Allergan bid a wrinkle in Medicis merger with Inamed; Biovail off on spinoff plan; SkyePharma up

By Ronda Fears

Nashville, Nov. 15 - Merger news continued to drive activity in biotech names Tuesday, with London-based SkyePharma plc rocketing further upward following news a day before that the company has received an unsolicited bid. Meanwhile, in the United States, a bidding war erupted for Inamed Corp., which makes breast implants, and Biovail Corp. announced pans to spin off its generic unit.

SkyePharma shares in London rose 3.75p, or 7.61%, to 53p and in the U.S. gained 34 cents, or 3.82%, to $9.23. There was no news on the matter, however, aside from Monday's announcement by the company that it had hired Lehman Brothers Inc. to evaluate the unidentified bid and its alternatives.

Irvine, Calif.-based Allergan Inc., a maker of health care products including anti-wrinkle treatment Botox, on Tuesday put in a competing bid for Inamed, which makes breast implants, at $3.2 billion in cash and stock against Medicis Pharmaceutical Corp.'s standing $2.8 billion cash and stock bid that dates back to March.

Inamed had already agreed to the Medicis offer, but Inamed shares soared on the Allergan offer while Medicis shares took dive.

Allergan shares dropped $2.60, or $2.63%, to $96.25.

Allergan is offering $84 in cash or 0.8498 of a share of common Allergan stock for Inamed. In March, Inamed agreed to Medicis' buyout offer that was at that time equivalent to about $75 per share. Allergan said its offer is superior because it has a premium of about $450 million over the current value of Medicis' offer, based on Monday's closing price of $29.67 for Medicis shares.

"This is a buy opportunity [for Allergan shares] here," said a sellside market source, who said he thinks the Inamed purchase would be a positive event for Allergan. "We have a gift of a pullback."

Allergan also said its offer has a 26% higher cash component, can be closed at least as fast as or faster than the Medicis transaction and will create a company with a stronger pro forma balance sheet. The proposed acquisition would accelerate Allergan's sales growth and is expected to be accretive to Allergan's cash earnings per share in 2007 and beyond, Allergan said.

"This acquisition marks a significant expansion of our existing medical aesthetics franchise and will add another leadership position to our portfolio of ophthalmology, medical dermatology, medical aesthetics and neurosciences specialty businesses," said Allergan chief executive David Pyott in a statement.

Medicis closes down by 10%

To remain a player for Inamed, Medicis will have to pony up more cash, and the prospect of a higher price tag sent Medicis shares tumbling in the wake of Allergan's rival bid. The stock ended off by $2.97, or 10.01%, at $26.70.

"The market reaction, of course, is anticipating that Medicis will have to raise their offer. They may, but the merger will likely not happen," said a source at a hedge fund.

"Medicis can't match Allergan's bid. I wouldn't sell Medicis here, though. I think that they will end up with Reloxin at favorable terms plus a $90 million merger termination fee. The only problem is that they don't have a call into plastic surgeons - that was the beauty of the merger. I would think that it is highly unlikely that the Medicis/Inamed deal closes now, but, you never know."

Allergan said it is committed to the rapid sale of Reloxin, Inamed's botulinum toxin type A product, to minimize any potential antitrust issues in the acquisition.

"It would be a good strategy," for Medicis to purchase Reloxin, "of course, after raising the bid to screw Allergan," the hedge fund source said.

"However, in my opinion, if they [Medicis] do not up the bid, wait a few weeks, then buy, because even without Inamed, Medicis is a great company with a strong future. The only thing that worries me is that revenue was weak last quarter, but I think that may just be a down cycle where people do not need to buy more products yet. If next quarter's revenue is weak as well, I would be cautious."

Inamed bounces by 9%

Inamed holders were cashing in on the attention, with the stock climbing more than 10% at one point of the session before easing back to end the day higher by 9.19%, or $6.84, at $81.28.

"Why would Inamed approve the [Medicis] merger under the present terms? Medicis will have to go higher and will not be able to compete with a $13 billion company [Allergan]," said a sellside trader. "It's all good for Inamed. I just bought more and then Inamed popped big, so I'm happy."

The market is definitely pricing in a bidding war for Inamed, the trader said. But, he too thought that Medicis might eventually walk away from Inamed and that would make its stock a good buy.

"Medicis management [is] very savvy and won't play that game," he speculated, however. "The next bid that Medicis makes will probably be hollow, [just] to make Allergan pay more. Then, Medicis will walk away, in my opinion. That would leave its stock very undervalued."

Biovail declines 1% in U.S.

Biovail Corp. said on Tuesday it plans to spin off most of its off-patent products to its shareholders by next year, and declared its first dividend. Biovail, Canada's largest publicly traded drug maker, said it will pay a dividend of 50 cents a share on Dec. 14 and its board had adopted a dividend policy that envisages quarterly payments of 12.5 cents a share.

"Biovail believes that a spinoff of the legacy products allows both for the underlying value of these assets to be better realized and for a more focused growth strategy for Biovail," the company's executive chairman, Eugene Melnyk, said in a statement.

Shares of Biovail in the United States initially rose on the news, before retracing into negative territory, but gained ground in Canada.

In the United States, Biovail shares closed off by 21 cents, or 0.79%, to $26.51. In Toronto, the stock edged up by C$0.02, or 0.06%, to close at C$31.87.

"Biovail simply won't distribute any dividend if it sees some kind of problems ahead. The precious cash needs to be there to cover any problems, such as regulatory fines," said a buyside market source. "This is a good confidence booster."

The company said it would spin off the products on a pro rata basis, either as a dividend in kind or a return of capital to shareholders, by the end of 2006 Products to be spun off include some that are no longer promoted by the company, or whose patent protection has expired, or whose prescription volumes are falling. They include hypertension drugs Cardizem CD and Tiazac, and a handful of others.

In June, the company said it was looking at options for these products, which posted $137 million in revenue in the 12 months ended September 2005. If successful, the spinoff will result in an independent company called Crystaal Pharmaceuticals Corp., which would focus on acquiring new products. Biovail would have no stake in the new company.

Biovail has been working with Canadian and U.S. regulators on questions about whether the company improperly recognized revenue in 2003 quarterly statements. Regulators have focused on the company's warning in October 2003 that a traffic accident involving a truck carrying millions of dollars worth of its top-selling antidepressant, Wellbutrin XL, would cause a revenue shortfall.

"The company has over $325 million in cash and could certainly afford to pay several tens of millions in fines and penalties if they needed to. The annual dividend of 50 cents a share is still only $80 million," the buysider said. "Whatever happens with the SEC, OSC and OIC wouldn't have any affect on the dividend decision. Absolutely nothing should be implied about how Biovail feels about the regulatory matters from their decision to initiate a dividend."

Celgene, Cell Genesys higher

Drug data released Tuesday by Celgene Corp. and Cell Genesys, Inc. moved those stocks higher, and the convertibles of Cell Genesys gained ground as well.

Celgene announced the Food and Drug Administration has issued an approvable letter for its Thalomid in the treatment of multiple myeloma, with a request for revised product labeling and updated safety information. Merrill lynch analyst Thomas McGahren said Thalomid is already a standard of care drug for multiple myeloma on an off-label basis, but a specific label for that use could result in a 10% bump in sales.

Celgene shares rose 7 cents, or 0.12%, to $59.97.

Cell Genesys announced interim findings from a phase 2 clinical trial of its GVAX vaccine for pancreatic cancer showing a one-year survival rate of 88% and a two-year survival rate of 76% with a mean follow-up of approximately 24 months. These results compare favorably with historical data from multiple studies in patients undergoing pancreatic cancer surgery and adjuvant therapy for whom the two-year survival has been reported to be in the range of 40 to 50%, the company said.

Cell Genesys shares climbed 25 cents, or 4.55%, to $5.74 and the Cell Genesys 3.125% convertible due 2011 traded at 80 early in the day when the stock was at $5.75

A couple of other biotech convertibles were seen in trade, too, although a sellside market source said the volume was pretty light in the sector. Cephalon Inc.'s 2% converts traded at 114 with the stock at $47.75, MedImmune Inc.'s 1% convertibles moved at 97 with the stock at $35 and Chiron Corp.'s 2.75% converts were at 98.75 versus a stock price of $44.10.

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