InterMune drops on FDA rejection, but hedgies do OK; American Medical convertibles richen

By Rebecca Melvin

New York, May 5 - InterMune Inc. convertibles dropped amid heavy selling after the U.S. Food and Drug Administration failed to approve its lung-disease drug and said the company would have to run an additional clinical trial before it considers approval.

Hedge players likely made out "OK" in the name, however, given that it was trading at double par and undoubtedly heavily hedged, market participants said.

The 100-plus-point drop outright in the InterMune bonds was against a backdrop of weakness in the broader markets, but convertibles players said it was an event-specific move that was unrelated to the broader markets.

"Plenty of stocks have made a round trip like this, but maybe over the course of a year. To have made the round trip it two months is maybe once in a lifetime," a New York-based sellside trader said.

Moving in the opposite direction, American Medical Systems Holdings Inc. convertibles richened as their underlying shares moved up 23% after the Minnetonka, Minn.-based medical device maker reported first-quarter profits that topped estimates and raised guidance.

Beazer Homes USA Inc., which priced $75 million of mandatories after the close of markets Tuesday, as expected, was not a main focus of trading. The Beazer $25-par mandatories traded at $25.30 versus a share price of $5.75 during the session, according to a syndicate source.

Elsewhere, Gaylord Entertainment Co. bounced around in trade on Wednesday after shares and the bonds fell Monday on news that the Nashville-based entertainment company was forced to close its Opryland Resorts as a result of devastating floods that have left 18 dead.

The Gaylord 3.75% convertibles due 2014 traded at 120 versus a share price of $27.67 on Wednesday and also at 124 versus a share price of $28.90, according to sources.

The convertibles of UAL Corp., which fell about 33 points on a dollar basis on Tuesday, amid a flight to quality in the broader markets, remained in trade at about the same levels on Wednesday.

The UAL 6% bonds were 235.125 bid versus a share price of $19.25, and the UAL 4.5% convertibles were 98.375.

Secondary pricing weakens

Overall, the market was seen "better to sell," meaning there were a lot of sellers amid weaker pricing, several sources said.

"Yesterday the high-delta convertibles market came in about 0.5 point on swap. Today the market is better for sale. The energy names are again dominating trading volume after a slight reprieve yesterday," a New York-based sellside analyst said.

A Connecticut-based sellsider said, "The market is much better for sale."

But a third sellsider, based in New York, said that he didn't see any indications of a change of tone and that he saw people were willing to buy.

"I saw plenty of buyers, with interest on both the buy and the sellside," the sellsider said.

His view is that market volatility that has spiked this week helps foster the convertibles market to move beyond the credit-sensitive trades that have worked well in the last year and have dominated action.

Although people have tried to squeeze the last drop of blood out of the credit trade, the jump in volatility encourages other types of trades that should be healthy for the market, he said.

InterMune plunges

Both tranches of InterMune convertibles had been trading north of 200, but on Wednesday the InterMune 0.25% convertibles due 2011 had a freefall to 96 bid, 96.5 offered, a 122.5-point drop; and the InterMune 5% convertibles due 2015 dropped to trade between 86 and 90.

Shares of the Brisbane, Calif.-based biotechnology company plunged $34.06, or 75%, to $11.38 after word of its FDA setback.

InterMune is seeking to have its lung-disease drug pirfenidone, also known as Esbriet, approved for the treatment of a lung disease known as idiopathic pulmonary fibrosis.

The FDA has requested an additional clinical trial to support the efficacy of Esbriet in IPF patients. And while InterMune intends to meet with the FDA as soon as possible to explore the best ways to address the points raised by the agency, there is no clear pathway forward for the drug, although approval may ultimately be gained.

This is opposite to the way things had been looking, and the stock and convertibles of the company had been running up in the last two months in anticipation of approval.

"After the positive FDA Advisory Committee meeting of March 9 at which the Committee recommended the approval of the pirfenidone NDA by a 9-3 margin, we are disappointed by this outcome," InterMune chief executive Dan Welch said in a release.

"We will meet with the FDA as soon as possible to understand their points of view and to determine the most appropriate path forward to expeditiously make Esbriet available to the approximately 100,000 patients with IPF and their families who suffer from this terrible disease and for whom no FDA-approved medicines exist," Welch said.

IPF is characterized by inflammation and scarring (fibrosis) in the lungs, hindering the ability to process oxygen and is a progressive disease, meaning that over time, lung scarring and symptoms increase in severity.

InterMune is a biotechnology company focused on R&D and commercialization of innovative therapies in pulmonology and hepatology.

American Medical convertibles richen

American Medical Systems' 4% convertibles due 2041 bounced around but ultimately richened, trading at 129.5 and 128.29, which was a climb of 17 points, according to Trace data.

The American Medical Systems 3.25% convertibles due 2036, the smaller of the issues in terms of bonds outstanding, jumped 12.6 points to 177.5.

Shares of the company gained $4.01, or 23%, to $21.47 on Wednesday.

"There were prints all over the place, but they richen on the way up," a sellside analyst said.

There are $250 million of the 4% convertibles outstanding, compared to $61 million of the 3.25% paper.

The two bonds were the big gainers of the day, though not in terms of volume, sources said.

Late Tuesday the company said it earned $20.7 million, or 27 cents per share, during the quarter, up from $17.1 million, or 23 cents per share, a year prior. Excluding charges, the company said it earned 29 cents per share, which was better than the 25 cents per share expected by analysts.

Revenue rose to $134.9 million from $123.6 million, and analysts expected revenue of $130 million.

Looking ahead, the Minneapolis company said it expects second-quarter profit, excluding charges, between 29 cents and 31 cents per share on revenue between $135 million and $139 million.

The company also boosted its full-year profit outlook to between $1.19 and $1.27 per share, from a prior range of $1.16 to $1.24 per share. Full-year revenue guidance was narrowed to a range of $544 million to $560 million from prior estimates of $540 million to $560 million

Raymond James upgraded shares to "buy" from "hold," citing first-quarter results and outlook, and pointing to strong management and the company's healthy balance sheet.

Beazer trades modestly

The newly priced Beazer 7.25% mandatorily convertible equity units traded at $25.30 versus a share price of $5.75 during the session, according to a syndicate source.

"This Beazer is a small deal, but I think it is overvalued relative to most mandatories and should not be owned," a New York-based sellsider said.

Beazer priced $75 million of 3.25-year tangible equity units late Tuesday, which will pay a distribution free of 7.25%, with an initial conversion premium of 22%.

The units, with a par of $25 each, came at the midpoint of price talk, which was for a yield of 7% to 7.5% and an initial conversion premium of 20% to 25%.

The tangible equity units are comprised of a prepaid stock purchase contract and a senior amortizing note due 2013.

In addition to the mandatory offering, the Atlanta-based homebuilder priced common stock and $300 million of eight-year senior straight notes (Caa2/CCC) at par to yield 9 1/8%, in the middle of the 9% to 9¼% price talk.

Beazer may accelerate conversion of the stock purchase contracts at the maximum conversion rate, or at the minimum rate if the share price is greater than 130% of conversion price, and investors will have the right to require Beazer to repurchase the amortizing note.

Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC were the joint bookrunners, with Deutsche Bank Securities Inc. as a joint lead manager and Moelis & Co. as co-manager.

Proceeds will be used to fund redemption of Beazer's 8 3/8% senior notes due 2012 and its 4.625% convertible senior notes due 2024, and for other general corporate purposes.

Mentioned in this article:

American Medical Systems Holdings Inc. Nasdaq: AMMD

Beazer Homes USA Inc. NYSE: BZH

InterMune Inc. Nasdaq: ITMN

UAL Corp. Nasdaq: UAUA

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