Financials pummeled, Lehman, Wachovia hard hit; PDL BioPharma inks alliance with Bristol-Myers

By Rebecca Melvin

New York, Aug. 19 - Financials, particularly the larger-cap convertible preferred shares, got slaughtered on Tuesday as negative sentiment reared up hard again, the likes of which hadn't been seen since mid-July, market players said.

Financials lost about 2.5 points across the sector, an East Coast-based buyside convertibles trader said.

Lehman Brothers Holdings Inc. was among the hardest hit and most actively traded after JPMorgan Chase analysts estimated that Lehman will have to write down its investments during the third quarter by $4 billion.

Another aspect of uncertainty surrounding Lehman is a potential sale of at least part of its Neuberger Berman investment-management unit to private equity, sources said.

American International Group Inc. was lower after Goldman Sachs recommended that investors not purchase the name because of the increased possibility of a capital raise.

And Wachovia Corp. was also a hard hit name.

Economics data on the tape Tuesday didn't do much to help the market. There was a drop in new home construction, and the Labor Department said its Producer Price Index rose by 1.2% in July, more than double the expected rate, lifting the current annual rate to its highest in 27 years.

Even peeling off volatile food and energy prices, core prices rose by a higher-than-expected 0.7%, the biggest increase since November 2006.

Medtronic Inc., which posted earnings that beat estimates, saw its convertibles trade mostly unchanged to slightly better as their underlying shares gained.

"The entire market felt there was a financial overhang. Financials were for sale, they got pushed down, and everything else traded with those," a New York-based sellside trader said.

The convertible primary market remained quiet on Tuesday.

PDL BioPharma Inc. may be something to watch Wednesday, though, after the biotech and drugmaker Bristol-Myers Squibb Co. announced as the market closed an alliance to develop PDL's novel treatment for multiple myeloma.

Lehman, Wachovia heaviest hit

Lehman Brothers' 8.75% mandatory convertible preferred stock due 2011 closed at about 51, versus a share price of $13.07 on Tuesday, compared to last month's 55 bid at a stock price of $14.00. In early July, the paper had been 83 versus a stock price of $22.00.

Shares of the New York-based investment bank (NYSE: LEH) closed down $1.96, or 13%.

Close to 200 million financial convertibles traded Tuesday, and 40 million of them were Lehman, a convertibles buysider said. "It felt like mid-July when the things got pummeled."

"It was a bloody mess," a New York-based sellside trader concurred.

Lehman Brothers is facing "another difficult quarter," said the JPMorgan analysts, who lowered their profit forecasts and rate Lehman shares at "neutral."

"The credit environment continues to be difficult, exacerbated by a slowdown in execution and origination," wrote analysts Kenneth Worthington and Funda Akarsu in a Tuesday research note.

Meanwhile, the debate continues regarding whether Lehman, which has courted several potential bidders for the bank's investment-management business, will actually part with Neuberger-Berman, which provides a steady revenue stream, or not.

Lehman has made financial information about the unit available to a group that includes private equity firms Carlyle Group, Hellman & Friedman LLC and General Atlantic LLC, according to reports.

AIG weakens

AIG's 8.5% mandatory equity units due May 2011 closed at about $48 versus a stock price of $20.32, which was above its lows of the day, compared to about $49 versus a stock price of $21.60 on Monday.

Shares of the New York-based financial services and insurance company (NYSE: AIG) closed down $1.28, or 6%.

AIG could see $9 billion to $20 billion in losses on its investments in credit default swaps backed by mortgages, according to Goldman Sachs, which advised investors against buying the shares and suggested capital raises were likely.

The Goldman analyst, Thomas Cholnoky, maintained a "neutral" rating on the shares.

Wachovia's 7.5% series L perpetual convertible preferred slid to about 775 versus a share price of $14.30 Tuesday, compared to 817.5 versus a share price of $14.96 on Monday.

Shares of the Charlotte, N.C.-based commercial bank (NYSE: WB) dropped 66 cents, or 4.4%.

"Everyone gets tarred with the same brush," a New York-based sellside trader said. "That arena was totally wide open early in the year [as to who was going to suffer,] and as time has gone by, now they all go lower."

"What's different from yesterday? It's more of the same," he said about Tuesday's session.

Medtronic unchanged to higher

Medtronic's 1.5% convertible senior notes due April 2011 (series A) was at 108.25 versus a share price of $53.48 at the close Tuesday, compared with 108 versus a share price of $53.44 on Monday.

Medtronic's 1.625% convertible senior notes due April 2013 (series B) closed at about 108.875 bid, 109.375 offered.

Shares of the Minneapolis-based medical device maker (NYSE: MDT) closed up $1.05, or 2%.

"I see it not so much better," a New York-based sellside trader said.

A second New York-based sellsider said that the convertibles were unchanged because there was not enough of a valuation change resulting from the earnings news.

"They are still in the context. I mean the stock was up for a little while, and the bonds are where they should be. The fundamentals have not changed, nor the valuations. Both are fair," he said.

Medtronic reported fiscal first-quarter net income of $747 million, which was up 11% excluding one-time items; while revenue rose 19% to $3.706 billion, from $3.127 billion, in the fiscal first quarter.

Revenue benefited from international sales and the launch of its Endeavor drug-eluting stent. Endeavor in February became the first coated stent approved in the United States in nearly four years.

Sales of heart-rhythm devices grew 6%, with pacing revenue up 7% and ICD revenue rising 5%. International sales jumped 19%, driven by 23% ICD growth, the company said.

Medtronic has focused on supporting operations overseas as international ICD sales grow.

In the cardiovascular business, revenue rose 30%. Coronary vascular revenue grew 41% globally and nearly tripled in the United States amid the domestic launch of the Endeavor drug-eluting stent at the beginning of the fiscal fourth quarter.

PDL, Bristol-Myers alliance

An agreement under which Bristol-Myers will buy the rights to PDL's treatment for multiple myeloma, or blood cancer, hit the tape at the market close, sending PDL shares up in after-hours trading by 4% initially. Later they were up by 3.4%.

Under the agreement, Bristol-Myers will pay about $30 million up front for the rights to the treatment, and PDL could earn up to $680 million in additional payments if the certain development and sales milestones are met.

In addition, Bristol Myers will pay 80% of the development costs of the treatment, which is currently in phase 1 development.

The treatment antibody, Elotuzumab, provides a novel approach to treating multiple myeloma because it is an antibody that binds to the CS1 glycoprotein, allowing the immune system to selectively kill myeloma cells with minimal effects on other cell types, according to the companies' news release.

PDL's 2.75% convertibles due 2023 were last at 97.69, and its 2% convertibles due 2012 were last at 88.65. Prior to the news, shares of Redwood City, Calif.-based PDL (Nasdaq: PDLI) had closed little changed at $11.80, up 3 cents, or 0.25%.

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