LifePoint Hospitals, MGI Pharma convertibles weaker on lower guidance; Cephalon jumps; GM mixed

By Rebecca Melvin

Princeton, N.J., Jan. 10 - The convertibles market turned mixed Tuesday, with earnings warnings from the likes of LifePoint Hospitals Inc. and MGI Pharma Inc. pulling the convertibles of those companies lower, traders said.

But Cephalon Inc. saw its stock and convertibles motor up on Tuesday after the Frazer, Pa.-based biotechnology company announced it had settled another patent dispute, this time with generic drug maker Mylan Laboratories Inc., over Mylan's version of Cephalon's Provigil tablets.

The Cephalon 2% convertibles gained more than 12 points outright to 172.5, and the 0% convertibles, both the A and B tranches, each added about another 9 points.

"It's just a machine," a New York-based sellside trader said of the Cephalon convertible paper.

General Motors Corp.'s $25 convertible bonds were mixed in active trade amid an onslaught of headlines. Among them was urging from billionaire shareholder Kirk Kerkorian's investment vehicle, Tracinda Corp., for GM to reduce its dividend in half and accelerate cost-cutting plans including reducing salaries of top company officials.

Meanwhile, better-than-expected December sales news from Apple Computer Inc. had some spill over effect onto related companies with convertible issues including Intel Corp. and Synaptics Inc., sources said.

Synaptics stands to gain if demand for Apple's iPod music players continues, a New York-based convertibles trader said.

So far Cypress Semiconductor Inc. has gained from growing iPod sales, but there are some who suspect that Apple might need another supplier and Synaptics could gain from that additional demand, the trader said.

LifePoint loses 1 point dollar neutral

The 3.5% convertibles of LifePoint Hospitals dropped about 6 points outright but only about a point on a hedged basis. And the bond issue held up either way compared to its shares, which tumbled 19% after the Brentwood, Tenn.-based health care services provider lowered its earnings guidance for every quarter in 2006.

Following lower earnings guidance, Deutsche Securities downgraded the shares to "hold" from "buy."

Why the 3.5s held up better on a hedged basis was linked to its delta of 55, which means modest sensitivity to the equity and also because investors are comfortable with the company's credit quality, according to a New York-based sellside convertibles research director.

In addition, people may have set it up on a hedged basis on a delta of less than 55, the research director said.

The bonds on Monday closed out at 90.625, versus a stock price of $36.25, which means it had 31 points of premium.

On Tuesday a 2 p.m. ET market was 84.875 bid, 85.375 offered, and at the close it was about 84.75 bid, which was down 6% compared to Monday, the sellsider said. LifePoint Hospitals priced the 3.5% convertibles in August.

LifePoint said it expects to earn 50 cents to 55 cents per share on revenue of $579.4 million to $589.4 million for the first quarter, well below the Thomson Financial consensus projection of 70 cents per share in earnings on $611.9 million in revenue.

The misses are about the same magnitude for the following three quarters, yielding full year earnings expectation of between $2.18 and $2.35 per share on $2.31 billion to $2.35 billion in revenue. Analysts had projected earnings of $2.87 per share on revenue of $2.5 billion.

Kenneth Donahey, chairman, president and chief executive, said, "We have acquired some great assets in great communities. Our year will be focused on laying the foundation for future growth and opportunities. As we have previously stated, the integration of the former Province facilities and our other recent acquisitions will take time, but we are up to the challenge of capitalizing on these great opportunities."

Shares of LifePoint closed down $6.87, or 19%, to $29.54.

MGI Pharma weaker

The 1.682% convertibles of MGI Pharma were weaker by about 2 points on Tuesday after the Minneapolis-based biopharmaceutical company lowered guidance for 2006 and said 2005 results missed expectations.

At the annual JPMorgan Healthcare Conference, MGI predicted 2006 sales of $370 million to $385 million, including as much as $300 million from Aloxi, its injection to treat chemotherapy-related nausea, and about $40 million from its Gliadel wafer, an implant for brain tumor patients, and around $25 million from its Dacogen cancer therapy, which hasn't yet been approved.

Analysts surveyed by Thomson Financial expected higher sales of $394.5 million for 2006.

For 2005, the company said its key Aloxi drug missed company guidance, totaling $248 million for 2005, including $67 million in the fourth quarter, which was below its guidance in October for full-year sales of $250 million to $260 million.

Sales of the Gliadel wafer were $34 million for the year, with about $8.5 million of that since MGI acquired the product in October when it bought Guilford Pharmaceuticals. MGI had said at that time that it expected $10 million in 2005 revenue from Gliadel.

The 1.682% convertibles traded at 61.875, compared with 63.75 bid, 64.25 offered on Tuesday. Shares of MGI sank 99 cents, or 5.5%, to $16.99.

Cephalon ratchets up again

The actively traded convertibles of Cephalon, namely the 2s due 2013 and the 0s due 2033, traded up again as their underlying shares surged 9% in heavy volume of 9.5 million shares compared with the normal amount changing hands of 1.8 million shares.

The catalyst was a settlement with Mylan Pharmaceuticals to their patent suit over a generic version of Cephalon's sleep disorder drug Provigil, which is used for such things as sleep apnea and narcolepsy.

In connection with the settlement, Cephalon will grant Mylan a non-exclusive royalty-bearing right to market and sell a generic version of Provigil in the United States. Mylan's license will become effective in October 2011, unless Cephalon obtains a pediatric extension for Provigil, which would permit entry by Mylan in April 2012.

An earlier entry by Mylan may occur based upon the entry of another generic version of Provigil. The terms of the agreement are confidential and are subject to review by the U.S. Federal Trade Commission. Financial terms were not disclosed.

The Cephalon 2s traded at 172.5, up compared to about 158 on Monday and compared with 114 versus a share price of $47.75 on Nov. 15. The 0% A tranche traded at nearly 132, and the 0% B tranche traded at 138.75.

"The short covering in this stock was crazy today," an equity trader said.

Meanwhile a buysider said that with three lawsuits down, and only one to go, it's unlikely that the only suit left - from Barr Pharmaceuticals Inc. - will have any grounds to stand on other than a settlement.

The deal announced Tuesday is Cephalon's third with generic-drug makers who have sued to break the Provigil patent in the United States. The other two settlements in December were with India's Ranbaxy Laboratories and Israel's Teva Pharmaceutical Industries Inc.

Each settlement precipitated a jump in Cephalon shares. On Tuesday, the shares gained $6.10, or 8.8%, for a close of $75.74.

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