Human Genome adds outright, slides on hedge; New Titan gains dollar neutral; Gilead mixed

By Rebecca Melvin

New York, April 19 - Human Genome Sciences Inc.'s 3% convertible bonds jumped outright, but came in by as much as 10 points on a dollar-neutral, or hedged, basis on Thursday, as shares of the Rockville, Md.-based biopharmaceutical company about doubled on news the company rejected a $2.59 billion bid by GlaxoSmithKline, sources said.

Human Genome's 2.25% convertibles, which mature in a few months on Aug. 15, came in about 5.75 points on a dollar-neutral basis as Human Genome shares jumped to $14.17 from $7.17.

Titan Machinery Inc.'s newly priced 3.75% convertibles jumped in first-day trading to a session close of 104 bid, 104.75 offered, which accounting for the share move represented a gain at the mid market of about 2.5 points on a dollar-neutral basis, a syndicate source said.

Another name of the day was Gilead Sciences Inc., and its three sister convertibles gained outright but were flat to slightly better on a dollar-neutral basis after the Foster City Calif.-based biopharmaceutical company and Bristol-Myers Squibb released new drug trial data that was strikingly positive as the race for new therapies to treat hepatitis C continues.

Gilead shares gained 11% in very high volume and at one point were 17% higher on the day.

Nevertheless, it was "tough to tell if these guys were overall money makers," one trader said of the Gilead convertibles because it wasn't clear what the delta hedges on the bonds were.

Delta refers to how much underlying stock is shorted in relationship to being long the bonds.

Stocks wavered during the session, shaking off early weakness by midday only to slide again to near session lows at the market close.

Some weaker-than-expected economic reports appeared to trump some positive earnings news. First time unemployment claims were down, existing home sales dipped 2.6% and the Philadelphia Fed regional manufacturing index also fell, coming in below expectations.

Gilead's three sister convertible issues jumped higher outright and were mixed on a dollar-neutral or hedged basis.

Human Genome slides

Human Genome's 3% convertibles due 2018 traded at 125 on Thursday, which was significantly higher compared to 92.75 on Wednesday. But given a 98% climb in the shares to $14.17, the gain didn't keep pace considering the 56% theoretical delta as which the bonds went into the day trading on.

Now the Human Genome 3% bonds are said to be on a 79% to 80% delta, according to a New York-based sellside analyst.

"The premium has come in," the analyst said. "Convert people lost money."

Traders were understandably vague about how the Human Genome convertibles performed Thursday. One said the bonds were "in multiple points," but the analyst said the 3% bonds were in 10 points.

The Human Genome 2.25% convertibles due Aug. 15, 2011 traded at 100.9, which was in 5.75 points.

The stock jump was not out of the ordinary for a smaller, biotechnology company.

And now the convertible paper, which had a fair amount of outright interest prior to the news, is unlikely to be useful to an outright player.

"There's not much juice left. You might get a few points more upside depending on the final takeout price," the analyst said. "But for the risk arb investor it's interesting at this point because you have probably got a gain of 5% to 6% depending on the final takeout price."

Causing the spike in the underlying shares was news that the Rockville, Md.-based biopharmaceutical company rejected an unsolicited $2.59 billion buyout offer from GlaxoSmithKline plc.

Human Genome said the $13 per share offer undervalues its company. However the company stated that it decided to look into its strategic options, which may result in the sale of the company to GlaxoSmithKline or to another company.

The two companies are already working together to produce the lupus drug Benlysta, so that makes Glaxo a ready purchaser, but not the only choice, an analyst said.

"The $13 offer price is the floor, and the market clearly thinks it could go higher," the analyst said.

Getting another acceptable bid could take three to six or seven months.

New Titan carries its weight

Titan's newly priced 3.75% convertibles jumped in early trade to 102.5 bid, 103 offered versus an underlying share price of $31.98, and closed higher at 104 bid, 104.75 offered versus the closing share price of $33.25, which was up $1.27, or nearly 4% on the day.

The new paper gained about 2.5 points on a dollar-neutral basis on their debut in secondary dealings Thursday after the upsized $135 million deal priced late Tuesday at the rich end or toward the rich end of talk.

Shares of the Fargo, N.D.-based owner and operator of agricultural and construction equipment stores jumped swiftly into the close, having spent much of the session in the plus 0.75% range around $32.22.

The bond was seen 3% to 6.5% cheap ahead of pricing, using a credit spread of 600 basis points to 650 bps over Libor and a 35% to 40% vol., according to a Connecticut-based analyst.

That compared to the new Wabash National Corp. deal, which was seen 2.5% cheap using a credit spread of 750 bps over Libor and a 35% vol.

One could also get away with a higher credit spread of around 800 bps for the Wabash deal and a 40% vol., one market source said.

The Titan deal was upsized to $135 million from $115 million for the seven-year convertible senior notes.

The yield came toward the rich end of 3.625% to 4.125% talk for the coupon, while the initial conversion premium was at the rich end of the 30% to 35% talk.

Bank of America Merrill Lynch and Wells Fargo Securities LLC are joint bookrunners for the Rule 144A sale.

The greenshoe was reduced to $15 million from $17.25 million.

Proceeds are expected to be used for working capital and general corporate purposes, which could include repaying portions of its floor plan financing facilities and the acquisition or investment in companies or assets that complement Titan's business.

Gilead flat on stock pop

Gilead's 1% convertibles due 2014, or the C convertibles, traded at 126.75 during Thursday's session which was up 7.257 points outright.

Gilead's 0.625% convertibles due 2013, or the B convertibles, traded at 139.625, which was up 10.937 points, and the Gilead 1.625% convertibles due 2016, or the D convertibles, were up 8.127 points.

Shares of the Foster City, Calif.-based biopharmaceutical company ended up $5.64, or 12%, to $52.25.

The three Gilead bonds were the day's most actively traded issues, and continued market interest is expected due to the significant volatility that this name will see.

The latest data isn't the last word "by a long shot," a Connecticut-based analyst said.

"It's a complicated story, but an earlier study suggested patients relapsed after coming off the drug. Also, this is interim data, and a phase 3 trial is required before approval can even be considered," the analyst said.

"Lots can happen, like side-effects, and there are many competitors too, so a delay could aid them, or create head to head studies," he said.

A second analyst said there will be volatility related to its own studies and those of its competitors like Abbott Labs and others.

Currently the convertibles are on about a 70% to 75% delta.

Gilead announced interim data from a phase 2 trial that showed strikingly successful cure rates for hepatitis C patients who were treated with a combination of drugs by Gilead and Bristol-Myers.

The study examined a 12-week course of treatment with the once-daily nucleotide GS-7977 plus pegylated interferon and ribavirin in treatment naive patients with genotype 1 chronic hepatitis C virus infection.

The study found that a high percentage of patients achieved sustained virologic response, which is defined as maintaining undetectable viral load 12 weeks after the completion of therapy.

The study results aren't final but contrast with data released in February that showed six out of eight patients had a viral relapse within four weeks of stopping a 12-week regiment of 7977 and ribavirin.

Gilead has begun a research collaboration program with Adimab to identify therapeutic antibodies.

Mentioned in this article:

Gilead Sciences Inc. Nasdaq: GILD

Human Genome Sciences Inc. Nasdaq: HGSI

Titan Machinery Inc. Nasdaq: TITN

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