Chiron drops as convertibles market trades mostly flat to lower; but CV Therapeutics, Isis gain

By Rebecca Melvin

Princeton, N.J., July 15 - The convertibles market was mostly flat to slightly lower Friday, with names in the healthcare, energy, and airlines sectors trading lower, as investors decided to take profits in names that were among the best performers in the first half of the month.

In healthcare's biotechnology side, the convertibles of Chiron Corp. dropped on a batch of bad news, but CV Therapeutics Inc. jumped and Isis Pharmaceuticals Inc. was higher.

3M Co. edged lower ahead of its earnings report seen Monday, and Rambus Inc. convertibles lost in response to lackluster earnings posted after the close Thursday.

In recent days buyers have been eyeing King Pharmaceuticals Inc., which saw its convertibles lift Friday

"It definitely has a few buyers. We're printing a bid at 95 and change. It's definitely at 96.25 levels," said a New York-based sellside trader.

Overall, the market was "not overly busy," but "steady" traders said.

Raft of news sinks Chiron

Chiron convertibles dropped 0.5 point to 1 point on Friday after the Emeryville, Calif.-based biotech delivered a triple news whammy ahead of the bell.

First, the company said it received an action letter from the U.S. Food and Drug Administration, saying that the company's new drug Pulminiq, an experimental lung transplant drug to help organ rejection, is "approvable," but that an additional pre-approval study is required to confirm its efficacy. The drug is the inhaled version of cyclosporine, which has been approved for transplants of liver, heart and other organs.

Second, the company said it has cut by two-thirds its supply expectations for the Begrivac influenza virus vaccine for customers outside the U.S. for the winter flu season, and it may delay shipments until October due to manufacturing quality concerns.

Chiron, which had to scrap its flu vaccine last season because of contamination problems at its U.K.-based plant, has reduced expected supply of Begrivac by 8 million doses to 4 million doses. The vaccine is manufactured at Chiron's facility in Marburg, Germany.

Chiron said it is conducting additional testing to determine the full extent of the issue. In addition to the Marburg facility, Chiron makes vaccines for Europe and other non-U.S. markets at a facility in Siena/Rosia, Italy.

It said it hopes to mitigate the impact of reduced supply of Begrivac by reallocating non-U.S. vaccine doses among affected markets, and by allocating the shipment of the company's non-U.S. influenza virus vaccines from extra production in Siena.

Chiron said it won't record any sales of Begrivac in the third quarter, but it still expects to be within the range of its updated 2005 financial guidance of income from continuing operations.

Third, Chiron said that the FDA is currently conducting a full inspection of its Liverpool, U.K., facility which manufactures Fluvirin influenza virus vaccine.

"It's going to be a snowball effect for a little while, a New York-based convertibles analyst said, referring to the market's "twice shy" reaction to news about vaccine production.

Chiron's 2.75% convertible due 2034 was down about 0.75 point to 95.5, compared with 96.173 bid, 96.423 offered on Thursday.

Its 1.625% convertible due 2033 traded at 93, down about 0.5 point from Thursday. Shares of Chiron lost $1.24, or 3.33%, to $36.03 on the Nasdaq Stock Exchange.

Isis, CV Therapeutics gain

Healthcare, under which biotechnology companies are often categorized, wasn't one of the best performing sectors in the first half of July, a New York-based convertibles analyst said. And perhaps that is why the sector held up better than some others, such as transportation and energy, on Friday.

Nevertheless, biotechnology was no laggard in the two weeks since June 30. Healthcare ranked eighth in terms of performance in that period, with an improvement of 1.64% on a weighted average basis, according to Merrill Lynch & Co. figures. But within that category, biotechnology was up 2.82%, compared with the pharmaceuticals part of healthcare, which was up by only 1.46%.

The convertibles of Isis Pharmaceuticals traded up about 2 points on Friday amid no obvious news. The 5.5% convertible due 2009 traded at 85.5, compared with 82.661 bid, 83.661 offered on Thursday. Shares of the Carlsbad, Calif.-based biotech gained 14 cents, or 2.99%, to $4.83.

CV Therapeutics didn't have specific news on the tape either, but a pair of its convertibles surged 6 points. The Palo Alto, Calif.-based biotech's 2.75% convertibles due 2012 were up at 164.197 bid, 164.697 offered, compared to 157.561 bid, 158.061 offered on Thursday. Its newer 3.25% convertibles due 2013 were up to 120.029 bid, 120.539 offered, compared to 116.417 bid, 116.917 offered on Thursday.

Shares of CV Therapeutics were up $1.35, or 5.26%, at $27.00.

The convertibles of Ivax Corp. edged slightly higher Friday after the Miami-based generic drug maker said it received final FDA approval for hydrochlorothiazide capsules 12.5 mg.

This product will be sold through subsidiary Ivax Pharmaceuticals, Inc. Hydrochlorothiazide capsules 12.5 mg is the generic equivalent of Microzide Capsules 12.5 mg, which is marketed by Watson Pharmaceuticals, Inc. and is indicated for the management of hypertension.

Ivax's 1.5% convertible due 2025 traded at 115.86 bid, 116.26 offered, edging slightly higher from Thursday.

Energy dips despite higher oil

Several energy names in convertibles traded 1 point to 2 points lower Friday despite oil prices which reversed course again amid renewed concerns about bad weather affecting production in the U.S. Gulf.

Weather forecasts showing the track of Hurricane Emily indicate it is moving closer to production platforms and refineries in Texas. It could become the fifth storm to enter the Gulf in as many weeks and is predicted to reach land close to the United States-Mexico border next week.

Oil drillers including Nabors Industries Inc. and Diamond Offshore Drilling Inc. saw their convertibles lower, although Nabors' convertibles were only slightly lower, while Diamond Offshore's 1.5% convertible due 2031 shed nearly 2 points to 121.243 bid, 121.493 offered.

The convertibles of Transocean Inc., the largest offshore drilling company, weren't reported to have traded. However, its 1.5% due 2021 "ran up a little bit" in the first couple of weeks of July to 102.75 from 101.125, a New York-based analyst said. "It's callable in a year and carries a 34% premium, so it has a long way to go."

Schlumberger Inc. lost one point, leaving its 1.5% convertible A tranche due 2023 at 115.2 bid, 115.7 offered. Its shares lost 49 cents, or 0.5%, to $75.81.

Airlines take a break

The convertibles of airlines came off Friday after strong performance in the first two weeks of the month. Transportation, of which airlines is a part, gained 4.42%, according to the Merrill data. The second best-performing sector was materials, with a 3.9% gain, followed by consumer discretionary, which gained in large part due to the automakers' employee discount programs that are drawing down inventories this month.

AMR Corp., the parent of American Airlines, saw its convertibles back off a little more than a point after surging on Thursday. Its 4.25% convertible due 2023 traded at 94.466 bid, 94.966 offered.

3M flat to lower

The diversified 3M Co. saw its convertibles trade flat to lower by about 0.5 point ahead of its second-quarter earnings reported expected Monday.

The St. Paul, Minn.-based company is seen posting earnings above last year's level due mostly to growth in LCD-related products.

Its 0% convertible due 2032 traded at 86.76, compared with trades at 87.4 bid, 87.7 offered on Thursday. Its shares were essentially flat, adding just two cents to close at $75.45.

Earnings pressure Rambus

Rambus saw its convertibles drop about 1.5 point on Friday after the company posted lower net income for its second quarter.

Its 0% convertible traded at 82, versus a stock price of $14.50 early Friday. Shares ended the day down $1.02, or 6.97%, at $13.62.

King attracts buyers

The former takeover target of Mylan Labs Inc., King Pharmaceuticals, has seen activity in its 2.91% convertibles in the last week, according to a trader. The paper traded at 96 bid, 96.50 offered on Friday, up from early bids in the day at 95.5.

The Bristol, Tenn.-based company was almost acquired by Mylan Labs 12 months ago; but the deal was torpedoed by billionaire investor Carl Icahn, who didn't approve.

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