New Supernus jumps outright, adds on hedge; Theravance contracts on hedge; D.R. Horton up

By Rebecca Melvin

New York, April 26 - Supernus Pharmaceuticals Inc.'s newly priced 7.5% convertibles traded up strongly on an outright basis, and were also higher on hedge Friday, as the underlying shares of the Rockville, Md.-based specialty pharmaceutical company jumped 9.8%.

The new Surpernus deal was said to have expanded by 2 points on a delta of about 80%. But setting up the deal on a hedged basis was difficult due to limited available stock borrow, market sources said.

Theravance Inc.'s two convertible bond issues were trading actively and were mixed on an outright basis, but lower on a hedged basis, after the San Francisco-based biotechnology company said it is planning to split itself up into two publicly traded companies.

The company retaining the Theravance convertibles is essentially a royalty stream company without the developing drug pipeline, and the plan was seen as a negative for convertibles players because it dampens - or as one source said, collapses - volatility in the name.

The wider implication about whether the Theravance plan creates a precedent that other biotechnology companies will follow was also being considered. But there was no evidence as yet in the market that investors were acting on their view of how biotech names will be affected, a New York-based convertibles analyst said.

Elsewhere, D.R. Horton Inc.'s convertibles were trading higher above double par in tandem with a jump in the underlying shares of the Fort Worth-based homebuilder that reported quarterly earnings that beat estimates.

Equities were mixed to little changed as earnings season continued and after weaker-than-expected economic data Friday. The nation's gross domestic product grew at a 2.5% annual rate between January and March, the Commerce Department said Friday. Economists had forecast a stronger 3.2% expansion.

The Dow Jones industrial average ended up 11.75 points at 14,712.55; the S&P 500 stock index was down 2.92 points at 1,582.24, and the Nasdaq stock average fell 10.73 points, or 0.3%, to 3,279.26.

Supernus gains on debut

Supernus' newly priced 7.5% convertibles due 2019 jumped to 108 bid, 110 offered with the underlying share price at $4.99, sources said.

The paper was said to be have expanded about 2 points on a dollar-neutral, or hedged, basis if holders were on an 80% delta. But stock borrow in the name was difficult.

"I don't know if it's borrowable," an East Coast-based buysider said.

A Connecticut-based convertibles analyst noted that the notes' premium came in a little from issuance at par versus Thursday's closing share price, which was the reference price for setting the deal's conversion price.

Shares of the Rockville, Md.-based specialty pharmaceutical company settled higher by 44 cents, or 9.8%, at $4.95 on Friday.

The bonds debuted in the secondary market after $75 million of the six-year convertible senior notes priced at the cheap end of coupon talk and at the midpoint of premium talk late Thursday.

There was speculation during marketing Thursday that the deal might be upsized to $100 million, but an upsizing did not materialize.

Price talk for the Rule 144A deal was for a 7% to 7.5% coupon and a 15% to 20% premium.

Jefferies & Co. and Piper Jaffray & Co. were joint bookrunners for the deal, for which there is a $15 million greenshoe.

The notes are non-callable until May 1, 2017 and then provisionally callable if shares rise to 140% of the conversion price for 20 out of 30 days.

Proceeds will be used to repay and close a secured credit facility, to fund commercialization of its approved and tentatively approved drugs, Oxtellar XR and Trokendi XR, to develop its pipeline products and for general corporate purposes.

Supernus focuses on treatment of central nervous system diseases, including epilepsy.

Theravance 'comes in' on split

Theravance's 2.125% convertibles due 2023 were seen at 137 bid, 137.5 offered during the session, which was up a little more than a point outright versus an underlying share price of about $33.20.

Theravance's 3% convertibles of 2015 were seen at 133, which was down about 4.5 points outright versus the same $33.20 share price.

The newer Theravance bond, or the 2.125% convertible, was seen down 2 points on a dollar-neutral, or hedged, basis, several market sources said.

The older Theravance convertible with the 3% coupon was seen down only 0.5 point, by one source. But another source called the older bond down 2 points like the newer bond.

The newer bonds trade on a delta of 75%, plus or minus 10%, an analyst said, while the older bonds trade on a lower delta of about 65%.

Theravance shares rose $3.08, or 10%, to $34.00.

The plan to split into two companies was seen to be more favorable to stockholders than to bondholders.

"They've been all over the place," an analyst said about the convertible bonds in trade Friday.

As for how the plan will affect the convertibles, the analyst said, "It's tough to say."

"It could be a disaster since volatility is going to collapse because it's just a royalty company and the credit could also collapse" if they don't get regulatory approval for their proposed drug," the New York-based convertibles analyst said.

A second source agreed about the volatility crunch but disagreed about the prognosis on the credit.

"I agree that it's not great for convertible holders because of vol. damping, but I certainly don't agree about the credit collapse. This split happens after approvals, so it's not a risk, and you could read it as being an indicator of confidence that they do get FDA approval. Also the takeover table is still in effect and GlaxoSmithKline could still buy," the source said.

The company has an upcoming regulatory decision and GlaxoSmithKline is its partner on existing drugs. It owns about 25% of the shares of Theravance.

The royalty company, which has yet to be named, is going to be the residual company, and it's going to have a smaller amount of cash, the analyst said.

The biotech company, which will be the developer of new drugs, will get the bulk of cash and assets, the analyst said.

Stockholders will receive one share of each new company for every share held in the single company, and they will thereby maintain exposure to both businesses. But convertibles holders will not be part of the biotech group anymore, the analyst said.

"It's probably more attractive for shareholders," the analyst said of the move to split the company into two entities.

The upside for convert holders is that there is not going to be the cash burn that the biotech side generates, but the downside is there aren't the assets either. "But a lot of people don't ascribe much value to the assets anymore," the analyst said.

"It's not readily apparent how badly convert holders will be affected," the analyst said.

Theravance eyed

Another issue related to the Theravance move is that it could be precedent setting.

"I've never seen this done before, but it's possible it's been done," an analyst said.

"It could be a bad precedent. But people are sort of waiting to see how this is going to play out. It does have potential to create precedent, and people might be rethinking other positions in biotech," the analyst said.

"It creates more uncertainty," the analyst said. "But there is always the small risk that any company could do this."

There is also the problem that investors who bought the new Theravance convertible in January when $287.5 million of the 2.125% 10-year convertibles were priced, aren't invested in the same securities anymore.

"If you bought into it on that day a few months ago, now all of sudden there is a change in the profile of the company that you bought," the analyst said.

After the market close Thursday, Theravance said it intends to create two new independent publicly traded companies with differing business objectives and opportunities. One company, referred to as the Royalty Management Co., will continue to manage the late-stage partnered respiratory assets and associated potential royalty revenues as well as retain the convertible bond debt, with the intention of returning capital to stockholders.

The other company will be a separate biopharmaceutical company, referred to as Theravance Biopharma, and it will focus on discovery, development and commercialization of small-molecule medicines in areas of unmet medical need, the company said in its release.

D.R. Horton higher

D.R. Horton's 2% convertibles due 2014 traded at 202, which was up 12 points outright on the day, according to trace data.

Shares of the Fort Worth-based homebuilder gained $2.14, or 8.7%, to $26.67.

D.R. Horton said its orders for the most recent quarter rose 34% to 7,879 homes, with a total value of $2 billion in the quarter, up from $1.3 billion a year earlier.

Net income rose to $111.0 million, or 32 cents per share, in the second quarter, up from $40.6 million, or 13 cents per share, a year earlier.

Revenue rose 49% to $1.39 billion.

The results were much better than analysts on average had expected. The estimate was for a profit of 19 cents per share and revenue of $1.26 billion.

Mentioned in this article:

D.R. Horton Inc. NYSE: DHI

Supernus Pharmaceuticals Inc. Nasdaq: SUPN

Theravance Inc. Nasdaq: THRX

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.