Convertibles gain on Nasdaq strength; Alpharma drops

By Ronda Fears

Nashville, Tenn., March 8 - Convertibles gained with stocks that were buoyed by lower jobless claims, traders said, with the sharp rise in the Nasdaq particularly helping the market. Activity was fairly brisk for a Friday, traders said, with interest in defense issues and a few energy names. Alpharma Inc. joined the ranks of drugmakers hitting the skids, as unexpected charges and future negative impacts to earnings caused investors to launch a selling spree.

"It was busy today for a Friday," said a convertible trader at a major investment bank in New York.

"Positive news today, the unemployment report, won out. There are, though, a lot of people that are still skeptical and certainly there are individual situations that are still in dire straits."

Dealers said the drop in unemployment helped ease concerns about the overall condition of businesses somewhat. The jobless rate dropped to 5.5% from 5.6% but the market had expected the February claims to come in at 5.8%. The Nasdaq rose 2.55%, although the Dow Jones Industrial Average edged up only 0.45%.

"If the economic news keeps supporting what Greenspan said about the economy heating up, then people will feel like they are on more solid ground and this market could find some legs," said a convertible trader at another major investment bank in New York.

Alpharma was hit, however, after reporting Friday that a production slowdown due to Food and Drug Administration concerns at its Baltimore manufacturing facility will have an impact on its earnings in the first quarter. That news came after posting a wider than expected quarterly loss late Thursday and the company saying it was recalling a respiratory inhalant after discovering problems in its manufacture by a third party.

The specialty pharmaceutical company reported a fourth quarter net loss of $80.2 million, or $1.88 per share, compared to net income of $18.7 million, or 43c, a year earlier. Revenues fell to $242.8 million from $247.6 million.

Alpharma said 2001 inspections by the FDA at four of its manufacturing plants resulted in a warning letter and an allegation from the agency that Alpharma's Baltimore plant didn't comply with a 1992 consent decree. In its earnings report, Alpharma said problems discovered in February in Epinephrine, its generic version of Primatene Mist, resulted in the product being recalled and reduced operating income for the quarter by about $6.5 million, or 10c a share. The Fort Lee, N.J.-based company also said it took a charge of $4.3 million, or 6 cents a share, in the fourth quarter due to a potential problem on another of its human pharmaceutical products.

"On the earnings call, it was clear that investors feel like Alpharma has been overstating their prospects and not forthright about charges. There was a conference they were at last week and nothing about this was mentioned," said a convertible market source at a brokerage in New York.

Alpharma's 3% convertible due 2006 fell 9 points on the day to 81.25 bid, 82.25 offered and the 5.75% convertible due 2005 lost 6.5 points to 80.25 bid, 80.75 offered. The common shares plunged $3.45 to $16.

Sepracor and ImClone Systems have both been victim of the backlash of investors on problems with FDA drug approvals. The three Sepracor convertibles (CCC+), roughly $1 billion outstanding, were mostly lower again Friday, but traders said the 7% due 2005 actually gained a bit while the 5.75% due 2006 and the 5% due 2007 lost more territory. Sepracor shares closed off 13c to $19.51.

"The Sepracor 7s widened out a little this morning. Strictly from a credit standpoint, there was some interest. The 7s get paid first because they mature first. The yield-to-maturity is about 20% and the premium is somewhere around 110%, whereas the yield on the 5s is just 21% although the premium is like 145%," said Stuart Novick, a convertible analyst at Salomon Smith Barney.

New issues of the week were higher along with the broader market, traders said.

Merrill's new 30-year 0% convertible floater (Aa3/AA-) gained 0.75 point to 102.5 bid, 103 offered while the stock closed added 54c to $53.33.

St. Mary Land & Exploration Co.'s small $75 million 5.75% convertible due 2022, which priced with a 30% initial conversion premium added 2.5 points to 102.5 bid, 103 offered as the stock slipped 17c to close at $19.83.

Sources said next week's calendar looks fairly light, but that could change if stocks continue to firm up.

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