Convertibles weaken some; Amylin flat; Gilead mostly lower; A123 Systems sheds a point

By Rebecca Melvin

New York, April 18 - Convertibles were mostly weaker across the board Monday, underperforming the broader markets on a hedged basis, but on pretty light volume, market sources said.

"On a hedged basis, I'd call it generically about 0.25 point weaker," a New York-based sellside trader said, citing both the equities and credit markets as lower as well as the fact that the convertible market in general is overvalued and therefore vulnerable to any selling in a down market.

"There was not much event-driven [trading]. And more in-the-money names were better for sale - those names in the 120 to 140 price range," the trader said.

But there weren't any concerted selling efforts reported. "Some names were unchanged. The things with a little more beta came in a little more maybe," the trader said.

Amylin Pharmaceuticals Inc.'s convertibles were steady Monday in decent volume despite lower shares after the San Diego-based drug discovery company reported disappointing first-quarter earnings.

On Friday, the Amylin convertibles had gained outright after a European committee endorsed Bydureon, a move which puts the diabetes drug a significant step closer to getting approval in the European Union.

Also in the drug discovery space, Gilead Sciences Inc. saw action in its four convertible bonds as the underlying shares underperformed the market. A study in Africa to see whether Gildead's Truvada medication would help prevent HIV infections was halted after no benefit was found by people participating in the trial.

The Gilead B convertibles were down probably 0.375 point and the As were down a little, while the Cs and Ds were unchanged.

A123 Systems Inc.'s bonds traded down a point on a dollar-neutral basis as the underlying shares surged on a rating upgrade by Goldman Sachs. Goldman changed its rating to buy and left its price target unchanged at $9.00 per share.

The A123 convertibles were still up 3 points on a dollar-neutral basis from where the deal came at the end of March, a syndicate source said.

Overall, there "wasn't a whole lot going on," a New York-based sellsider said, and volume was pretty light.

But equities and credit were lower - high-yield debt was 0.5 point weaker - according to a New York-based sellside analyst.

"There was no real panic selling," a New York-based sellside analyst said. Instead people were sitting on their hands and there was not "a ton coming in."

Market action was expected to be muted for the remainder of the holiday-shortened week. Passover starts Tuesday evening and markets are closed Friday in observance of Good Friday.

Amylin flat after earnings

Amylin's 3% convertibles due 2014 traded actively around 90, which was unchanged on the day with shares dropping in strong volume after the company reported a narrower first-quarter loss that missed estimates by a penny on weaker revenue.

"A decent amount traded," a New York-based sellsider said.

Amylin lost $37.3 million, or 26 cents per share, for the quarter ended March 31, compared to a loss of $38.2 million, or 27 cents per share, in the first quarter of 2010.

Excluding one-time items, the company's loss would have been 24 cents, which was a penny more than analysts expected.

Revenue fell 12% to $152.7 million from $174.1 million as Byetta sales fell 15% to $149.8 million.

Sales of Amylin's other diabetes drug Symlin were flat at $22.8 million.

The decline in revenue was offset by lower marketing and research and development costs.

On Friday, Amylin, Eli Lily and Alkermes Inc. said in a joint news release before the market open that the Committee for Medicinal Products for Human Use of the European Medicines Agency issued a positive opinion recommending approval for its Bydureon once-weekly, injectable version of the type 2 diabetes treatment Byetta.

The European Commission, which approves drugs for the European Union, usually takes the recommendations given by this panel within two to three months.

A123 slips a point

A123 Systems' 3.75% convertibles due 2016 went out at 104 bid, 105 offered versus a closing stock price of $6.13, a syndicate source said.

Earlier another source said his firm had the notes at 104 versus a share price of $6.15 but hadn't traded the name.

The underlying shares of the Watertown, Mass.-based maker of lithium batteries for hybrid and electric cars surged 62 cents, or 11.25%, to the $6.13 level.

"Some guys were peeling out of them after the stock had a good run," the syndicate source said. They were down a point on a dollar-neutral basis.

Goldman Sachs' upgrade lifted the underlying shares, the source noted. Goldman has a $9.00 price target on the shares. When the convertible bond deal priced, the equity was printing at $6.00, the source said.

The Goldman rating on the shares was raised to "buy" from "neutral," with the company's improved balance sheet, including the convertible capital raise, cited as helping to de-risk the capacity expansion, improve the company's competitive position and supporting Goldman's view of a "revenue ramp."

Near-term catalysts for the stock include initial sales to electric car market Fisker, announcement of a major OEM partner for battery systems on a global auto platform, a new chief financial officer bringing increased transparency, and announcement of a Department of Energy loan commitment, the Goldman upgrade noted.

For 2011, Goldman now sees A123 Systems losing $1.50 a share, down from a previous forecast of a loss of $1.71.

For 2012, the loss is forecast to expand to $1.05 from 85 cents. A123 is seen generating revenue of $220 million for 2011 and $430 million for 2012.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

A123 Systems Inc. Nasdaq: AONE

Gilead Sciences Inc. Nasdaq: GILD

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