Chiron rises on rejection of bid from Novartis; Barr, Teva gain; New River higher; Andrx falls

By Ronda Fears

Nashville, Sept. 6 - Chiron Corp. was cheered Tuesday for rejecting Novartis AG's $4.5 billion takeover offer, which some onlookers had considered a low-ball bid, but there was still much debate as to whether the troubled influenza vaccine maker will merit a bona fide bidding war.

While Chiron shares climbed as much as 2% early before steadily retracing gains during the afternoon, the convertible debt was moving in a frenetic fashion as the takeover scenario became less assured.

Elsewhere in the secondary market, several generic drug names were active on news. Too, Durect Corp. was mentioned as the stock hit a new 52-week high with a gain of 28 cents, or 4.4%, to $6.65, passing the old high of $6.50.

Barr Pharmaceuticals Inc. and Teva Pharmaceutical Industries Ltd. on Tuesday announced a joint agreement to launch a generic version of Sanofi-Aventis' allergy medicine Allegra.

New River Pharmaceutical Inc., however, may have thwarted Barr's efforts to be the first to introduce a generic version of Shire Pharmaceutical plc's attention deficit hyperactivity disorder drug Adderall.

Generic drugmaker Andrx plunged over 20% early Tuesday, however, after disclosing that the Food and Drug Administration has put all its drug applications on hold because its plants failed inspection.

On the primary market front, there were some rumblings about the initial public offerings of Accentia Biopharmaceuticals Inc., Sunesis Pharmaceuticals Inc. and Intarcia Therapeutics Inc. - all with IPOs now seen in "day-to-day" status for pricing. Then, there was Mediscience Technology Corp. in the market with a hefty $10 million PIPEs deal.

Chiron snubs Novartis low bid

Chiron moved higher Tuesday after the company rejected Novartis' $40 per share takeover offer for the 42% equity stake it doesn't already hold, but the stock retraced gains all afternoon as the rejection stirred debate as to whether any competing offers would emerge.

"I said all along that it was a pretty lame offer, a 5% premium at the time, versus other [M&A] deals that were in the neighborhood of 40%," said a Chiron holder.

In early trade, Chiron shares were up around 2% but steadily declined from there during the afternoon. The stock closed out Tuesday's session up $0.72, or 1.68%, at $43.51.

Novartis currently owns 58% of Chiron and last week said it made the bid partly because it believes Chiron would better be able to cope with the regulatory and production problems as a subsidiary rather than as an independent company.

Chiron, based in Emeryville, Calif., makes the Fluvirin flu shot, as well as a number of blood-testing products. The company missed the 2004-2005 flu season because U.K regulatory authorities abruptly closed its manufacturing plant in Liverpool last October over contamination concerns, which in turn caused shortages for flu vaccines in the United States.

Also last week, U.S. and U.K. regulators made preliminary clearances for the plant to resume supplies in the upcoming flu season, pending regular product and site inspections. But in July, Chiron reported problems with another vaccine plant in Germany. It has two other vaccine plants in Italy.

Analysts seemed a bit more skeptical that Chiron, with all its problems related to the flu shot, would garner any other bids.

Chiron bidding war debatable

Thomas Weisel Partners analyst Ian Somaiya said that he thinks it would take a bid of $43 and $45 per share to get the Novartis acquisition done but he also thinks it is "unlikely a bidding war will break out for Chiron."

Contrary to views by the market and Chiron that the Novartis bid was a low-ball one, Merrill analyst Eric Ende's estimates make it look appealing. He estimates the break-up or acquisition value of Chiron shares at $38 per share. Without the merger scenario, Ende puts fair value on Chiron shares more like $32 to $34 a share.

Moreover, Ende also seemed doubtful of other bids for Chiron, so he was keener about the Novartis bid.

"While Novartis could raise its bid by a couple of dollars, it remains unclear whether a modestly higher bid would be adequate to Chiron's board," Ende said in a report Tuesday. "Thus, we believe Chiron shareholders would get more value and reduce risk through an all-cash acquisition by Novartis than if existing management continued to run the business."

Even at the current $40 a share bid, the Merrill analyst sees Chiron shareholders as winners because of his estimate of the fundamental fair value of the stock. It may have just been a 5% premium when the bid was made last week, and the stock has run up over that point since then, but compared with Ende's fair value on Chiron shares it would be an 18% to 25% premium.

Then again, Ende added, if no subsequent offers emerge or Chiron rejects future offers, he sees the shares as fundamentally overvalued.

Chiron 1.625s off, 2.75s steady

Chiron debtholders were in a similar quandary, with the bonds having run up several points last week on expectations of a par put getting triggered by the acquisition. Both the 1.625% and 2.75% issues climbed nearly to par last week, so Tuesday the 1.625s eased back while the 2.75s were described as steady.

Now, the prospect of a bidding war having driven Chiron shares higher, the market's preference among the convertibles has shifted to lean toward the 2.75% issue.

The 1.625s have a change-of-control put at par like the 2.75% issue, one sellside market source said, but the premium make-whole provision for the 2.75s becomes more of a viable event with the stock run-up close to the a pre-set threshold on the takeover protection.

On the Novartis bid being rejected, the 1.625% convertible bonds were off 0.375 point at 98.25 on Tuesday while the 2.75% convertible bond gained 0.5 point to 99.125.

Lehman Brothers convertible analysts had said last week that, based solely on the par put getting exercised, the 1.625% issue at a price of 93.5 [last Wednesday] could have a 6.5-point upside for outright holders and a 4.71-point upside on an 18% hedge.

The 2.75% issue has takeover protection in the form of a premium make-whole payment but with a stock price threshold of $44.84, but that was moot last week before the stock shot up. Based solely on the exercise of the change-of-control put, the Lehman analysts estimated that off a price for the 2.75% convertible of 95.75 [last Wednesday], upside for outright holders was about 4.25 points and around 0.69 point on a 35% hedge.

Barr, Teva join on generic Allegra

Barr Pharma and Teva, as well as Ivax Corp. with a merger with Teva pending, gained Tuesday on an announcement from Barr and Teva to jointly launch of a generic version of Allegra, an allergy medicine produced by Sanofi-Aventis.

The deal calls for Barr to take the regulatory steps necessary to permit Teva to obtain approval from the FDA to sell the generic allergy medicine within Barr's six-month exclusivity period. Barr has announced last week hurdling the final FDA approval to market its generic version of Allegra. Teva had hoped to beat Barr to the exclusivity period with its version of generic Allegra.

Barr shares on Tuesday climbed $4.42, or 9.69%, to close at $50.05.

Teva shares rose 70 cents on the day, or 2.13%, to end at $33.60. Ivax, which is being acquired by Teva, rose 31 cents, or 1.19%, to $26.38.

New River cuts in on Adderall

Barr's race for a generic form of Shire's attention deficit hyperactivity disorder drug Adderall, however, is less of a sure shot. Barr and Shire are in negotiations to settle a patent dispute over that drug, but analysts say New River Pharma's product in development with Shire may make it a pointless effort.

"If this second-generation Adderall, the NRP104, becomes the so-called preferred drug to prescribe for ADHD then the generic Adderall is left flapping in the wind," said a buyside biotech analyst.

New River is teaming up with Shire for a generic Adderall, and a research note from Merrill Lynch on Tuesday suggested it will become the new market leader to treat attention deficit hyperactivity disorder.

On Tuesday, New River shares gained $1.03, or 2.52%, to $41.97.

In mid-August, Shire acknowledged preliminary talks with Barr to settle disputes involving generic versions of Adderall. Even if Barr wins its case to market a generic form of Adderall, whether by settlement or in the patent challenge, the buyside market source said it would likely be too late, because of the New River product.

Andrx plunges on FDA hold

Generic drugmaker Andrx Corp. plummeted by more than 20% early Tuesday after disclosing that the FDA has put a hold on all its drug applications because of failed inspections of its manufacturing plants, stemming from warnings issued by the FDA to the company in May.

Andrx shares came off the lows of the day to end with a decline of $3.05, or 17%, at $14.89. The stock had traded as low as $12.74 during the session.

The company said it has filed a corrective plan for the violations and said it disclosed the inspection information in its most recent quarterly report filed with the Securities and Exchange Commission.

"Andrx is working to resolve the GMP [good manufacturing practices] issues at its facility as quickly as possible," the company said in a news release. "The timing of that resolution is uncertain, and is not solely in our control."

Additionally, the company said the FDA may take other actions, such as product recalls or suspending its manufacturing and distribution operations. The company markets a variety of drugs, including generic versions of birth control pills, Prozac, Pepcid, Cardizem, Vicodin, Claritin, Paxil and Glucophage.

Pending are applications to market generic versions of Concerta, OrthoNovum, Wellbutrin and Zyban.

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