Cephalon falls, PDL widens on results; NPS falls, MGI climbs on FDA news; XM firm despite lawsuits

By Kenneth Lim

Boston, May 3 - Biotech names dominated action in the convertible bond market on Wednesday with earnings disappointments triggering a mostly negative session for the sector.

Cephalon Inc. lost ground but stayed in line with its stock after the company's first-quarter earnings were seen as a mixed bag without any compelling positive story to boost the stock.

PDL Biopharma Inc. also fell on an outright basis after the stock crashed on disappointing earnings and a lowered forecast. But the convertibles managed to expand on a dollar-neutral basis, giving hedged investors something to cheer about.

NPS Pharmaceuticals Inc. also tumbled with its stock after the Food and Drug Administration sought a new clinical trial for the company's post-menopausal osteoporotic drug Preos. The company's 3% convertible due 2008 was seen at 84 against a stock price of $5.50 early Wednesday, said a sell-side source whose firm was "trading a lot of NPSPs." NPS stock (Nasdaq: NPSP) closed lower by 39.22%, or $3.22, to end at $4.99.

Salt Lake City-based NPS said the FDA was concerned that trials showed a higher incidence of patients having an abnormally high concentration of calcium in their blood when taking Preos compared to a placebo. NPS said it plans to file an amended drug application by early next year to address the FDA's concerns.

Beating the trend, Bloomington, Minn.-based MGI Pharma Inc. improved after it received FDA approval for its blood disease drug Dacogen. MGI's 1.682% convertible due 2011 was marked at 64.69 bid, 65.19 offered against its closing stock price of $19.28 on Wednesday. MGI stock (Nasdaq: MOGN) closed higher by 4.84% or 89 cents.

"Those did better outright and dollar-neural after the stock improved on the drug's approval," a sellsider said. "It was good for both outright and arb today."

MGI said Wednesday that the FDA approved Dacogen for the treatment of patients with myelodysplastic syndromes, and it expects to launch the drug in the second quarter.

"In general biotechs have been weak across the board for some time," said a sell-side analyst. "They've been very weak for the past two months, really."

Outside the biotech sector, XM Satellite Radio Holdings Inc. opened up on a dollar-neutral basis as the stock fell on news of a class-action suit against the company from some shareholders. XM's 1.75% convertible due 2009 was seen at 77.72 bid, 78.22 offered against the closing stock price of $17.51 on Wednesday. XM stock (Nasdaq: XMSR) closed lower by 5.09% or 94 cents.

"XMSR did a little better neutral as the stock continued to weaken," said the sellsider. "They were a touch better dollar-neutral because of news about the lawsuit, but I'm not sure how material it is."

Two lawsuits were filed this week on behalf of investors charging that XM executives reduced their stakes in the Washington, D.C.-based satellite radio broadcaster and misled shareholders about their plans to cut spending. XM said the allegations are without merit and it plans to "vigorously defend" itself.

Allied Waste Industries Inc. was also seen as holding firm despite a sharp drop in its stock on disappointing earnings. The company's 4.25% convertible due 2034 was marked at 96.5 bid, 97.5 offered against a stock price of $13.10 early Wednesday, and ended roughly in line on a dollar-neutral basis. Allied Waste stock (NYSE: AW) closed at $13.11, down 7.68% or $1.09.

Allied Waste said late Tuesday that first-quarter net income rose to $41 million, or 8 cents per share, from $25 million, or 5 cents per share, in the year-ago period. The Street had been expecting earnings around 9 cents per share. But the solid-waste disposal company said it also managed to raise its prices, leading some to see a bright light in the future.

"They are able to get price increases - I see that as a positive," said a convertible bond trader.

Cephalon slides in line on mixed earnings

Cephalon saw its convertible bonds slide in line with its stock after the company reported a mixed bag of results with a lower first-quarter profit but a higher full-year forecast.

The Cephalon A tranche zero-coupon convertible due 2033 was marked at 118 versus a stock price of $62.25 on Wednesday. Its B tranche zero-coupon convertible due 2003 was 116 against a $63.50 stock price, while its 2% convertible due 2015 was 147 also versus $63.50. Cephalon stock (Nasdaq: CEPH) closed at $63.93, down 0.95% or 61 cents.

"They were active but in line with where they closed," said a sell-side convertible strategist.

Frazer, Pa.-based Cephalon said late Tuesday that its first-quarter net profit fell 86% to $3.6 million, or 5 cents per share, from $26.7 million, or 44 cents per share, in the year-ago period. Excluding amortization expenses and other items, adjust income would have been 86 cents per share, up 37% from the adjusted 63 cents per share in the first quarter of 2005. But the biotech company also raised its 2006 sales guidance by $25 million, to between $1.475 million and $1.525 million. It expects adjusted net income of $240 million to $250 million for 2006.

A convertible analyst said "the results were sort of mixed, and that's why the stock's down."

"We were a little disappointed by the slightly lower revenue, so net-net I think people were looking for more positive news."

The analyst said there was "nothing really worrisome in the results," and the company seemed to back its assertion that the lower sales in the first quarter were due to wholesale inventory reductions, by raising its full-year guidance.

Cephalon also has the potential for positive news depending on how the Food and Drug Administration rules on its review of Cephalon's Sparlon drug, which the company is trying to market as a treatment for attention deficit hyperactivity disorder in children. The Sparlon application was rejected in March over concerns that the drug was linked to a rare skin disorder, but the company has since submitted additional data that it says refutes the link. The FDA has not completed its review, and Cephalon did not provide any updates during its earnings conference call with analysts, the analyst said.

But "some of the experts who have opined on this have suggested that this was probably not a case of SJS [the rare skin disorder Stevens-Johnson syndrome], and that's the company's position as well," the analyst said. "It seems the story has not ended...the outcome could be better for Cephalon because the evidence seems to be a little bit weak to reject Sparlon."

PDL gains dollar-neutral on poor results

PDL BioPharma's two convertibles slid on an outright basis along with the stock, but improved on a dollar-neutral basis after the biotech company disappointed with its first-quarter results and lowered guidance.

PDL's 2% convertible due 2012 was seen at 105 versus a stock price of $20.50, while its 2.75% convertible due 2023 traded at 115.5 against the same stock price. PDL stock (Nasdaq: PDLI) closed at $21.10, down 23.52% or $6.49.

"The PDLIs held up, expanded pretty well dollar-neutral," said a sellsider, adding later: "I think it did well for arbs, but if you're outright, you got smacked pretty good."

PDL reported adjusted earnings of $2.5 million, or 2 cents per share, in its first quarter, far short of Street estimates around 14 cents per share. The Fremont, Calif.-based biotech company also lowered its 2006 earnings outlook to between 7 cents and 19 cents. First Albany downgraded the stock to a buy from a strong buy, while JMP Securities downgraded the stock to market perform from market outperform. Citigroup upgraded the stock to a buy from a hold, and that may have provided some support for the equity later in the day, the convertible sellsider said.

"Obviously the stock got creamed, but it was a little overdone on the sell side," the sellsider said. "But that's what you want to see when you're set up on swaps."

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