Lennar improves on hedge; ViroPharma adds 0.25 point dollar neutral; Sotheby's cheaper

By Rebecca Melvin

New York, Jan. 11 - Lennar Corp.'s convertibles gained on both an outright and hedged basis Tuesday after the Miami-based homebuilder reported better-than-expected fourth-quarter earnings.

ViroPharma Inc.'s convertibles added about 0.25 point dollar neutral after the Exton, Pa.-based biotechnology company provided guidance that points to higher-than-expected growth of its Cinryze treatment.

Sotheby's was about 0.5 point cheaper on swap with lower shares on Tuesday amid no particular news, a sellside trading source said. A second sellsider said the convertibles were lower in line with the underlying shares.

Overall, action in the convertibles market was similar to Monday's mode, with a variety of names trading, some prompted by the advent of earnings season, but with not a lot of volume or flow direction, market sources said.

Lennar improves on swap

Lennar's newly priced 2.75% convertible senior notes due 2020 traded at 114 versus a share price of $20.00, which was seen higher by 0.25 point to 0.75 point on swap from a previous level of roughly 110 versus a share price of $18.90.

On their debut Nov. 5, the new Lennar convertibles were heard 100 bid, 100.25 offered versus a share price of $15.81.

The older Lennar paper, a 2% convertible senior note due 2020, traded at 103 versus a share price of $20.00 on Tuesday, which was up 0.5 point on swap, from a previous level of roughly 100.5 versus a share price of $18.90, a Connecticut-based sellside trader said.

Shares of the Miami-based homebuilder jumped $1.34, or 7%, to $20.24 from a previous close of $18.90.

Lennar's fourth-quarter earnings were better than expected even though profit dropped 10% from the prior year, to $32 million, or 17 cents a share for the quarter ended Nov. 30, down from $35.6 million, or 19 cents a share, for the year-earlier period.

The prior year's result included a large $320.5 million tax benefit.

Fourth-quarter revenue slipped 5.9% to $860.1 million. Revenue from home sales for the period decreased 13% to $725.8 million.

Lennar's Rialto Investments unit contributed a significant $13.4 million of operating earnings during the period.

New orders declined, while deliveries dropped 12% and the average home sale price was $238,000 as incentives dropped. But gross margins and expenses related to selling, general and administrative expenses improved.

The housing sector remains under pressure due to high unemployment, tight lending practices and low consumer confidence, chief executive Stuart Miller said in the release. But he said he is confident 2011 will be another profitable year for Lennar.

Lennar priced the upsized $435 million of 2.75% convertible bonds in December under Rule 144A. The convertibles are non-callable until Dec. 20, 2015, with a put in year five.

Proceeds were earmarked for general corporate purposes, including repayment of outstanding debt and potential acquisitions of real estate.

ViroPharma up 0.25 point

ViroPharma 2% convertible senior notes due 2017 traded at 114.50 versus a share price of $17.50, according to a New York-based sellside analyst, and that level compared to a previous level of 114.25 versus the same $17.50 share price.

Trace wasn't recording prints of the paper near the market close, however; so trading was thin.

Shares of the biotechnology firm settled higher by less than a dime at $17.54, which was up about 0.2%.

The ViroPharma convertibles trade on a 78% delta.

The company released its guidance early Monday, and JMP Securities equity research put out a note in response, reiterating its "outperform" rating and price target of $22.00 per share.

The guidance was slightly above expectations in terms of sales, but guidance for expenses was also a little higher because of the clinical work involved.

ViroPharma's Cinryze treatment is a brand of C1-inhibitor that has been FDA-approved for preventing hereditary angioedema, or HAE, attacks. HAE is a rare and potentially life-threatening genetic condition that includes episodes of edema, or swelling, in various body parts, including the hands, feet, face and airway.

ViroPharma chief executive Vincent Milano said in a news release that 2010 marked yet another year of continued progress for the company.

Cinryze is being taken by more than 600 U.S. patients who are actively preventing their HAE attacks, rather than treating them once they start.

"This strong foundation, along with the momentum we continue to generate in the marketplace leads us to provide 2011 U.S. Cinryze net sales guidance of between $235 and $260 million, representing excellent year over year growth," Milano said.

"Our 2011 Cinryze net sales guidance assumes that we receive approval of our supplemental biologics license application for our industrial scale manufacturing by late in the first half of the year," he said.

Current manufacturing is expected to yield up to 60,000 doses of Cinryze, which should generate at least $220 million of net sales in the U.S. during 2011.

The company plans to invest in 2011 in Europe.

It is also investing in non-toxigenic C. difficile and C1-INH clinical programs in 2011. Based on supportive preliminary phase 2 data, the company is moving forward into phase 3 clinical studies of subcutaneous formulation of Cinryze later this year.

The company also plans to begin phase 2 clinical testing of C1-INH in antibody mediated rejection and delayed graft function, as well as VP20621 for prevention of recurrence of C. difficile infection in 2011.

The company's combined R&D and SG&A expense guidance is targeted between $170 million and $190 million.

Sotheby's comes 'in' slightly

Sotheby's 3.125% convertible senior notes due 2013 were bid about 0.25 point cheaper on a hedged basis during the session with shares trending downward. Toward the end of the session, however, the 3.125% convertibles were seen lower about in line, at 146.125 versus a share price of $45.11.

"I have them in line from where I had them before," a West Coast-based sellside trader said.

Shares of the New York-based auctioneer of fine and decorative art ended lower by 30 cents, or 0.7%, at $45.41. The stock had been down by 1.8% earlier.

The convertibles are held by market players on an 80% delta and have a relatively small 10% to 11% premium.

There was no real news out on the stock; although Stifel Nicolaus put out a note on luxury retailer Tiffany & Co., one sellsider commented, which may have influenced trade in Sotheby's.

The Sotheby's convertibles were "'in' a quarter on a dollar-neutral basis, with the stock down 30 cents," a sellsider said.

Mentioned in this article:

Lennar Corp. NYSE: LEN

ViroPharma Inc. Nasdaq: VPHM

Sotheby's NYSE: BID

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