Valeant, other drug makers continue slide; hospital names trade off; oil credits again lower

By Paul Deckelman

New York, Oct. 22 – Valeant Pharmaceuticals International Inc.’s paper continued to get hammered in heavy trading on Thursday, although the carnage was not as bad as that seen on Wednesday, when the Canadian drug maker was accused in a trading house research report of using a string of shadowy specialty pharmacies to artificially inflate its revenues, a charge that the company vehemently denies.

Valeant meanwhile tried to reassure investors, planning a Monday conference call at which it said it would refute the allegations and explain in detail the operations of its specialty pharmacies.

Other pharmaceutical and biotech names remained on the downside in the wake of Valeant’s shocking decline, including Endo International plc and the newly issued notes of Concordia Healthcare Corp.

Horizon Pharma plc’s convertible notes also remained under pressure.

Distressed-debt traders were meantime casting a few glances on Thursday at another segment of the health-care industry – hospitals. Although none of the major names in the sector are considered to be distressed per se, they noted the sharp fall in Community Health Systems, Inc.’s bonds and shares in heavy trading after that company issued guidance on its expected third-quarter earnings, coming in well below analysts’ expectations.

Bonds of other hospital operators also took it on the chin on Thursday, pulled lower by the weak Community Health outlook. Among them were Tenet Healthcare Corp., LifePoint Hospitals Inc. and HCA Holdings, Inc., which just a week ago also warned that its quarterly earnings would come in below Wall Street’s expectations.

Away from health care, crude oil prices firmed up, snapping a three-session losing streak.

But that did little or nothing to help the beleaguered bonds of such oil and natural gas exploration and production companies as California Resources Corp. and Linn Energy LLC.

On the upside, Avaya Inc.’s bonds firmed smartly in brisk trading, although none of the market participants had seen any fresh positive news out on the communications company that might explain the rise.

Another slide for Valeant

Valeant Pharmaceuticals International’s paper was down for a third straight session Thursday, roiled by allegations by a trading house, which specializes in selling short against the target company’s shares, that the Laval, Quebec-based drug manufacturer was using a network of “phantom pharmacies” to artificially and fraudulently boost its revenues, a charge the company has vehemently denied.

Its bellwether issue, the 6 1/8% notes due 2025, “was the really active one,” a trader said, with over $120 million of the notes changing hands. He saw the bonds down 4 or 5 points on the day in the mid-80s.

“Valeant was still getting chased lower and whipsawed around,” a second trader said.

Its shorter issues were also active, with the 5 7/8% notes due 2023 ending down nearly 1 point at 87¼ bid. More than $69 million of the notes traded.

Its 5 3/8% notes due 2020 were seen down 2¾ points at 88¾ bid, on volume of more than $35 million.

Its NYSE-traded shares – which on Wednesday “got slaughtered,” a trader said – lost an additional $8.74 on Thursday, or 7.37%, ending at $109.87. Volume of 55 million shares was nine times the norm.

One of the traders noted that those shares “began the week at $165. Now they’re down to $110. Ouch.”

Valeant announced Thursday that it will hold a conference call on Monday, on which it will explain its side of the story following the highly negative research report from Citron Research, which accused Valeant of using specialty pharmacies to create “phantom sales” of its products.

The report said that the firm believes that “the whole thing is a fraud to deceive the auditors and book revenue.”

Valeant contends that Citron issued false and misleading research in an effort to drive its stock down so the short-seller would profit.

Other pharmaceuticals still suffer

Valeant’s troubles have proven to be contagious for other names in the drug industry.

For a second straight session, bonds of Irish pharmaceuticals maker Endo International were trading off on active volume.

Its 6% notes due 2025 lost 1½ points to end at 96¾ bid, on $12 million of volume.

A trader saw the company’s 5¾% notes due 2022 off by 3½ points at 97½ bid.

The new 9½% notes due 2022 from Oakville, Ont.-based drug producer Concordia Healthcare were seen in a 94-95 context, still well down from Tuesday’s par issue price.

A trader saw them at 95 5/8 bid, off nearly a full point, with over $16 million traded.

In the convertibles market, participants continued to monitor the Valeant situation, even though the company does not have any outstanding convertible paper. But another sector peer that does have convertibles out, and whose shares have been under sharp pressure, like Valeant’s, was Horizon Pharma.

Horizon’s 2.25% convertibles took another leg lower, quoted at 81 versus an underlying share price of $13.31 by a New York-based trader on Thursday. That move represented a drop of about 3 points on an outright basis. Later, the bonds were seen trading at 82.

The Irish pharmaceutical company came under fire after a news article critical of its drug pricing and Prescriptions-Made-Easy program, under which doctors send prescriptions directly to mail-order specialty pharmacy outlets affiliated with Horizon rather than to retail pharmacies.

Hospitals are hurtin’

Distressed-debt traders were also looking in on what was going on Thursday in the high-yield hospitals sector. None of those names are technically considered distressed, but all of them were being beaten down multiple points during the session.

“The hospitals were the main story today,” a trader said, pointing to the nosedive that Community Health Systems’ bonds took after the Franklin, Tenn.-based hospital operator put out preliminary financial and operating results for the three months ended Sept. 30 – projections that came well below what analysts were looking for.

The company’s 6 7/8% notes due 2022 were the busiest junk bonds on Thursday, with over $129 million traded as they ended at par, down 6 points on the day.

A second trader saw two-sided markets around a par-to-100½ context, which he called down at least 5 points on the day.

“It’s pretty painful if you own them,” he opined.

Community Health’s other bonds were also lower in busy trading. Its 8% notes due 2019 lost 1 full point to end at 103¼ bid, on volume of over $15 million.

Its New York Stock Exchange-traded shares meantime plunged $14.25, or 35.14%, to close at $26.30 per share, on volume of 27.1 million – more than 15 times the usual volume.

The bonds and shares plummeted after the company released its preliminary earnings estimates for the just-passed third quarter, with the final numbers due out on Nov. 2.

It suggested that adjusted earnings for the quarter ended Sept. 30 will come in at 56 cents per share, which is well below the average of around 72 cents per share expected on Wall Street.

The company also projected that EBITDA will be around $661 million, down from $750 million a year ago and down as well from analysts’ expectations of around $760 million.

It also said that it would report revenue of about $4.85 billion, down from the nearly $5 billion the financial community expects.

The company blamed the lessened expectations on a roughly 2% drop in patient admissions at its established locations as well as a fall-off in the percentage of people covered by commercial insurance, which offers the best reimbursement to the hospitals.

Community Health’s not-so robust expectations spooked investors in other hospital bonds as well.

Dallas-based Tenet Healthcare’s 6¾% notes due 2023 sank by more than 3 points, ending at 97 5/8 bid, on volume of more than $37 million.

Its 8 1/8% notes due 2022 were also down more than 3 points, falling to 104 bid, with more than $12 million having changed hands.

Its 6% notes due 2020 lost 1 point, moving down to 108 bid.

Nashville-based HCA’s 5 3/8% notes due 2025 lost 1¼ points, ending at 101 bid, while its 7½% notes due 2022 ended at 113½ bid, down 1¾ points.

One of the traders saw HCA’s 5% notes due 2024 unchanged, which he called “kind of odd,” given the sector-wide carnage going on around those bond.

A trader saw Brentwood, Tenn.-based LifePoint Health’s 5½% notes due 2021 ending at par and calling that down more than 3 points, with over $20 million having been traded.

The shares of the other hospital operators were also all multiple points lower on very active volume.

Oil name remain weak

Away from health care-related names, oil and natural gas names remained under pressure, even though crude oil prices did pull out of their three-session slump, with November-delivery West Texas Intermediate moving up by 18 cents on the New York Mercantile Exchange to $45.38 per barrel.

California Resources’ 6% notes due 2024 lost ¾ point to end at 68¼ bid, with more than $12 million traded.

Linn Energy’s 6 3/8% notes due 2022 dropped by 4 points, a trader said, to 34 bid, on volume of about $5 million.

He saw its 7¾% notes due 2021 also four points lower – though on lesser volume – finishing at 27 bid, 28 offered.

“Not a lot of volume, but they’re still down. It’s been a painful year.”

Avaya moves up

On the upside, Avaya’s 10½% notes due 2021 gained 4 points to end at 39 bid, with $15 million traded.

Its 7% notes due 2019 shot up by 5 points to 78 bid, with $12 million changing hands.

Traders saw no fresh news out to explain the rise in the bonds of the Santa Clara, Calif.-based provider of business collaboration and communications services.

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