Convertibles mostly quiet: Kodak drops sharply after negative ruling; Onyx adds on hedge

By Rebecca Melvin

New York, July 23 - Weakness in the broader markets quieted the convertibles market on Monday.

Equities stumbled on fears about escalating European sovereign debt problems, but the Dow Jones industrial average pared triple-digit losses to end lower by just 86 points, or 0.7%, to 12,737. Convertibles did not see similar selling but were generally quiet.

"It seems like any time the market comes in, it's not panicking and selling positions like crazy; it just tends to be lighter volumes. There are vacuums in volumes," a Connecticut-based trader said.

Unlike the general trend, Eastman Kodak Co. was an active name, retracing gains notched last week after it lost an infringement case at the U.S. International Trade Commission, which ruled that the patent in question was invalid, and prodding fears about the company's ability to raise money in bankruptcy by selling patents.

There was also news out on Monday that Eastman Kodak won an appeal - but that ruling was deemed as having little impact on the Rochester, N.Y.-based digital imaging company compared to the ITC decision, a West Coast-based analyst said.

Elsewhere, Onyx Pharmaceuticals Inc. also had news on both Friday and Monday. The Onyx convertibles were better by about 0.25 point on a hedged basis despite Monday's news that the San Francisco-based biopharmaceutical company announced a clinical trial failure for Nexavar to treat liver cancer.

The news didn't carry much weight compared to word Friday that Onyx received accelerated approval from the Food and Drug Administration for its Kyprolis (carfilzomib) drug for blood cancer patients whose disease has not responded to at least two other drugs.

This week is a big one for earnings reports from convertibles issuers. On Monday, InterMune Inc. posted second-quarter revenue that missed estimates as sales of its Esbriet drug fell short of expectations. The Brisbane, Calif.-based company now expects full-year revenue of $20 million to $25 million, compared to analysts' estimates for $77.9 million. InterMune shares fell 15%, but the convertibles weren't heard in trade.

Illumina Inc. was set to post earnings on Tuesday.

Overall, there was little selling although the broader market was getting crushed during the session.

"There was not a ton of activity; it was fairly quiet," a trader said.

Equities were lower not only in the United States but in Europe as well. Spanish bond yields surged to their highest levels since the advent of the euro despite word Friday that European finance ministers backed details of an aid package worth up to €100 billion for Madrid to bolster its troubled banks. The Spanish 10-year yield surged more than 7.4%.

Kodak falls sharply

Kodak's 7% convertibles due 2017 traded down 3.5 points to 16 bid, 17.5 offered on Monday from about 19.625 bid, 20 offered on Friday.

The paper traded at 18 early in the session and also at 16.5 later in the day.

On Friday, Kodak lost an infringement case at the ITC that it had brought against Apple and BlackBerry maker Research In Motion Ltd.

Friday's decision could make it harder to sell more than 1,100 digital imaging patents, roughly one-tenth of its patent portfolio, to help repay creditors as it shifts its business focus toward printing.

Kodak plans to hold the auction for those patents in the middle of August. And there will be no change in that plan, despite the ruling which came earlier than expected on Friday instead of in September, a West Coast-based analyst said.

The decision was pertaining to just one of 1,100 patents that the company is trying to sell, but it is considered "the best patent," the analyst said.

Also in news for Kodak, an appeals court ruled on Monday that Kodak did not infringe on patented Apple Inc. technology for digital cameras. The U.S. Court of Appeals for the Federal Circuit issued a brief ruling on Monday upholding last July's decision by the ITC that Kodak did not infringe the Apple patents for making digital cameras and related software.

"The one that they won today doesn't mean much," the analyst said. "The market didn't have very high expectations for that. It was a claim that Apple had filed against Kodak, and winning it means only that they avoid penalties."

"The one [Kodak] lost Friday was one they were working on for two or three years, and they thought it could be a sizable settlement, with a big effect," the analyst said.

There's a fear now that the portfolio won't be as valuable, although the judge just reconfirmed a decision so it was not a total surprise, the analyst said.

"There was potentially a large amount of value coming to Kodak with a positive ruling," the analyst said regarding Friday's ruling.

Onyx adds 0.25 point on hedge

Onyx Pharmaceuticals' 4% convertibles due 2016 traded at 207.59 versus an underlying share price of $76.84 on Monday, which was called 0.25 point better on hedge by a Connecticut-based analyst as shares pulled back slightly amid news that a phase 3 trial evaluating the efficacy and safety of adding Tarceva tablets to Nexavar did not improve overall survival for patients with unresectable hepatocellular carcinoma compared to Nexavar alone.

Bayer HealthCare Pharmaceuticals, Onyx and Astellas Pharma Inc. were involved in the trial.

The safety and tolerability of the treatment combination were generally as expected based upon experience and use of the two products alone and there were no new or unexpected toxicities or changes to the respective product safety profiles observed. Data from this study will be presented at an upcoming scientific meeting.

Nexavar is jointly developed by Bayer and Onyx. Tarceva is jointly marketed by Astellas and Genentech, a member of the Roche Group.

But that news wasn't as significant as Friday's FDA approval of Krypolis to treat multiple myeloma, a form of cancer that causes tumors in the bone marrow and prevents the production of normal blood cells. The approval sent shares up nearly 12% and the convertibles climbed 20 points outright to over 200.

Mentioned in this article:

Eastman Kodak Co. Pink Sheets: EKDKQ

Illumina Inc. Nasdaq: ILMN

InterMune Inc. Nasdaq: ITMN

Onyx Pharmaceuticals Inc. Nasdaq: ONXX

SanDisk Corp. Nasdaq: SNDK

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