Advanced Medical, PMC-Sierra falls on warnings; Cephalon gains on drug nod; ChipMOS prices

By Kenneth Lim

Sept. 26 - The convertible bond market picked up on Tuesday as earnings-related developments sparked a spike in volume.

Advanced Medical Optics Inc. fell outright but improved on a hedged basis after the company lowered its outlook for 2006.

Cephalon Inc., meanwhile, gained slightly after a key product was approved by the U.S. Food and Drug Administration, although observers noted that the news was largely expected.

From the primary market, ChipMOS Technologies (Bermuda) Ltd. launched and priced an $85 million offering outside of the United States.

BearingPoint Inc. also announced after the market closed that an ongoing suit brought by some holders of the company's convertible bond holders will cause it to delay filing its annual report and drag earnings below expectations on higher finance and accounting costs.

The market in general had a busy session, welcome for traders after a quiet Monday.

"Advanced Medical Optics and Cephalon were active right off the bat," a sellsider said. "It gave people a couple of names to trade around, and we saw kind of a consistent flow throughout the rest of the day."

Also seen trading on Tuesday was Emdeon Corp.'s 3.125% convertible due 2025, which was mostly unchanged outright after the company sold a stake in its business services unit and announced a stock buyback.

The convertible was seen at 101.875 bid, 102.625 offered against a stock price of $12.10 on Tuesday. Emdeon stock (Nasdaq: HLTH) gained 1.29% or 15 cents to close at $11.79.

"They were up in the morning on the news," a sellsider said.

Emdeon on Tuesday said it was selling a 52% stake in its wholly owned business services unit to private equity firm General Atlantic for $1.2 billion in cash. Emdeon also tendered for up to 100 million shares, or 36% of its outstanding common stock, at $12.25 apiece, with plans to pay for the shares using the proceeds of its stake sale.

PMC-Sierra Inc.'s 2.25% convertible due 2025 fell about 4 points outright after it warned that its third-quarter sales would be lower than expected. The convertible was marked at 102.5 against a $6 stock price on Tuesday, while PMC-Sierra stock (Nasdaq: PMCS) dropped 8.4% or 55 cents to finish the session at $6.

"The stock took a hit on the news," a convertible bond trader said. "I think there's some concern that this may be a sign of broader weakness in the sector."

PMC-Sierra said late Monday that it expects third-quarter sales of $114 million to $116 million, below its earlier guidance for $122 million to $124 million, citing lower-than-expected demand particularly in Asia. PMC-Sierra is a Santa Clara, Calif.-based maker of communications and storage semiconductors.

Advanced Medical drops on warning

Advanced Medical's 3.25% convertible due 2026 fell about 7 points outright but improved slightly on a dollar-neutral basis after the company cut its earnings forecast for 2006 and 2007.

The convertible traded at 97.125 against a stock price of $40.20 on Tuesday, while Advanced Medical stock (NYSE: EYE) fell 16.31% or $7.55 to close at $38.75.

"The bonds did better, they improved dollar-neutral," a sellsider said. "There were quite a few [investors] who were on a market delta, but if they were outright on it they might have gotten hurt."

Santa Ana, Calif.-based Advanced Medical said late Monday that it now expects 2006 earnings per share of $1.90 to $1.95, from the earlier guidance of $2.05 to $2.21. The maker of eye care products and surgical devices, also said it now expects 2007 revenue of $1.1 billion, at the bottom end of its earlier forecast of $1.1 billion to $1.2 billion. Advanced Medical cited poorer-than-expected global demand for the weakness.

"It's obviously not good for the equity," a convertible bond analyst said. "But if you had them hedged you'd be happy."

The analyst said the news was unexpected. "People started getting interested" in the company a few months ago when rival Bausch and Lomb announced a massive recall of a contact lens solution product, fueling hopes that Advanced Medical would benefit from increased market share.

"But the stock's down about 14% now, so obviously people were surprised," the analyst said.

Credit Suisse equity analyst Marc Goodman said in a research note that he is reviewing his numbers for the company, but added that the stock is inexpensive if the company can come close to its 2007 guidance. It remains to be seen, however, if the company's new guidance is reliable, the analyst said.

"The announcement is clearly a disappointment, but probably not a complete surprise to many investors...The stock has remained inexpensive, as we think that investors have never believed management's financial guidance," the analyst wrote. "This announcement gives credibility to those concerns, and we think investors for now will remain very skeptical of the 2007 guidance."

Cephalon gets FDA boost

Cephalon's three series of convertibles improved slightly on Tuesday after the drug maker said received approval for a key cancer pain drug.

Cephalon's series A zero-coupon convertible due 2033 traded at 112 against a stock price of $59 on, while the series B zero-coupon convertible, also due 2033, changed hands at 116 against a $58.75 stock price. The 2% convertible due 2015, meanwhile, traded at 140.25 against a stock price of $58.90. Cephalon stock (Nasdaq: CEPH) closed at $60.72, gaining 3.09% or $1.82.

"It traded off a little earlier," a convertible bond strategist said. "The stock was up on the Fentora approval, which definitely is good news, but I think it was also definitely priced into the market."

Cephalon late Monday received FDA approval for Fentora, which is used to treat pain in cancer patients. The Frazer, Pa.-based drug maker said Fentora should be available next week.

"It should be [a big drug for Cephalon]," a sellside convertible bond analyst said. "They're losing Actiq, so this is a key replacement."

Actiq, another Cephalon cancer painkiller, will soon face generic competition from Barr Laboratories.

The convertible strategist said the FDA approval for Fentora was largely expected.

"I think that was one of the big volatility catalysts for the year for Cephalon, but people may be a touch more cautious now," the strategist said.

ChipMOS prices deal

ChipMOS Tuesday priced $85 million of five-year convertible senior unsecured notes within talk, at a coupon of 3.375% and an initial conversion premium of 19.1%.

The notes, which were offered at par, were talked at a coupon of 3.125% to 3.625% and an initial conversion premium between 17% and 22%.

Lehman Brothers was the bookrunner for deal, which was sold outside the United States under Regulation S.

ChipMOS, a Taiwan-based semiconductor test and assembly services provider for liquid-crystal and flat-panel display semiconductors, did not specify how it would use the proceeds, but the company's existing $85 million of 1.75% convertible senior notes due 2009 may be put on Nov. 3 this year.

ChipMOS stock (Nasdaq: IMOS) fell 5.53% or 34 cents to close at $5.81 after the deal was priced.

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