Cell Genesys drops on drug speculation; Seagate falls on warning; General Growth, TriZetto launch deals

By Kenneth Lim

Boston, April 10 - Cell Genesys Inc. convertibles continued on their rollercoaster ride Tuesday and fell as speculative trades sent the stock on a steep drop.

Seagate Technology fell in line with its stock after the company warned that it will miss its own revenue forecast for the quarter.

Meanwhile, General Growth Properties Inc. announced a $1.55 billion offering that priced in the evening, while The TriZetto Group Inc. launched a $200 million deal that is expected to arrive Wednesday after the market closes.

The secondary convertible market in general continued to have a slow session.

"There's absolutely nothing," a buyside convertible trader said. "I guess April is the new August."

Cell Genesys falls back

Cell Genesys's 3.125% convertible due 2011 gained as much as half a point outright early Tuesday before taking a plunge with the stock later in the day.

The convertible traded at 97 against a stock price of $6.15 near the close. Cell Genesys stock (Nasdaq: CEGE) finished the day at $6.08, down by 11.37% or 78 cents.

"It was up and down today," a sellside convertible trader said. "It's hard to know how guys are doing on the bonds right now because it all depends on what kind of a hedge you have. Those on a heavier hedge probably got hurt yesterday, but most people are probably on lighter hedges or outright at this point."

Cell Genesys stock had gained more than a quarter of its value in a Monday rally. The South San Francisco, Calif.-based biotechnology company has seen its stock climb over the past few weeks after a U.S. Food and Drug Administration panel recommended approving a rival cancer drug by Dendreon Corp. that works similarly to a treatment that Cell Genesys is currently developing. The FDA will decide whether to approve Dendreon's drug in May.

"There's a lot of volatility right now and not all of it is coming off any news," the trader said. "A lot of it is technicals, and there's hedge guys who are closing out their shorts that's driving the stock in all sorts of directions."

A buysider said Monday's rally was likely linked to hedge funds who were short on the stock covering their positions following the stock's recent run-up.

"I suspect what you saw yesterday when the stock took off after Dendreon's, I suspect guys started buying it back," the buysider said. "There are a lot of guys unable to take the pain covering the stock. There were huge shorts in both of those names."

Dendreon's announcement at the end of March about the FDA panel's recommendation came as a surprise to quite a number of hedge players, the buysider said.

"Before Dendreon's announcement, people were not expecting this to go through at all," the buysider said.

A sellside desk analyst said stock's drop on Tuesday may also have been a result of opportunistic trading.

"It could be people taking profit after yesterday's run," the analyst said.

Seagate falls on sales warning

Seagate's 2.375% convertible due 2012 fell about 7 points outright on Tuesday after the company warned that its fiscal third-quarter sales were below target.

The convertible was 137.75 against a stock price of $21.50 on Tuesday, while Seagate stock (NYSE: STX) fell 6.22% or $1.46 to close at $22.

"Those converts are going to be in line," a sellside convertible trader said. "They're in the money, so they're going to move with the stock."

Scotts Valley, Calif.-based Seagate, a maker of computer disc drives, said late Monday that it expects sales of $2.8 billion for its fiscal third quarter, below its forecast of between $2.9 billion and $3 billion. Seagate cited lower than expected demand for its 3.5-inch ATA drives and its 2.5-inch drives, and it said that it did not gain market share in the quarter. Seagate expects to report its results on April 17.

A sellside convertible analyst said the news suggested that the computer hard disk sector may be in the midst of a slowdown.

"We're seeing signs of softness from the big guys like Seagate and AMD," the analyst said. "This is probably going to put some pressure on the stock, which will affect the convertibles only because the credit doesn't really matter for the convertibles right now."

Credit Suisse equity analyst Robert Semple maintained an outperform rating on the stock.

"The silver lining is that even in a difficult environment, HDD vendors fought the urge to behave irrationally, their traditional response to difficult industry conditions," Semple wrote in a note. "If demand is in fact softening, we believe Seagate is the best name to own owing to its industry leading cost structure, and while its too early to know if this is the last downward earnings revision for Seagate, at a minimum, the bar has been reset, and the stock is attractively valued."

General Growth prices deal

General Growth Properties said after the market closed that it had priced $1.55 billion of 20-year exchangeable senior notes to yield 3.98% with an initial exchange premium of 35%.

The notes were issued by General Growth operating partnership GGP LP and are exchangeable into General Growth common stock.

There is an over-allotment option for a further $200 million.

Citigroup was the bookrunner of the Rule 144A offering.

General Growth stock (NYSE: GGP) closed at $65.72 before the deal was announced.

General Growth, a Chicago-based real estate investment trust that focuses on shopping centers and community development projects, said the proceeds of the deal will be used to repay outstanding debt that currently bears an interest rate of 6.57% and to fund general corporate purposes.

TriZetto launches offering.

The TriZetto Group also announced $200 million of five-year convertible senior notes that are expected to price Wednesday after the close. The deal is talked at a coupon of 1.125% to 1.625% and an initial conversion premium of 15% to 20%.

The convertibles will be offered at par.

There is an over-allotment option for a further $30 million.

Deutsche Bank, Goldman Sachs and UBS Investment Bank are the bookrunners of the Rule 144A offering.

Trizetto, a Newport Beach, Calif.-based provider of information technology solutions for the healthcare and insurance sectors, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions and to fund general purposes, which include debt repayment, stock buybacks or acquisitions.

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