Gilead jumps after negative drug study; SunPower gains on earnings beat; Suntech higher

By Rebecca Melvin

New York, Feb. 17 - Gilead Sciences Inc. was the name of the day Friday when the Foster City, Calif.-based biopharmaceutical company's convertibles dropped hard outright, but pulled ahead on a delta-neutral, or hedged, basis on negative news on a study of its hepatitis C drug.

In the ongoing study, the majority of patients, who had previously not responded to an interferon-containing regimen, experienced viral relapse within four weeks of completing a 12-week treatment with Gilead's GS-7977.

SunPower Corp.'s 4.5% convertibles jumped about 3.5 points outright after the San Jose, Calif.-based solar power company released better-than-expected earnings and an outlook that was in line with expectations.

Fellow solar power company Suntech Power Holdings Co. Ltd. also traded better by a couple of points after the China-based solar panel maker boosted its 2011 earnings forecast in a preannouncement based on stronger-than-expected shipments.

Overall, convertible bonds were a little weaker across the board in the early part of the week as the market began to strike a more defensive tone and as equities languished, but they regained their footing on strong volume Thursday.

"Valuations shot up" on Thursday on higher volume, a New York-based analyst said.

"The market went definitely down for the first couple of days [of the week], but on Thursday it shot back up from a valuation and volume perspective," he said.

A second source said, "I really can't say I saw any trend at all. Hedge issues have been fully priced for a while now."

Equities were mostly higher on Friday, with the Standard & Poor's 500 stock index near a three-year high, but the Nasdaq Stock Market ended a few points lower.

Gilead adds on hedged basis

All three Gilead convertible issues dropped outright but gained on a dollar-neutral basis after reporting that a small study of patients that failed to respond to the traditional regimen to treat hepatitis C found most of them relapsed after being treated with Gilead's GS-7977 drug.

Gilead's head researcher, Rorbert Bischofberger, said the data suggest that "additional direct acting antivirals may be necessary to effectively treat this patient population."

The news was a reversal of favorable clinical trial data earlier this month for the hepatitis C drug that Gilead acquired when it bought Pharmasset Inc. for $10.8 billion in January.

It's not the end of the story, however. "There will be more news on the drug's development in the next two months, and the stock will move around even more at that point," a New York-based analyst said.

Nevertheless, the latest drug results "weren't in line with what the market expected," he said.

The stock dropped and the credit was wider, but the convertibles expanded delta neutral.

"They are high delta names, so they are down significantly," he said of the Gilead convertibles.

The Gilead 1.625% convertibles due 2016, or the D convertibles, dropped to 125.75 versus a share price of $47.07 in morning trade Friday, compared to 136.5 at Thursday's close.

Gilead's 1% convertibles due 2014, or the C convertibles, traded at 120.5 versus the underlying share price of $47.07, which was down 10 points from 130.5 on Thursday.

Gilead's shorter-dated 0.625% convertibles due 2013 fell to 128 from 146.

But delta neutral, they were all up 2 to 3 points.

Shares of the company skidded $7.81, or 14%, to $47.00 on Friday.

The Gilead convertibles were also active earlier this week, with shares seeing a little pull back following strong gains since December.

SunPower jumps

SunPower's 4.5% convertibles due 2015 traded up a couple of points to 88.5 initially and then moved higher to 89.5 to 90, which was up 3.5 points on the day.

These bonds had been as low as the upper 60s in December.

"These bonds have recovered a lot," a New York-based analyst said.

SunPower's 4.75% convertibles due 2014 traded at 93.5, which was up about 1.5 points, but weren't as actively traded.

The SunPower earnings report was "not massively credit positive," the analyst said.

"It's nothing to jump up and down about. The quality of the earnings was pretty poor, in my opinion. But they have ample liquidity," he said, noting that the company paid down $200 million of a sister convertible issue and now the company has $450 million in cash.

It's likely to burn through another $150 million this year, he said. "It's not like it's all of a sudden profitable."

Technical factors and short covering may have been behind some of the stock move.

The solar sector has been a heavily shorted sector for the past 12 months to 18 months, and part of a sharp rally as such is likely to be short covering and unwinding rather than fundamentals, the analyst said.

SunPower shares surged 23% after the earnings release, before backing off the highs to end higher by 9% at $8.13.

The company lost money during the quarter, but after one-time items like restructuring charges and stock-based compensation, it earned more than analysts had expected.

For the quarter, SunPower reported a loss of $83 million, or 84 cents per share, compared to income of $152.3 million, or $1.44 per share, a year earlier.

Excluding items, the company's profit was 16 cents per share, which was much better than the 5 cent loss analysts were expecting. The company cited strong demand for the boost.

Looking ahead, the company forecast 2012 sales of between $2.6 billion and $3 billion, compared to analysts' average forecast of $2.7 billion.

It also expects to post a loss of between 5 cents and 20 cents per share in the first quarter, but to breakeven or better for the remainder of the year.

Suntech Power adds

Suntech Power's 3% convertibles due 2013 traded up a few points to 75.75 bid, 76.25 offered. At its lows at the end of September to early October, the bond had traded down into the 40s and high 30s, a New York-based analyst said.

Suntech Power shares on Friday gained 27 cents, or 8%, at $3.64.

The Chinese solar panel maker raised its guidance on full-year shipments last year, suggesting demand wasn't as bad as some analysts feared.

"They preannounced and it looked positive for the fourth quarter," an analyst said.

There was a lot of demand to rush projects through at the end of the year after customers had waited for as long as they could to get the best pricing on panels, the analyst said.

Mentioned in this article:

Gilead Sciences Inc. Nasdaq: GILD

SunPower Corp. Nasdaq: SPWR

Suntech Power Holdings Co. Ltd. NYSE: STP

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