Advanced Life Sciences IPO cut; ZymoGenetics plans follow-on; Elan plunges on credit worries

By Ronda Fears

Nashville, July 28 - Advanced Life Sciences Inc. cut the price range on its initial public offering ahead of the scheduled pricing after Thursday's close, further illustrating that the market remains tough for biotech IPOs. Follow-on offerings shave had more luck recently, and to that end ZymoGenetics Inc. is planning a big secondary stock sale for next week.

The price cut for Advanced Life Sciences was big, 44%, and underscored the view that last week's aggressively priced IPO from Adams Respiratory Therapeutics Inc. involved extraordinary circumstances. The Adams IPO was ranked the second-best debuting IPO last week, rising about 55% in its first day of trade on Thursday after pricing aggressively outside of price talk at $17 a share versus the range of $14 to $16.

In addition to Adams' coup in re-labeling its Mucinex expectorant, which eliminated other competitors, onlookers pointed out that the company's financial statement was in the black. For the nine months ended March 31, Adams posted net income of $24.0 million, up from profits of $19.0 million in the same period a year earlier. Operating income for the period rose to $39.6 million, also from $19.0 million.

For the six months ended June 30, Advanced Life Sciences said in its registration statement that it posted a net loss of $1.66 million compared with a net loss of $1.12 million in the year-before period and an operating loss of $1.46 million versus an operating loss of $1.03 million a year earlier.

"Adams was in the positive," said Amit Bhatia, health care IPO analyst with the independent research firm Current Offerings. "A lot of these companies are in the red and that becomes problematic."

Meanwhile there were a couple of sizable fund-raising deals, totaling $80 million together, announced Thursday by London-based SR Pharma plc and Tucker, Ga.-based Altea Therapeutics.

Adams, ZymoGenetics lower

In trade Thursday, Adams shares were under pressure with the sector and broader markets, losing 96 cents on the day, or 3.27%, to end at $28.39.

Elsewhere in secondary action, ZymoGenetics shares came under pressure because of the follow-on filing, as expected, and closed off $1.02, or 5.36%, at $18.00.

Generally speaking, traders said biotech stocks were weaker Thursday amid a spate of ill-boding news within earnings reports, although results themselves were in line with expectations. "But, you have to remember," as one sellside trader put it, "the expectations had been lowered for a lot of biotechs before the results came out."

Biotech heavyweight Amgen Inc. was off 28 cents on the day, or 0.34%, to close Thursday at $81.00.

Before Thursday's open, Elan Corp. plc reported second-quarter results that were in line with expectations, but its securities dropped precipitously amid skepticism that its multiple sclerosis drug Tysabri, in development with big biotech Biogen Idec Inc., will never return to the market. Thus, without Tysabri, players have become concerned that Elan can meet debt service obligations, including the 6.5% convertible due 2008.

To the upside, CV Therapeutics Inc. gained after filing for approval of its angina drug Ranexa with the U.S. Food and Drug Administration a month earlier than expected.

Advanced Life cuts IPO range

Ahead of pricing after the close Thursday, Advanced Life Sciences cut the price range for the stock to between $8 and $9 from original plans to fetch $11 to $13 but upped the number of shares to 5 million from 4.5 million.

Underwriters are C.E. Unterberg Towbin, ThinkEquity Partners LLC and Merriman Curham Ford & Co.

Woodbridge, Ill.-based Advanced Life Sciences is focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, inflammation and oncology. The company has a pipeline of clinical and preclinical product candidates for the treatment of respiratory tract infections, HIV, acute respiratory distress syndrome and cancer.

Currently, the company has four product candidates that are either in clinical development or approved to begin clinical development, and seven additional product candidates that are in preclinical development. The company has arrangements with Abbott Laboratories, Sarawak MediChem Pharmaceuticals Inc. and others.

Proceeds, together with existing cash, are earmarked to continue clinical trials of cethromycin and to make related milestone and license payments to Abbott Laboratories. In addition, proceeds will be used to repay some $6 million of debt and the remainder for general corporate purposes, including the continued development of other product candidates and working capital.

ZymoGenetics seen Wednesday

ZymoGenetics announced plans to offer 6.5 million shares off the shelf with net proceeds estimated at $136.7 million with the greenshoe, and a source at bookrunner Merrill Lynch said the follow-on currently is slated to price after the market close next Wednesday.

Proceeds, estimated to net the company $136.7 million including the greenshoe, are earmarked for clinical and preclinical development of existing product candidates, discovery and development of additional product opportunities, capital expenditures and working capital, and other general corporate purposes.

Also Thursday, ZymoGenetics reported financial results and said its pipeline has grown to four product candidates with the addition of IL-29 as a potential treatment for hepatitis C.

The Seattle-based biotech posted a second-quarter net loss of $23.8 million, or $0.41 per share, which was narrowed from a net loss of $24.5 million, or $0.46 per share, for second-quarter 2004. Revenues slipped to $8.0 million from $8.4 million, attributed to lower license fees and milestones in addition to decreased royalties due to insulin patent expirations in certain European countries.

ZymoGenetics recorded $275 million of cash and investments as of June 30.

In late June, an end of phase II meeting for rhThrombin was held between the company and the FDA to discuss the proposed phase III pivotal study. ZymoGenetics intends to obtain a Special Protocol Assessment before initiating the phase III study, and to initiate a single pivotal study later this year, enroll and treat 400 to 600 patients and complete the study in 2006.

Last October, ZymoGenetics raised $50 million as part of a series of agreements with Swiss biotech Serono SA that included a private stock sale for 3,176,620 shares at $15.74 each. In other parts of the agreement, originally announced in September, the company and Serono will evaluate its protein drug therapies over five years. Serono will pay $20 million for licensing options or enter into a co-development arrangement.

SR Pharma raises £10 million

London-based SR Pharma plc said it raised £10 million from a private placement of stock at 23p each, on the heels of its acquisition of the Berlin-based biotech Atugen AG. The company sold 43.5 million shares to institutional investors including Introgen Therapeutics Inc., Apex Partners and new and existing investors.

On the news, SR Pharma shares rose 1p, or 3.03%, to close at 34p on the London stock exchange.

SR Pharma is focused on developing cancer and inflammation treatments. Proceeds from the £1.7 million investment made by Introgen will be used to develop products and therapies such as the siRNA technology used in oncology. The Introgen investment brings its holdings in SR Pharma to 8.3%.

The siRNA technology, including the atuPLEX proprietary delivery system, is SR Pharma's leading product and was acquired from Atugen.

"The strategic investment by Introgen underlines the importance of working with quality partners," said SR Pharma chairman Iain Ross. "We have identified a number of initiatives upon which the two companies may collaborate and look forward to making further announcements about collaborative activities as events present themselves."

Funds raised from the other investors will also be used to develop products and technologies, but also for acquisitions.

In early May, SR Pharma announced it terminated late-stage merger discussions with an unnamed U.K.-based third party in order to pursue an acquisition of its own. Then, on June 21, it announced the Atugen purchase, for £6.2 million, which because of the size of the companies was described as a reverse takeover.

Atugen has generated about €20 million of contract research revenues to date through partners, including AstraZeneca plc, Berlex Inc., Altana AG and Sankyo Ltd. In addition, Atugen has been able to establish drug development collaborations in the field of RNAi therapeutics with Sanofi-Aventis and Quark Biotech Inc.

Altea gets $30 million venture capital

Altea Therapeutics said it raised more than $30 million in series C financing led by Aperture Venture Partners. Other investors included Domain, Venrock, vSpring Capital, KBC, Quilvest, CX Ventures and Rockport Ventures.

Based in Tucker, Ga., Altea Therapeutics is a closely held company that makes transdermal drug delivery patches for typically injected medicines.

Its PassPort transdermal system is in phase II clinical trials, and the new funds will be used to continue the clinical development of lead products for pain management and diabetes control.

Elan cuts revenue guidance

With sell ratings maintained on Elan shares by investment bank heavyweights Merrill Lynch and Smith Barney Citigroup, the stock fell more than 6% in trade Thursday, and traders also remarked that there was an "alarming rate" of insiders dumping shares.

Elan shares closed off 49 cents, or 6.13%, at $7.50.

The Irish drugmaker reported an in-line net loss of $142.6 million, or 35 cents a share, for second quarter, widened from the net loss of $117.6 million, or 30 cents a share, for second-quarter 2004, citing the problems with Tysabri. Revenue increased 9% to $118.6 million from $108.4 million, and Elan said product sales excluding Tysabri were up 47% year over year. Adjusted EBITDA for the quarter was a negative $58.7 million compared to a negative $45.7 million a year earlier.

Elan stood by its guidance for adjusted EBITDA of $240 million to $260 million for 2005 but lowered its revenue projection to $460 million to $500 million from the previous forecast in excess of $500 million.

"We are cautiously optimistic that with continued strong revenue growth and careful and disciplined cost management, this business, excluding Tysabri, will get to our target of break-even on an EBITDA basis, by the end of 2005," said Elan chief executive Shane Cooke.

But analysts were not as optimistic and Smith Barney Citigroup analyst Andrew Swanson said Elan's current share price implies that Tysarbi returns as the market leader in multiple sclerosis - "an optimistic scenario in our view."

Merrill Lynch analyst Erica Whittaker said she expects Tysabri could return to the market in early 2006 but only in a limited clinical setting, with peak global sales of no more than $500 million. Under this scenario, she said Elan's "valuation is negligible."

Elan debt overshadows Tysabri

Even assuming that Elan reduces non-Tysabri operating expenses by almost 50% by 2007, Merrill's estimate of fair value for the shares "only approaches $2, and it is still unclear how Elan's debt obligations would be met."

Thus, traders said that, without visibility on Tysabri, Elan's ominous debtload was the impetus for selling out of the story. Along with the stock, Elan's 6.5% convertible due 2008 fell 4.875 points to 126.25 bid, 127.25 offered.

"Without Tysabri, Elan is a one-trick pony, nothing more than a glorified research company," said a buyside trader at a convertible fund based in New York. "There's no money coming in to justify the price."

The key driver for Elan is the FDA decision on the future of withdrawn MS drug Tysabri. No additional information was provided on this front by Elan, and the time frame for submission of the Tysabri safety review remains the end of this summer.

"Without Tysabri as a blockbuster product, we remain concerned that, unless there is more severe restructuring, Elan will have difficulty repaying its $2 billion-plus debt obligations in 2008 and 2011," said Merrill's Whittaker.

Elan reported in second-quarter results that it retired about $240 million of the 2008 convertibles and still ended the quarter with more than $1.15 billion in cash.

CV Therapeutics short covering

CV Therapeutics Inc. continued to rise Thursday after announcing an FDA filing for its angina drug Ranexa a month earlier than the market was expecting. Traders said a good deal of the stock move was attributable to short-covering ahead of the Palo Alto, Calif.-based biotech's second-quarter results due Aug. 8.

Investors are eager to see cash burn rates and any further updates on their programs, including possibly something on Ranexa's approval in Europe, said a sellside trader who traffics both the stock and convertibles.

Both on Thursday as well as on Wednesday, he noted that CV Therapeutics hit intraday prices in excess of its 52-week high of $28.25. The stock ended Thursday up 59 cents, or 2.12%, at $28.41.

CV Therapeutics' newest convertible, the 3.25% issue due 2013 sold in late June, added 1.75 points outright to 125.25 bid, 125.75 offered, the sellsider said.

Analysts expect Ranexa, if approved, could be launched in the first half of 2006 with revenue estimates in the neighborhood of $660 million by 2009. If approved, CV Therapeutics said Ranexa would represent the first new class of anti-anginal therapy in the United States in more than 25 years.

Par Pharma weaker amid earnings woes

The convertibles of Par Pharmaceutical Cos. edged lower as its underlying stock tumbled after the generic drugmaker swung to a loss on weaker sales of some of its core drugs and cited increased competition in generic drugs.

The Woodcliff Lake, N.J.-based company said Thursday its second-quarter net loss was $600,000, or 2 cents a share, compared to profit of $29.9 million, or 85 cents a share, in the year earlier period.

The result included a one-time loss of $5.2 million from an investment in Advancis Pharmaceutical Corp., another drug company.

Excluding special items, the company would have earned 13 cents per share. But that level was still well below the 35 cents a share that analysts were expecting.

Revenue fell 45% to $117 million from the prior year's $212.5 million. Sales of its versions of generic Paxil and Prozac were down due to competition from other generic drugmakers.

Also First Albany downgraded the company to "neutral" from "strong buy."

The 2.875% convertible traded in about 0.25 point to 0.50 point at 79 bid, 79 offered.

Par Pharmaceuticals stock tumbled $3.79, or 13.54%, to $24.21.

"It's considered a busted convert which means that it won't really trade with the stock. But missing the earnings reflects the overall trend of consolidation in the industry, which is making it harder for smaller players to compete," a New York-based sellside analyst said, citing the merger linkup announced earlier this week between IVAX Corp. and generic heavyweight Teva Pharmaceutical Industries Ltd.

When the paper was issued, the underlying stock was in the mid $60s, and it carries a 35% conversion premium, the source said.

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