Convertibles start year strong; Regeneron jumps to 104; Dendreon gains; RF Micro drops

By Rebecca Melvin

New York, Jan. 6 - The holiday-shortened first trading week of 2012 in the convertible bond market saw much better tone and volume compared to the end of 2011. Equities started with a bang, rallying up on the first day of the new year, but as that rally faded, convertibles remained firm, market players said.

Overall, the convertibles market had much better tone and volume, and paper is better to buy, a Connecticut-based trader said.

Better to buy generally means that the bid is stronger, but the offers are possibly nebulous.

A New York-based analyst said money was being put to work in the convertibles market and the tone was particularly better from a hedged fund perspective while for outrights it was mixed.

Nevertheless, outright investors were buying in the biotech space on Friday, according to a third New York-based sellsider.

"It's mostly outright. Outrights are trying to buy paper," the sellsider said when asked about biotech names in trade.

Regeneron Pharmaceuticals Inc.'s convertibles were active in trade and better along with higher shares.

The Tarrytown, N.Y.-based-biopharmaceutical company was upgraded to "buy" from "hold" by Jefferies & Co., and the Regeneron convertibles were up to 104, which represented a significant gain from late last year when the paper priced Oct. 18 at a discount of 98 and subsequently slid to a handle of 92.

Dendreon Corp.'s convertibles extended gains, adding another point or two on Friday after jumping 4 points Thursday on the Seattle-based biotech's better-than-expected fourth-quarter sales of Provenge, its prostate cancer drug.

Vertex Pharmaceuticals Inc., a maker of Incvek, the hepatitis C pill, was also a point better on the day, according to Trace data, with shares up 3%.

Elsewhere, RF Micro Devices Inc. were lower outright, but seen in line on a hedged basis after the Greensboro, N.C.-maker of chips for mobile devices warned that its fiscal third-quarter revenue would be about 10% below previous guidance. The news was followed by a series of analysts' downgrades on the shares.

The RF Micro 1% convertibles due 2014 traded down to 97.5 bid, 98 offered, from 101.625 on Thursday. Shares plunged 20% to $4.54 on Friday.

Best Buy Co. Inc. reported disappointing same-store sales for December; but its 2.25% senior notes due 2022, which are putable Jan. 15, weren't reported in trade. Market players expected that the bonds would be put, due to among other things, their hefty premium.

In general, there was a little bit of a drop in volume on Friday, but there is buy interest in the market and the general feeling for the new year is better, a sellsider said.

Looking at the jobs data

Jobs data for December came in better than expected. Nonfarm payrolls increased 200,000, the Labor Department said Friday, which was above the 155,000 gain that markets expected. The unemployment rate dropped to 8.5%, which was also lower than the 8.7% expected, and the lowest level since February 2009.

The payrolls count for November was revised down to 100,000 from 120,000 previously, but the payroll count for October was revised up slightly to 112,000 from 100,000.

Non-farm employment in December came from the private sector, where payrolls rose 212,000, while the public sector declined by 12,000.

Regeneron jumps to 104

Regeneron's 1.875% convertibles due 2016 traded at 104 in pretty decent volume, according to a New York-based analyst, who said it was the first time that the bonds had passed that 104 threshold.

Regeneron shares jumped $4.85, or 8%, to $65.79.

Jefferies upgraded Regeneron after its ophthalmologist survey showed greater participation in the company's wet age-related macular degeneration treatment Eylea. Jefferies raised its price target for shares to $75 from $66.

An analyst also pointed to the upcoming J.P. Morgan Securities LLC biotechnology conference as a cause for increased focus on biopharmaceutical names, in particular, Regeneron, which was expected to present revised fourth-quarter revenue statistics at the conference on Monday afternoon.

"JPMorgan is the biggest conference of the year, and a lot of people are probably going to work on these names this week to try get back up to speed and refresh everything ahead of the presentations," the analyst said. "I wouldn't be surprised if there was heightened interest."

Dendreon extends gains

Dendreon's 2.875% convertibles due 2016 traded up another 1.375 points on Friday to 75.625 after jumping 4 points on Thursday.

Dendreon shares extended gains by $1.73, or 16%, to $12.35, which was a 50% gain in two days.

It was suggested that some of the run up in shares was due to a short squeeze, and that even though convertible traders were playing the bonds outright, they shorted some equity against the bonds in the absence of credit default swaps in the name.

In terms of the biotech space in general, 2011 was not a very good year, especially for product launch or one-trick ponies, an analyst said, referring to one-product companies.

The stocks of these companies are down for the most part despite the fact that they shouldn't be correlated because they are so different in terms of businesses.

"It's really all name specific; it's difficult to generalize the biotech space," an analyst said.

Vertex adds a point

Vertex's 3.35% convertibles due 2015 added a point to 106.25 bid, 106.5 offered, according to Trace data. Shares of the Cambridge, Mass.-based biopharmaceutical company gained 93 cents, or 3%, to $34.05.

The bonds had slumped during October and reaching a low point in November. Since the end of November, they have been creeping back up.

Piper Jaffray says the company remains a top pick for 2012 given its Incivek cash flows and Kalydeco Cystic Fibrosis franchise. Earlier this week, Piper Jaffray reiterated an "overweight" rating on the stock with a $56 price target.

Mentioned in this article:

Best Buy & Co. NYSE: BBY

Dendreon Corp. Nasdaq: DNDN

Regeneron Pharmaceuticals Inc. Nasdaq: REGN

RF Micro Devices Inc. Nasdaq: RFMD

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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