Stanley Works sprints off the blocks; Amgen retreats on Medicare review; Alpharma bright in gray market

By Kenneth Lim

Boston, March 15 - The Stanley Works surged on its secondary market debut on Thursday amid strong interest in the deal despite early concerns about how to model the offering.

Amgen Inc. eased slightly after the U.S. Centers for Medicare and Medicaid Services said they were reviewing their policies regarding anemia drugs such as Amgen's Aranesp.

Alpharma Inc. announced a new $200 million deal, which quickly climbed higher in the gray market amid strong interest.

Stanley Works soars in start

Stanley Works' new floating-rate convertible senior note due 2012 rose a few points outright on Thursday after the deal priced at the rich end of talk.

The convertible traded at 102.5 against a stock price of $54.45 on Thursday. The convertible was offered at par. Stanley Works stock (NYSE: SWK) slipped 0.31% or 17 cents to close at $54.28.

The $300 million offering, which priced Wednesday after the market closed, comprised convertible units bundled with 3.2-year mandatory purchase contracts. The convertible has an initial conversion premium of 19%. The purchase contract bears a 5.125% adjustment coupon.

The convertible was talked at a coupon of three-month Libor minus 350 bps to three-month Libor minus 300 bps and an initial conversion premium of 15% to 19%.

The purchase contract's adjustment coupon was the same as price talk.

Citigroup, Morgan Stanley and Banc of America were the bookrunners of the registered offering. Citigroup and Morgan Stanley were the structuring agents.

There was a concurrent $200 million offering of three-year unsecured notes.

The purchase contract requires the holder to buy $1,000 of Stanley Works common stock on May 17, 2010. The number of shares received will not exceed 18.366, based on the reference stock price of $54.45.

Stanley Works, a New Britain, Conn.-based maker of tools and security products, plans to use the proceeds of the deal to repay its commercial debt, to repay a $130 million loan and to pay convertible note hedge and warrant transactions.

"It did really well for a structure that saw a lot of guys saying, 'I don't really understand it,'" a sellside convertible trader said.

The trader thought that some of the enthusiasm about the deal was overdone.

"From what I read of the structure, I didn't think it was that terrific," the trader said. "That put option at the end of the thing, I guess at some point in 2009 you got to start buying puts to protect yourself."

A sellside convertible analyst said the deal modeled around where it was trading on Thursday.

"It's difficult to model," the analyst said. "We basically modeled a couple of the separate securities, added it together, and it looked pretty cheap. But we don't really expect it to trade very much."

Amgen slips on Medicare review

Amgen slipped about 2 points outright on Thursday in line with its stock after Medicare said it was reviewing its reimbursement policies regarding a class of drugs that includes Amgen's Aranesp anemia treatment.

The Amgen 0.125% convertible due 2011 traded at 94.375 against a stock price of $60.10. Amgen stock (Nasdaq: AMGN) dropped 1.12% or 68 cents to close at $60.01.

"Amgen was pretty active today, quite a lot traded in the morning," a sellsider said.

Medicare said Wednesday that it was beginning the review following the U.S. Food and Drug Administration's decision the previous week to issue new "black box" warnings on anemia drugs that are classified as erythropoiesis stimulating agents. Those warnings will affect Aranesp and Epogen, anemia drugs sold by Thousand Oaks, Calif.-based Amgen, a drug maker.

The FDA warnings were in turn prompted by studies that suggested patients taking those drugs experienced higher risk of death. Medicare said it will look into coverage for the drugs in treating conditions other than end-stage renal disease.

"It's slightly negative, but it's not a big surprise coming after the news about the black box warnings," a convertible analyst said. "People were already expecting the trial results and the black box warnings to take a chunk out of Aranesp and Epogen sales, so a lot of that pessimism is already priced in. I don't think changes to Medicare coverage, unless they're really drastic, which doesn't seem to be the case, are going to make too much of a difference. Patients were already going to be more concerned about Aranesp and doctors were already going to be more cautious about prescribing Aranesp even before the announcement."

Credit Suisse equity analyst Michael Aberman maintained his neutral rating on Amgen stock, saying the Medicare move was not a surprise. The National Kidney Foundation is expected to change its anemia treatment guidelines by April, and Medicare will likely have to move in line with those changes, Aberman wrote in a note. But a formal decision in terms of cancer treatment by Medicare is unlikely before 2008, Aberman added.

"We believe Amgen will continue to face pressure from negative headlines heading into the ODAC [oncologic drug advisory committee] panel on May 10... Thus, while we would not be surprised to see the stock trade down into the $50s on negative news, we are comfortable with our probability adjusted fair value of $58," Aberman wrote.

Alpharma prices, strong in gray

Alpharma priced an upsized $300 million of 20-year convertible senior notes at the rich end of talk on Thursday after the deal saw strong bids in the gray market.

The deal was bid at 102 to 103 in the gray market on Thursday. The convertible was offered at par and priced with a coupon of 2.125% with an initial conversion premium of 35%. Alpharma stock (NYSE: ALO) closed at $24.15, down by 4.7% or $1.19.

The deal was talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 30% to 35%. The size of the deal was originally $200 million with an over-allotment option for a further $30 million. There is no longer any over-allotment option.

Banc of America was the bookrunner of the registered offering.

Alpharma, a Fort Lee, N.J.-based specialty pharmaceutical company, plans to use the proceeds of the deal to fund future business development transactions and general purposes.

"They look hot," a sellside convertible trader said. "I don't think they're coming on swaps, so it's looking more like outright buyers."

A sellside convertible analyst said the deal modeled "pretty cheap" using a credit spread assumption in the low-to-mid 200 basis points over Libor region and a volatility around 30%.

"That might be a little conservative too," the analyst said. "You could probably use a 31 vol or a little bit tighter spread. It looks like a good deal."

"This is sort of a pretty typical structure," the analyst said. "Seven years is a little longer than normal, but it's typical. It's a decent coupon, relatively regular premium, but it's priced cheap."

The analyst said the deal could attract interest from both outright and arb investors.

"The vol's relatively low for a small pharmaceutical, so some it might not be that great for some hedge guys," the analyst said. "But then again, there could be a lot of hedge guys going into this too."

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