Vertex higher on drug study data; Cobalt improves dollar-neutral; Intelsat extends gains

By Rebecca Melvin

New York, April 19 - Vertex Pharmaceuticals Inc.'s convertibles steamed higher Friday on both an outright and dollar-neutral, or hedged, basis as shares of the Cambridge, Mass.-based specialty drug company surged 62% on favorable results from a mid-stage study of its cystic fibrosis drug, market sources said.

"That's the name du jour," a New York-based trader said of Vertex. A second trader said the Vertex convertible was "the bid name of the day."

Also higher was Cobalt International Energy Inc.'s 2.625% convertible. Those bonds were better on a dollar-neutral basis by about 0.375 point with the underlying shares up 1.4%, New York-based trader said.

The Houston-based oil and natural gas deepwater driller reported that a well located offshore from Angola didn't produce in a test, but that the test did confirm potentially high flow rates.

"The news was largely expected," the trader said.

NetApp Inc.'s 1.75% convertible, which matures in June, traded actively again as shares of the Sunnyvale, Calif.-based data storage company traded down 2.4%

Intelsat SA's 5.75% mandatory convertible preferreds, which debuted Thursday, rose strongly and were seen at 54.48 versus a common share price of $20.85. The preferreds were up $3 against the common that was up $1.50.

Otherwise, the market was quiet. Traders said a lot of the day's focus was on Boston, where a massive manhunt was underway to find the remaining brother who is a suspect in the Boston Marathon bombings.

"A lot of people are watching television," a New York-based trader said.

A second trader said, "All eyes are on Boston right now."

The Boston Marathon bombings left three dead and more than 170 injured on Monday. Of two suspects that emerged, the elder brother was killed by police in a shootout late Thursday. The chaos overnight also left one police officer dead and another officer injured.

Equities Friday ended higher after early losses. But the major indexes were still down for the week, which was marked by a sharp pickup in volatility. The Dow Jones industrial average ended up 10.37 points to 14,547.51; the S&P 500 stock index added 13.64 points, or 0.9%, to end at 1,555.25; and the Nasdaq stock market gained 39.70 points, or 1.3%, to 3,206.06.

Vertex catapults higher

Vertex Pharmaceuticals' 3.35% convertible senior rose to 173 bid, 173.25 offered versus an underlying share price of $84.00 on Friday. That was up compared to 118.25 versus an underlying share price of $52.87 before the news, according to a Connecticut-based trader.

The 55-point outright climb in the convertibles represented about 13 points to 14 points of expansion on a dollar-neutral basis if the bonds were held on about a 60% delta, the trader said.

A second trader said that holders made 12 points on a dollar-neutral basis if the bonds were held on a 65% delta. A third trader said that the gain on swap was 7 points "out of the gate" if people were on a 70% delta.

"Most people were on a 70% delta," the third trader said. "Sixty would be too light."

Shares of the Cambridge, Mass.-based specialty pharmaceutical company were up about 60% for much of the session, and pushed higher into the close to end up $32.73, or 62%, at $85.60.

Driving the gains was positive data for its cystic fibrosis drug, known a VX-661, in combination with its already approved treatment for cystic fibrosis, Kalydeco (ivacaftor) in a 28-day study.

Vertex said its experimental drug improved lung function in adults with cystic fibrosis in a mid-stage trial.

The phase II study involved 128 people with cystic fibrosis who had two copies of the most common gene mutation responsible for the disease.

Patients treated in the two highest dose groups had a mean relative increase in lung function of between 7.5% and 9%, compared with patients taking placebo.

The news was released late Thursday and $20 million of the Vertex convertibles changed hands at that time when the stock surged to $80 in after-hours action.

On Friday, one trader said "the first couple of prints out of the gate were up 7 points on swap if you were set up like most people on a 70."

The convertibles were trading a little more than a point over parity, and holders were setting them up on a heavier 98% to 99% delta at the higher stock price.

The convertibles are also provisionally callable since they are trading above the threshold price, but if the company calls them, it has to make holders whole in terms of coupon payments.

"The price reflects the valuation assuming they have to pay that final coupon," a trader said.

Cobalt adds dollar-neutral

Cobalt's 2.625% convertibles due 2019 traded at 109.875 bid, 110.25 offered at the close, versus the closing share price of $26.97 a trader said.

That represented an expansion on a dollar-neutral basis of about 0.375 point, a trader said.

Cobalt shares added 40 cents, or 1.5% during the session.

Because news of the test results from the lowest level drilled at its Carneia No. 2 well off the coast of Angola was not unexpected, the securities reacted positively, the trader said.

"One of the wells didn't have the production, but it wasn't new news. I was a little surprised that the stock was indicated to open at $25.10 and sure enough, [the shares] moved higher,"' the trader said.

Intelsat flat dollar-neutral

Intelsat's new 5.75% mandatory convertible preferred shares traded up to $54.48 on Friday, which was significantly higher than where the shares closed on their debut Thursday, which was at $51.25 versus an underlying share price of $19.25. They have a $50.00 par.

Intelsat common stock was higher by about 3% during the session and then pushed higher into the market close, ending up $1.00, or 5%, at $20.25.

"The stock is running. It went all the way up to almost $21.00," a trader said, noting strong investor demand in both the common stock and mandatory preferred shares.

Intelsat, a Luxembourg -based fixed satellite services provider, priced $150 million of three-year series A mandatory convertible preferred shares to yield 5.75% with an initial conversion premium of 22.5%.

The junior non-voting mandatory preferreds priced concurrently with Intelsat's IPO on Thursday

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Intelsat SA NYSE: I

NetApp Inc. Nasdaq: NTAP

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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