Cubist mixed dollar neutral after Teva agreement; Ciena mixed; Horizon Lines recoups some

By Rebecca Melvin

New York, April 5 - Cubist Pharmaceuticals Inc.'s two convertible bond issues traded actively Tuesday and were higher outright but mixed on a hedged basis after the Lexington, Mass.-based drugmaker said it had settled a key patent dispute with Teva Pharmaceutical Industries over its Cubicin antibiotic.

Ciena Corp.'s four convertible bond issues were also higher outright but mixed on a hedged basis - with slight gains and losses - on gains in the underlying shares after an upgrade to "buy" from Bank of America Merrill Lynch.

Horizon Lines Inc. stopped a downward slide and regained a point or two as market players continue to weigh the prospects of a potential bankruptcy. The bonds are trading primarily flat now as buyers seem unwilling to bet that the next coupon in August will be paid, a New York-based sellside trader said.

Chesapeake Energy Corp. was active on the heels of the start of tender offers for three series of contingent convertible senior notes for up to $1 billion of notes.

No new issues emerged in the primary market, but market participants weren't surprised by the contrast to last week's pretty strong issuance flow.

"March was a strong month. And now we're at the very beginning of the quarter, and there's probably not a lot of urgency," a New York-based sellside analyst said regarding companies that may have needed or wanted to get cash on their balance sheets before quarter end.

"We expect continuing strong issuance, but people are used to volatility week by week," he said.

Cubist mixed on hedge

Cubist's newer 2.5% convertibles due 2017, which priced in October 2010, traded at 120.4 during the session, which was up 11.9 points on the day; but on a hedged basis the bonds were higher by about 1.25 points.

Cubist's 2.25% convertibles due 2013 traded at 114.3388, which was up 2.68 points outright but lower by about 0.5 point on a dollar-neutral basis.

Shares of the Lexington, Mass.-based drugmaker popped $3.76, or 15%, to $29.01.

"Those bonds on a dollar-neutral basis traded up initially and then bled back down. The 2.25% bonds ended down about a half, and the 2.5% was up 1.25 points on a dollar-neutral basis," a New York-based sellside analyst said.

The opposing behavior was chalked up to "different bond profiles" for the paper that was arguably rich to begin with, the analyst said.

"They're different bonds and there are a bunch of different reasons why," the analyst said. For one thing, the Cubist 2.25% convertible is a smaller issue of only about $100 million and that may have contributed to it not holding up as well, he said.

As for how they behaved, he said, "Obviously, there are outright holders looking to get out of the name and take profits, and the hedge players are checking out what the pro forma business is going to look like. It depends on what your view is."

Deal with Teva eyed

Cubist is a "one trick pony," with only one product, and the fact that it was able to get a drug licensing deal with Teva and delay when Teva will produce a generic version is huge for them, the analyst said.

"It's huge in terms of operationally for them, when you have a clear runway for six or seven years going forward," the analyst said.

In addition it sets up Cubist more attractively for a potential takeout, although for convertible hedge players these days the pick up in M&A activity is not necessarily helpful.

"If you own them on swap it's never clear. And it's not very attractive in an M&A scenario. It's not going to be the best thing in the world," the analyst said.

The Cubist agreement delays Teva's production of the drug as a generic by six months and will make it easier for Cubist to market the drug.

Teva's sales of the generic version of Cubicin are not slated to begin until December 2017 at the earliest, so investors should not anticipate near-term revenues from the deal, according to a Cubist news release.

But Cubist chief executive Mike Bonney noted that the settlement would better allow the company to work with others to develop its business and "eliminated uncertainty."

Under the terms of the license agreement, Teva may launch its generic daptomycin product in the United States on June 24, 2018, if Cubist obtains a six-month extension of marketing exclusivity for Cubicin for pediatric exclusivity. Otherwise, Teva may launch on Dec. 24, 2017.

The agreement also provides that, for the period the license from Cubist to Teva is in effect, Teva will purchase its U.S. requirements of daptomycin exclusively from Cubist. The payments to be made to Cubist for such supply would have two components: one based on the cost-of-goods-sold plus a margin, and the other based on a specified percentage of gross margin (referred to as net profit in the agreement) from the sale of Teva's generic daptomycin.

As part of the agreement, Teva admits that the patents asserted in the lawsuit are valid.

Cubist confirmed that it expects Cubicin to achieve $1 billion in U.S. revenues before the anticipated entry of Teva's generic daptomycin.

Cubist and Teva will submit the agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice.

The litigation originates to early 2009 when Cubist announced that it had received a letter from Teva notifying Cubist that it was seeking FDA approval to market a generic version of Cubicin.

Ciena mixed dollar neutral

Ciena's 0.25% convertibles due 2013 and Ciena 0.875% convertibles due 2017 were both down 0.25 point to 0.5 point on a dollar-neutral basis Tuesday, while the Ciena 4% convertibles due 2015 and the Ciena 3.75% convertibles due 2018 were both up slightly dollar neutral.

Ciena's 0.25% paper traded last at 103.398, which was up 3.7 points outright, according to Trace data.

"The 4% and the 3.75% were up small, dollar neutral," a New York-based sellside analyst said.

Shares of the Linthicum, Md.-based communications networking equipment and software company closed up $1.48, or 6%, at $26.55.

Bank of America Merrill Lynch analyst Tal Liani upgraded his rating on the stock to "buy" from "neutral," citing what he believes is Ciena's unique position to benefit from a "multi-year spending cycle in optical, after two years of declines."

A few months ago Bank of America Merrill Lynch downgraded Ciena's stock on fears of near-term headwinds. "We think the stock is now at a more attractive point, with near term expectations adequately low," Liani wrote in a note entitled "Back on the Horse; upgrading to Buy."

Last quarter, Ciena's gross margin of about 41.8% was a five-year low and should improve to 43% to 44% on growth of line card sales, higher margin CESD switching and sales of OTN switch.

Liani said his recommendation is based on expectations for continued revenue outperformance for Ciena, and he said the company is uniquely positioned to sell gear to both Verizon and AT&T.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Ciena Corp. Nasdaq: CIEN

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Horizon Lines Inc. NYSE: HRZ

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