Corixa converts climb to par on takeover, other biotechs mixed; Calpine higher; Primus plunges

By Ronda Fears

Nashville, May 2 - Corixa Corp. convertibles zoomed to around par Monday on news of its takeover by GlaxoSmithKline plc, and there was some speculation regarding what other small biotech targets might have caught the eye of Big Pharma.

"The biggest item here this morning was the CRXA takeover," one sellside market source said. "We trade a lot of those little biotech issues, many of which have traded down into the 80s, and when one of them instantly goes from 78 (offered there on Friday, from what I understand!) to par, that's big."

Other small biotech concerns with converts in play that look similar to Corixa, he said, include ViroPharma Inc., Vertex Pharmaceuticals Inc., Cubist Pharmaceuticals Inc., and Guilford Pharmaceuticals Inc. Those were mixed in reaction to the Corixa news, traders said, with split views on Big Pharma's move to pickup smaller biotechs they have deals with.

General Motors Corp. issues were still trading on speculation about the fate of its common stock dividend. The 6.25% and 5.25% issues were up slightly while the 4.5% issue dipped a bit.

Trading in the GM and Ford Motor Co. converts also was based on the April auto sales figures, which are expected this week, but volume was light, dealers said.

Rather, "a bunch" of Novell Inc. converts traded Monday, as the network platform company was couched by the sellside desk analyst as "apparently on the road to cleaning up its financials." He said the Novell converts were at around 82 early Monday with the stock at $5.95. Novell shares settled Monday unchanged at $5.91.

Simon Property Group Inc.'s convertible was active Monday ahead of the Federal Reserve meeting, but traders remarked a "total silence" in the area of real estate issues, particularly homebuilders.

"Homebuilders are in some bizarre zone of the market. It's like that sector is insulated from all we are hearing about the economy pulling back, all that jazz," a buyside trader said. "A lot of people are afraid to touch them, one way or the other. If you own them, you're afraid to sell. If you don't, you're afraid to buy. It's just weird."

Indeed, the desk analyst begged off when asked about his a position on the homebuilding group, saying, "I've been so completely wrong on the sector for a long time (I thought it was time to sell about two years ago!)."

Corixa climbs 20-plus points

After Friday's closing bell, Corixa said it had agreed to be acquired by British pharmaceutical giant GlaxoSmithKline plc for $4.40 a share in cash, or $300 million. The per-share price is a 42.4% premium over the closing price Friday of $3.09.

One sellside trader declared the merger transaction a "home run" for Corixa holders.

Corixa's converts zoomed to around par on Monday from a trade at 78.5 on Friday before the news.

The 4.25% convertibles due 2008 are to be assumed by GlaxoSmithKline, although holders could exercise a put option triggered by the change of control.

"With GSK's [GlaxoSmithKline] underlying credit and a 4.25% coupon with two years of call protection, some people might decide to let them stay outstanding," said one sellside source.

Glaxo said one of the key features of the deal is the acquisition of Corixa's manufacturing facility that produces Monophosphoryl Lipid A, or MPL, an adjuvant contained in a number of vaccines in Glaxo's pipeline. To build a new facility of its own for that purpose, one source estimated GlaxoSmithKline would have to spend $40 million to $50 million.

"It was a smart move by GlaxoSmithKline," said one sellside convertible trader. "Corixa has a $150 million, eight-year deal with them. It's cheaper to buy them out."

Small biotech targets smart

There is a big bank of biotech firms that could be targets of the bigger pharmaceutical companies they are already partnering with, and it would seem to be a win-win-win situation for the Big Pharma company, the smaller biotech and the convertible holders, onlookers said.

"You have to own them to win. Buy what you like and keep buying it as long as fundamentals don't change. It's the Buffett way," he sellside trader said. "Others deals are coming."

Although traders said there was not a great deal of trading in biotech issues on the Corixa news, it was pointed out that many of those issues are small and illiquid so a trade could "take some work." There were some moves, though, and analysts pointed out several immediate convertible names in the sector that resemble Corixa.

"There are a number of similar looking biotech converts - similar from a convertible security standpoint, anyway," one said. "I have no idea as to the possibility of a takeover, obviously."

Those he mentioned specifically were ViroPharma with a 6% due 2007, Vertex with a 5% due 2007 and 5.75% due 2011, Cubist with a 5.5% due 2008 and Guilford with a 5% due 2008.

Baltimore-based Guilford is focused on the hospital and neurology markets, with marketing arrangements with Merck & Co. Inc.

Cubist, based in Lexington, Mass., is focused on research, development and commercialization of new antibiotics to inhibit specific bacterial targets. The company has an international commercialization agreement with Chiron Corp.

Cambridge, Mass.-based Vertex is engaged in treatments for serious human immunodeficiency virus (HIV) infection, chronic hepatitis C, inflammatory and autoimmune disorders, cancer and pain, independently and with collaborators such as Merck and Novartis Pharma AG.

ViroPharma, based in Exton, Pa., is focusing its product development activities on viral diseases like antibiotic-associated pseudomembranous colitis and hepatitis C. In November, the company acquired from Eli Lilly & Co. the rights to market and sell Vancocin Pulvules HCl, a treatment for colitis and enterocolitis.

Primus plunges 20-plus points

Primus Telecom was hammered Monday after it reported a walloping net loss, warned of revenue declines and remarked in general about a tough business climate worldwide.

The Primus 3.75% and 5.75% convertibles fell into the high 30s from the 50s last week, traders said, while the straight bonds fell similarly. The 8s of 2014 traded down to the 46.75 bid, 47.75 offered context from 59 bid, 60 offered on Friday, and the 12.75% due 2009 fell to 59.5 bid, 60.5 offered from 75 bid, 80 offered on Friday. Another trader saw the straight debt "all over the place," and he pegged the 12.75s at 66 bid with the 8s at 49.75 bid.

Primus shares were hammered hard, losing nearly half their value, plunging 74 cents to close Monday at 77 cents - a 49% decline from Friday. The stock traded as low as 73 cents during the session.

Primus largely blamed its weak operating results for first quarter on greater than expected sequential revenue erosion in it high-margin core long distance and dial-up ISP businesses, as well as severe revenue declines in its European prepaid services business.

Thus, Primus reported adjusted EBITDA for the quarter of $6 million and a net loss of $35 million, or 38 cents per diluted share, compared to a net loss of $10 million, or 11 cents per diluted shares, a year ago. Revenues declined to $314 million from $348 million.

Based on those results and "potential continuation of similar trends," the company said it expects adjusted EBITDA for 2005 now to be in the range of $35 million to $50 million. The company forecasts prepaid services revenue to decline further in second quarter and forecast annual revenue to be 10% below 2004 reported revenue, or slightly above $1.2 billion.

Primus positive on 2006

But, Primus stressed, "Management's priority is to establish a trajectory to be free cash flow positive in 2006, through managing profitability from existing businesses and reducing costs while providing optimal support to its most promising new initiatives."

Primus ended the first quarter with a cash balance of $130 million, including $13 million of restricted funds. Free cash flow stood at a negative $25 million. Long-term debt obligations as of March 31 were $656 million, including a new $100 million senior secured term loan facility.

Currently, Primus said its major new initiatives are focused on broadband customers in Australia - which in first quarter rose 25% sequentially - retail Voice over Internet Protocol, or VoIP, services - which rose 40% sequentially in first quarter, and residential local telephone service in Canada - which grew 60% sequentially in first quarter.

"We are executing our strategy of offering a broader portfolio of services, including voice, DSL, wireless and VoIP services to strengthen our competitive position in our major markets," said K. Paul Singh, chief executive of Primus. "Our major challenge continues to be generating margin contribution from our new initiatives at rates that exceed the declining contribution from our core long distance and dial-up ISP businesses. Growth from our new initiatives, however, is continuing at anticipated levels."

Calpine converts climbing back

After a wild ride last week with regard to Calpine, amidst rumors of defaults and even bankruptcy, followed by "assurances" from the company, Calpine debt continued to see a "nice bounce," gaining "smartly" across the board.

The Calpine convertibles were anywhere from 2 to 6 points higher Monday. The 5% preferreds rose 2.5 points to 40 bid, 41 offered while the 4.75% bonds gained 4 points to 49 bid, 50 offered and the 6% bonds added 6.5 points to 59 bid, 60 offered.

Calpine shares added back a quarter, or 14%, to settle Monday at $2.04.

Calpine is scheduled to report results Thursday, followed by a conference call.

"People are either starting to believe what the company says, or they're at least breathing a sigh of relief," said a bond trader. "Bankruptcy does not look imminent with $800 million of cash on the balance sheet."

The trader pegged Calpine's 8¼% due 2005 bonds at 90 bid, 92 offered, up about 1 point from 89 bid, 91 offered late Friday, and the 10½% due 2006 bonds at 77.5 bid, 79.5 offered at Monday's close, up from 75 bid, 77 offered, and the 8½% bonds due 2011 at 53 bid, 55 offered going out on Monday, up from 48.5 bid, 51 offered on Friday.

Merrill hedge index conservative

Merrill Lynch's convertible hedge index was reported down 2.4%, net of a 2% annual management and a 20% performance fee, in April before hedging out interest rates and down 2.62% after the same but the firm acknowledged that its results were conservative compared to what the industry actually experienced.

"Anecdotally, many hedge fund managers underperformed our index in April," said Merrill convertible analyst Tatyana Hube. "We heard that many hedge fund managers suffered steeper losses than did our [index], with some losing on average 3% to 5%."

She said Merrill's index did not fall as much probably because of three main reasons:

1 - The Merrill index is very broad, with 700-plus securities, and is far more diversified across sectors and credit quality than most hedge fund portfolios.

2 - Its short position in underlying equities is based on a theoretical delta, "while, as we hear it, many fund managers have been employing lighter deltas, which can lead to underperformance in a falling equity market."

3 - "Some funds were making a bet on interest rates rising, which detracted from returns as yields declined during the month."

Contributing to the negative impact on hedge fund returns were dramatically wider spreads and cheapening in the convertible market based on fund redemptions, or selling. On the positive side, a rise in both realized and call-implied volatility as well as the easing in Treasury yields helped.

Spread widening was the main culprit, as Hube observed that investor have become more credit risk averse in a softening economy.

Year to date, Merrill's hedge fund index is down 6.29% on a net basis, before hedging out interest rates, or at a 5.83% loss afterward.

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