Cubist trades down after patent setback; Energy XXI drops; IGI Laboratories launches deal

By Rebecca Melvin

New York, Dec. 9 – Cubist Pharmaceuticals Inc.’s two balanced convertibles contracted for a second straight day on Tuesday, with the bonds down slightly on an outright basis against lower shares after a negative patent ruling cast some uncertainty over its new deal with Merck & Co., market sources said.

The bonds traded all over the place, but eventually “they came in,” a New York-based sellsider said.

It was the second straight day that the Cubist convertibles were a centerpiece of the convertibles market and contracted. On Monday, the bonds jumped outright but underperformed the common shares on a hedged basis after news of the Merck deal.

The bonds came in again on news late Monday that the U.S. District Court in Delaware ruled four Cubist Cubicin patents are invalid and that Hospira Inc. can launch a generic version of the product as soon as 2016.

Merck said in a release that it still expects to complete its purchase of Cubist in the first quarter of 2015 and noted that the court ruling is subject to appeal.

But even though the Cubist-Merck deal may be unaffected by the negative patent ruling, it “does give investors caution in terms of whether the deal gets completed or not,” a New York-based trader said.

In the energy sector, Energy XXI Ltd. traded sharply lower despite higher crude oil prices, which buoyed shares of many energy and exploration companies, including its own.

Energy XXI’s 3% convertibles due 2018 traded down at 42 from 49 previously, a New York-based trader said. Meanwhile EXXI shares jumped 14% to $3.19.

Other energy names were not seen in trade, including BPZ Resources Inc. BPZ’s shares fell 8.2% on the day.

Goodrich Petroleum Corp. saw trades at steady pricing around 54 with shares much higher. Goodrich Petroleum shares recouped 38%, or $1.13, to $4.09.

West Texas Intermediate crude for January delivery recouped 1.1% to $63.74 a barrel.

In the primary market, T-Mobile US Inc.’s planned new deal for $870 million of mandatory convertible preferred shares was getting a look from market players and looked appealing particularly from an outright perspective, given positive fundamentals of the Bellevue, Wash.-based wireless company, a New York-based trader said.

“It’s a fair amount of premium, but if you like the stock, there are only four [players] in the sector, and this is the only one that is growing,” the trader said.

Talk on the registered T-Mobile deal is for a 5% to 5.5% dividend and with a 20% to 25% premium. Late Monday, Prospect News reported incorrectly that the dividend range was 3% to 3.5% with an initial conversion premium of 25% to 30%.

Two other deals were on the calendar for Tuesday and Wednesday pricing, including Chicago-based Envestnet Inc.’s planned $125 million of five-year convertible senior notes and Italian automaker Fiat Chrysler Automobiles NV’s planned $2.5 billion of two-year mandatory convertibles.

After the market close on Tuesday, New Jersey-based pharmaceutical company IGI Laboratories Inc. joined the calendar with a $125 million deal of five-year convertible senior notes that was talked to yield 3.25% to 3.75% with an initial conversion premium of 25% to 30%.

Overall, the market was a little weaker, although not significantly, a New York-based trader said.

“Credit is wider and convertibles are a little heavy, but nothing is out of context the market,” he said.

Cubist comes in on ruling

Cubist convertibles slipped back on an absolute basis and were also in a bit on a hedged basis after a patent ruling went against Cubist and in favor of generic drug maker Hospira Inc.

Cubist’s 1.125% convertibles due 2018, or the Cubist As, were trading down about 3 to 3.5 points to 128.85 with the underlying shares at $96.50, which was down $4.10, or 4%.

That was in about 0.5 point on a hedged basis, a New York-based sellsider said.

On Monday, these convertibles were last 132.22, versus an underlying share price of $100.67. And that was up about 17.5 points on an outright basis from 115.125 on Friday.

Cubist’s 1.875% convertibles due 2020, or the B tranche, traded at 132, which was down about 3.5 point from Monday. But still up from about 120.75 heading into Monday.

On swap, the Cubist 1.875% convertibles were in about 0.25 point.

Cubist shares were down $4.77, or 4.7%, at $95.83.

On Monday, Cubist convertibles jumped on an outright basis, but were mixed on a hedged basis, with the two balanced convertibles contracting and the in-the-money issue expanding after news that Merck & Co. agreed to buy the Lexington, Mass.-based biopharmaceutical company for $102.00 per share, or $9.5 billion, including debt.

Late Monday, Hospira got a ruling in its patent suit against Cubist that invalidated some of Cubist’s patents on Cubicin, which is its main product accounting for some 80% of sales, according to a New York-based trader.

Whether the patent ruling puts the Merck deal in jeopardy was not known. But the market revealed a level of doubt, the trader said.

“The stock is down to $96 from where the deal gets done at $102,” which is not all that much, the trader said.

“But people are afraid that this does put pressure on Merck that we need clarity before we go through with the deal,” he said.

Credit Suisse analyst Vamil Divan said that the court ruling sets the stage for launch of a generic Cubicin in June 2016 instead of June 2018. He said that it calls into question the financial value of the deal and also raises questions about Merck’s due diligence process and timing for the deal.

T-Mobile eyed ahead of pricing

Using a credit spread of 400 basis points over Libor and a 3 vol. skew, the deal was seen fair value at about 41.15, a trader said.

“It’s not a screaming buy,” but it holds appeal from an outright perspective, the trader said.

A second source said that he thought the deal would price on the cheap end of talked terms and suggested the deal would perform well in first-day action if that was the case.

“Then there will be more buyers on Wednesday and they’ll walk them up.” He said.

T-Mobile shares dropped 8% on Tuesday after the deal was launched late Monday

Bellevue, Wash.-based T-Mobile, a wireless messaging and data services company, plans to price 870 million of mandatory convertible preferreds late Tuesday to yield 3% to 3.5% with an initial conversion premium of 25% to 30%, according to market sources.

Goldman Sachs & Co., Morgan Stanley & Co. LLC and Citigroup Global Markets Inc. are the joint bookrunning managers of the deal. Co-managers are Barclays, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC.

The registered, off-the-shelf offering of 17,391,305 shares of mandatories has a liquidation preference of $50.00 per share.

There is a $130 million greenshoe for the three-year securities.

Proceeds will be used for general corporate purposes, including capital investment and acquisition of additional spectrum.

IGI on tap

IGI Laboratories plans to price $125 million of five-year convertible senior notes after the market close on Wednesday. The Rule 144A deal was talked to yield 3.25% to 3.75% with an initial conversion premium of 25% to 30%.

Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC are joint bookrunners.

The notes will be non-callable for three years until Dec. 19. 2017, and then provisionally callable if shares exceed 150% of the conversion price.

They have takeover and dividend protection.

Proceeds are earmarked for general corporate purposes, including for capital expenditures and potential future acquisitions and strategic transactions.

Hillside, N.J. -based IGI is a pharmaceutical company.

Mentioned in this article:

BPZ Resources Inc. NYSE: BPZ

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Energy XXI Ltd. Nasdaq: EXXI

Envestnet Inc. NYSE: ENV

Fiat Chrysler Automobiles NV Nasdaq: FCAU

IGI Laboratories Inc. NYSE: IG

Goodrich Petroleum Corp. NYSE: GDP

T-Mobile US Inc. Nasdaq: TMUS

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