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Onyx Holder's Winning Angle

Timing is everything on Wall Street. Take Onyx Pharmaceuticals' (ONXX) dealings with an offshore hedge fund.

Shares of the California biotech got shellacked Monday, falling 30% on news that kidney cancer drug Nexavar didn't work in some patients. The one-day plunge wiped out $223 million in market cap for the money-losing biotech, which has a partnership with Germany's Bayer (BAY).

Onyx's bad clinical results caused a lot of pain for shareholders. But the company isn't feeling quite so bad. After all, the Nexavar news came just weeks after Onyx sold a big block of stock to hedge fund Azimuth Opportunity.

A Nov. 17 filing indicates that Onyx planned to raise $40 million by selling 2.2 million shares to Azimuth at an average price of $17.94. The deal, which came under a larger agreement between Onyx and Azimuth, gave Azimuth a 2% discount to the then-prevailing market price.

With Onyx shares having plunged Monday to close at $12.18, Azimuth appears to be severely underwater on the trade. But Wall Streeters say don't fret for the British Virgin Islands-based fund.

Observers say it's likely the hedge fund quickly unloaded at least some of the discounted shares -- as is common in a PIPE, or private investment in public equity, deal. There's no precise way to track whether the shares were sold, but filings show Azimuth wasn't restricted. "Any sale of our shares of common stock to Azimuth will be registered on our registration statement," an Onyx filing states -- meaning shares can be promptly resold.

Indeed, trading volume in shares of Onyx was heavier than normal in six of the nine days since the deal's scheduled Nov. 20 close, leading up to Monday's debacle. Azimuth couldn't be reached for comment.

The investors who may have gotten hurt the most in Monday's fierce selloff were the ones buying any shares Azimuth may have sold. Officials with Onyx didn't return telephone calls. An attorney for the company declined to comment.

The sale of stock to Azimuth was part of a special kind of PIPE deal known as a stock-equity line. In a stock-equity line, a company strikes a deal to sell discounted shares to a hedge fund from time to time. The arrangement is similar to a secondary, or a follow-on, offering of shares, in that the sales are done at the discretion of the company.

In its deal with Azimuth, agreed to in September, Onyx stands to raise $150 million over two years from the periodic stock sales.

The November stock sale was the second one under the stock-equity line. In October, Onyx sold 2.1 million shares to Azimuth in a deal that netted $34.6 million for the company. The shares in that transaction were sold at a 3% to 5% discount to the then market price of $17.29.

Shares of Onyx rallied in the days after that stock sale, closing as high as $19.60 on Nov. 8.

Azimuth, meanwhile, is making a cottage industry out of stock-equity lines. The deal with Onyx is the 11th such financing transaction it has agreed to this year. Other companies it has reached similar deals with include Solexa (SLXA), Nanogen (NGEN) and Encysive (ENCY), according to PlacementTracker.

As is the case with most PIPEs, the companies doing stock-equity-line deals tend to be small-cap companies in need of cash. The arrangement is good for companies because it enables them to obtain a ready supply of capital.

But critics contend stock-equity lines dilute the value of existing shares by pumping more stock into the market. They say these deals, regardless of their cash-raising potential, are bad for investors.

Onyx shareholders might be inclined to agree about now.

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