Cephalon climbs on drug's progress; General Motors gains with stock; Health Management gets sweeter

By Kenneth Lim

Boston, June 30 - The convertible bond market was quiet on Friday as activity wound down ahead of the weekend.

Cephalon Inc. surged after the company said a cancer pain drug had gotten an approvable letter from the U.S. Food and Drug Administration, boosting hopes that the product could hit markets by the end of the year.

Meanwhile, General Motors Corp. gained in line with the stock after billionaire investor Kirk Kerkorian said rival auto makers Renault SA and Nissan Motor Co. were interested in taking a significant minority stake in General Motors.

Health Management Associates Inc.'s convertible also gained a couple of points outright after the company offered a sweetener to investors who do not put the notes by Aug. 1.

The convertible market in general ended the week at a languid pace.

"We haven't traded a thing," a buyside convertible bond trader said. "It's been pretty lackluster, there's really nothing on the news side. Things are certainly stable, if not better to buy."

JetBlue Airways Corp.'s 3.5% convertible due 2033 was about half a point higher outright at 90.75 against a stock price of $12.75 as airline names rallied in early trading. JetBlue stock (Nasdaq: JBLU) retreated from an intraday high of $12.88 to close at $12.14, down by 3.11% or 39 cents.

"JetBlues were a little better today, but it was kind of a quiet day," a sellsider said.

JetBlue is a Forest Hills, N.Y.-based budget carrier.

Nortel Networks Corp.'s 4.25% convertible due 2008 continued to make slight gains outright as investors breathed a sigh of relief after the telecom equipment maker managed to sell $2 billion of senior notes.

"They [the convertibles] bottomed out around 93 before the high-yield deal," the sellsider said. "People were worried about the high-yield deal not going through, the high yield deal went up, the converts also improved, they last traded at 94.125, up over a point [outright] in the last two days. That's a nice move up there."

The Nortel convertible traded at 94.125 versus a stock price of $2.25 on Friday. Shares of Brampton, Ont.-based Nortel (NYSE: NT) slid 1.75% or 4 cents to close at $2.24.

Cephalon soars on drug progress

Cephalon's two zero-coupon convertibles due 2033 gained about 10 points outright after the company said its cancer pain drug Fentora received an approvable letter from the Food and Drug Administration.

The series A zero-coupon convertible due 2033 was bid at about 114.25 against a stock price of $61, while the series B zero-coupon convertible due 2033 was 117.875 bid versus the same stock price. Cephalon stock (Nasdaq: CEPH) climbed 10.76% or $5.84 on Friday to close at $60.10.

"They were better by about a quarter point to an eighth," a sellside analyst said.

Cephalon said Friday that it plans to submit a response by the end of July after the FDA asked for additional information regarding Fentora. The FDA is expected to review Cephalon's response within 60 days, the Frazer, Penn.-based drug maker said.

No additional clinical trials or tests are necessary, and labeling issues are "essentially finalized," Cephalon added.

Fentora is Cephalon's next version of the cancer pain drug Actiq. Cephalon currently has an agreement with Barr Laboratories Inc. that will let Barr sell a generic version of Actiq once Fentora is approved.

Biotech stocks have taken a beating over the past month, so Friday's news was a catalyst for the stock to correct after having been pummeled in the past few weeks, a New York-based analyst said.

The approvable letter was positive news, and Cephalon could launch Fentora by the fourth quarter of the year, the analyst said. But the news was also largely expected, so the analyst does not expect any major changes to Cephalon's credit profile.

General Motors gets Kerkorian boost

General Motors' convertibles rose Friday in line with the stock after investor Kirk Kerkorian said Renault and Nissan were interested in buying a stake in the Detroit auto maker.

The General Motors 4.5% convertible due 2032 (NYSE: GXM) gained 0.62% or 0.15 point to close at 24.41, while the 5.25% convertible due 2032 (NYSE: GBM) improved 4.72% or 0.84 point to end at 18.50. The 6.25% convertible due 2033 (NYSE: GPM) closed at 20.31, up by 5.4% or 1.04 points. General Motors stock (NYSE: GM) closed at $29.79, up by 8.56% or $2.35.

"It's up, but it's become a hedging game," a buyside trader said.

Kerkorian's investment company, Tracinda Corp., said Friday that Renault and Nissan are open to including General Motors in their alliance and taking a "significant minority interest" in General Motors. Tracinda urged General Motors to form a board committee to explore the opportunity with management.

General Motors said in a statement that it will take Tracinda's request "under advisement," and that it had not received any offers by Renault and Nissan.

Health Management on sweetener high

Health Management Associates' 1.5% convertible due 2023 gained about two points outright on Friday after the company modified its indenture, offering a sweetener to investors who do not put the paper before Aug. 1.

The convertible was 100 bid, 101 offered against the previous closing stock price of $19.57 early Friday after the modifications were announced. Health Management stock (NYSE: HMA) closed at $19.71, up by 0.72% or 14 cents.

Health Management on Friday said it will pay holders of the notes 2.875% per year on the principal amount of each note, with the first payment to be made on Feb. 1, 2007. The hard call protection on the notes will also be extended by two years, to Aug. 5, 2010 under the new terms.

Health Management also said it will suspend its planned $250 million stock buyback program until the close of Aug. 1, 2006.

"I think it'll probably be enough to keep people from putting it back," a sellside convertible strategist said.

"We hit the bid!" a convertible fund manager said.

Lehman Brothers convertible analyst Venu Krishna wrote in a report that investors should hold the convertible if Health Management stock is at least $19.38 on Aug. 1, 2006.

Krishna said the new terms would add just over 7.5 points to the theoretical value of the convertible after the put date, raising the value of the convertible after the put date to 100.34 using a credit spread of 75 basis points over Libor and a volatility of 18%.

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