New Pacira surges on debut; planned Theravance seen cheap; planned Solazyme lacks borrow

By Rebecca Melvin

New York, Jan. 17 - A flurry of new deals from the biotechnology sector dominated Thursday's action in the convertible bond market. One new deal in the secondary was trading up handsomely, like the new InterMune Inc. before it on Wednesday, and two new deals were on tap and set to price after the market close.

Pacira Pharmaceuticals Inc.'s newly priced 3.25% convertibles due 2019 traded up strongly as the Parsippany, N.J.-based company's shares performed well after the upsized $110 million deal hit the market following pricing that came significantly tightened from initial talk.

The new Pacira opened around 105 bid, 106 offered out of the gate Thursday and traded up through the day, with a quote heard as high as 109 bid, 110 offered versus an underlying share price of $19.40. Shares gained 3.7% on the day, so the bonds gained 6 or 7 points delta neutral, sources said.

Of the two deals on tap, there wasn't a uniform market reaction due to the two deals' different characteristics. The $250 million of Theravance Inc. convertible notes was getting more focus and was seen somewhat cheap ahead of final terms. But many did not like the 10-year structure on this type of credit.

"It looks OK, a bit cheap, although the long tenure is giving some pushback," an East Coast-based buysider said.

An existing Theravance convertible, the 3% paper due 2015, was pulled into trade with news of the new deal and trading at about 112.5, which was seen as an expansion on a dollar-neutral, or hedged, basis of about 1 to 1.5 points.

Meanwhile, Solazyme Inc. launched a $100 million offering of five-year convertible senior subordinated notes early Thursday that was also seen pricing after the market close.

The planned Solazyme does not have a readily available stock borrow and many didn't focus as much on that issue.

"It looks good to me, though not for hedge guys," the buysider said, referring to its "interesting technology."

The San Francisco-based company uses plant-based sugars to produce oils for use in the chemicals and fuels industries, as well as for the nutrition, skin and personal care markets.

The new deals attracted some attention among investors, although there are some firms that watched but don't get involved in the sector.

Whether the issuance trend continues remains to be seen, but one New York-based trader said hopefully there will be more as the convertibles market is a natural place for biotechnology issuers to come.

"Biotechs are the natural issuers because they are generally lower credit, burn cash (in general), and care less about dilution of stock and more about cash," the trader said.

After the market close, Intel Inc., which has two large issues in the convert space, reported better-than-expected earnings, but a weak outlook sent shares lower in after-hours trade.

The Santa Clara, Calif.-based chip giant forecast current, first-quarter revenue that was slightly below expectations at $12.7 billion, plus or minus $500 million. It said that gross margin would be 58% and R&D plus MG&A spending will be about $4.6 billion.

For the quarter just ended, Intel posted revenue of $13.5 billion on net income of $2.5 billion, or 48 cents per share. That was in line with estimates on revenue and better than estimates on earnings.

During the session, the Intel 2.95% convertibles due 2035 traded at 107, which was up 0.8 point on the day, according to Trace data.

Pacira trades well

Pacira's newly priced 3.25% convertibles traded up to 109 bid, 110 offered versus a share price of $19.40 or $19.43, syndicate sources said.

Pacira shares gained 70 cents, or 3.7%, to $19.43 on Thursday.

The new paper opened at 105 bid, 106 offered and was later seen at 106.25 bid, 107.5 offered versus a share price of $19.38.

It was "up a lot," a buysider said.

Meanwhile, a syndicate source said the convertibles were trading well.

Pacira was referred to as a wall cross deal, meaning that there was not a lot of paper for the general public.

The deal was marketed to a few accounts before it went out to the general public. "These firms generally get the best allocations as they helped priced the deal," a buysider said.

The deal priced at par to yield 3.25% with an initial conversion premium of 32.5%.

Pricing came at talked terms, which were tightened during marketing from a 3.5% to 4% coupon and a 27.5% to 32.5% premium.

The deal was also upsized by 10% to $110 million, and it has a $10 million greenshoe.

Joint bookrunners were Jefferies & Co. Inc. and Barclays.

The bonds are non-callable for four years and then are provisionally callable if the stock price exceeds 130% of the conversion price. There is a coupon make-whole payment upon redemption or conversion based upon a fundamental change make-whole table.

About $30 million of the proceeds will be used to repay amounts outstanding under the company's senior secured credit facility, with remaining proceeds earmarked to fund continued commercialization of Exparel, a long-acting, non-opioid postsurgical analgesic for postsurgical pain management, to develop additional indications for Exparel and for general corporate purposes.

Parsippany, N.J.-based Pacira is a specialty pharmaceutical company focused on acute care medical needs.

Theravance looks cheap

The new issue of Theravance was seen somewhat cheap with one source using a credit spread of 550 basis points over Libor and a 35% vol. getting them at fair value at 102.

A second source was a little tighter, using a 500 bps credit spread and 37% vol. and getting the new paper at 104.2 at the midpoint of talk.

A third source commented that he thought "500 [bps] seems awfully tight to me for something that is going to do $140 million in revenue in 2014. But I am sure it's going to trade to 105-106 like everything else."

Theravance is a San Francisco-based biopharmaceutical company.

A strike against the deal is its long, 10-year tenor with no calls or puts.

Proceeds are intended to be used for potential milestone payments to GlaxoSmithKline plc if there is any approval or launch of products under the parties' collaboration, for the potential repayment of debt and for other general corporate purposes.

The company also intends to use a portion of the proceeds to pay the cost of entering into capped call transactions with the underwriter and/or affiliates.

Solazyme to price

The Solazyme convertibles were talked to yield 5.5% to 6% with an initial conversion premium of 20% to 25%.

The deal is a Rule 144A offering with a $15 million greenshoe and was being sold via bookrunner Goldman Sachs & Co.

The stock borrow on the name is limited, sources said, making it difficult for hedged investors to get involved.

But one buysider mentioned its interesting technology, potentially large market and premium partners.

In addition, the bonds are convertible at any time, with holders to receive 83.33 shares per $1,000 upon an early conversion prior to Nov. 1, 2016 at the holder's option.

"Solazyme has an interesting convert premium feature, which makes the premium around 11%," a Connecticut-based analyst said, adding that this feature may be attractive to some investors.

The analyst said a credit spread in the name would be in the 400 bps range.

The five-year paper is non-callable with no investor puts.

Proceeds will be used to fund project-related costs and capital expenditures and for general corporate purpose.

Mentioned in this article:

Intel Inc. Nasdaq: INTC

InterMune Corp. Nasdaq: ITMN

Pacira Pharmaceuticals Inc. Nasdaq: PCRX

Theravance Inc. Nasdaq: THRX

Solazyme Inv. Nasdaq: SZYM

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