Onyx gains after 'well-priced' deal; Elan, Biogen rise; Protein Design Labs up; Cubist higher

By Ronda Fears

Nashville, Nov. 18 - Irish drug maker Elan Corp. plc and Cambridge, Mass.-based Biogen Idec Inc. were higher on new that the U.S. Food and Drug Administration granted a priority review for the multiple sclerosis drug Tysabri, which is jointly developed by the two companies - and also higher on the news was Fremont, Calif.-based Protein Design Laboratories, Inc.

Protein Design Labs was sharply higher, a sellside convertible trader said, because it receives a royalty stream from Tysabri sales and the prospect of higher sales would be a boon for the company. He said the Protein Design Labs 2.75% convertible due 2023 traded up 7.5 points outright, or about 3 points on swap, while the stock added $1.40 on the day, or 5.3%, to $27.80.

A sellside stock trader said the biotech sector was very strong Friday on whole, and he mentioned Vertex Pharmaceuticals, Inc. and Enzon Pharmaceuticals, Inc. as two stand-outs.

"Next week is a short week because of the Thanksgiving holiday, so it doesn't surprise me" that the biotech sector gained, as did the broader stock indexes, the equity trader said.

Gilead Sciences, Inc., however, did not see a benefit from an FDA advisory panel reporting Friday that it saw no evidence that Tamiflu caused the deaths of 12 children in Japan who took the drug. The news sent Tamiflu marketer Roche Holdings AG shares zooming, but developer Gilead Sciences saw little impact. Tamiflu is in high demand as the lead vaccine against the avian flu. Roche shares gained €7.60, or 5.78%, to €139.00 on the Xetra while Gilead shares dipped 39 cents on the day, or 0.71%, to $54.36.

San Diego-based Ligand Pharmaceuticals Inc. announced that the board of directors and management of the company believe that, while ongoing operational actions should translate into improved shareholder value, it is appropriate to initiate an external process to explore strategic alternatives to enhance shareholder value. As a result, the company has engaged UBS Investment Bank to assist in this process.

Majority Ligand shareholder Third Point Management Co. LLC has campaigned for a sale of the company for months.

Ligand has R&D collaborations with Abbott Laboratories, Allergan, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmithKline plc, Organon (Akzo Nobel), Pfizer Inc., TAP Pharmaceutical Products and Wyeth. Also, it has a strategic alliance with Elan Corp. plc. The stock was higher for a good portion of the session but ended off by 15 cents, or 1.54%, at $9.60.

Onyx up 3% after follow-on

Onyx Pharmaceuticals Inc.'s equity deal was "very well-priced," as one buyside market source put it, and the stock rose nicely in the wake of the capital-raising effort. Emeryville, Calif.-based Onyx sold 5 million shares at $25.25 per share - discounted slightly from Thursday's closing price of $25.38.

"It was a really nice deal, the response was very good from what we've heard," the buysider said.

Onyx develops therapies that target the molecular mechanisms that cause cancer. Its drugs include Nexavar, in collaboration with Bayer Pharmaceuticals Corp., and proceeds in part are earmarked to fund sales and marketing activities in anticipation of the commercial launch of Nexavar.

The buyside source had said in advance of the pricing that the deal seemed to confirm that FDA approval is coming soon and should alleviate concerns about Onyx's cash levels.

On the heels of the deal, Onyx shares closed Friday up 72 cents, or 2.84%, at $26.10.

Elan up 4%, Biogen up 1%

Elan and Biogen gained in the wake of the Tysabri news, and while many holders of those names were cheering the development, several players said they were hedging their bets heavily with regard to Elan as Tysabri is a far more crucial product to Elan than Biogen.

The FDA granted Tysabri a priority review, saying a decision about the drug returning to the U.S. market would be made in six months rather than the standard 10 months. Elan and Biogen shares have spiraled since February when the two companies took Tysabri off the market after the drug was linked to three cases of progressive multifocal leukoencephalopathy, or PML, a rare and usually fatal brain disease. The FDA also ordered the drug off the market.

In November 2004, the FDA had approved Tysabri for multiple sclerosis.

Following the February event, a subsequent review of several thousand people who took Tysabri in clinical trials produced no more confirmed cases of PML, leading to the FDA's review decision.

Tysabri is most important for Elan, while Biogen has several other products in its pipeline.

"First, this is a very nice move given the news, very nice," said a buyside market source holding Elan shares. "Second, the strength here suggests to me that there may be some credence to the 'no advisory panel' for this review."

Another buysider at a hedge fund said he liked the Elan story and thought options were the best way to participate - as long as the price is right.

"The best way to play from here is to long the Jan '06 calls, any price would do as long as it is below 60. Of course, the higher the strike, the cheaper the premium. But 60 itself is cutting too close and you have to buy a load of it to make a lot," he said.

Elan was quoted up $0.41 or 3.98% at $10.71 on the New York Stock Exchange. Biogen stock was quoted up $0.52 or 1.16% to end at $45.33.

Elan debt remains troublesome

Analysts said the news was encouraging but Citigroup and Merrill Lynch analysts held to sell recommendations on the stock, in part due to ongoing concerns about meeting debt obligations.

"We do not view this decision as a good predictor of final FDA approval," said Citigroup analyst Andrew Swanson in a report. "However, the decision does indicate that the FDA views Tysabri as a potential answer to the ongoing unmet needs of multiple sclerosis patients."

Thus, Citigroup reinstated Tysabri sales and costs into its model for Elan, after having removed the product with the revelation of a third case of PML. Assuming a second-quarter 2006 launch, Citigroup estimates overall Tysabri sales of $74 million in 2006, $446 million in 2007 and peak sales of $1.5 billion - which forecasts Tysabri taking an 11% share of the current MS market with use in Crohn's disease.

"Although we have now reinstated Tysabri as a blockbuster therapy, we still cannot support the Elan valuation at current levels," Swanson said, asserting that discounted cash flow and discounted multiple metrics support a $10 target price on the stock.

Merrill Lynch analyst Erica Whittaker also kept a sell rating on Elan shares, also saying the stock was trading above fair value.

"In addition, we estimate Elan may struggle to meet its $2 billion debt obligations, due in 2008 and 2011," Whittaker said in a report. "We believe that Tysabri sales must reach $1 billion-plus before Elan can become profitable and repay its debt."

Cubist soars on Europe approval

A panel of European experts has recommended approval of the use of Cubist Pharmaceuticals Inc.'s antibiotic Cubicin - the first in a new class of antibiotics known as lipopeptides used to treat infections that have become resistant to other drugs.

Cubist shares rose 76 cents, or 3.46%, to $22.70.

The European Medicines Agency recommended the use of Cubicin to treat complicated skin and soft-tissue infections in adults and an endorsement from the European Commission is anticipated within 90 days. Cubicin is already approved in the United States and generated revenues of $58.6 million in 2004 for Lexington, Mass.-based Cubist.

"That [approval in Europe] is almost an immediate tripling of sales for Cubist," speculated a buyside analyst. Thus, he expects the news to mean that Cubist will be expanding its sales force soon, or will be looking to expand partnerships with companies operating in Europe.

Merrill Lynch analyst David Munno said in a report Friday that peak Cubicin sales of $250 million may be reached faster than expected, and he raised his price target on the stock to $30 from $28. He has a buy rating on the stock.

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