Cephalon, Teva gain on patent settlement; eyes turn toward Omnicare; Alltel mostly quiet

By Rebecca Melvin

Princeton, N.J., Dec. 9 - Convertibles players, many of whom battled a snowstorm to get to work Friday, traded Cephalon Inc. bonds early in the session after the Frazer. Pa.-based biotechnology company announced it settled a patent infringement dispute with Teva Pharmaceutical Industries Ltd. by giving Teva rights to market a generic form of its narcolepsy drug Provigil.

The Cephalon convertibles gained 2 to 3 points outright but were mostly flat on a hedged basis. Teva convertibles were also trading higher by about a point. But several traders said Cephalon was their most active issue of the day.

The generic pharmaceuticals sector overall picked up on Friday, with Par Pharmaceutical Cos. doing a touch better dollar neutral as its stock rose seemingly on no particular news, a New York-based sellside trader said. But Watson Pharmaceuticals Inc. convertibles traded in slightly.

A fast moving winter storm hit a broad swath of midwestern and northeastern states, and by early Friday snow blanketed the greater New York region, leaving roads passable but slippery.

"It was dangerous on the roads," said a Connecticut-based buyside trader, who added that trade may have been affected "a little bit here and there as some dealers don't have a full staff."

Also trading Friday were the convertibles of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., which were up slightly as their stocks gained, after Citigroup initiated equity coverage with a "buy" rating on the satellite radio concerns.

Citigroup analyst Eileen Furukawa said in a report to clients that "satellite radio is one of the few growth stories in media."

"In our view, satellite radio is one of the few areas within the media sector that offers attractive secular growth," Furukawa said. She compared them to America Online, another one-time emerging growth story.

Also in trade were the $25 convertible bonds of General Motors Corp., which gained on Friday as GM shares jumped 4.18%. Of the bonds, the 6.25% bonds posted the best showing, up 0.61 point, or 3.60%, to 17.56.

Focus - what there was of it in a session that seemed distracted by snow fall and holiday spirits - also shifted toward the Dec. 12 week when on Monday nursing-home drug-services company Omnicare Inc. was expected to price $750 million of 30-year convertibles.

Omnicare issue next at bat

Price talk on Omnicare's notes was for a coupon of 3.125% to 3.625% with an initial conversion premium of 32.5% to 37.5%. JP Morgan, Lehman Brothers and CIBC World Markets are acting as joint bookrunners, with SunTrust Robinson Humphrey, Wachovia Securities and Merrill Lynch acting as co-managers.

Anecdotal evidence seemed to point to a warm reception for the new issue. "The stock has been an animal," a Connecticut-base convertibles desk director said of Omnicare shares. "I hear that management is doing a good job on the road. When a company is bringing a billion and a half in paper [and] for the stock to be up over the marketing period is significant," the convertibles director said.

The shares of Covington, Ky.-based Omnicare closed lower on Friday by 90 cents, or 1.46%, to $60.95. But since Dec. 5, when the company launched concurrent debt and equity offerings and shares closed at $58.99, they have been generally higher. In addition, the shares are up more than 15% since early September.

Concurrent with the convertibles offering, the company is offering $750 million of senior subordinated notes and 12,825,000 shares of common stock, not including an over-allotment option.

Some convertible market players were waiting for the straight notes to price before valuing Omnicare. But others saw the convertible debt rated double-B as cheap.

Using a credit spread of 250 basis points over Libor and a volatility of 25%, the convertibles looked about 2% cheap at the midpoint of talk, according to a New York-based sellside trader.

Standard & Poor's affirmed its ratings on Omnicare, including the BBB- corporate credit rating, and removed it from CreditWatch, where it was placed with negative implications May 24, 2004, when it first initiated an ultimately successful effort to acquire competitor NeighborCare Inc. for $1.9 billion.

At the same time, S&P said it assigned a BB+ rating to Omnicare's convertible and senior subordinated note offerings.

Cephalon is the trade of the day

Cephalon was a big name Friday, with all of its convertibles issues trading higher outright by a couple of points but flat to slightly better on a hedged basis.

The Cephalon 2s traded in the 128.50 bid, 129.75 offered range, while the Cephalon 0% B convertibles moved up to as high 103.7 but were mostly in the range of 101.5 bid, to 102.5 offered.

"The 2s - which are 9.5 year paper - trade in the low vol 22ish range, which is cheap to me. It was very active today and better bid," the New York sellsider said.

Cephalon shares hit a new 52-week high, passing the previous high of $52.72, to close up $3.74, or 7.2%, to $55.83.

Teva shares rose 60 cents, or 1.37%, to $44.48.

"This stock was bogged down with the Teva issue for the past six to eight months despite decent fundamentals," said an equity trader. "The market is responding correctly by pushing the stock up, but then there is a lot of short covering going on from the overhang of this issue. Of course, there will be some pull back from today's rally when that's over."

Under the new agreement, Cephalon will receive royalties on the generic Provigil, but specific financial terms were not disclosed. Also both parties will drop their lawsuits and Cephalon will grant Teva a non-exclusive royalty-bearing license to make a generic form of Provigil effective in October 2011.

Also, Teva will immediately grant Cephalon a non-exclusive license to certain rights concerning the manufacture of generic drugs and supply Cephalon with modafinil, the active ingredient in Provigil.

In November, Cephalon said it expected a generic version of Provigil to enter the market in 2006. Cephalon projected 2005 sales of Provigil to total $500 million to $525 million, slightly less than half its overall sales for the year.

The parties will promptly file dismissals with prejudice with the U.S. District Court for the District of New Jersey and United Kingdom High Court of Justice, Chancery Division, which will conclude all pending litigations regarding the narcolepsy drug.

But the settlement does not affect the status of the ongoing Provigil patent litigations between Cephalon and other generic companies that are pending in the U.S. District Court in New Jersey, the company said in its release.

Alltel's landline spinoff spurs little trade

No trades were reported on Alltel Corp.'s 4.625% convertibles after the Little Rock, Ark.-based telecommunications services provider announced that it is spinning off its wireline business to merge it with Valor Communications Group Inc. in a deal valued at about $9.1 billion.

The combination creates a large wireline competitor focused on the rural United States.

Alltel's 4.625% convertibles were recently seen above triple par. Alltel shares closed up 1.64% to $65.88.

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