Kosan retreats further after pulling follow-on; Nektar slips; Acambis off, Electro-Optical IPO seen delayed

By Ronda Fears

Nashville, Aug. 16 - Deal flow was very thin in the biotech sector Tuesday, and, in fact, Kosan Biosciences Inc. pulling its follow-on stock offering from last week just as it was about to close was an ill-boding signal for other would-be issuers.

"There are some deals on the calendar, but nothing looks close to pricing," said a buyside market source focused on IPOs. Furthermore, he added, "We're about to slide into the slow part of the year."

Medtech issues are having as much of an uphill climb in this effort as mainstream biotech, with news late in the day from buyside sources that it appeared the IPO of Electro-Optical Sciences Inc. would be delayed from plans to price after Tuesday's close.

Electro-Optical Sciences, which makes a medical device used in the early diagnosis of melanoma and dental imaging tools, had made two price cuts to its IPO - 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.

Secondary activity was perhaps surprisingly brisk, sellsiders said, with buyers stepping up to the plate to take a higher dose of biotech exposure on the downdraft in stocks Tuesday, illustrated broadly by the 1.21% drop in the Nasdaq Biotech Index on Tuesday. Many declines, and some were steep, were seen as a buying opportunity "opening up" after some healthy price gains earlier this year, traders said.

"Buyers," replied one sellsider when asked what was going on in the biotech sector Tuesday.

Kosan orders marked 'error'

Kosan opened higher Tuesday, by as much as 6% in pre-market activity, on the company canceling its follow-on deal from last week but that was attributed to short covering, and traders said when that activity dried up the stock continued to retreat.

It wasn't entirely a matter of unwinding orders in the follow-on deal, because those were marked as "errors," said a buysider in Colorado who participated in the deal.

"Everything was just marked as an error account," he said. "We were knocked back by 1 point from where we bought, so it worked out for us."

A buysider in Florida said early in the day that he expected huge short covering from the now-cancelled follow-on offering and that once that was over the stock would "tank again." That indeed turned out to be the case, with the stock closing off by 17 cents, or 2.31%, at $7.18. Volume was heavy, again, with 2.7 million shares changing hands Tuesday, compared with the three-month running average of 336,395.

Kosan shares plunged 17% on Monday in a huge sell-off after the company announced that trials on two cancer drugs will be delayed. On that event, the company pulled its follow-on sale of 4.5 million shares at $8.75 each - which was discounted from the day's close of $9.00 per share.

"The news should have been a non-event. No one died. No one got hurt. There was no bad news. This is quite ordinary and typical," said the Florida buysider. "Just about every new drug makes adjustments and obtains a protocol agreement within the first one to three months of a test. So why was this hyped into bad news? I really have no idea. But [Monday's] non-news-event changes nothing as far as I'm concerned."

Considering the market reaction, however, he said, "That's [pulling the follow-on] commendable. It would have been foolish to continue it at this time."

Nektar issues $24 million PIPE

Nektar Therapeutics announced Tuesday a $24 million PIPEs transaction with the funds earmarked to help pay for its acquisition of rival respiratory drug developer Aerogen Inc., a day after announcing the $32 million purchase.

The company sold 1.4 million shares of stock at $16.71 per share to Mainfield Enterprises Inc., with an option to purchase additional shares through Sept. 16 at the greater of a 10% discount to the volume weighted average price on the trading day immediately preceding the exercise date and $17.59. If the option is exercised in full, that would net another $7.9 million for Nektar.

Nektar shares ended off Tuesday by 14 cents, or 0.79%, at $17.48 as players interpreted the events in mixed reaction.

"It [the PIPE deal] is more dilution to common shareholders. This is a fast one management is pulling. The institutional shareholders gets shares BELOW the market price, so what do they do, they will be dumping them all today, cashing out for a quick gain. And the ones who get the shaft are the shareholders," one buyside analyst said.

"The investor on this offering also really got a nice perk in the option... They can wait to see how the FDA situation plays out and if there is a nice pop on some big news they can get 10% off of the PRIOR day's average price (or $17.59, the greater of). Of course, the down side would be the release of bad news and watching the price of the 1.4 million shares they already have decline."

Another buysider said he was unperturbed about Mainfield getting a sweet deal.

"Well, you can look at it this way, if things go the way they seem to be going, in three weeks this dilution and small price drop will mean absolutely nothing when/if the FDA/EMEA both approve Exubera," he said. "This seems like the perfect time to do a deal like this and we really don't know what the true value of this deal was, as there is more to this company than just Exubera."

Through a collaborative agreement with Pfizer Inc., Nektar is providing the advanced inhalation technology being used by Pfizer and Sanofi-Aventis in the development of Exubera, an inhaled dry-powder insulin used to treat Type 1 and Type 2 diabetes.

ViroPharma rises on outlook

ViroPharma Inc. shares spiked nearly 30% higher Tuesday to a new 52-week high after the drug company said it would hike the price of its antibiotic Vancocin by 21% to 24%, depending on dosage.

ViroPharma shares Tuesday climbed $3.25, or 29.57%, to $14.24, surpassing the previous high of $13.39 on heavy volume. The stock has been climbing steadily since May, following the release of the first full quarter of Vancocin sales. The company booked first-quarter sales of $21.1 million and then reported second-quarter sales of $28.8 million earlier this month.

In an SEC filing after Monday's closing bell, the company said it would raise the wholesale price of a 20-unit package of 125 milligram Vancocin capsules to $242.10 from $195.76, or 24%, and a 20-unit package of 250 milligram Vancocin capsules to $446.32 from $368.86, or 21%.

ViroPharma noted, too, that its most recent sales guidance of $100 million to $105 million for the current quarter did not take into effect the price increase.

The company acquired all U.S. rights to Vancocin-brand products in December from drug maker Eli Lilly & Co. for $116 million up front, plus royalties. The antibiotic is used to treat inflammation of the mucus membrane of the intestine.

Acambis, Baxter mixed on bid

Acambis plc, a U.K. maker of vaccines for anti-terrorism programs, is preparing a bid for a contract for supplying another 20 million doses of smallpox vaccine to the U.S. government, which could amount to $1 billion of business. Analysts said it is considered a top bid, competing with Danish rival Bavarian Nordic for the U.S. contract and possibly others.

"This is a massive contract with possible future add ons," said a sellside trader.

Acambis shares in the United States, however, dropped 33 cents, or 3.44%, to $9.25 and in London closed off 9p, or 3.5%, at 248p.

Baxter International, Acambis' partner in the smallpox MVA vaccine, gained 25 cents on the day, or 0.63%, to $40.11. Baxter also has a 7% mandatory convertible in play, which gained 0.27 point to 57.13 on Tuesday.

Merrill Lynch analyst David Munno said there were no surprises in the news. He said he considers Acambis and Bavarian Nordic as the top bidders and it is highly likely that the U.S. government will split the contract between the two so as to reduce risk in having all the vaccine come from a single supplier.

Bids are to be submitted by Sept. 29, and the contract is anticipated next February.

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