Encysive gains outright on FDA submission; Omnicare, XM Satellite better on hedge amid stock declines

By Kenneth Lim

Boston, May 25 - The convertible bond market was generally quieter on Thursday ahead of the holiday weekend, but biotech names saw some improvement on an early stock rally across the sector.

Encysive Pharmaceutials Inc.'s 2.5% convertible due 2012 improved in line with a surge in the stock after the company said it submitted a response to the U.S. Food and Drug Administration regarding a key drug, boosting hopes that the company can avoid conducting more costly trials that the regulator had asked for.

Omnicare Inc.'s convertible improved on a dollar-neutral basis, holding firm as its stock tumbled after the Centers for Medicare and Medicaid said the company could not charge premiums for extra services.

Teva Pharmaceutical Industries Ltd.'s 1.75% convertible due 2026 traded about one point higher on an outright basis, in line with gains in the stock after the company received a tentative FDA nod for its generic form of cholesterol drug Zocor.

The convertible was seen trading at 95.25 against a stock price of $36.10 on Thursday. Teva stock (Nasdaq: TEVA) closed at $36.65, up 3.07% or $1.09.

"It's up on the FDA approval, but it's not final yet, so there's still some risk," a convertible bond trader said.

Teva said Thursday that it received tentative FDA approval for its Simvastatin tablets, which are generic forms of Merck's Zocor tablets. The Israel-based generic drug maker will not be able to launch its version until the FDA gives its final approval, and the company is seeking a 180-day marketing exclusivity if the final OK is given. But the FDA on Thursday appealed against a U.S. District Court ruling that found the FDA had unfairly denied Teva its exclusivity petition.

Meanwhile, XM Satellite Radio Inc.'s convertible was better on a dollar-neutral as the stock took a hit in early trading after the satellite radio provider lowered guidance on its subscription numbers.

The convertible bond market in general was quiet Thursday with a long weekend approaching, a convertible bond trader said.

"Today was dead, tomorrow will be worse," the trader said.

Encysive gains on hopes of drug approval

Encysive Pharmaceuticals' 2.5% convertible due 2012 gained about five points outright after the company said it had submitted a complete response to the Food and Drug Administration regarding its application for the pulmonary arterial hypertension drug Thelin.

The convertible traded at 70.75 against the closing stock price of $4.45. Encysive stock (Nasdaq: ENCY) gained 16.49% or 63 cents on Thursday.

Encysive reported on Thursday that it expects to hear from the FDA within 30 days on its latest submission, and said in a statement that "Encysive and the FDA have come to the mutual agreement that the company's approach to responding to the items outlined in the approvable letter with our existing data set is reasonable."

Encysive shares plunged in March after the FDA sought additional clinical trial work for Thelin, which is seen as a key drug for the Houston-based biopharmaceutical company.

"The market was expecting that they would have to do another trial," a sell-side convertible analyst said, explaining that extra drug trials could have cost the company quite a bit of money and delayed the launch of the drug. "Today they submitted their response, which they're hoping the FDA will think is enough, but from what I'm reading, it doesn't sound like people, or analysts, are too convinced."

It is still unclear whether the response submitted by Encysive will be enough to allay the FDA's concerns, the analyst said.

"The FDA has been pretty stingy with approvals," the analyst noted. "They want to make sure people don't get killed by the stuff they approve...it's still kind of a risky situation [for Encysive]."

With the FDA's reaction still unknown for the next 30 days or so, Thursday's submission may have little impact right now on Encysive's credit situation, the analyst said. Nevertheless, after investors sold down the name following the bad news in March, an FDA nod could be a big positive.

"Thirty days from now, they may get an approval letter, who knows?" the analyst said.

Omnicare gains on hedged basis

Omnicare's 3.25% convertible due 2035 was about two points lower on an outright basis, but improved on a hedged basis as the stock slid on reports that the drug maker was not allowed to charge a premium for extra services under a certain Medicare drug plan.

The convertible was seen trading at 89.25 against a stock price of $44.50, while Omnicare stock (NYSE: OCR) closed at $44.46, down by 7.38% or $3.54.

"Those bonds actually improved on a delta basis, although I wouldn't say they're incredibly attractive," a sell-side convertible bond trader said. "Those were all over the gamut today."

The Centers for Medicare and Medicaid said on Wednesday that companies like Omnicare, which provides drugs to beneficiaries of the Medicare Part D plan, are not permitted to charge a premium for services beyond those allowed under regulatory guidelines.

Covington, Ky.-based Omnicare said in a statement that the agency's announcement was "contrary to the interests of Medicare beneficiaries." About 40% of the geriatric drug specialist's revenues come from Medicare Part D business, and some of its contracts include additional services.

XM Satellite firm against stock slide

XM Satellite Radio's 1.75% convertible due 2009 was lower by about half a point early Thursday as the stock fell on lowered guidance before rebounding later in the day.

The convertible was seen trading at about 79 against a stock price of $13.25 early Thursday. XM Satellite stock (Nasdaq: XMSR) bounced back in the afternoon, closing at $14.35, up 4.36% or 60 cents.

"Those were down with the stock, which saw a couple of downgrades, and they traded off at the worst a point dollar neutral, but with the stock rally within the day it did improve somewhat," a sell-side convertible strategist said. "The converts definitely improved in the last hour or so."

XM Satellite, a Washington-based satellite radio broadcaster, said Wednesday that it now expects 8.5 million subscribers by the end of the year, down from the 9 million previously forecast. Revenue for fiscal 2006 is expected to be $835 million, from the earlier guidance of $860 million.

Bear Stearns downgraded the stock to underperform from outperform, citing management credibility concerns, while RBC maintained an outperform on the shares but lowered its price target to $30 from $34.

A sell-side convertible bond trader said XM Satellite and its rival, Sirius Satellite Radio Inc., continue to be risky investments.

"There are two of them, and there's only going to be one survivor," the trader said.

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