Biomarin stock hovers near strike price with call approaching; Kulicke and Soffa raises chip sector worries

By Kenneth Lim

Boston, March 16 - Biomarin Pharmaceutical's convertible was active on Thursday after the stock surged to near the call strike price amid positive drug trial results.

Meanwhile, Kulicke and Soffa Industries Inc.'s convertibles slid in line with the stock, which fell by about a fifth after the market felt the company failed to address concerns about its low earnings forecast at a mid-quarter guidance conference call.

The newly issued convertibles from Universal Corp. had a lackluster debut, trading below their offer price during the day.

Meanwhile, investors shrugged off Fisher-Scientific International Inc.'s plans to buy privately held medical test maker Athena Diagnostics Inc. for $283 million in cash and a 9% stake in biotech company Nanogen Inc. for $15.1 million. Hampton, N.H.-based Fisher Scientific (NYSE: FSH) saw its 3.25% convertible due 2024 around 109.25 bid on Thursday against a stock price of around $70, while its stock slid 0.19%, or 13 cents, to close at $69.75.

A sell-side analyst said the acquisitions were considered small deals for the scientific products maker, but reckoned that the 3.25% convertible was still about 1.5% cheap.

Biomarin nears strike price

Biomarin announced positive results late Wednesday from Phase 3 tests of a metabolic disorder drug, and saw its stock jump past the call strike price of its convertible, which becomes callable in June.

The company's 3.5% convertible due 2008 was seen at 113.75 bid, 114.5 offered versus a stock price of $15, which is higher than the call strike price of $14.21. Biomarin stock (Nasdaq: BMRN) closed at $13.92 on Thursday, up $1.47 or 11.81%.

"They're trading at about a seven-point premium, and they're callable in June 2006," said a sell-side analyst. "Right now the stock is very close to the strike price."

"If the stock pulls back after the news, those traders on a 70 delta will do well on the stock and continue to collect on the coupon," he added.

But if the stock goes past the strike price, "then they'll definitely be called and you risk losing your seven-point premium."

Biomarin said on Wednesday that the late-stage results of its study of Phenoptin were positive, showing that the treatment for the metabolic disorder phenylketonuria significantly addressed levels of the protein that patients cannot metabolize.

The drug is developing the drug with Serono SA and the partners plan to seek marketing authorization in the United States and in Europe in 2007.

Biomarin also said that it will start to receive royalty payments under a new agreement that gives privately held Alliant Pharmaceuticals Inc. rights to the asthma drug Orapred in North America.

Biomarin is a Novato, Calif.-based pharmaceutical company.

Kulicke and Soffa plunge on outlook

Kulicke and Soffa's 0.5% convertible due 2008 was seen at 87 versus the closing stock price of $8.99 on Thursday after the shares fell 20.3% after the company reiterated poorer-than-expected guidance and noted softening demand during a conference call with analysts.

"It's kind of considered a precursor to the whole semiconductor industry topping out," said a buy-side convertible analyst who covers the technology sector.

Kulicke and Soffa in January had guided for revenue of $158 million in the current March quarter, below analysts' expectations of about $170 million. The company said on Thursday that revenue would fall within that range, and that wire-bond demand would soften in the June quarter.

Kulicke and Soffa, which is in the process of selling its loss-making testing business, makes most if its money from selling chip packaging equipment to subcontractors in the semiconductor industry. The company's stock has been climbing on expectations of positive numbers after the sale of the testing business, but Thursday's plunge brought it back to levels "as if it hadn't sold the testing business," the analyst said.

"It's historically considered to be a canary in a coalmine in the semiconductor business," the analyst said. "The story goes that when the packaging equipment goes down, that means subcontractors are not ordering, which means chip demand is going down."

The analyst said the market is starting to hear rumblings of concern about the chip cycle heading for a downturn after growing rapidly over the past year.

"That's the problem with this announcement by Kulicke," the analyst said. "There are some calls already on the cycle turning over, the latest by JP Morgan in October. It may have just been premature...but then you've seen some other announcements like [Taiwan chip makers] USM [United Microelectronics Corp.] and TMC [Taiwan Semiconductor Manufacturing Co.] said they saw declines in orders. So it looks like something is happening in the industry."

He said that although Kulicke and Soffa's credit would probably hold up despite the stock's slide, he did not think the convertibles were cheap. And opportunities to invest in the convertibles on a hedged basis might be dulled simply because the industry's outlook may be negative, he said.

If the technology sector is in line for a downturn, convertible names with high betas are likely to take the biggest hits, the analyst said.

On his list of high-beta tech names are ON Semiconductor Corp. (Nasdaq: ONNN), which has a zero-coupon convertible due 2024 and a 1.875% convertible due 2025 with a beta of around 2.3; and Vishay Intertechnology Inc. (NYSE: VSH), which has a zero-coupon convertible due 2021 and a 3.625% convertible due 2023 with a beta of 1.6; and PMC-Sierra Inc. (Nasdaq: PMCS), which has a 2.25% convertible due 2025 and a beta of 2.

Universal converts fail to shine

Universal Corp.'s newly priced 6.75% convertible perpetual preferreds were seen trading below their offer price on Thursday as analysts blamed the structure and pricing of the deal.

The preferreds, which were priced within revised talk with an initial conversion premium of 27.5%, were seen at 99.625 bid, 99.75 offered on Thursday. The premium talk had been raised to between 25% and 30%, from 20% and 25%.

One analyst said "people just don't feel warm and fuzzy about" the $1,000 par price of the preferreds, even though "they modeled very cheaply."

Some investors who subscribed to the deal on the primary market may have gotten the short end of the stick, he added.

"Because the modeled so cheap, people who were involved thought it would trade up maybe a couple of points and they could flip it, but it didn't happen today," he said.

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