Impax Laboratories jumps in active trade after merger news; Herbalife slips; Cemex up

By Rebecca Melvin

New York, Oct. 17 – Impax Laboratories Inc.’s convertibles jumped in active trade on Tuesday after news that the Hayward, Calif.-based generic and branded drug company has agreed to merge with Amneal Pharmaceuticals LLC, a market source said.

The Impax 2% convertibles due 2022 jumped about 4.625 points and accounted for the lion’s share of trading in the U.S. convertibles market for the day.

The Impax convertible was busted, which means it had become decoupled from the price of the shares that underlie the bonds, or broken, and carried a high premium. There was no theoretical delta on the issue, but some market players may have had the bond set up on a speculative delta of 25% to 35%, a market source said.

The second most actively traded convertible bond of the day was Herbalife Ltd., according to Finra’s Trace data. The 2% convertibles due 2019 retraced most of the gain they notched on Monday, settling back to around 106.6 on Tuesday from 107 to 107.5 on Monday. Shares of the California-based nutrition and supplements company was also down, off $1.08, or 1.4%, at $77.58.

Cemex SAB de CV’s trio of convertibles was also trading actively and was a bit higher with the American Depositary Shares of the Mexican cement and building materials company, which added more than 3.5% on the day.

The Cemex 3.72% convertibles due 2020 traded up nearly 0.875 point to 105.277, the Cemex 3.75% convertibles due 2018 edged up to 105.875, and the Cemex 3.72% convertibles due 2020 were up 0.5 point to 105.45. The ADRs were last up 28 cents, or 3.6%, at $8.09.

Priceline Group Inc.’s 0.35% convertibles due 2020 were up about 0.25 point to 150.6, while the Priceline 0.9% convertibles due 2021 were at 118.25, with shares of the travel services company down last 0.2% at $1,932.05.

Meanwhile, Depomed Inc.’s 2.5% convertibles due 2021 traded little changed at 72 as shares of the specialty pharmaceutical company moved up 19 cents, or 3.75%, to $5.25. In a report on Sunday, Piper Jaffray raised its price target on the shares to $9.00.

The story of the day continued to be the run up in U.S. stocks and the fact that the Dow Jones industrial average crossed over the threshold of 23,000 for the first time. The index traded at that level briefly before slipping back and closing a hair below at 22,997.44, which was up 40.48 points, or 0.2%.

The S&P 500 index added 1.72 points to 2,559.36, while the Nasdaq Composite slipped less than a point 6,623.66.

The indexes have climbed this year on a combination of corporate earnings and optimism related to global economic growth. The DJIA is up 25% since the U.S. presidential election in November 2016. There are concerns that stocks are trading at very high valuations, but these concerns keep getting brushed aside in the face of strong global growth.

Central bank policy is the other piece of the puzzle that investors are trying to discern. As central banks like the Federal Reserve and European Central Bank tighten policy and raise rates, stocks are expected to be less attractive compared to bonds.

The ECB may provide more clarity on policy next week when it talks about plans to slow its monthly asset purchases. The end of its bond buying program will likely mark the beginning of higher interest rates, which have not been raised since 2011.

Impax jumps on merger news

Impax’s 2% convertibles due 2022 jumped about 4 points in the early going on Tuesday to 93 to 93.5 and settled higher at 94.5, according to Trace data, notching a 4.625 point move upward.

The move was more than 4 points on both an outright and hedged basis.

The bonds were not widely held on swap, but some players may have been set up on a speculative delta of 25% to 35%, a market source said.

But shares of the Hayward, Calif.-based company sank $1.95, or 10%, at $18.00 by late morning and settled down 65 cents, or 2.2%, at $19.30.

Spurring the moves was news of an all-stock merger deal between Impax and Amneal that is expected to create a generic-drug power house called Amneal Pharmaceuticals Inc.

The announcement came before the open on Tuesday. Impax said it has entered into a definitive agreement, with Amneal Holdings members owning about 75% and Impax shareholders owning about 25% of the new company's pro forma shares on an as converted basis.

The new company will rank as the fifth largest generics company in the United States by gross revenue and growing high-margin specialty franchise business, according to a company press release.

The combined company is expected to have 2018 pro forma adjusted EBITDA of about $700 million to $750 million, which includes expected cost savings within the first full year of operation.

The combined organization will have a pipeline with more than 300 products either filed with the FDA or in active stages of development, a foundation for international expansion with select commercial presence in the United Kingdom and Germany, and cost-efficient global manufacturing and development capabilities in all dosage forms.

The transaction will be accretive to Impax earnings in the first 12 months and generate double-digit growth in revenue and adjusted EPS over the three years following the close of the transaction. About $200 million of cost synergies are expected to be achieved within three years.

Stronger cash flows are expected to be used to repay debt and reinvestment in the business. The combined company is expected to have 2017 pro forma net revenue of between $1.75 billion and $1.85 billion and pro forma adjusted EBITDA of about $600 million to $650 million in 2017 and $700 million to $750 million in 2018, each including $80 million to $120 million of annualized cost savings within the first year.

Mentioned in this article:

Cemex SAB de CV NYSE: CX

Depomed Inc. Nasdaq: DEPO

Herbalife Ltd. NYSE: HLF

Impax Laboratories Inc. Nasdaq: IPXL

Priceline Group Inc. Nasdaq: PCLN

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