buyout price, a 35.3% premium to Monday's close, as a lowball bid that could hurt other biotech services names that may be takeover targets.

The deal indeed was blamed for dips in the stocks of Invitrogen Corp., Sigma-Aldrich Corp. and Fisher Scientific International, Inc., but the biotech sector as a whole was markedly weaker Tuesday.

Nonetheless, traders see Serologicals' buyout as tight, though, with the sector pulling back.

"This could hurt Invitrogen, Sigma-Aldrich, Fisher," said a sellside market source. "It might be tight."

To the idea that the price tag might be low, a trader remarked, "Mr. Market seems to say so," what with technicals in the biotech sector weakening in recent weeks from the surge in early 2006.

The sector also was rattled, traders said, from late Monday drug-related news from DOV Pharmaceutical, Inc. and Discovery Laboratories, Inc., which both extended severe price declines from after-hours activity Monday. However, reactions Tuesday remained mixed on both names. Also declining from late Monday news was Neurocrine Biosciences, Inc. which lost big on concerns about pending drug approval although first-quarter results beat Wall Street projections.

Serologicals saved by deal

Although many players in Atlanta-based Serologicals might have been disappointed with the Millipore deal figure, at the same time many saw it as a rescue of sorts. Still, because of short covering and risk arbitrage and event-driven hedge funds getting involved, Serologicals shares hit a new 52-week high with a more than 33.5% gain on the day.

"From the look of the first-quarter numbers, they got bailed out," said an Atlanta-based fund manager. "The party is over for us. This is now a risk arb trade. Once the market adjusts in Millipore, I'll probably take a long position there. It's a good company."

A sellside market source seemed to agree.

"Anyone who thinks this is deserved is crazy! This is an incredible gift," the trader said. "There's no way they would have achieved this valuation in less than another two years, minimum, maybe longer."

Serologicals shares (Nasdaq: SERO) traded in a band of $31.05 to $31.19 before settling the day with a gain of $7.83, or 33.58%, to $31.15. That surpassed the previous high of $25.45. Some 15.1 million shares traded, compared with the three-month running average of 309,524 shares.

Millipore is paying $31.55 per share, or roughly $1.4 billion, for Serologicals, which is a 35.5% premium to the $23.32 close for the stock on Monday.

Separately, Serologicals said it expects first-quarter earnings of 8 cents per share, or 14 cents excluding items, on revenue of $55 million, which was well below the Thomson First Call analysts' average forecast of 12 cents per share on $53 million in revenue. The company was scheduled to report results after Tuesday's close.

Millipore to deepen footprint

With the deal, Billerica, Mass.-based Millipore aims to become a life-sciences leader with projected 2006 revenue of $1.4 billion. The company helps develop and produce biologics and supplies high-performance products used to improve productivity in the laboratory. Serologicals provides consumable biological products and enabling technologies and services to biotechs.

"This move will significantly increase our life-sciences footprint and will advance many of our strategic objectives," said Martin Madaus, Millipore chief executive, in a statement. "Serologicals and Millipore are two of the fastest-growing companies in our sector, and our combination will create a company with very attractive growth and profitability."

Separately, Millipore reported first-quarter net income of $34.5 million, or 64 cents a share, compared with $32.3 million, or 64 cents, a year earlier and sales of $268.4 million, up from $250.2 million. Thomson First Call analysts, on average, had been looking for EPS of 70 cents on sales of $266 million.

Millipore plans debt issue

Millipore said it plans on funding the acquisition with about $900 million of debt and some $600 million of cash on hand. UBS Investment Bank has provided the debt commitment, but a structure for the debt has not been determined yet.

Under the acquisition agreement, Millipore also will assume Serologicals' debt, which at least includes $130 million of 4.75% convertible bonds due 2033 and a $50 million term loan.

Millipore said that, for the combined company, cash flow is anticipated to be in the $220 million to $230 million range.

Assuming the transaction closes by June 30, Millipore expects the acquisition to increase its 2006 non-GAAP earnings per share between 10 cents and 15 cents, which will result in 2006 non-GAAP earnings between $3.00 and $3.10 per share. The company anticipates that pro forma 2007 non-GAAP earnings will be in a range of $3.60 to $3.75 per share.

Millipore expects cost savings and synergies of $9 million to $10 million in 2007 and $15 million to $17 million in 2008.

Biotech service names dip

Serologicals' buyout spurred some chatter about other biotech service companies like Invitrogen, Sigma-Aldrich, Fisher Scientific, and the upshot was that the price tag would not bode well for them, sources said. All three stocks lost ground Tuesday as sellers dominated.

"To those on the sidelines watching for potential deals, there is some pain. I feel the pain," said a Milwaukee-based fund manager, referring to players who chose more high-profile names like Invitrogen over Serologicals as a takeover target.

"I have been there, done that. I didn't get burned badly on this but it was enough to shake out a lot of us," he added, saying he was a seller in Invitrogen on Tuesday. "But, you know, there is always another one, albeit, far and few between."

Carlsbad, Calif.-based Invitrogen Corp. provides products and services that support academic and government research institutions, as well as pharmaceutical and biotechnology companies. Invitrogen shares (Nasdaq: IVGN) on Tuesday dropped 23 cents, or 0.36%, to end at $63.49.

St. Louis-based Sigma-Aldrich Corp. makes various biochemicals and organic chemical products and kits used in scientific and genomic research and pharmaceutical development. Sigma-Aldrich shares (Nasdaq: SIAL) lost 66 cents, or 0.97%, to settle Tuesday at $67.37.

Hampton, N.H.-based Fisher provides products and services to the scientific research and clinical laboratory markets. Fisher shares (NYSE: FSH) declined by 31 cents, or 0.44%, to close at $70.16.

Invitrogen dangers internal

The fund manger said the market has not forgotten earnings misses by Invitrogen, so it probably has more downside in its future. An additional part of the lingering negativity, he said, is concern about the integration of its own acquisitions.

"The long-term trend is up and Invitrogen has $14 of cash per share to make it over any speed bumps. That is swimming in the direction of the tide," the fund manager said. "I'm doing OK so far but I'm just not holding on. The stock went down so much because the market is starting to think there's another shoe to drop."

Moreover, the lack of consistency at Invitrogen will not sustain growth in the stock, he reckons.

"We're talking about a price to earnings nearly double its growth rate. That would be acceptable for this company because it has significant earnings leverage due to its healthy margins. But the market accepts that only when its growth is consistent and reliable," he said.

"A small miss here or there and the market starts to think it's overvalued. Add in the risk of one or more of their nine acquisitions in the last year suffering integration issues and you've got the potential for a huge drop on the horizon. That's where I am now."

DOV Pharma drops 42%

DOV Pharma on Tuesday extended the dive that started after Monday's close on the failed phase 3 trial for its lead drug candidate Bicifadine, for lower back pain, but amid the flocks of sellers there were some buyers for the story in light of other prospects for the company, including its possible acquisition.

Hitting a new 52-week low, DOV shares (Nasdaq: DOVP) on Tuesday fell $6.19, or 42.14%, to close at $8.50, eclipsing the previous low of $13.63. After dropping more than 45% in after-hours trade the day before, the stock traded Tuesday in a range of $7.92 to $9.01.

Traders said there were brief bounces on some fairly hefty purchases in the stock.

While the failed trial was devastating for Hackensack, N.J.-based DOV Pharma, at least one trader saw the huge drop as an opportunity to load up.

Trader touts DOV as buy

DOV Pharma "blew up last night. Here is the opportunity - Neurocrine has been trying to buy back the royalty rights to Indiplon (insomnia drug). Our second-half 2006 Indiplon sales estimate is $152 million. Looking at our Neurocrine model, a purchase price of $300 million would be immediately accretive."

Timing of such a deal could be imminent, he added, given that approval of Indiplon is expected May 15. But his main point was that a buyout by Neurocrine would make sense.

DOV Pharma has $80 million in debt with a $200 million market cap and ended the last quarter with $100 million in cash, versus an annual cash burn estimate this year of $80 million. Neurocrine, he noted, has zero debt, a $2.4 billion market cap and ended the last quarter with $265 million in cash.

Indiplon has patent protection through the year 2020 - an unusually long patent period, he noted, so it would not be feasible to just endure making royalty payments to DOV Pharma through that time frame. In February 2004, Neurocrine purchased all of Wyeth's financial interest in Indiplon, which was licensed from DOV Pharma in 1998. Neurocrine has a marketing agreement with Pfizer, Inc. for Indiplon.

Neurocrine falls in sympathy

Neurocrine shares fell Tuesday in sympathy with other biotechs finding trouble with trials and drug approval, despite reporting earnings that beat Wall Street's estimates, as the market focused on the Food and Drug Administration's looming decision on Indiplon.

After Monday's close, San Diego-based Neurocrine posted a wider first-quarter loss weighed by hefty stock compensation costs, but the results topped analysts' forecast and the company issued a break-even outlook for the full year.

Neurocrine shares (Nasdaq: NBIX) dropped $3.18 on the day, or 5.08%, to $59.44.

The company posted a first-quarter net loss of $25.9 million, or 69 cents per share, versus a loss of $18.8 million, or 51 cents per share, a year earlier, with a gain in revenue to $19.5 million from $11.9 million, boosted by the Indiplon deal with Pfizer.

Neurocrine said, though, that it expects to break even in the fiscal year, with revenue ranging from $165 million to $175 million, excluding Indiplon revenues. Neurocrine stands to collect a $109 million milestone payment from Pfizer if the drug receives FDA approval.

Discovery Labs dives 53%

In another extension of the previous day's after-hours disaster, Discovery Labs lost more than half its market capitalization Tuesday amid ongoing manufacturing problems with its lead drug, Surfaxin, a respiratory treatment for premature infants.

Discovery Labs said that because of the continuing trouble with Surfaxin it was abandoning plans to commercialize the drug on its own and will be looking for strategic partners.

While some holders said it wasn't really news at all, many players jumping ship were calling for some sort of affirmative action from the company and said the company's hunt for a partner was a good start in that process.

"A go it alone Discovery Labs is not a viable investment at this point. Up until yesterday I had given management the benefit of the doubt, but at this point I have lost all confidence in their ability to get through the process on their own," said a buyside source in Boston.

"General Motors hasn't figured out how to manufacture cars for a profit after 100 years. So there's no promise that Discovery Labs can manufacture a complicated drug."

A sellsider in New York was more positive, however, pointing out that the company believes FDA approval will come, just after a longer delay than originally thought.

"I still believe in this management. I'm willing to believe that they were surprised yesterday to learn of the unstable test batch. Their resilience will now be put to the test," he said. "Surfaxin will make it to market. If I was new to Discovery Labs this morning and had cash to invest, I'd buy and lock it away for five years."

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