Medtronic, Wilson Greatbatch skip up on defibrillator implant trial results; market cheapens

By Ronda Fears

Nashville, March 8 - Convertibles were cheapening in reaction to the weakness in stocks, traders said, but flow was described as light, particularly early in the session. Lots of players were looking for something in the form of new paper to emerge, as sources expect heavy deal flow through the end of March, but nothing transpired.

"We're hearing there's a bunch [of new deals] in the pipeline for this week and next, but nothing yet," said a convertible dealer at one of the busiest sellside shops.

There likely will be something launched early Tuesday, a buyside trader speculated.

Meanwhile, outside of the strong gains in Medtronic Inc. and Wilson Greatbatch Technologies Inc. stemming from a landmark trial on implantable defibrillators, most of the market was weaker, traders said.

Performance Food Group Co. extended losses from Friday on its chief executive's resignation, and American Axle & Manufacturing Inc. was lower on weakness in General Motors Corp. and Ford Motor Co. American Axle may see a slight rebound, traders said, because after the close it announced a renewed contract with the United Auto Workers union.

Eastman Kodak Co. holders stood their ground while the converts dropped in tandem with the stock after the filmmaker lowered its guidance for 2004 earnings, as traders moved very little of the Kodak paper.

Trial lifts heart implant makers

Medtronic was the big winner from the results of the "Sudden Cardiac Death in Heart Failure Trial" - the largest-ever implantable cardioverter-defibrillator trial - which were presented during the 53rd Scientific Session of the American College of Cardiology on Monday.

Wilson Greatbatch Inc. was another big winner but to a lesser degree.

The New York Stock Exchange delayed trading of those shares, along with other medical names, at the market's open as a result of the pending event, but when the okay was given, traders said both names got busy as the trial results were overwhelmingly positive news for defibrillator implant makers like Medtronic and Wilson Greatbatch.

Medtronic saw the most activity, traders said, but Wilson Greatbatch got the biggest pop.

The Medtronic 1.25% convertible due 2021 gained about 1 point outright, or 0.5 point on swap, to end Monday at 104.625 bid, 104.875 offered. The stock closed up $1.70, or 3.5%, to $50.25.

The Wilson Greatbatch 2.25% convertible due 2013 climbed 9 points outright, but with little activity, to close the day at 122.25 bid, 123.25 offered. The stock rose $1.86, or 4.81%, to $40.51.

People with heart failure live longer when they receive an implantable cardioverter-defibrillator, according to results of the landmark study. The 2,521-patient trial showed that defibrillator implants reduced death by 23% in people with moderate heart failure compared to those without defibrillators.

"The results of the trial show definitively that simple implantable defibrillator therapy will prolong life in patients with congestive heart failure," said study director Gust H. Bardy, M.D., who presented the results at the cardiology convention in New Orleans.

Defibrillator implants have been vastly underutilized, he stressed.

"The important thing to remember about this trial is that it greatly enhances physicians' ability to identify and treat heart failure patients at risk for sudden cardiac death," said Steve Mahle, president of Medtronic's cardiac rhythm management unit.

Kodak holders pat on purchase

Kodak lowered its earnings outlook for 2004 on Monday to reflect acquisitions of two digital print businesses from Germany's Heidelberger Druckmaschinen AG, but the market barely blinked. Cash outlay will be based on the unit's performance through year-end 2005, with a maximum set at $150 million.

With very few bonds trading, a dealer took the Kodak 3.375% convertible due 2033 out at 116.25 bid, 116.5 offered, lower by 2 points, outright. Kodak shares lost 96 cents, or 3.45%, to end at $26.83.

Kodak said it now expects operating earnings of $2.05 to $2.35 a share, down from its previous projection of $2.25 to $2.55 a share. The company reaffirmed operational earnings of $3 per share in 2006.

The buyout of Heidelberg's interests in digital printing systems makers should boost Kodak's revenue by around $175 million during the remainder of 2004.

American Axle inks UAW pact

American Axle's convertibles were sold off slightly, mostly in reaction to the downgrade in the stock that stemmed largely from concern about any benefits to the company's ties to GM, dealers said. But one also said there could be a rebound on Tuesday from the UAW strike ending.

The American Axle 2% cash-to-zero convertible due 2024 was pegged at 100.625 bid, 101.125 offered at the close. A trader said it was down 1 point outright and unfazed on swap. Underlying shares dropped $1.18, or 3.09%, to end at $37.01.

The trader said RW Baird downgraded the stock to neutral from outperform based on concern about earnings through the first half of 2004 as well as a "lack of upside from General Motors exposure," which was a key earnings driver for American Axle last year.

While the company supplies the Big 3 automakers, about 80% of its sales are to GM; it supplies about 90% of GM's axle requirements.

GM also was weaker Monday, with the stock losing 75 cents, or 1.55%, to close at $47.63. The three GM converts each lost a small fraction, the trader said, but with little activity.

After Monday's close, American Axle announced that the tentative agreement with the UAW reached Feb. 27, covering some 6,700 American Axle employees, has been ratified.

The UAW went on strike at American Axle plants Feb. 26.

Performance Food not performing

Performance Food Group extended losses from Friday when its chief executive resigned without explanation. That was compounded by a downgrade to the stock by Deutsche Bank Securities on Monday, although Merrill Lynch upgraded the stock on Friday.

Shares of Performance Food were hit again Monday as Deutsche Bank Securities downgraded the stock to hold from buy, on doubts of its ability to meet its 2004 earnings estimates. The price target on the stock was lowered to $30 from $35.

Deutsche stock analyst Edouard Aubin said Performance Food's target of 2004 earnings - $1.62 to $1.72 per share - "may prove challenging, especially in the wake of the surprise departure of the CEO," which sparked Friday's sell off. Aubin said Gray's decision to quit "gives us pause, considering the operational difficulties and performance shortfalls the company has experienced over the last three quarters."

In a statement, the company gave no reason for Gray's resignation, which was effective Friday.

On that news, however, Merrill Lynch & Co. upgraded the stock to buy from neutral on Friday. Merrill stock analyst Mark Huss said Gray's resignation should "close the door on the high growth but highly volatile, mostly to the downside, performance of the last year."

Performance Food said in early February that it anticipates 2004 net earnings per diluted share will be $1.62 to $1.72. Also, the company projected earnings per share of 13-16 cents in first quarter, 50-54 cents for second quarter, 52-56 cents in third quarter and 42-46 cents in fourth quarter.

Based on these anticipated results, the company said its convertible notes are expected to be anti-dilutive for the first quarter but dilutive for the full year.

In mid-February, Performance Food reached a settlement with the Securities and Exchange Commission regarding an accounting error at its AFI Foodservice Distributor Inc. unit. The company said it agreed to the entry of an order, without a monetary penalty and without admitting or denying the SEC's findings.

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