Vertex pops on hedge after drug data benefits curbed; coal names eyed; Vishay to price

By Rebecca Melvin

New York, May 29 - Vertex Pharmaceuticals Inc. dropped outright along with the underlying shares but popped on a dollar-neutral, or hedged, basis early Tuesday after the Cambridge, Mass.-based biopharmaceutical company revised its success rate of trial results for its new cystic fibrosis therapy. The revision cut the stronger-than-expected results announced three weeks ago.

Vertex was one of the most actively traded issues in the convertibles market in the week's first session following the long, holiday weekend for Memorial Day.

Initially the Vertex hedged pricing improved more than 3 points, but that amount came in during the session as the underlying shares recovered about half of their initial drop.

Coal companies were once more in focus but didn't look to be moving dramatically in terms of pricing after Goldman Sachs' call that coal prices should rebound amid stronger demand from China.

Goldman lifted its coverage view for the sector to attractive after a recent pullback in coal stock prices.

Patriot Coal Corp.'s convertibles were steady in the lower 60s after creeping up last week and amid Tuesday's news that the financially strapped St. Louis-based coal producer has named a new leadership team, citing the company's intention to improve its operating and financial structure.

Peabody Energy Corp. was little changed Tuesday, but more than a point lower from a week earlier, as shares jumped after Goldman Sachs analyst Andre Benjamin raised his rating on the coal company to "buy" from "neutral," citing a gradual improvement in thermal coal pricing in the second half of 2012 following production cuts and a rise in natural gas prices.

Alpha Natural Resources Inc. looked a little lower after the Goldman analyst cut his stock price target for the company to $12 from $16, citing thin thermal coal margins.

After the market close, Vishay Intertechnology Inc. launched a $150 million offering of 30-year convertible senior debentures that was expected to price before the market open on Wednesday.

Vertex adds on hedge

Vertex Pharmaceuticals' 3.35% convertibles due 2015 dropped early Tuesday to 122 bid, 122.75 offered versus an underlying share price of $51.00.

That was down about 8 points outright but better by more than 3 points on a dollar-neutral basis.

Later, the bonds were 130 bid, 130.5 versus an underlying share price of $57.00.

Vertex shares ended down $7.05, or 11%, at $57.80, but they had traded as low as $50.00.

"The stock has rallied throughout the day, so they may be leaking a bit on the way back up," an East Coast-based buysider said.

Vertex said 35% of patients in a phase 2 trial showed significant benefit of at least 5% by taking a drug combination including its Kalydeco drug. That was down from the 46% the company reported earlier this month.

The company blamed misinterpretation of data provided by a third-party vendor for the downward revision.

When the news came out three weeks ago, the bonds gained about 0.5 point on a hedged basis using a 50% to 55% delta.

Vertex said that pending final data at midyear and discussions with regulatory agencies, it plans to start a pivotal study of VX-809 and Kalydeco to treat the underlying cause of cystic fibrosis in adults with two copies of the F508del mutation.

Final phase 2 trial results are expected around mid-year.

Patriot little changed

Patriot Coal's 3.25% convertibles due May 31, 2013 were heard in the low 60s on Tuesday, which was little changed from Friday.

Patriot shares were better by 14 cents, or 5.7%, at $2.60 on Tuesday.

Patriot said current chairman Irl Engelhardt is taking on the mantle of chief executive officer as well, replacing Richard Whiting, who is leaving the company.

Chief operating officer Bennett Hatfield will take on the role of president as well chief operating officer. Michael Scharf has been named lead independent director.

Like Patriot, Peabody Energy shares gained more than 5%, and its convertibles were little changed on the day at about 89, according to a New York-based trader.

Goldman's Benjamin said he expects Peabody's earnings per share to rise from $2.57 in 2012 to $3.05 in 2013 and $3.79 in 2014.

Peabody has production in Australia and will benefit from increased demand and prices in China, the Goldman analyst pointed out.

Benjamin said the recovery in coal prices would only be temporary however due to the fact that U.S. power generation is inevitably going to be shifting more toward natural gas.

The Alpha Natural convertibles were trading around 85, which looked a little lower than the 85.25 bid, 85.5 offered range on Friday.

Shares of the Abingdon, Va.-based coal producer gained 37 cents, or 3.3%, to $11.54.

Vishay to price $150 million

The planned new deal of Vishay Intertechnology was talked to yield a coupon of 2% to 2.25% with an initial conversion premium of 12.5% to 15%, according to a market source.

J.P. Morgan Securities LLC and Goldman Sachs & Co. are joint bookrunners for the Rule 144A offering.

The debentures will be non-callable for 10 years and then provisionally callable subject to a 150% price hurdle. There are no puts.

Proceeds are for share repurchases.

Malvern, Pa.-based Vishay makes semiconductors and electronic components.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

Vishay Intertechnology Inc. NYSE VSH

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