Mylan off outright, expands on hedge; Incyte premium comes in; Alaska Communications on tap

By Rebecca Melvin

New York, May 3 - Earnings news drove much of what action there was in the convertible bond market Tuesday, and a lot of that action was in the health care space, during a session that brought a good deal of intraday volatility, market sources said.

Mylan Inc. was lower outright, but gained on a hedged basis by 0.25 point to 0.75 point, market sources said, after the Canonsburg, Pa.-based generic and branded drug maker reported in-line first-quarter profit.

The company also discussed reducing leverage, which gave rise to speculation that Mylan's 3.75% convertibles - an issue that is predominantly held by hedge players - is a likely flush out candidate.

"They were better to buy on hedge off of the earnings," a New York-based sellside trader said.

Incyte Corp. was in about 1.5 points at 15.5 points of premium over parity, according to a New York-based sellside analyst, after the Wilmington, Del.-based biopharmaceutical company's shares popped 12% on a first-quarter loss that was better than expected on revenue that beat estimates.

Dendreon Corp. traded wider by about a point to 31.8 points of premium over parity after the Seattle-based biotechnology company reported first-quarter results that were in line with guidance and reiterated its full-year sales guidance.

Other names cited in trade were mostly investment-grade health care companies, including Medtronic Inc., which saw its B paper changing hands, as well as Amgen Inc. and Gilead Sciences Inc.

The new issue front was quiet during the session, but after the market close, Alaska Communications Systems Group Inc. launched a $100 million offering of seven-year, non-callable for life convertible notes, which were set to price late Wednesday via J.P. Morgan Securities LLC with Oppenheimer & Co. Inc. and Evercore as co-managers.

Mylan gains on hedge

Mylan's 3.75% convertibles due 2015 settled lower on an outright basis at 194.875, after trading in heavy volume, versus the closing share price of $24.23, according to a New York-based sellside trader.

Given the stock move, the paper, which is well in-the-money and very sensitive to equity moves, contracted about 4 points outright, but they expanded on hedge, the trader said.

Mylan's 1.25% convertibles due 2012 - which are an outright play - were less active, but traded at 112 versus a share price of $24.00 during the session and were seen closing a little higher at about 113 to 114.

Shares of the Canonsburg, Pa.-based generic drug maker dropped 61 cents, or 2.5%, to $24.23 on Tuesday.

The more tightly held Mylan 1.25% "are more likely going to be addressed with cash," the trader said, meaning that the company will let those mature, as opposed to speculation that the Mylan 3.75% convertibles will be "flushed out."

There was speculation about whether the company would take such action on the 3.75% convertibles based on the earnings conference call in which company officials said they wanted to reduce Mylan's leverage down to three to one, the trader said.

"Investors asked about the converts, and the company said they plan a stock buyback of up to $350 million," the trader said.

There are $600 million outstanding of the Mylan 1.25% convertibles and $575 million outstanding of the 3.75% convertibles.

"The [3.75%] bonds have a decent coupon, they carry well, and have a good duration," so it's a good play, the sellsider said.

Volume in the Mylan 3.75% bonds was notably high and was at one point the most active junk-rated bond on Trace, as reported by Advantage Data.

The Mylan 3.75% convertibles topped the actives list with about $22 million having changed hands as of about 3 p.m. ET.

The sudden surge in activity was attributed to speculation regarding the potential flush out.

Mylan's first-quarter earnings rose 71% to $104.2 million, or 23 cents per share, for the three months through March 31, up from $61.1 million, or 20 cents a share, a year ago.

Revenue rose 12% to $1.45 billion, mainly on higher drug sales in North America.

Excluding charges and including purchase accounting items and litigation expenses, the company said it earned 44 cents per share, matching estimates. In addition, analysts expected revenue of about $1.43 billion.

Generic drug sales rose 12% to $1.34 billion during the quarter, driven by volume in North America. Specialty drug revenue rose 17% to $97 million.

Looking ahead, the company reiterated 2011 profit guidance of earnings of between $1.90 per share to $2.10 per share. In February, the company said it expects revenue between $6.1 billion and $6.4 billion. Analysts expected profit of about $2.01 per share on revenue of about $6.1 billion.

Mylan's approved $350 million stock buyback program is expected to be completed by June 30.

Incyte premium slips

Incyte's 4.75% convertibles due 2015 traded higher outright at 241 versus a share price of $19.65 during the session, which represented 15.5 points of premium over parity, while the underlying shares shot higher on earnings.

On Monday, the Incyte 4.75% convertibles were 225 versus a share price of $18.25, but that premium was higher at 17 points.

Incyte shares surged $2.17, or 12%, to $20.43 on Tuesday.

Incyte's convertibles are an in-the-money issue that is called a "cash flow trade," meaning that it's a hedged name that players set up at 100%, in anticipation that shares will move lower, a sellsider said.

But the company reported better-than-expected revenue, guided up and received an upgrade.

Incyte's net loss for the quarter was $26.5 million, or $0.21 per share, compared to a net loss of $35.7 million, or $0.30 per share, for the same period in 2010.

Included in the loss was $15 million recognized under the Novartis agreement on the achievement of a predefined milestone in an ongoing phase 1 dose-escalation trial for INCB28060 in patients with solid tumors.

Also included in the loss was $6.9 million of non-cash expense related to the impact of expensing employee stock options, compared to $3.1 million for the same period in 2010.

Revenue jumped 85% to $32 million, compared to $17.3 million for the same period in 2010.

The increase was primarily the result of the $15 million predefined milestone recognized under the Novartis agreement.

As a result of the $15 million payment, the company raised revenue guidance to $82 million from $67 million for 2011.

Alaska Communications on tap

Alaska Communications, an Anchorage-based provider of broadband, wireline and wireless services, said it plans to price $100 million of seven-year convertible notes after the market close on Wednesday that were talked to yield a coupon of 5.75% to 6.25% and an initial conversion premium of 15% to 20%.

There is no over-allotment option.

JPMorgan is the bookrunner of the Rule 144A offering with Oppenheimer and Evercore as co-managers.

Proceeds will be used for general corporate purposes, including repayment of existing debt and to fund capital expenditures.

Mentioned in this article:

Alaska Communications Systems Group Inc. Nasdaq: ALSK

Amgen Inc Nasdaq: AMGN

Dendreon Corp. Nasdaq: DNDN

Gilead Sciences Inc. Nasdaq: GILD

Incyte Corp. Nasdaq: INCY

Medtronic Inc. NYSE: MDT

Mylan Inc. NYSE: MYL

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