Panacos, SkyePharma add to deal slate; Incyte, Endo drop on news; Electro-Optic rejigs talk, syndicate

By Ronda Fears

Nashville, Sept. 28 - Deal flow continued to gather steam as primary market players prepare for a busy fourth quarter, with a handful of follow-on equity offerings emerging as well as a reworked initial public offering from medtech firm Electro-Optical Sciences Inc.

On the heels of mainstream biotech firm Sunesis Pharmaceuticals Inc. having to sharply slash its IPO price to get it off earlier this week, Electro-Optical has bumped up its price range and also replaced its bookrunner on the deal.

In mid-August the Electro-Optical IPO was delayed after two price cuts - the latest proposed at $5.50 per share, down from a cut to $8 to $10 from original plans to ask for $10 to $12. Now, the Irvington, N.Y.-based maker of medical devices used in the early diagnosis of melanoma and dental imaging tools, is pitching the IPO at $5.50 to $6.50.

Meanwhile, Sunesis shares continued to stumble but volume trailed off sharply. Sunesis priced its IPO markedly below range on Monday at $7 a share - versus the price range of $9 to $11 - and the stock dropped in its first day to $6.50. On Wednesday, the stock lost another 25 cents, or 3.85%, to settle at $6.25.

Timing on Electro-Optical is being described as "day-to-day." A couple of other IPOs that are sitting on the forward calendar but firmly slated for next week's lineup are Panacos Inc. and Threshold Pharmaceuticals Inc. with follow-on deals. Plus, SkyePharma plc is making a £35 million rights offering.

In the PIPEs arena it was a bit slower but San Diego-based Nanogen Inc., which produces diagnostic tests, pocketed $20 million from the sale of 6.8 million shares at $2.94 plus five-year warrants for 1 million shares with a strike price of $4.00.

Incyte plunge seen overdone

Incyte Corp. shares felt the sting of biotech investors' wrath Wednesday along with several others that have acknowledged ill-favored news from the Food and Drug Administration. The stock fell more than 40% and its convertibles followed suit, losing 15 to 16 points on an outright basis.

The FDA has asked Incyte to conduct another phase II clinical trial to show its Reverset drug's safety and effectiveness in treating HIV patients who have already received other treatments, which will prevent the company form proceeding with two planned phase III clinical trials.

It will likely mean a 12- to 18-month setback in launching the drug, Incyte said. Initially, the company had hoped to launch Reverset in early 2008.

Incyte shares fell $2.97, or 41.02%, to end Wednesday at $4.27. Its 3.5% convertible bond due 2011 was traded heavily, dropping to 73 from 88.75 on Tuesday.

Many fans of Incyte, however, thought the market reactions were overblown.

One market source said the "stock is oversold" based on his read of what the FDA staff was saying.

"FDA is requesting another phase II trial for Reverset. We believe management didn't construct trial properly," he said. "The FDA requested more data on safety and efficacy of Reverset before moving to phase III trials, said the group was too small and they weren't sure of the safety profile of [the] drug due to a small group size."

While the delay in phase III trials and eventual launch of the drug would push out profitability projections from 2008 to 2009, he said fair value on the stock seems reasonable at $5.00. That, he added, would make the 3.5% convertible worth 76.25 to 77.

Endo pained by patch rejection

Endo Pharmaceuticals Holdings Inc. has been under heavy selling pressure since a secondary stock offering by its biggest institutional backers and insiders emerged earlier this week, but on Wednesday the stock was again suffering as its generic pain patch in development with partner Noven Pharmaceuticals Inc. was rejected by the FDA.

Noven took the brunt of the blow from the event, plunging $2.50 on the day, or 16.07%, to $13.06. Endo shares on Wednesday dropped $1.09, or 3.84%, to $27.30.

Endo said the FDA on Tuesday informed Noven that it will not approve the abbreviated New Drug Application for the transdermal fentanyl patch based on the agency's assessment of potential safety concerns related to the higher drug content in the Noven product versus the reference-listed product, Duragesic.

As a result, Endo expects that it will incur a write-off of about $5 million related to inventory and about $6 million in unamortized upfront license fees paid to Noven in February 2004.

Endo stressed that its financial guidance for 2005 did not include any sales or earnings for the transdermal fentanyl patch.

The secondary offering of 26 million Endo shares, for which the company will not receive any proceeds, is expected to price next week.

SkyePharma steps out alone

SkyePharma plc, another of Endo's partners in a pain treatment, announced Wednesday a 1-for-5 rights offering of 125.6 million new ordinary shares at 30p to qualifying shareholders for some £35 million to fund phase III trials for its new asthma drug Flutiform instead of seeking an out-licensing partner.

In London, SkyePharma shares took a big hit from the news, losing 10.75p on the day, or 20.38%, to settle at 42p. In the United States, the stock fell similarly, dropping $1.91, or 20.54%, to $7.39.

SkyePharma chief executive Michael Ashton said the SkyePharma board of directors "firmly believes it is in shareholders' interests to proceed with the clinical development of Flutiform ourselves."

Flutiform is a fixed-dose combination of formoterol and the inhaled steroid fluticasone. It has completed a phase II trial review by the FDA and SkyePharma has submitted an application to commence phase III trials in early 2006 with a target filing date of mid-2007.

The market for combination products for asthma alone is already worth in excess of $5 billion and growing rapidly and is projected to be worth $10 billion by 2010, according to SkyePharma. The company said it believes Flutiform will have significant advantages over a limited number of potentially competitive products expected to reach the market over the next few years.

By proceeding with phase III development at its own expense, SkyePharma believes it can appoint a marketing partner or partners at a later stage on substantially better terms than previously anticipated.

Genentech, MedImmune spike

The patent scare involving Genentech Inc. was put to bed Wednesday as a minimal event and the shares rebounded sharply, along with MedImmune Inc., which is on the other side of the patent dispute. While a two-week old ruling on the Cabilly patent pressured Genentech on Tuesday because of fears that big royalties were at stake, MedImmune surpassed the gain in Genentech on Wednesday.

MedImmune's gain, however, gained mostly due to its news of a collaboration with the National Institutes of Health to develop various pandemic flu vaccines, including one for avian flu. MedImmune already markets an inhalable influenza vaccine, FluMist.

Essentially, on comments from Genentech and numerous analysts, it was resolved in the markets that the patent dispute with MedImmune was years away from resolution and the ruling two weeks ago was only mildly negative to Genentech. In any event, analysts said the estimated $30 million at stake for Genentech was not a material amount of money.

Genentech shares regained $3.49, or 4.37%, to close Wednesday at $83.35.

MedImmune shares rose $1.65, or 5.22%, to $33.23.

Inex other shoe drops

Canada-based Inex Pharmaceuticals Corp. has been forced into involuntary bankruptcy by the convertible noteholders who last month issued a demand for repayment of about US$24 million in convertible notes, asserting the issue was in default.

Inex shares fell C$0.025, or 14.71%, to close at C$0.145 on the Toronto exchange amid heavy volume. In the United States, however, the over-the-counter stock was not traded Wednesday and closed at 17 cents.

Stark Trading and Shepherd Investments International Ltd., majority holder in the Inex convertible, is forcing the Vancouver, B.C.-based cancer drug researcher into bankruptcy, but the company is still fighting the Stark group's claims.

"We categorically deny the allegations brought forward by Stark and will defend against these allegations vigorously," said Inex chief executive Timothy M. Ruane in a statement. "We are focused on executing our objectives of partnering [chemotherapy drug] Marqibo and the other products in our pipeline to maximize the value of our assets for all stakeholders."

At June 30, Inex said it had $15.2 million in working capital

Inex, which has been in restructuring negotiations with the Stark group since December, asserts it is not in default of the notes. As of June 30, Inex said there is about US$32.7 million in promissory notes due April 2007 that were originally issued to Elan Corp. plc in April 2001 and subsequently were bought from Elan by certain institutional investors in April 2004.

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