Teva trades in line after earnings; NetApp heavy ahead of earnings; Central European gains

By Rebecca Melvin

New York, Feb. 15 - Teva Pharmaceutical Industries Ltd.'s convertibles traded a little higher in line with their underlying shares on Wednesday after the Israel-based generic and branded drug maker reported positive earnings that sent shares higher.

Teva doesn't seem to be planning to redeem the convertibles, which has been the subject of speculation, and investors are cheered by that development, a New York-based trader said.

Meanwhile, convertible players didn't react to a downgrade of Medtronic Inc. by Standard & Poor's, which lowered its corporate credit and senior unsecured debt ratings on the Minneapolis-based medical device maker to A+ from AA- and revised its outlook to stable from negative.

Medtronic's convertibles "came in maybe a nickel" and weren't particularly active, a trader said, suggesting that the rating downgrade wasn't a significant reduction, especially relative to the convert space, which is short of investment-grade paper.

"It didn't matter to investors; Medtronic is considered a good credit," the trader said.

NetApp Inc.'s convertibles were heavy despite the shares moving slightly higher ahead of earnings, which were posted after the market close.

Shares of the Sunnyvale, Calif.-based data storage company jumped in after-hours trade.

Elsewhere, Central European Distribution Corp.'s convertibles traded higher during the session at 91, on what one trader suggested might have been an overly aggressive bidder, and then the paper moved back down to 88 bid, 88.5 offered, or the unchanged mark.

Convertibles have been very quiet so far this week as investors seemingly wait on the sidelines for some catalyst to get involved, market players said.

It has "felt like people wanted to sell convertibles before they wanted to buy them," but ultimately there will be buyers given the lack of supply in the convertible market, one New York-based trader said.

"Valuations are not moving that quickly, and when they do, they are only moving up, moving richer. Nobody wants to sell because then what will they buy," the trader said.

Teva moves in line with stock

Teva's 0.25% convertibles due 2026 traded at 111 during the session and were seen at 110.125 bid, 110.625 offered at the close, which was up in line with the shares.

Teva's 0.25% convertibles are the only Teva issue left in the convertibles market with any significant amount outstanding.

Shares of the Petach Tikva, Israel-based generic drug maker ended up $1.52, or 3.5%, at $46.04 in heavy volume on Wednesday.

"They were in line dollar neutral," a trader said, saying that the market was interested to see that it didn't look like the company was going to call the notes.

Contrary to speculation that the company might call the convertibles, the company during its conference call didn't make any mention of it, and that's good for holders, the trader said.

Teva shares improved on the back of earnings, which were a penny better than consensus estimates. Revenue was in line with expectations.

For the fourth quarter, Teva reported a profit of $506 million, or 57 cents a share, which was down from $771 million, or 85 cents a share, in the year-earlier quarter.

The latest quarter included acquisition and restructuring costs, and legal settlements and other items. Excluding these items, earnings would have been $1.59 a share.

Fourth-quarter sales rose 28% to $5.7 billion, helped by last year's $6.8 billion acquisition of Cephalon, which expanded Teva's branded drug business.

Branded products were up 68% to $2.3 billion. Teva's Copaxone blockbuster for the treatment for multiple sclerosis had sales of $927 million, up 11%.

Meanwhile, generic product revenue rose 12% to $3 billion, but U.S. generic revenue declined 5%.

Medtronic little changed

Medtronic's 1.625% convertibles due 2013 were little changed at 101 after S&P downgraded its rating on the underlying shares to A+.

S&P credit analyst Cheryl Richer said in a news release, "We are affirming our A-1+ commercial paper rating, given the company's exceptional liquidity."

The stable outlook on Medtronic reflects expectations that the company will maintain a "modest" financial risk profile, the agency said.

The rating "wasn't significantly lowered, so it didn't matter to investors," a convertibles trader said.

I don't think it matters, not unless it's significantly lowered; especially since it's short-dated paper, with reasonable yield, that's as good a credit as there is in our market."

"If anything, it moved in a nickel," he said.

Still, S&P pointed out that the company's performance has been sluggish, largely because of declines in cardiac rhythm disease management and spinal business units, and the agency said it expects near-term revenue growth to be in the low-single-digit area.

NetApp heavy before earnings

NetApp's 1.75% convertible notes due 2013 were seen at 134.25 bid, 134.5 offered versus an underlying share price of $40.00 at the close Wednesday.

NetApp shares were up 1.9% in a weak market for equities and ahead of earnings posted after the close.

"The bonds have been heavy, and down about 0.5 point over the last week," a New York-based trader said.

The company posted a drop in fiscal third-quarter net income on higher costs, but the result and its outlook weren't as bad as some analysts had feared, and shares jumped 8% in after-hours trading.

For the quarter ended Jan. 27, NetApp had net income of $119.6 million, or 32 cents per share, compared to $186.4 million, or 46 cents per share, during the same period the year before.

Revenue during the quarter was $1.57 billion, up from $1.29 billion in the prior-year period.

Adjusted earnings are expected to be between 60 and 65 cents per share during the current quarter, which is in line with the 63 cents per share that analysts were expecting.

The company said revenue should be between $1.65 billion and $1.73 billion in the quarter, which was tilting above the high end of expectations for $1.68 billion in revenue.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

Medtronic Inc. NYSE: MDT

NetApp Inc. Nasdaq: NTAP

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

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