ImClone slips on lost patent; Yahoo drops with sales warning; First Industrial, BioMed launch REIT deals

By Kenneth Lim

Boston, Sept. 19 - The convertible bond market continued to be a little slow on Tuesday, with ImClone Systems Inc. slipping slightly amid a drop in the stock after the company lost a patent case in court.

Yahoo Inc. fell sharply in line with the stock after the company warned that its third-quarter sales would be at the low end of estimates amid a slowdown in advertising growth.

Meanwhile, another two real estate investment trusts launched convertible deals on Tuesday, leading to concerns of market fatigue as the sector continues to churn out new paper. First Industrial Realty Trust Inc.'s planned $175 million deal was reoffered after initial talk guided for pricing at par. BioMed Realty Trust Inc.'s $150 million offering is expected to price Wednesday before the market opens.

ImClone firm against lost suit

ImClone's 1.375% convertible due 2024 was about 1/8 point lower on an outright basis from week-ago levels after its lost patent rights related to the key drug Erbitux.

The convertible traded at 87.375 against a stock price of $28.50 on Tuesday. ImClone stock (Nasdaq: IMCL) fell 4.46% or $1.36 to close at $29.16.

New York-based ImClone said late Monday that a federal court ruled that a group of Israeli scientists were the sole inventors of a technology used in a key Erbitux patent. ImClone, a biotech company whose sole product is Erbitux, said it plans to appeal the court's decision. ImClone could be forced to pay royalties to the inventors or lose exclusive rights to the technology if its appeal fails.

Adding a twist to Tuesday's news was ImClone's shareholders' meeting on Wednesday, when activist shareholder Carl Icahn and candidates with Icahn's support will seek election to ImClone's board of directors.

"That's why it's where it is," a sellside convertible bond trader said of the stock and convertible. "It didn't get any worse."

The patent dispute could take some time to play out, the trader said.

"They could push this in court, it could be some time before it's resolved," the trader said. "It's down the horizon. You got a May of '09 put [on the convertible], it may be here before this [case] comes to fruition."

Icahn's impact on ImClone is also interesting, the trader said.

"He's goal-oriented, short-term oriented, he's going to get something done," the trader said. "I don't know what they can do to make it a better situation, but there could be something."

The trader noted that ImClone, which tried unsuccessfully to sell itself earlier in the year, could also have better luck this time with speculation that Bristol-Myers Squibb Co., a major shareholder and its partner in selling Erbitux, may also be trying to sell itself. Bristol-Myers may want to sell its ImClone stake to make it more digestible to potential acquirers, the trader explained. And if Bristol-Myers is no longer a major shareholder, ImClone may have more flexibility in assessing offers if its looks for buyers again, the trader said.

"A deal would be more plausible," the trader said.

Yahoo cheerless on warning

Yahoo's zero-coupon convertible due 2008 fell about 14 points outright in line with its stock after the company warned of a weak third quarter.

The convertible traded at 131.25 against a $25.50 stock price on Tuesday. Yahoo stock (Nasdaq: YHOO) closed at $25.75, a loss of 11.21% or $3.25.

"It's starting to look more interesting now that the stock's gotten hit," a buyside convertible bond trader said.

Yahoo said Tuesday it expects third-quarter revenue to be in the bottom half of its previous forecast of $1.12 billion to $1.23 billion, excluding traffic acquisition costs, given in July. The web services company cited recent weakness in auto and financial services advertising for the weakness.

"It's not a big surprise that they lowered the guidance," a buyside convertible bond analyst said. "They've been struggling...I think they're struggling against the competition, basically."

Concerns about its market share and delays in Yahoo's new Panama advertising model over the past few months have suggested that Yahoo was facing some problems, the analyst said.

The buyside analyst noted that Yahoo seems to have maintained its market share, but "I'm not really sure if that's going to be true going forward."

The analyst said Yahoo's credit continues to be healthy, but the convertible is not trading on the credit.

"It's a pure stock play," the analyst said.

More REITs launch deals

Two more real estate investment trusts launched new deals on Tuesday, raising concern that the market may not be able to stomach so much paper from the sector.

First Industrial's $175 million of five-year exchangeable senior unsecured notes were reoffered below initial guidance on Tuesday after the market closed. The notes, which were reoffered at 99, arrived at a coupon of 4.625% and an initial conversion premium of 20%.

The exchangeables were originally offered at par. Price talk also guided for a coupon of 4.125% to 4.625% and an initial exchange premium of 20%. First Industrial stock (NYSE: FR) closed at $42.44 on Tuesday, down by 1.53% or 66 cents after the deal was announced.

The notes are issued by First Industrial Realty's operating partnership, First Industrial L.P., and will be exchangeable into common shares of the listed company. First Industrial Realty is guaranteeing the notes.

There is an over-allotment option for a further $25 million.

JP Morgan, Credit Suisse and Merrill Lynch were the bookrunners of the Rule 144A offering.

First Industrial, a Chicago-based real estate investment trust that develops industrial real estate in the United States and Canada, said it will enter into hedging transactions using the proceeds of the deal. It will also use the proceeds to reduce its borrowings on a 5.867% loan, acquire and develop properties and pay off the $150 million outstanding of 7% senior notes due Dec. 1, 2006, upon the maturity of that debt security.

A hedge fund convertible bond trader said the gray market was quiet on the First Industrial deal, and described it as most likely for outright investors.

BioMed Realty Trust also announced plans for $150 million of 20-year exchangeable senior notes, talked at a coupon of 4% to 4.5% and an initial exchange premium of 20%.

The notes, which are being offered at par, are expected to price before the market opens on Wednesday. They will be issued by BioMed's operating subsidiary BioMed Realty L.P. and exchangeable into the listed company's common stock.

There is an over-allotment option for a further $25 million.

Credit Suisse and Morgan Stanley are the bookrunners of the Rule 144A offering.

BioMed, a San Diego, Calif.-based real estate investment trust that focuses on biotech laboratory and office space properties, said it will use the proceeds of the deal to repay a revolving loan and for general corporate purposes.

BioMed stock (NYSE: BMR) closed at $31.49 on Tuesday, gaining 0.03% or 1 cent before the offering was announced.

Investors said the new deals sounded unexciting.

"Another REIT?" a convertible bond trader said upon learning of the First Industrial deal. "Oh God, another REIT. One of the first lessons you learn in converts is that these guys go out at the top of their stock...When the whole industry comes out, what are they telling you?"

A sellside convertible bond analyst said that most of the new REIT convertible offerings looked similar.

"They're all basically the same," the analyst said. "The market's in real danger of fatigue here. The hedge community doesn't want them, so it has to go to outright buyers. Now there's going to be a lot of supply...There've been so many we've already seen so many that have to be reoffered."

The analyst said REITs continue to need capital, but most of them are "kind of fully valued on the equity side, so it's [selling convertibles] an opportunity to sell additional equity forward."

"There are a few here and there that are showing signs of a turnaround going on - there's something unique about them - but in general it's a very toppy sector," the analyst said.

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