Amgen falls under drug panel scrutiny; Alesco, Chesapeake gain early, end flat; CACI, L-1 quiet in gray

By Kenneth Lim

Boston, May 10 - Amgen Inc. fell outright but improved on a dollar-neutral basis on Thursday after a regulatory advisory panel recommended tighter restrictions on anemia drugs that include the company's Aranesp.

Meanwhile, Alesco Financial Inc. made early gains in its secondary market debut but settled flat as its stock faltered during the day.

Chesapeake Energy Corp. rose slightly on light volume after its massive $1 billion deal priced within talk.

The gray market stayed silent on CACI International Inc. and L-1 Identity Solutions Inc. although both deals were seen to model cheap. But interest in L-1 was expected to be hampered by a dearth of stock to borrow.

Inverness Medical Innovations Inc.'s new $132.5 million series of 10-year convertibles was quiet with its deal believed to be tightly held by a handful of investors.

Amgen falls on drug's woes

Amgen convertibles fell 1 to 3 points outright on Thursday but rose on a hedged basis after the stock tanked on a Food and Drug Administration advisory panel's recommendation to impose curbs on anemia drugs such as Aranesp.

The 0.125% convertible due 2011 traded at 93.625 against a stock price of $61, down by about a point. The 0.375% convertible due 2013 was also a point lower at 93 versus the same stock price but was seen to fall to about 91 later in the day. Amgen stock (Nasdaq: AMGN) fell 9.14% or $5.77 to close at $57.33.

"Amgen took a beating today after the FDA ruling came out," a sellside convertible trader said.

The FDA panel, whose recommendations are usually followed by the FDA, sought new prescribing restrictions on anemia drugs such as Aranesp, which came under spotlight after some studies suggested that the drugs could raise the risk of death. The panel also demanded new clinical trials but allowed maximum recommended dosages to remain.

"This is obviously not good for Amgen," a sellside convertible analyst said. "Actually most people were already expecting the FDA to tighten regulation of these drugs because the FDA seems to be clamping down on issues like this, but I think what really sent the stock crashing was the extent that the panel appeared to be concerned or critical about the drugs. It's definitely going to cost the companies in terms of sales and additional trials, so the only question now is how much."

The analyst said Amgen's credit may have weakened slightly but the news on Thursday was not enough to break the company's creditworthiness.

"This is definitely going to hit their bottom line, but the company's still going to be profitable and the bond floor is still going to hold," the analyst said. "If you had hedged these you probably came out OK. The outright guys obviously will be happier if the stock goes up, but they're still holding up better than the stock."

Alesco gains on debut

Alesco's upsized $115 million offering of 20-year convertible senior notes was seen as high as 101.5 early Thursday but eased closer to par on weakness in the stock.

The new 7.625% convertible due 2027 was marked at 100 against a stock price of $9.35 at the end of the day. The convertible was offered at par. Alesco stock (NYSE: AFN) closed at that $9.35 price, down by 2.09% or 20 cents.

"The Alescos did well," a buyside convertible trader said. "It's kind of a high-risk deal, but you're looking at a really fat coupon and a pretty low premium. It was a pretty popular deal."

Alesco priced the deal Wednesday after the market closed with an initial conversion premium of 22.5%. The deal was talked at a coupon of 7.375% to 7.875% and an initial conversion premium of 20% to 25%.

The size of the deal was originally $75 million with an over-allotment option for a further $11.25 million. The greenshoe is now $25 million.

RBC Capital Markets was the bookrunner of the Rule 144A offering.

Alesco, a Philadelphia-based real estate investment trust, said it will use $32.1 million of the proceeds to concurrently buy back its common stock at $9.55 per share. It will also partly repay its outstanding debt and fund additional investments.

Chesapeake up, quiet in start

Chesapeake's new 2.5% convertible senior note due 2037 also made early gains but fell back to par after its deal priced to mixed reviews.

"Chesapeake was 100.125 early then I saw them getting whacked at par after that," a sellside convertible trader said. "It wasn't terribly active on the Street."

Chesapeake offered the convertible at par. Chesapeake stock (NYSE: CHK) slipped 1.4% or 48 cents to close at $33.91.

Chesapeake priced the $1 billion offering Thursday before the market opened at an initial conversion premium of 50%. The deal was talked at a coupon of 2.125%-2.625% and an initial conversion premium of 47.5% to 52.5%.

There is an over-allotment option for a further $150 million.

Credit Suisse and UBS Investment Bank were the bookrunners of the registered offering.

Chesapeake, an Oklahoma City-based oil and gas exploration and production company, said it will use the proceeds of the deal to repay outstanding revolving debt that currently bears interest at an average of 6.7%.

"They were able to price it up 50%, but I was surprised because I know people didn't like the premium," a convertible analyst said. "It's a great company, but on this piece of paper I thought they modeled fair...The equity has some good upside, but they didn't set up all that well for hedgies and that vol's really low now. It's hard to see how you'd get a 50% premium with that kind of vol."

CACI quiet in gray

CACI's planned $270 million of seven-year convertible senor subordinated notes was quiet in the gray market on Thursday, but analysts said the deal appeared cheap.

The deal was expected to price Thursday after the market closed. It was talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 20% to 25%. CACI stock (NYSE: CAI) closed at $45.54, lower by 5.32% or $2.56.

The convertibles will be offered at par.

There is an over-allotment option for a further $30 million.

JPMorgan and Banc of America are the bookrunners of the Rule 144A offering.

CACI, an Arlington, Va.-based simulation and information technology company, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions. The proceeds will also fund general corporate purposes, including possible acquisitions and stock buybacks.

A sellside convertible trader said the deal modeled about 1.5 points cheap at the midpoint of talk using a credit spread assumption in the mid-200 basis points over Libor region and a volatility in the mid-20% range.

"It looked like a pretty good deal," the analyst said.

L-1 faces tough borrow

L-1's planned $150 million of 20-year convertible senior notes also remained silent in the gray market with the deal seen as cheap but limited by a poor stock borrow.

"I have customers who don't seem too enthused for it," a sellside convertible trader said.

The deal was talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 57.5% and 62.5%. The convertibles will be offered at par. L-1 stock (NYSE: ID) closed at $20, down 0.05% or one cent.

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

Bear Stearns and Banc of America are the bookrunners of the Rule 144A offering.

L-1, a Stamford, Conn.-based identification security company, said it will use the proceeds of the deal to buy back up to 4.2 million shares of its common stock, repay existing senior debt and fund general purposes including acquisitions.

"The problem here is that there's no borrow, or a very, very tough borrow," a convertible analyst said. "The premium's a big concern too. I think it's an interesting company, but it's a 60% premium, which is tough, and there's no borrow."

The analyst said it was not clear whether the company's stock repurchase would create a borrow facility that will improve the situation. But even if some stock was freed up the rebate on the borrow may not be good enough.

"If you can get a borrow and a rebate then it's an interesting deal," the analyst said.

Another analyst said the deal modeled "pretty cheap" if the stock borrow was not a problem and using a volatility in the mid-30% range and a credit spread around the mid-300 basis points over Libor area. But with the stock borrow factored in, it "makes sense why it is modeling cheap," the second analyst said.

"CAI definitely looks better," the analyst said. "Although I like the business ID is in."

Inverness stays quiet

Inverness's new $132.5 million of 10-year convertible senior subordinated notes were quiet on Thursday, making a debut that was as quiet as its marketing.

The 3% convertible with an initial conversion premium of 30% priced Wednesday after the market closed. Inverness did not disclose details of the private placement.

Inverness, a Waltham, Mass.-based developer of in vitro diagnostic products, said the proceeds of the deal will be used to fund general corporate purposes, including acquisitions. The company on Wednesday announced a $1.7 billion, or $92.50 per share, bid for medical test maker Biosite Inc.

"Didn't see any of it at all," a sellside convertible trader said.

A convertible analyst also did not hear about the deal until it was priced.

"It was all private," the analyst said. "I haven't even seen a term sheet."

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