Axcan annihilated; Lexicon lifted; Advanced Magnetics draws interest; CombiMatrix climbs

By Ronda Fears

Memphis, Feb. 22 - Biotech stocks were on a tear Wednesday in what traders said was a test to see if the gains seen in January could be recaptured and extended after a dip earlier this month.

"This is a test of the higher levels that we saw in January," said a biotech stock trader at one of the bulge bracket brokerages in New York. "It's looking pretty bullish. Of course there is still some risk aversion, but I see that subsiding. It's to the point where everyone knows they have to take a view, and step up and do something about it."

Advanced Magnetics, Inc. was a name he mentioned with regard to risk tolerance easing after the Cambridge, Mass., company reported Tuesday that an independent committee identified no safety concerns from the phase 3 studies of its ferumoxytol, a drug being tested as an intravenous iron replacement therapy in chronic kidney disease patients.

The story also got a plug from Jefferies & Co. analyst Adam Walsh on Wednesday, who in a report upped his price target on the buy-rated stock to $32 from $24, saying the news was "highly positive."

Advanced Magnetics shares (Amex: AVM) saw heavy volume on Wednesday but marked just a small gain of 16 cents, or 0.65%, to close at $24.85.

"It's had quite a run so far but I see a lot of upside. To be honest, my target on the stock is in the neighborhood of $45 to $50," said a buyside source in Boston. "It's strong. They have a lot of news flow coming out."

Axcan dives 28% on failed trial

Axcan Pharmaceuticals, Inc. saw massive volume Wednesday, too, but all related to a huge sellout after the company announced that a phase 3 clinical trial for its Itopride, a drug to treat functional dyspepsia, had failed, although the company said it would pursue the drug for different indications.

"What a disaster," one sellside trader said. "I think it could eventually sink to $7 or $8."

Axcan shares (Nasdaq: AXCA) plunged more than 30% on Wednesday but came off the day's lows to close down by $4.57, or 27.99%, at $11.76.

Mont-Saint-Hilaire, Quebec-based Axcan, which focuses on drugs for gastrointestinal diseases, said Wednesday that results of a phase 3 clinical trial showed that Itopride did not meet its primary endpoint and, as such, did not confirm the efficacy observed in the phase 2 clinical trial. The company said it would continue to analyze the efficacy data from this phase 3 trial to decide on the continuation of the functional dyspepsia trials, but also continue studying Itopride for other areas such as diabetic gastropathy.

Merrill Lynch downgraded the stock to a sell, citing considerable uncertainty about the fate of Itopride.

One buysider, however, was buying on the downswing.

"The fact that the trial failed is obviously not great; however, this company has other drugs and earnings. They are cash flow positive," said a buyside market source. "Smart money is buying while others panic and sell. I bought for the first time, was looking for a good entry point [and] I got it today. As for the trial, it is not over yet. There is more data coming from another phase 3 study."

Lexicon up 12% on earnings

Lexicon Genetics, Inc. shot up sharply on turning profitable in fourth quarter, but a sellside trader said disappointment in the conference call led to a reversal in after-hours action.

Before the market open, The Woodlands, Texas-based Lexicon reported fourth-quarter net income of $5.9 million, or $0.09 per share, principally as a result of performance milestone payments received in the fourth quarter of 2005. That reversed a net loss of $500,000, or $0.01 per share, for fourth-quarter 2004. Revenues increased 30% to $33.9 million from $26 million.

A conference call was held at 11 a.m. ET and the stock had a "hiccup" as the trader put it, dropping from a 10.5% gain earlier to 9%. There was a surge in short covering in the afternoon, he said, and that pushed the stock up until the close, but shortly after the bell rang it began to sink.

Lexicon shares (Nasdaq: LEXG) shot up by 45 cents, or 11.63%, to close at $4.32. In after-hours activity, the stock was seen easier by 2 cents, or 0.46%.

"I was not impressed with the conference call," the trader said. "This company needs to show that they can get an NDA [New Drug Application] filed and get one of their '90' candidates in trials. This will show that their mouse knockout target paradigm leads to potential human drugs. Not much of a market for mouse drugs I hear, although there might be a market for some of these in veterinary medicine. Anyway the issue always has been: Will they take the money and run with a buyout by Big Pharma, or will they get a drug licensed without there being 1 billion shares outstanding?"

At Dec. 31, the company had $99.7 million in cash and equivalents. Arthur Sands, chief executive of Lexicon, said the company was "encouraged" by the results of preclinical safety testing for its lead programs - LG617 for Alzheimer's and cognitive disorders and LG103 for irritable bowel syndrome.

CombiMatrix, Acacia climb

Acacia Research Corp. and its majority-owned unit CombiMatrix took off sharply on the launch of the next generation of its influenza A detection and genotyping technology on the CustomArray platform, as biotechs involved in flu vaccines remain hot items.

"Under $5 this is a steal," a sellside trader said, referring to the spun off unit, CombiMatrix. "Acacia is taking all the credit and [is] up big. It's time to split CombiMatrix once and for all. I hope they can cut the ties this year. They have $20 million in cash left. That will last CombiMatrix another one and a half years while the array product can carry the load and produce revenue growth."

CombiMatrix shares (Nasdaq: CBMX) added 7 cents, or 4.17%, to $1.75. Acacia Research shares (Nasdaq: ACTG) gained 61 cents, or 7.68%, to $8.55.

Acacia and CombiMatrix said the news was another step in CombiMatrix's "expansion of its product line and another step in CombiMatrix's goal to make influenza A technology more available and affordable."

The companies said its latest array product can detect and accurately type flu strains using a protocol that requires less than four hours start to finish, at a cost per test much lower than with an earlier version. This microarray can identify H5N1 bird flu, as well, they said.

QLT gains 7% on 2006 forecast

Canada-based QLT Inc. reported Wednesday a wider fourth-quarter net loss, mostly due to restructuring costs and a hefty $410.5 million charge related to its acquisition of Atrix Laboratories Inc. last year, but the stock was propped up by its outlook for sales to triple or more in 2006 for its lead drug, Visudyne.

"The clear message was that QLT management have given a good indication that the stock has reached the bottom and poised for takeoff," said a sellside source in Canada.

Higher-than-expected growth predicted for Visudyne, an update on several other products and a rise in cash flow, he said, were all "factors [that] will help this company move forward. Note that today's report did not really give any major news, but the stock moved up. Next time [there's] any sign of news, there will be a major move to the upside. It is a good company and patience will pay off."

QLT shares (Nasdaq: QLTI) gained 48 cents, or 7.17%, to $7.17.

The company reported a fourth-quarter net loss of $370.4 million, or $4.04 per share, compared with a net loss of $221.1 million, or $2.62 per share, a year before. Revenue came to $50.4 million, off 6% from $53.8 million a year earlier.

Sales of Visudyne, its drug to treat age-related macular degeneration, fell 14% to $107.2 million, but in 2006, QLT said it expects Visudyne sales to range from $370 million to $400 million.

Another major factor in Visudyne sales, the Canadian market source said, is early evidence of doctors using Visudyne in combination with Avastin [Genentech, Inc.'s colorectal cancer drug], for one initial treatment. Ongoing stock buybacks also are helping, he said.

"This could be a major factor in stabilizing Visudyne U.S. revenues in 2007, and they [QLT officials on the company conference call] even hinted that sales could start to 'come back' in the second half of 2007."

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