Cephalon convertibles gain on patent agreement; SFBC up on possible sale; Albertson's, Placer lose

By Rebecca Melvin

Princeton, N.J., Dec. 22 - Cephalon Inc. moved higher on Thursday on news of the biotechnology company's drug patent settlement, while drug-development services company SFBC International Inc. gained on expectation that the company may be putting itself up for sale.

M&A activity was behind other trades in the convertibles market on Thursday, with the bonds of Albertson's Inc. losing ground in line with its shares amid uncertainty surrounding the Boise, Idaho-based grocery retailer's plan to auction itself. And Vancouver-based Placer Dome Inc. saw its convertibles move lower after the gold mining company finally agreed to be taken over by Barrick Gold Corp.

The New York Times reported Thursday that Albertson's talks ended with a group of investors including Cerberus Capital, real estate investment trust Kimco Realty Corp. and grocery chain Supervalu Inc.

Placer Dome agreed to be taken over for $10.4 billion, the companies said Thursday. The new price tag replaces Barrick's last offer of about $9.4 billion that the Placer Dome board had rejected.

Conmed Corp.'s 2.5% convertibles weren't seen in trade, although convertibles players inquired about them after the Utica, N.Y.-based medical technology company lowered fourth-quarter guidance, citing lower sales due to trends such as reduced surgical procedures and delayed purchasing by hospitals, as well as higher operating costs.

"Nobody could find a decent level on them," a Connecticut-based buyside trader said of the Conmed convertibles. "But people were talking about them." He added that trading was "dead today."

Meanwhile, the New York City transit strike, which was in its third day, appeared to be drawing to a close, with the expectation that subway trains and buses would be running by the morning commute.

The end of the strike looked poised to bolster the ranks of convertibles players on Friday, the last session before Christmas. Several sources, who had said they would take off to avoid commuting woes, decided that they would make it in on Friday after all.

Transit union leaders voted to send their members back to work without a new contract in the face of mounting fines and possible jail terms.

Cephalon rises on patent settlement

The three most actively traded convertibles of Cephalon Inc. gained Thursday after the Frazer, Pa.-based biotechnology company and Ranbaxy Laboratories Ltd. said they had struck an agreement in a patent dispute that Cephalon had with the Indian drugmaker over its sleep treatment Provigil.

Under the agreement, Cephalon will grant Ranbaxy a non-exclusive royalty bearing license to market and make a generic form of Provigil in October 2011, or April 2012 if Cephalon gets a patent exclusivity extension for studying the drug in children.

The news sent Cephalon's 0% A tranche convertibles up a point to 107.5 bid, 108 offered versus a share price of $59.50. The 0% B tranche gained slightly less at about 0.875 point to 110.5 bid, 111 offered, and the 2% convertibles were at 137.125 bid, 137.5 offered.

Shares of Cephalon closed up $4.64, or 8.3%, to $60.55, slightly higher than the level at which those convertibles trades were made.

The move was considered "pretty big" given the generally quiet character of the second-to-last trading session before Christmas, according to a New York-based buyside trader.

"It was one of the big movers of the day," he said.

Also under the agreement, Ranbaxy has agreed to grant to Cephalon a non- exclusive license, effective immediately, to certain of its worldwide intellectual property rights related to modafinil in exchange for milestone payments.

And Cephalon has agreed to enter into arrangements with Ranbaxy related to Ranbaxy's supply of the active pharmaceutical ingredient modafinil.

Terms of the agreement are subject to review by the U.S. Federal Trade Commission.

Finally, the agreement means that Cephalon will dismiss all pending litigation between the parties regarding Provigil.

The companies said in a news release that neither this settlement nor the recent settlement with Teva Pharmaceutical Industries Ltd. and Teva Pharmaceuticals USA Inc. affect the status of ongoing Provigil patent litigations between Cephalon and other generic companies that are pending in the U.S. District Court in New Jersey.

AtheroGenics ascends 20%

Due to the massive size of the deal for AtheroGenics, Inc., that stock soared higher by close to 20%, propelled largely by short covering, traders said.

AtheroGenics' convertibles were quiet, but higher on Thursday as well. One convertible market source said the 1.5% bond due 2012 had just a couple of trades, but gained 8.25 points, on an outright basis, to 92.5 bid, 93 offered.

AtheroGenics inked a deal with drug giant AstraZeneca to license its heart medication AGI-1067, for the condition artherosclerosis, in which AtheroGenics will pocket an upfront fee of $50 million plus up to $1 billion if it meets performance milestones.

"The royalty rate is excellent," an equity trader said. "AtheroGenics can earn up to 30% with realistic revenue level expectations. This is key, because now they probably will have no further need to do any financing. This stock should now begin ascending."

In fact, AtheroGenics shares added $3.24 on the day, or 19.64%, to close Thursday at $19.74.

Uncertainty takes Albertson's lower

Albertson's mandatory convertibles lost 3.3% with buyers as well as sellers in the names, according to a buyside trader, as players eyed "the volatility in the stock. And people expect it to rock around a little more," he said.

But Albertson's more straight credit was reacting positively to the report that a buyout may not come to fruition.

"If that's the case, then the worse case scenario for bondholders potentially is averted," said Craig Hutson, senior bond analyst at Gimme Credit in Chicago.

Bonds improved on the idea that there is not going to be a private equity sponsored deal that results in the bonds being downgraded well into junk territory, he said.

The New York Times said on Thursday that Albertsons had ended talks with a group of investors and drugstore operator CVS Corp. The Wall Street Journal also reported that concerns about federal antitrust clearance were blocking the sale to the investor group.

SFBC convertibles gain

The 2.25% convertibles of SFBC gained 5 or 6 points on Thursday to trade at 75.669, according to NASB Trace data. But "not a whole lot was trading," according to a New York-based sellside trader.

"From what I can see I think they want to sell themselves. They hired Lehman and UBS to explore strategic alternatives," he said, adding that many players have steered clear of the company after claims that SFBC mishandled a trial in Montreal, allowing a TB-infected patient to inappropriately enter a trial and infect others, among other things.

Earlier this month Robert W. Baird cut its rating on the drug development services company shares, citing "material risks" that have emerged.

On Thursday the beaten down shares gained 13% to $15.82.

The company announced that it adopted a shareholder rights plan and retained Lehman Brothers and UBS Investment Bank to act as joint financial advisers to explore strategic alternatives.

Placer Dome convertibles sag

The 2.75% convertibles of Placer Dome were weaker after it was announced that it had reached an agreement on a friendly transaction with Barrick Gold.

Under the revised offer, Placer Dome's shareholders will have the right to elect to receive $22.50 in cash, or 0.8269 of a Barrick common share plus $0.05 in cash for each Placer Dome common share, subject to pro ration based on the maximum amount of cash and Barrick common shares offered.

The maximum amount of cash paid by Barrick will be about $1.344 billion, and the maximum number of Barrick common shares to be issued will be about 333 million, taking into account the conversion of Placer Dome's outstanding convertible debt securities and the exercise of all outstanding share options.

Assuming full pro ration of these amounts, this would result in $2.91 in cash and 0.7216 of a Barrick common share for each Placer Dome common share subject to the offer.

The Placer board has determined that the revised Barrick offer is fair, the companies said in a release.

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