New Exelixis gains on debut; new Prospect Capital prices at a discount; Medicis better

By Rebecca Melvin

New York, Aug. 9 - Exelixis Inc.'s newly priced 4.25% convertibles traded up as much as 6.6 points on their debut in the secondary market on Thursday after the new issue was upsized and priced at the cheap end of talked terms.

The new paper, which was considered pretty long-dated for a biotech company, performed "as expected," closing out around 104.

"The borrow was not that great, but they were issuing common which should help in the long run, so it performed as expected," said a New York-based trader, who had the paper at fair value of 104.

A second trader said the deal was helped by a boost in the underlying shares, which were helped by some good news for the South San Francisco, Calif.-based biotechnology company in that regulators said they will review its drug sooner rather than later in November.

Prospect Capital Corp.'s newly priced 5.75% convertibles traded at what could qualify as a modest expansion on a 30% delta, one trader said. The $200 million of 5.5-year convertible notes ended the session at 98 bid, 98.375 offered after being reoffered at 98.

Meanwhile, Wednesday's two new deals, Isis Pharmaceuticals Inc.'s 2.75% convertibles and Hornbeck Offshore Services Inc.'s 1.5% convertibles, continued to trade fairly actively and both looked to be in line with the underlying shares.

What spurred the windfall of about $1 billion in new convertibles issuance this week couldn't be explained by market players; they only hoped that the trend would continue.

"I really hope it keeps up," a New York-based trader said.

If it does, according to another trader, "there are a great many issues around trading pretty tight as simple debt where the equity is an afterthought that could be impacted."

If new issuance continues, offering market players more of a choice, that paper will be under pressure as "a convert with optionality is much more appealing than one without," he said.

As for which new deal did the best this past week, it was difficult to gauge.

One could argue that Hornbeck did best because there was the most demand for it and the credit quality is good, according to a New York-based convertibles analyst. But the Isis new deal spike in price and did better than many had suspected, so that could be deemed the week's winner.

Back in the secondary market, Medicis Pharmaceutical Corp. traded flat to slightly better on a hedged, or dollar-neutral, basis on lower shares.

Deutsche Bank lowered its price target on the Medicis shares to $37 from $44 but kept a "buy" rating on the shares.

The Scottsdale, Calif.-based specialty pharmaceutical company focused on dermatology and aesthetic treatments reported a "solid all-around quarter," but lowered guidance for the second half, reflecting uneven implementation of a novel and not fully tested Alternative Fulfillment program, a Deutsche note stated.

Exelixis upsizes

Exelixis' newly priced 4.25% convertibles traded up to 106.6 in the early going Thursday and later was around 103 with the stock at about $4.30. The paper ended the day at 104 with the stock up 6 cents, or 1.3%, at $4.34.

"The common was up on good news and that had to have helped," a New York-based trader said.

The trader said the FDA is going to review its drug by Nov. 29.

"I think the timing helped. And I wonder if the news had come out prior if they would have gone shorter dated," he said.

Exelixis priced an upsized $250 million of seven-year convertible senior notes at the cheap end of talk, which was 3.75% to 4.25% for the coupon and 25% to 30% for the premium.

The deal was originally going to be $225 million in size.

Exelixis also priced an upsized 30 million shares of common stock at $4.25 per share. Initially the stock offering was going to be for 20 million shares.

The convertible notes have a $37.5 million greenshoe, which was upsized from $33.75 million, and a 4.5 million share greenshoe on the stock deal.

Goldman Sachs & Co. was the bookrunner of the notes, with Cowen and Co. acting as joint lead manager. Co-managers were Citigroup Global Markets Inc., Credit Suisse Securities (USA) Inc. and Morgan Stanley & Co. LLC.

The notes are non-callable until Aug. 15, 2016 and then provisionally callable at a price hurdle of 130%.

Proceeds will be used for general corporate purposes, including for clinical trials, research and development, capital expenditures, working capital, funding the interest escrow account and payment of a consent fee to entities affiliated with Deerfield Management Co. LP regarding previously issued convertibles.

Medicis slightly better

Medicis' 1.375% convertibles due 2017 traded at 98.4, which was down 1.6 points outright on the day, but added about 0.125 point on a dollar-neutral basis, an East Coast-based buysider said.

Medicis shares slipped 4% to $31.95 on Thursday.

The Scottsdale, Ariz.-based specialty pharmaceutical company reported second-quarter earnings per share of $0.52 which was 5 cents higher than estimates of $0.47, and company guidance of $0.37 to $0.47.

The upside driver was stronger-than-expected revenue from Medicis' aesthetic franchises and lower-than-expected Solodyn destocking.

Management lowered full-year revenue by $30 million to $800 million to $834 million and lowered earnings per share by $0.40 to $2.25 per share to $2.65 per share. Previous guidance was for revenue of $830 million to $862 million with earnings of $2.62 per share to $2.86 per share.

Deutsche Bank research analyst David Steinberg lowered his price estimate for the shares to $37 from $44 but kept his "buy" rating.

"We would expect shares to be weak but note that the company still has $50 million remaining in its share repurchase program to support the stock. Moreover, we continue to believe MRX fits our M&A thesis. Potential risks to our price target being achieved principally relate to the aesthetic franchises and prescription trends for Sologyn, Ziana and Zyclara," Steinberg wrote in his note.

Post the Solodyn settlements with Teva and others more than a year ago, there is now more visibility on the company's long-term growth rate, at least through 2017. "As we have noted on several occasions, Medicis fits into the current consolidation wave," Steinberg said.

"In the last four years, there have been 19 acquisitions of dermatology focused companies (including four in 2011, in addition to the purchase of JNJ's and Sanofi's legacy dermatology business by Valeant). Moreover Medicis' profile (profitable mid-cap company with market value between $300-$5,000M) is clearly in the 'sweet spot' of M&A in Specialty Pharma," Steinberg said.

Mentioned in this article:

Exelixis Inc. Nasdaq: EXEL

Hornbeck Offshore Services Inc. NYSE: HOS

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Medicis Pharmaceutical Corp. NYSE: MRX

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