Theravance mixed on COPD drug approval; Meritor improves; Electronic Arts extends gains

By Rebecca Melvin

New York, May 10 - Convertible players were bidding up issues Friday that were seeing gains in their underlying shares. These names were higher outright but not necessarily improved on a hedged basis.

Theravance Inc.'s convertibles traded mixed, with the newer 2.125% convertible trading in line on a dollar-neutral, or hedged, basis, while the older 3% convertibles were seen to have underperformed on a hedged basis. Both bonds were higher outright along with the company's common shares on word that U.S. regulators have approved the company's once-daily Breo Ellipta drug to treat chronic obstructive pulmonary disease, or COPD.

Meritor Inc.'s trio of convertible bonds continued to improve Friday amid no particular news for the Troy, Mich.-based truck parts maker. The bonds have been edging up for at least the past week, a trader said. Meritor shares were up 2.2% on Friday.

Electronic Arts Inc. was a notable gainer this past week on both an outright and dollar-neutral basis after the Redwood City, Calif.-based video game publisher posted positive quarterly results, which included a fiscal fourth-quarter loss but better-than-expected full-year guidance.

Salix Pharmaceuticals Ltd.'s convertibles were higher outright after the Raleigh, N.C.-based drug maker reported first-quarter earnings and revenue that missed estimates but guided in line for the second-quarter earnings and reaffirmed full-year guidance. Salix shares gained 5.5%.

Not all shares were moving up. Seattle-based biotechnology company Dendreon Corp. remained soft after a sharp drop Thursday when the company's quarterly report revealed weak sales of its Provenge prostate drug. Dendreon shares extended losses, ending the day down 5 cents, or 1.2%.

Meanwhile, Eastman Kodak Co.'s 7% convertibles extended gains this week after unveiling its reorganization plan last week.

The new plan to emerge from bankruptcy would put ownership of the company in the hands of its bondholders and unsecured creditors. After starting the week up 2 points at 24.5, the Kodak convertibles reached as high as 26.5 bid, but settled back to 25 bid, 27 offered, a New York-based trader said.

Overall, the convertible bond market was more active this week than last, sources said. Shifting allocations was cited for the higher volume.

"Basically, with stocks sitting at their highs and yields the tightest they've ever been, it feels like people are shifting things around and reallocating. With the returns of the past few months, maybe people are taking some profit and reallocating," a New York-based trader said.

Theravance mixed on drug nod

Theravance's 2.125% convertibles due 2023, which were issued in January and were the more actively traded of the two Theravance convertible issues, traded at 143 during the session, which was up 5 points on the day on an outright basis. But on a dollar-neutral basis, the paper was unchanged, or in line.

After the market close, the 2.125% convertible was seen at 143.954 versus an underlying share price of $34.78. That was about in line, a New York-based trader said.

But Theravance's 3% convertibles due 2015 were seen to have underperformed, quoted at 136.75 versus an underlying share price of $34.9 at the close.

That was down 1 of 2 points on a dollar-neutral basis on a delta of about 65%.

But people have all different deltas on this at this point. "And people are not showing their cards due to the uncertainty facing the company, or the potential for Glaxo to buy it out."

Theravance shares surged $3.63, or 12%, to $34.94.

The pop was on news that the U.S. Food and Drug Administration approved Breo Ellipta, the Theravance and GlaxoSmithKline plc inhaled, long-term maintenance treatment of airflow obstruction for COPD patients.

Meritors improve

Meritor's 4% convertibles due 2027 extended gains to trade at 92.8 on Friday.

The bonds, which trade on an outright basis, have improved 4 to 5 points in the past seven-day period, up from the mid to high 80s, a New York-based trader said.

Meritor's 7.875% convertibles due 2026, the newest Meritor convertible, also improved outright and on a dollar-neutral basis to 120 bid last versus an underlying share price of $6.25. They have improved at least a point dollar neutral in the past week, moving on a 60% to 65% delta.

"They were better every time I looked at them," the trader said.

These bonds are hedged, and "optically" unusual with the high coupon and long tenor. They may be attracting some outright interest as well, the trader said.

There is also a Meritor's 4.625% convertible due 2026 outstanding, and it is better too but not as liquid.

Shares of the trucking outfit Friday were up 21 cents, or 3.4%, to $6.34.

There was no specific news driving the trading action, but the shares popped after earnings at the end of April and have continued to rise since.

"I think there are some outright grabbing those," the trader said of the 4% bonds. He said the higher coupon bonds, which are more equity sensitive, were also in focus.

With stock indices at their highs and credit tight, "you can see how guys are moving down the rung to lower and lower credit," the trader said by way of explanation regarding the interest in Meritor.

Electronic Arts extends gains

Electronic Arts' 0.75% convertible senior notes due 2016 jumped to 104.75 versus an underlying share price of $22.05. That was up from 102.5 versus the closing price of underlying shares at $21.64 on Thursday.

The bond has a 50% premium and had a theoretical delta on Friday of 40%, a New York-based trader said.

That was up from a 30% delta Thursday which yielded a 0.5 point gain on a dollar-neutral basis.

"That is a name that has done great," a trader said. "That was trading at 89 when the stock was $15.00."

The improvement in active volume all week was precipitated by the company's fourth-quarter earnings report. Earnings missed expectations, but the company guided higher for fiscal 2014.

For full-year 2014, earnings are now expected to be $1.20 per share, which is a dime better than estimates, on revenue of $4 billion.

The prospects for the game publisher are improved on expected releases of new consoles, a trader said.

Salix adds outright

Salix's 1.5% convertibles due 2019 traded at 113.5, which was up 2.5 points outright. Salix's shares were up $2.99, or 5.5%, to $57.15 at the market close. Earlier they had been as much as 7.3% higher.

The Raleigh, N.C.-based drugmaker, which specializes in drugs for gastrointestinal disorders, reported lower net income of $40.1 million, or $0.63 per share, compared to $30.7 million, or $0.46 per share, in the year-earlier quarter.

Revenue rose to $202.6 million, compared to $171.1 million in the first quarter of 2012.

The results missed estimates for $0.68 per share of profit and $205.94 million revenue.

Xifaxan, which was initially approved to treat traveler's diarrhea, in 2010 was approved in a more powerful form to treat hepatic encephalophy.

Looking forward, the company expects to have product revenue for 2013 of about $920 million, which is about 25% higher than in 2012.

Mentioned in this article

Alpha Natural Resources Inc. NYSE: ANR

Dendreon Corp. Nasdaq: DNDN

Eastman Kodak Co. Pink sheets: EKDKQ

Electronic Arts Inc. NYSE: EA

Meritor Inc. Nasdaq: MTOR

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

Theravance Inc. Nasdaq: THRX

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