Amylin gains on debut; Integra higher, Ciena, Dendreon quiet in gray; Cogent, Panda launch unusual deals

By Kenneth Lim

Boston, June 5 - Amylin Pharmaceuticals Inc. took off on its debut on Tuesday as new deals dominated activity in the convertible market.

Integra LifeSciences Holdings Corp. was slightly higher in the gray market with its deal seen as attractively priced.

Dendreon Corp. was quiet in the gray market with its deal expected to appeal only to outright players with the lack of stock borrow failing to attract hedge funds.

Ciena Corp. also stayed quiet in the gray market on views that its deal was fair to slightly rich at the midpoint of talk.

Two unusual deals were announced Tuesday. Cogent Communications Group Inc.'s overnight $200 million offering comes with a 1% coupon and a 75% initial conversion premium, while Panda Ethanol Inc.'s is offering $140 million of notes that will likely arrive with an initial conversion discount.

Beyond the new deals, Amgen Inc. gained slightly in line with the stock after the company announced a $420 million acquisition.

Amgen's 0.125% convertible due 2011 rose ¼ point to trade at 92 against a stock price of $57.625 on Tuesday. Its 0.375% convertible due 2013 also gained ¼ point to 90.375 versus the same stock price. Amgen stock (Nasdaq: AMGN) closed at $57.61, up by 1.23% or 70 cents.

Thousand Oaks, Calif.-based Amgen said late Monday that it is offering $420 million in cash for Illypsa Inc., a biopharmaceutical company developing a kidney disease drug. Illypsa's ILY101 treatment is slated to begin phase 3 testing in the second half of the year.

"We like this deal as it could help contribute to growth towards the end of the decade, although the impact may be relatively small for Amgen," wrote Credit Suisse equity analyst Michael Aberman in a report. "We also think that Amgen may have paid a reasonable price if we were to assume convincing phase 2 data (not yet released)."

Aberman explained that Illypsa's drug could benefit from Amgen's strong sales force and could become a significant rival to Genzyme's existing Renagel treatment. But Amgen faces near-term challenges as problems with its own anemia drugs weigh on earnings and new product launches.

"Thus, while we like this move, we remain neutral rated with a $52 price target and have a negative bias at current prices," Aberman wrote.

A sellside convertible analyst said the Amgen purchase seemed positive from a strategic standpoint and the deal consideration is not expected to significantly affect the company's credit profile.

"Amgen could use a few strong candidates to make up for the expected losses that will come from Aranesp and Epogen," the analyst said. "I wouldn't be surprised if they continue to look for targets...Unless they make a major deal, I don't think their credit is going to be affected much. They've always been active acquirers, and they're practically swimming in cash. $420 million isn't going to crack their credit."

Amylin takes off on debut

Amylin's new 3% convertible senior note due 2014 was at 100.875 bid, 101.125 bid against a stock price of $43.62 early Tuesday after the deal was upsized and priced near the cheap end of talk.

The convertible was offered at par. Amylin stock (Nasdaq: AMLN) closed at $43.03, lower by 1.36% or 59 cents.

"Amylin did OK," a sellside convertible trader said. "There was a good amount of interest from outrights and hedge guys and the underwriters left enough on the table for everyone to be happy. I think they set up OK on a hedge, but I hear a lot of the support is actually coming from outrights."

Amylin priced its upsized $500 million offering on Monday after the market closed with an initial conversion premium of 40%. Price talk was originally at a coupon of 2.5% to 3% and an initial conversion premium of 37.5% to 42.5%, but guidance was narrowed to a coupon of 2.75% to 3% with an initial conversion premium of 40% mid-Monday.

The size of the deal was originally $400 million with an over-allotment option for a further $50 million. The greenshoe is now for an additional $75 million.

Goldman Sachs and Morgan Stanley were the bookrunners of the Rule 144A offering.

Amylin, a San Diego, Calif.-based biopharmaceutical company, said the proceeds of the deal will be used to develop its late-stage product candidates and fund research and development, operating expenses, potential acquisitions and other general purposes.

Integra gains in gray

Integra's new convertibles were bid at about 100.5 in the gray market on Tuesday although analysts said the longer-dated series in the two-tranche offering appeared more attractive.

Integra was expected to price its $250 million offering Tuesday after the market closed. The $125 million three-year series is talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 27.5% to 32.5% while the equally sized five-year tranche is talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 22.5% to 27.5%.

Both series will be offered at par. Integra stock (Nasdaq: IART) gained 0.83% or 43 cents to close at $51.97.

Each tranche has an over-allotment option for a further $25 million.

JPMorgan, Banc of America, Morgan Stanley, Deutsche Bank and Citigroup are the bookrunners of the Rule 144A offering.

Integra, a Plainsboro, N.J.-based maker of surgical implants and medical instruments, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions, buy back up to $75 million of its common stock, repay outstanding bank loans and fund general purposes.

"I like the B's better than the A's," a sellside convertible analyst said. "The five-years are better than the three-years at the mids."

The analyst used a credit spread assumption in the low-100 basis points over Libor range for the shorter-dated series and a mid-100 bps over Libor spread for the B series. Both series were assigned a volatility of in the mid-20% region.

Another convertible analyst said the deal looked "interesting" and agreed that the five-year series modeled better.

"I think most equity analysts are neutral to positive on the stock, so for outrights I think this could be an interesting investment," the second analyst said. "The five-years do model a little better assuming both of them price at the mids, although the difference isn't that big."

Dendreon silent on borrow woes

Dendreon's planned $75 million of seven-year convertible senior subordinated notes remained silent in the gray market Tuesday as stock to borrow continued to evade hedge funds.

The deal was expected to price after the market closed, talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%. The convertibles will be offered at par. Dendreon stock (Nasdaq: DNDN) closed at $8.75, up by 6.71% or 55 cents.

There is an over-allotment option for a further $25 million.

Merrill Lynch was the bookrunner of the Rule 144A offering.

Dendreon, a Seattle-based biotechnology company, said the proceeds of the deal will be used to develop the commercialization and manufacturing of its prostate cancer drug Provenge, research other products and fund general purposes.

"I hear that there's zero borrow available," a convertible analyst said. "It's just not available. So from a hedge perspective that's sort of killed the whole deal. Unless the underwriter has a way to get stock to the hedge guys, I don't see any hedge guys getting involved in this."

The analyst said outright investors will need to be confident in Dendron's product to want to get involved.

"They have $77 million worth of cash and they're issuing $75 million more," the analyst said. "Over the last 12 months they've burned $96 million in cash, so even with this convertible deal it looks like it will keep them floating only for the next year and a half and they're expecting people to buy a seven-year piece of paper with no puts. You're just betting that that [drug] will go through and if that goes through then they'll do great, but if that doesn't happen, then what?...They could raise more money again, and in this market that's probably what they will do, but it's still a gamble."

Ciena quiet in gray

Ciena's planned $450 million of 10-year convertible senior notes also failed to see action in the gray market on Tuesday with price talk seen as slightly too aggressive.

The deal was talked at a coupon of 0.625% to 1.125% with an initial conversion premium of 13% to 17%. The convertibles were offered at par. Ciena stock (Nasdaq: CIEN) declined 4.85% or $1.69 to close at $33.17 on Tuesday.

There is an over-allotment option for a further $50 million.

Deutsche Bank is the bookrunner of the registered offering.

Ciena, a Linthicum, Md.-based supplier communications networking equipment and software, said about $38.3 million of the proceeds will fund a call spread option on its common stock, while the rest of the proceeds will be used for general purposes, which could include buying back its outstanding 3.75% convertible senior notes due 2008.

"To be honest it doesn't look that great to me," a convertible analyst said. "I have it a little rich to fully valued."

The analyst said the deal modeled on a volatility in the mid-30% range and a credit spread around 300 basis points over Libor.

"We're using a pretty wide spread because it's a 10-year bullet, no calls and no puts, so it's a little riskier of a credit...It's not looking so good at the mids, maybe at the cheaps, but at the cheaps I'm sure it's something like 0.5% cheap."

The analyst said that although Ciena's credit was "decent" and the spread would be more palatable if the convertible was a five- or seven-year bullet, 10 years may be a little too far out.

"On a 10-year hard-call life with no puts, that's a pretty long piece of paper," the analyst said.

Cogent launches overnighter

Cogent Communications announced late Tuesday an overnight $200 million offering of 20-year convertible senior unsecured notes talked at a reoffer price of 98.75 to 99.25 with a fixed coupon of 1% and an initial conversion premium of 75%.

There is an over-allotment option for a further $20 million. Cogent stock (Nasdaq: CCOI) closed at $28.10 on Tuesday. The stock slipped 3.95% or $1.11 in after-hours trading to settle at $26.99 following the announcement of the deal.

Bear Stearns, UBS Investment Bank, RBC Capital Markets and Cowen & Co. were the bookrunners of the Rule 144A offering.

The conversion rate will be increased if the volume weighted average price of Cogent's common stock exceeds the initial conversion price of $49.18.

Cogent, a Washington-based provider of high-speed internet access, said about $10.6 million of the net proceeds will be used to redeem its outstanding 7.5% convertible subordinated notes due June 15, 2007, while $50 million will be used to buy back its common stock. The remaining proceeds will be used for general purposes.

Panda Ethanol plans deal

Panda Ethanol also announced a $140 million offering of seven-year convertible senior notes expected to price June 19 after the market closes.

The convertible is talked at a coupon of 6% with an initial conversion price of about $5 per share, or an initial conversion discount about 17% below the stock's current levels. Panda Ethanol stock (PDAE) fell $2.30 or 27.71% to close at $6 after the deal was announced.

The convertibles will be offered at par, but the company will pay $1,500 per note at maturity. The initial conversion price is also below Panda common stock's closing price of $6 on Tuesday.

Morgan Stanley is the bookrunner of the Rule 144A offering.

Panda Ethanol, a Dallas-based ethanol refining company that specializes in using cattle manure as a thermal energy source, said the proceeds of the deal will be used to fund its Yuma ethanol facility and general purposes.

The deal contains several unusual features, such as coupon step-ups if certain operational milestones are not met. The company may also choose to pay the coupon in kind, in which case the principal will accrete at a 7% rate.

The call protection mostly involves variations in the redemption price rather than the more usual hard-call features.

A market source explained that the unusual structure of the deal essentially offsets the risks involved in investing in the company as well as the lack of liquidity in the common stock. The deal is also expected to be widely marketed rather than being placed with just a handful of investors, the market source said.

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