Cephalon improves on FDA letter; Amgen remains soft on safety risks; issue pipeline seen healthy

By Kenneth Lim

Boston, April 2 - Cephalon Inc. rose a few points outright on Monday after its sleep disorder drug received an approvable letter from the U.S. Food and Drug Administration.

Amgen Inc. shrugged off concerns about an ongoing patent dispute with competitor Roche, but remained soft amid safety issues related to its anemia drug Aranesp.

The rest of the convertible market was mostly quiet, having come off a robust quarter in terms of primary issuance.

"There wasn't much in terms of news," a sellside convertible trader said. "I think guys are still digesting all the new deals."

The wave of convertible deals that pushed March issuance proceeds to the highest level since June 2003 were also more aggressively priced on average compared to previous months, said convertible analyst Venu Krishna from Lehman Brothers in a report. But demand indicators were strong and issuance could continue at a healthy clip, wrote Citigroup's Stuart Novick in a separate note.

Cephalon wakes up to FDA letter

Cephalon's 2% convertible due 2015 was up by about 4 points outright on Monday after the company received an approvable letter from the FDA for its sleeping disorder drug Nuvigil.

The convertible traded at 170.5 against a stock price of $74 as the stock got off to an early start. Cephalon stock (Nasdaq: CEPH) closed at $75.96, up by 6.67% or $4.75.

"We saw a couple of trades in Cephalon," a sellsider said. "They were up a few points outright."

Frazer, Pa.-based Cephalon, a biopharmaceutical company, said it had received the letter, which means that the regulatory agency will approve Nuvigil after certain conditions are met. But the FDA also required Cephalon to warn of skin rash and hypersensitivity in labels of Nuvigil and Provigil, another sleep disorder drug made by the company.

The sellsider said the news was mostly positive.

"After all the issues they had with Sparlon, this is definitely welcome," the sellsider said. "It doesn't mean they're doing great, but it means they've at least got another product to lean on. I don't think the warning labels are going to be that big of an issue."

The convertible was mostly in line with the stock, the sellsider said.

"These are all way in the money right now, so they're trading pretty much like the stock," the sellsider said.

Amgen soft on Aranesp concerns

Amgen's 0.125% convertible due 2011 and its 0.375% convertible due 2013 eased a modest eighth-point on Monday as Credit Suisse equity analyst Michael Aberman raised concerns about a patent lawsuit and safety issues relating to anemia drug Aranesp continued to weigh on investors.

The 0.125% convertible traded at 91.125 against a stock price of $55.60 on Monday, while the 0.375% convertible changed hands at 89.75 against the same stock price. Amgen stock (Nasdaq: AMGN) slipped 0.59% or 33 cents to close at $55.55.

"Amgen opened higher but it's come in since the morning," a sellside convertible analyst said.

Recently filed court papers will let a patent case between Amgen and Roche be settled before a jury, which would be negative for Amgen, wrote Credit Suisse's Aberman in a note. The judge in the case also allowed several of Roche's antitrust counterclaims in the case, the analyst wrote.

"A jury not only increases the likelihood of Roche prevailing but also increases the risk that Roche could win an anti-trust counterclaim (although we still believe this is a low probability)," Aberman wrote.

Although Aberman acknowledged that investors are probably more focused on the risks to Aranesp sales because of recent negative safety results from studies, the analyst said "the competitive threat of Roche's Mircera remains an important sensitivity to our Amgen valuation."

The sellside convertible analyst said the Credit Suisse report was reasonable, but "it's just a drop in the ocean for Amgen."

"I'm not a lawyer, so I'm not going to comment on the case," the analyst said. "But I think the bigger risk for Amgen is the loss of sales for Aranesp. Also Roche's drug is in the same class of drugs as Aranesp, so the problems that Amgen is now facing with Aranesp could also affect Mircera."

The convertible analyst said Amgen's credit remains unchanged.

"This is a giant biotech with very healthy cash flow," the analyst said. "I don't think anyone's doubted their credit for a moment."

Issuance demand robust

The new convertibles that priced in March were more aggressively priced than in previous months, and issuance levels could continue to be robust, said convertible analysts.

New issue cheapness slid to a 0.71% average in March from 0.94% in February, wrote Lehman Brothers convertible analyst Venu Krishna in a note. The average new issue so far this year yields 3% with a 23.3% initial conversion premium, compared to a 2.8% yield with a 24.8% premium for the typical issue in 2006.

Meanwhile, Citigroup's Stuart P. Novick wrote in a separate note that convertible demand indicators "looked very bullish in March."

Novick noted that 40% of the deals that priced in March were upsized while a high percentage also issued within one day of initial announcement.

The issuance rate is expected to remain strong, Novick wrote.

"Low interest rates and higher equity market volatility are likely to support convertible issuance in the U.S. over the near term in our opinion," the analyst said. "Perhaps not at the frenetic pace of late, but at a healthy clip nevertheless."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.