ImClone, Impax brighten as convertible players eye firmer market; GM extends gains

By Rebecca Melvin and Ronda Fears

Princeton, N.J., June 8 - A pair of biotechnology issues was active in an otherwise rather quiet day in convertibles on Wednesday. But market tone was seen firmer overall with more buyers appearing ready to step in, traders and analysts said. Two of General Motors Corp.'s trio of convertible bonds extended gains.

Biotechnology firm ImClone Systems Inc. was very active after a double dose of good news that also fueled its stock price up.

The first good item was that data from a late-stage study confirmed that ImClone's Erbitux - the same drug that was at the heart of the Martha Stewart scandal - when used in combination with radiation therapy, prevents the spread of head and neck cancer more effectively than radiation therapy alone. Erbitux is already approved by the Food and Drug Administration to treat colorectal cancer. Imclone had previously announced it would hold off seeking approval for its Erbitux drug in treating head and neck cancer until later in the year.

Icahn influences ImClone gain

Second, financier Carl Icahn filed Tuesday for clearance to invest between $100 million and $500 million in ImClone, including already acquired shares.

"I'm not sure of [Icahn's] intention. But whenever a big, savvy investor gets involved, people want to hop in," a New York-based convertibles desk analyst said, suggesting the spike was caused by a bit of hype as well as favorable value.

ImClone's 1.375% convertible moved up about 1.5 points Wednesday to 83.75 bid, 84 offered, up from an average level in recent sessions of about 78-79. ImClone stock surged $4.89, or 16.2%, on the day to $35.06.

"It's a good credit, and the interest by both Icahn and Bristol Myers in the company was the rationale [for the activity]," another analyst said.

The situation revived memories of a snag with Erbitux in 2002, which led to the celebrity scandal that eventually sent Stewart as well as former chief executive and ImClone founder Sam Waksal to prison for securities fraud.

Ruling, sweetener push Impax

A second biotech name, Impax Laboratories Inc., saw its convertibles "better bid" Wednesday in line with a strong stock price after news of an appeals court ruling in favor of Endo Pharmaceuticals Holdings. The ruling said that a lower court was right in its decision that certain OxyContin patents controlled by drugmaker Perdue Pharma LP were unenforceable. Along with Endo, Impax markets a generic version of OxyContin, which is a controversial painkiller known generically as oxycodone.

Another situation affecting Impax is that is has until June 21 to get filings to the Securities and Exchange Commission. One market participant said that right now the company is negotiating with some of the large bond holders to sweeten the deal. A convertibles analyst suggested that a revision of the package to include cash takeover protection as well as moving up the bond's put date to 2007 to be in line with the call date would be two revisions of the package that would be good enough to satisfy bondholders. Currently, the Impax convertible's put date is 2009. The analyst also said such moves would add about 5 points to the bonds.

Impax's 1.25% convertible senior subordinated debentures due 2024 were up Wednesday to 89.5 bid, 90.5 offered, from about 85.5. Impax stock was up for the day, but off its highs, at $16.86, a gain of 15 cents, or nearly 1%, on the day.

Tech paper eyed on outlooks

That Texas Instruments lifted its quarterly earnings estimate gave trading in stocks a boost Wednesday and may have helped spur a little activity in the convertible issues of Lucent Technologies Inc., Agilent Technologies Inc. and RF Micro Devices Inc.

RF Micro is a circuit designer for cell phone companies, and its 1.5% convertible due 2010 was seen at 84.25 bid, 85.25 offered, with a stock price of $4.65. The stock closed at $4.62, up 2 cents, or 0.43%.

Agilent, whose convertible gained 0.25 point Tuesday after news the company is looking to sell its money-losing semiconductor products division, was seen unchanged Wednesday at 98.5 bid, 99 offered on its 3% convertible senior reset notes due 2021. The stock on Wednesday added 23 cents, or 0.95%, to close at $24.45.

GM bonds extend gains

Billionaire investor Kirk Kerkorian boosted his stake in General Motors to 7.2% after his firm, Tracinda Corp., purchased 18.9 million shares as part of a tender offer, the company said Wednesday. The news helped extend gains in two of GM's three convertible bonds, alongside the stock.

The convertibles rose Tuesday along with the stock after the company announced at its annual meeting a plan to cut 25,000 jobs over the next several years.

GM's 6.25% convertible added 0.42 point, or 2%, to 21.25, and the 5.25% issue rose 0.21 point, or 1.2%, to 18.22. But the 4.5s dipped after an initial gain to settle down 0.11 point to 23.84. GM shares gained $1.29 on the day, or 4.2%, to $30.02.

Volatility weak but inviting

Volatility levels may still be excruciatingly low, but Lehman analysts have noted an expanding set of opportunities may be present to a greater degree now than in recent months.

Implied volatility of investment-grade convertible bonds declined further in May to 22.4% from 23.7% in April, the Lehman analysts said, while realized volatility of their underlying stocks was nearly unchanged at 22.9%. The analysts noted the GM factor and said that had those convertibles not been removed from that calculation in May, implied volatility would have been 23.6% with realized volatility substantially higher, at 25.4%.

Perhaps more importantly, the analysts said the spread between implied volatility of investment-grade convertible bonds and realized volatility of their underlying stocks now stands at a negative 0.5 points, "suggesting potential relative value opportunities may be present in this space to a greater degree than at any time in the past two and one-half years."

The top investment-grade convertible bonds with the lowest implied volatility relative to the 90-day realized volatility of the underlying stocks listed in Lehman's monthly report as of the end of May were the Harris Corp. 3.5%, Sealed Air Corp. 3%, Inco Ltd. 1%, SLM Corp. floater and Masco Corp. series B 0% issues.

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