Small Company Buyouts, Big Biotech Slumps Highlight Bruising Week

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The acquisition of two small companies highlighted a quiet deal-making week in the life sciences industry, while big, blue chip biotech stocks took a beating in a bruising week on Wall Street.

This article published with permission from The Burrill Report.

The acquisition of two small companies highlighted a quiet deal-making week in the life sciences industry. Endo Pharmaceuticals Holdings Inc. (NASDAQ: ENDP) agreed to acquire its partner Penwest Pharmaceuticals Co. (NASDAQ: PPCO) in a deal that looks promising for both companies. For Endo, the transaction provides access to Penwest’s royalty interest in pain drug Opana ER, a Penwest’s experimental pipeline, and its new delivery technology. For Penwest’s major shareholders, Tang Capital Partners, Perceptive Advisors, and president and CEO Jennifer Good, who collectively own 38.6 percent of the company’s common stock, the deal represents a 19 percent premium to the stock’s closing price before the deal was announced. Endo will pay $168 million for Penwest, or $5 per share in cash. (Read more about the acquisition here.) In trading Monday, Endo’s shares were trading at $25.08 and Penwest shares were at $4.99.

Emergent BioSolutions Inc. (NYSE: EBS) is acquiring Trubion Pharmaceuticals Inc. (NASDAQ: TRBN) in a deal valued at up to $135.5 million. Emergent will pay $96.8 million, or $4.55 per share in cash and stock, upfront for the company and issue milestone-based Contingent Value Rights worth up to $38.7 million more. Milestones are based on mid- and late stage clinical trials of TRU-016 for the treatment of chronic lymphocytic leukemia and non-Hodgkin’s lymphoma, which is partnered with Abbott Laboratories (NYSE: ABT). The deal expands Emergent beyond its biodefense focus into cancer and autoimmunity. It is expected to close in the fourth quarter 2010. Emergent shares were at $17.38, while Trubion shares were at $4.46. Abbott shares were at $50.24.

Private Canadian biotech Alectos Therapeutics has entered into a research collaboration with Merck & Co. Inc. (NYSE: MRK) to identify and develop compounds that modulate O-GlcNAcase, an enzyme that is believed to be involved in the development of Alzheimer's disease and potentially other disorders. Merck will have a worldwide, exclusive license to research, develop and commercialize compounds that modulate this target. The companies will collaborate on discovery and preclinical development, after which Merck will be responsible for all further development and commercialization. Alectos is eligible to receive up to $289 million in upfront, research, development and regulatory milestones and tiered royalty payments on sales of any products resulting from their collaboration. Shares of Merck were at $34.74.

While waiting for a hoped for regulatory approval of Afrezza inhaled insulin therapy, MannKind Corp. (NASDAQ: MNKD) has entered into a PIPE agreement with two investors for 36.4 million shares that will provide the company with more than $200 million in working capital. Mannkind will sell Seaside 88, a private investment limited partnership, 700,000 shares of common stock every two weeks over the course of a year for a total of up to 18.2 million shares. The shares will be priced at an 8 percent discount to the volume weighted average trading price of MannKind common stock for the 10 consecutive trading days immediately preceding each closing date. For any closing to take place, the volume weighted average trading price must be at least $6.50 per share. In a similar agreement, Mann Group, which is controlled by Mannkind’s CEO Alfred Mann, will buy 700,000 shares every two weeks over the course of a year for a total of up to 18.2 million shares at a minimum price of $7.15 per share. The sale to Mann will be to repay about $130 million in debt held by the group. MannKind shares were at $6.66.

In more market moving news:

It was a tough week for biotech’s blue chip companies. Amgen Inc. (NASDAQ: AMGN) dipped 1.6 percent on news that Vectibix, its colon cancer drug, had proven to be ineffective as a first-line treatment for head and neck cancer in a late-stage study. Amgen shares were at $53.98.

Genzyme Corp. (NASDAQ: GENZ) shares dropped 4.2 percent on news that it now expects its plan to fix its Allston production facility could to take up to four years, longer than the drug maker previously projected. Earlier this month, French drug giant Sanofi-Aventis SA (NYSE: SNY) offered to buy Genzyme and the talks are ongoing. Monday, Genzyme’s shares were at $66.76; Sanofi American depositary shares were at $28.82.

Deutsche Bank initiated coverage of Biogen Idec Inc. (NASDAQ: BIIB) with an investment rating of “hold.” Biogen is awaiting results of a Phase II trial of Ocrelizumab -- called the “next generation Rituxan” by some -- for the treatment of relapsing-remitting multiple sclerosis. Ocrelizumab is being developed by Biogen and Genentech, now part of Roche Holding AG, and investment analysts expect results from the trial to be positive. Approval of Ocrelizumab could put a dent in Biogen results, because the company draws a higher share of revenue from Rituxan sales than it would from Ocrelizumab. Profit from Rituxan is currently split 60—40 between Roche and Biogen Idec, respectively, but under the current agreement profit for Ocrelizumab would be split 70–30 between the two (respectively). Rituxan loses patent protection in 2015. Shares of Biogen were at $55.60.

Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) says a new trial shows that its late-stage hepatitis C therapy, telaprevir, can help some people tackle the virus in half the time the current treatment takes. A quicker cure, one slashing typical treatment times to 24 weeks from 48 weeks, could help millions of infected people stick to their treatment regimens and represent a windfall for Vertex. Its shares were at $36.35.

The U.S. District Court for the District of New Jersey has ruled against Eli Lilly & Co. (NYSE: LLY) finding that the method-of-use patent for its ADHD drug Strattera is invalid. The patent had been set to expire in May of 2017. Lilly is planning an immediate appeal. As a result of the court’s decision, Lilly anticipates the near-term entry of generic atomoxetine in the U.S. market but it will not cause the company to modify its current 2010 earnings per share guidance, expecting revenue growth in the low- to mid-single digits, a reduction from its prior revenue growth guidance of mid-single digits. Both Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA) and Switzerland’s Novartis AG (NYSE: NVS) have generic versions of Strattera ready to launch. Lilly shares were at $35.63; American depositary shares of Teva were at $50.59 and Novartis were at $50.63.

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