Nycomed deal seen coming on Altana buy; Warner Chilcott slips on debut; Serono up on buyout

By Ronda Fears

Memphis, Sept. 21 - It was a day of big deals Thursday that sparked conflicting sentiment from biotech players, who were glad to see some action but disappointed from the basic biotech standpoint.

Warner Chilcott Ltd.'s $1 billion initial public offering highlighted the day's business, although it slumped out of the chute, along with a trio of mega mergers on the international scene, all coming on the heels of deals from Incyte Corp. and Genta, Inc. that were seen as desperate measures.

On the global front, German chemical and pharmaceutical concern Altana AG said it was selling its drugs business to Denmark's Nycomed Holding AS, a transaction expected to generate new financing activity. Hospira Inc. - a spin-off from Abbott Laboratories - is buying Australian concern Mayne Pharma Ltd., and Germany-based Merck KGaA has purchased a majority stake in the Swiss biotech Serono SA with plans to tender for the rest in November.

"It's all very exciting, and I suppose you could make an existential argument, but I find it difficult to extrapolate the implications of these deals to the biotech sector," said a biotech fund manager in Boston.

"Takeover rumors are nothing new. In fact, we didn't hear much on this angle today at all. The sector was under pressure because we have seen so much negative news flow on clinical trials recently. Of course, this could be a trigger point for the Big Pharmas to get serious about any acquisition plans they may have, but I still think the buyout hopes of holders in biotechs is not much more than hype.

"It seems to me partnerships, in-licensing, will continue to be the means of getting funding from Big Pharma for biotechs. In any event, it is extremely difficult to get ahead of that news. You just have to move forward with your own due diligence. As for the IPO market, I don't really see anything that I am very excited about."

Warner Chilcott's deal had been eagerly watched if for no other reason than the size of it, but market sources said it did not entice a lot of traditional biotech funds.

Warner Chilcott trades light

The Warner Chilcott IPO traded off, after pricing below range, and with light volume despite it being touted as the biggest sponsor-backed IPO this year as a former unit of Warner Lambert that was taken public by private equity firms Bain Capital, DLJ Merchant Banking Partners, J.P. Morgan Partners LLC and Thomas H. Lee Partners.

Warner Chilcott raised $1.06 billion in proceeds from the sale of 70.6 million shares at $15 each, below price talk of $17 to $19.

The stock (Nasdaq: WCRX) opened at $14.75 and traded in a band of $14.50 to $15.10 before settling off the debut mark by a nickel at $14.95. Roughly 18 million shares traded Thursday.

As a result of lower proceeds, the company said it would reduce the amount of paydown on its senior secured credit facility - $1.62 billion as of June 30, which would otherwise mature in January 2012 - to $405 million from a previously planned paydown of $470 million.

Also, the company said it would lower the amount of buybacks of preferred stock from Warner Chilcott Holdings Co. II, Ltd. to $327.4 million from $462.8 million. Those preferred shares not redeemed will automatically convert into common stock.

Rockaway, N.J., company focused on products in women's health care, dermatology, contraceptives and hormone therapies plans to use proceeds to repay debt and for general corporate purposes. Net proceeds are estimated at $1 billion, about $193.1 million less than originally estimated.

Pre-IPO owners will now collectively hold 60.7% of the company. The private equity group won a bidding war in October 2004 to buy Warner Chilcott for about $3 billion. Afterward, the company tallied up nearly $2 billion in debt.

Altana up on Nycomed merger

In what could be a similar type deal coming down the pike, Nycomed - the prevailing namesake of the buyout by Altana - said it would fund the €4.5 billion, or $5.71 billion, deal with new equity and committed financing from a consortium of banks. A stock deal would follow closing of the merger, which is anticipated in fourth quarter.

Nycomed, which is owned by a consortium of private equity companies - Nordic Capital, CSFB Private Equity and The Blackstone Group - will go public with the merger.

Altana shares (NYSE: AAA) gained $1.64 in trade Thursday, or 2.89%, to close at $58.31.

Nycomed focuses on prescription drugs for gastrointestinal and respiratory diseases, distributing Altana's top-selling drug, ulcer treatment Pantoprazol, among others. For Altana's part, the deal represented a follow-through on its previously announced strategy to narrow its focus on chemicals.

The combined company will continue to operate under the Nycomed name with headquarters in Zurich. Research and development will be conducted in Konstanz, Germany, where Altana is now based.

Hospira up 4% on Mayne deal

In another big deal, Hospira was higher on news of its acquisition of Mayne Pharma for A$2.6 billion in cash to become the world's biggest maker of generic injectable drugs.

"I love this company," said a buyside source in Boston. "There are the 20 or more generic products that Hospira supposedly has in the pipeline. Mayne appears to be a good investment, even if only for their international presence. This can only be good."

Hospira shares (NYSE: HSP) shot up $1.65, or 4.39%, to $39.20 on the news.

Late Wednesday, Hospira said it would acquire Mayne at A$4.10 per share, a 32% premium over the closing price on Monday. Mayne shares (Australia: MYP) traded in a band of A$4.15 to A$4.26 on Thursday before closing unchanged from Wednesday at A$4.16.

Lake Forest, Ill.-based Hospira said it will finance the acquisition with available cash and some $1.9 billion of debt under committed financing facilities provided by Morgan Stanley. Thus, from a credit standpoint, Moody's Investors Service put the Baa3 debt ratings of Hospira under review for a possible downgrade, saying the deal would help position Hospira as a global player in the generic injectable pharmaceutical arena but its financial leverage increases significantly.

Serono up 17% on Merck deal

In another major European deal Thursday, Serono agreed to sell a controlling interest to Merck KGaA, which lost its bid to acquire rival drug maker Schering AG earlier this year to Bayer AG. The CHF 16.6 billion deal was a surprise since Serono had put itself up for sale last year to no avail, and sources in Europe said a full merger may be uphill.

As a result, Serono shares (NYSE: SRA) zoomed on the event, adding $3.19 on the day, or 17.43%, to close at $21.49.

Merck said it will pay CHF 1,100 a share for the 64.5% stake in Serono held by the Bertarelli family and will make a public tender for the remainder, likely in November. Serono shares in Europe (Swiss: SEO) gained CHF 161, or 17.6%, to CHF 1,076.

"We had pretty much given up on any outside deal, and figured they would be coming to market with a new deal of their own," said a buyside source in Florida.

In April, Serono shareholders gave approval for the company to raise $5 billion in new equity to finance expansion, but no deal ever emerged.

The buysider said recent news that put Serono's multiple sclerosis drug Rebif in a poor light had dimmed hopes on the story.

"Serono just recently completed a study to compare Rebif with Copaxone (Teva). The result of the study is quite explosive: Rebif is not (as promoted by Serono for months) superior to Copaxone," the buyside source said. "So, a merger in the face of this kind of news was a big surprise."

Analysts said the deal gives Merck, whose products include the heart drug Concor and the colorectal cancer drug Erbitux in a partnership with ImClone Systems, Inc., access to new markets thanks to Serono's partnership with Pfizer Inc. to market Rebif.

Serono convertible in limbo

From a credit standpoint, analysts in Europe said no announcement has been made with regard to Serono's 0.5% convertible bond due 2008 and would not expect Merck to tender for the issue given the bond's low equity sensitivity.

In addition, the Barclays Capital Market analysts said in a report Thursday that Serono shares were suspended in early trade and "upon resumption of trading they are currently priced at CHF 1,080, indicating that the market is not fully pricing in a successful takeover."

Credit analysts at Standard & Poor's put the BBB+/A-2 corporate credit ratings on Merck KGaA on negative watch as a result of the deal, and Moody's also put the Baa1 long-term and Prime-2 short-term ratings of Merck KGaA on review for possible downgrade.

Barclays analysts said in the report that the Serono convertible offers takeover protection via a change-of-control put at accreted value and via a ratchet mechanism but it is moot since the conversion price would decrease from CHF 1,415.11 to CHF 1,250.07 if the change-of-control date is before Nov. 26, which would still be above the offer price of CHF 1,100.

If a change of control does occur, the relevant put date will be 14 days after the end of a 60-day period from the date of the change-of-control notice. Bondholders must post a put notice within 60 days of the date of the change-of-control notice. As of Thursday, the analysts said the accreted principal amount is CHF 5,160.92, or 103.22%, with accrued interest of CHF 20.48.

Incyte convertible trades up

Incyte's new $132 million of 3.5% convertible senior notes due Feb. 15, 2011, with a 126% initial conversion premium, priced at 78 - the midpoint of a discounted offer price of 77 to 79 versus par of 100 - and traded up from there with the yield to maturity of 9.75% enticing high-yield bond buyers.

The new issue was quoted up to 79.5 against a $4.50 stock price. Incyte shares (Nasdaq: INCY) ended the day off by 61 cents, or 12.3%, at $4.35. The older Incyte 3.5% convertible bonds due 2011 were quoted at 75.75 with the stock at $4.40.

The new 3.5s will convert at $11.22, for a ratio of 89.1385 shares per bond, and accrue original issue discount for tax purposes.

Wilmington, Del.-based Incyte is developing in its most advanced program CCR2 antagonists under a collaborative research and license agreement with Pfizer, with an initial lead compound for rheumatoid arthritis and diabetes.

Incyte said it would use proceeds from the new deal, estimated at about $98 million, to redeem its outstanding 5.5% convertible subordinated notes due Feb. 1, 2007. Any remaining proceeds will be added to working capital and used for general corporate purposes, the company said.

A takeover or merger would trigger a par put to holders.

Pozen up on payment, guidance

In another bit of financing news, Pozen Inc. gained Thursday announcing that it received a $40 million payment from AstraZeneca plc and raised its third-quarter guidance.

Pozen shares (Nasdaq: POZN) added 17 cents, or 1.32%, to close at $13.01. The stock traded up to $13.33 before easing back late in the day.

"This stuff doesn't seem to justify the price increase," said a sellside trader. "It's setting up for a monster dump."

Pozen now expects revenue between $3 million and $4 million in the third quarter, from previous guidance of between $2 million and $3 million. For the year, Pozen expects revenue between $14 million to $16 million, from a previous range of $12 million to $14 million with full-year operating expenses of $36 million to $38 million.

The two companies are working together to develop and commercialize a drug to help manage pain and inflammation associated with diseases such as osteoarthritis and rheumatoid arthritis in patients who are at risk for developing medication-related ulcers.

Under their collaboration agreement reached last month, in addition to the $40 million payment, Pozen is eligible for up to $160 million if certain milestones are met and $175 million if potential sales performance milestones are met.

Chapel Hill, N.C.-based Pozen is focused on developing pain medications. It has another collaboration with GlaxoSmithKline plc for the migraine drug Trexima.

Depomed trades down over 3%

Heading lower was Depomed, Inc. despite news from a conference that it and King Pharmaceuticals, Inc. are considering an agreement for a combination product using the diabetes drug Glumetza, as players hold out for a better indication of how Glumetza will be received in the marketplace.

Depomed shares (Nasdaq: DEPO) dropped 14 cents, or 3.19%, to settle at $4.25.

The partners launched Glumetza for type 2 diabetes in the U.S. market earlier this month after forming a co-promotion partnership for the drug in June, with King selling Glumetza in the United States and Puerto Rico and Depomed retaining rights with its own sales force.

Meanwhile, a buyside analyst said it is a waiting game of sorts as the news from the UBS Global Life Sciences Conference in New York was "rather uneventful."

"A lot is hinging on Glumetza doing at least so-so. It doesn't have to blow anyone away, though that would be nice, but it is oh so important that it is doing better than Proquin [Depomed's antibiotic for urinary tract infections]," the buyside source said.

"With all that said nobody should be rushing to sell and nobody should be rushing to buy, thus we have the very boring trading range with ever so light volume, and we wait."

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