Valeant woes cast a pall over convertible biotech/health care; energy shows resilience

By Rebecca Melvin

New York, March 15 – A wave of selling hit the U.S. convertibles biotech/health care sector on Tuesday on the heels of Valeant Pharmaceuticals International Inc.’s news bombshell that it is in danger of events of default tied to the delay of its annual report filing.

The Laval, Quebec-based drug company had previously announced that it was delaying its 2015 10-K report due to a review of accounting matters by an ad hoc committee of the company’s board of directors.

Valeant said on Tuesday that it believes its liquidity is sufficient to cover credit agreements and bond indentures that could be affected by specific reporting requirements. But it also cut its 2016 sales and earnings outlook, and shares plunged 51%.

While Valeant is not a convertibles issuer, problems facing the company affect other companies in the convert space. One of those problems was related to funneling distribution through a specific pharmacy distributor and allegations of inflating drug pricing. Valeant no longer uses the distributor.

“It feels like deep selling in biotech,” a New York-based trader said, acknowledging that Valeant’s negative headlines were affecting other convertibles issuers.

Horizon Pharma plc’s convertibles and common shares fell on Tuesday. The Irish pharmaceutical company was subpoenaed in November for information about its patient assistance programs and other aspects of its marketing and commercialization activities.

The convertibles of Dublin-based Endo Pharmaceuticals plc were also hit, although there are very few bonds of the 2018 bond issue left outstanding.

DepoMed Inc.’s 2.5% convertibles due 2021 were also lower, dropping below par from about 105, along with a drop in the common shares of the Newark, Calif.-based specialty pharmaceutical company. DepoMed develops and commercializes products for pain and disorders.

Ionis Pharmaceuticals Inc. was also mentioned as a casualty of the biotech or health care sell-off, but a second source said that the 2.5% convertibles of the Carlsbad, Calif.-based drug discovery company were relatively unscathed despite a 9.5% drop in the common shares.

But Pernix Therapeutics Holdings Inc. was hit hard, with the common shares dropping 33 cents, or 21%, to $1.23, a convertibles trader noted.

Meanwhile, Acorda Therapeutics Inc.’s 1.75% convertibles due 2021 dropped another point to about 92 at late morning after having plunged 11 points on Monday in a move related to a patent review affecting its Ampyra treatment for multiple sclerosis. Shares of the Ardsley, N.Y.-based spinal cord and nervous system therapeutics company were down another $1.00, or 3%, to $28.60 at late morning and ended down another 30 cents, to $28.14. The shares are down 22% since Thursday.

The U.S. Patent and Trademark Office Patent Trials and Appeal Board has instituted the inter partes review of four out of five Orange Book-listed patents that apply to the Ampyra extended release tablets.

Elsewhere, energy names were a focus as oil prices were heading back down and as the equity markets slipped in the early going.

The usual energy suspects were under watch, including Whiting Petroleum Corp., which was a touch weaker, and the convertibles of Chesapeake Energy Corp., which were essentially unchanged. The Chesapeake bonds have “held in pretty well,” and “people think that there is some upside for the 2017 maturities,” a Connecticut-based trader said.

Biotech space drops

Valeant has until March 30 to file its 10-K or a default will occur under its credit agreement, although the company will have 30 days until April 29 to cure its credit default by filing the 10-K.

Meanwhile, if the 10-K has not been filed before Wednesday, a breach-of-reporting event occurs under Valeant’s bond indentures. At any time after the breach, the trustee or holders of at least 25% of any series of notes may deliver a notice of default. From receipt of this notice, the company would have 60 days to file a 10-K and thus cure the default, Valeant’s corporate treasurer, Linda La Gorga, explained during a conference call on Tuesday.

La Gorga said that the company intends to launch an amendment with its lenders next week to waive such a cross-default, and also to extend the time period for the delivery of the 10-K and the company’s 10-Q report for the first quarter, which is supposed to be filed shortly after the end of the quarter on March 31.

The severely leveraged company – with some $30 billion in debt – also cut its 2016 revenue forecast by $1.5 billion to $11 billion to $11.2 billion from a previous estimate of $12.5 billion to $12.7 billion. The reduction reflected slower growth in the U.S. dermatology, gastrointestinal and women’s health businesses, the company said.

Valeant also reported unaudited fourth-quarter earnings of $2.50 per share, excluding special items, which missed analysts' estimates.

Problems with Valeant’s drug distribution practices came to light last year. Valeant had sold its dermatology drugs through distributor Philidor RX Services, which raised issues about drug pricing and allegations that it was using the pharmacy to inflate dermatology revenue. That practice has been changed and Philidor went out of business.

Horizon Pharma’s 2.5% convertibles were quoted at 84.57 which was down from 89.82 on Monday. Horizon shares closed down $2.49, or 14%, at $15.74.

Horizon disclosed that it received a subpoena in November from the Attorney’s Office for the Southern District of New York requesting documents and information related to its patient assistance programs.

Horizon said that it is cooperating with the investigation and that it may incur significant costs related to the investigation regardless of the outcome.

DepoMed’s 2.5% convertibles were seen down at 97.5 from 104.87, according to a market source.

The Ionis 2.75% convertibles were seen down to 225 from 248.

Mentioned in this article:

Acorda Therapeutics Inc. Nasdaq: ACOR

Chesapeake Energy Corp. NYSE: CHK

DepoMed Inc. Nasdaq: DEPO

Endo Pharmaceuticals plc Nasdaq: ENDO

Horizon Pharma plc Nasdaq: HZNP

Ionis Pharmaceuticals Inc. Nasdaq: IONS

Pernix Therapeutics Holdings Inc. NYSE: PTX

Whiting Petroleum Corp. NYSE: WLL

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