Cubist improves dollar neutral; Ingersoll-Rand drops; low-premium names 'better for sale'

By Rebecca Melvin

New York, Oct. 20 - A pair of earnings releases, including the forward guidance they contained, spurred some trading action in the convertible bond market on Thursday; but overall the market was described as quiet, especially during the afternoon hours.

Cubist Pharmaceuticals Inc. traded actively and improved on a dollar-neutral basis as the underlying shares rose on positive earnings from the Lexington, Mass.-based biopharmaceutical company. Improved sales of the company's primary product, Cubicin, prompted the company to raise guidance for the fourth quarter.

Less widely traded, the convertibles of Ingersoll-Rand plc (Ireland) dropped about a dozen points outright with lower shares after the Dublin-based diversified manufacturer posted weak third-quarter profit and gave a soft outlook.

Overall, the market was quiet, including a couple of new deals that priced this week in the primary market.

"For most dedicated convertibles participants, it was quiet as people are waiting for clarity on the European Union situation," a trading source said.

The usual high-grade, benchmark names like Amgen Inc., Medtronic Inc. and Transocean Ltd. were strong on continued interest from crossover buyers, the source said. But "on balance, things were better for sale," the source said.

Weakness due to more sellers than buyers hit short-dated, low premium names, including ON Semiconductor Corp. and Old Republic International Corp.

Nevertheless, there wasn't a lot driving sales and most things didn't get done, a New York-based analyst said.

Uncertainty surrounding the euro zone hit other markets as well. Stocks wavered during the session amid headlines about disagreements between Germany and France over the debt plan.

German chancellor Angela Merkel and French president Nicolas Sarkozy issued a statement that no decisions could be taken by E.U. leaders on Sunday as previously planned.

Also during the session, president Barack Obama addressed the nation regarding the demise of deposed Libyan leader Moammar Gadhafi, who was killed by Libyan forces in his home city of Sirte.

Cubist valuation hurt

Cubist's 2.5% convertibles due 2017, of which there are about $450 million outstanding, traded up about 10 points outright during the session, to about 150 bid, 151 offered at the close from about 140 bid, 141 offered on Thursday.

The move, amid higher shares, represented a 0.25 point to 0.5 point improvement on a dollar-neutral basis, a New York-based trader said.

A second pricing source called the paper "in a point" on a premium basis to 13.7 points. And a third source said that the valuation weakened a bit on reduced vol. after the earnings report.

Cubist also has 2.25% convertibles due 2013, but that paper wasn't as actively traded, although it was seen 132 to 133.

The dollar-neutral improvement was because the company "had good numbers all across the board and is doing all the right things, and the guidance didn't hurt," the New York-based trader said.

The company said it now expects annual revenue of $740 million to $745 million in 2011, up from $700 million to $715 million. Analysts expected $713.3 million in revenue on average.

Cubist's profit fell $24.3 million, or 33 cents per share, from $31.2 million, or 50 cents per share. Cubist spent more money on research and development of its drug candidates and also reported greater expenses related to sales of Cubicin and Dificid, a drug it helps promote in the U.S. for another company, Optimer Pharmaceuticals Inc.

Deficid is approved for treating patients suffering from clostridium difficile-associated diarrhea and is available in U.S. markets since July. Cubist received $3 million in service revenue for marketing Dificid.

Revenue rose 24% to $201.7 million from $162.1 million. Revenue from Cubicin rose 21% to $186.4 million.

Both research and development expenses and selling, general & administrative expenses were on the upswing during the quarter. R&D climbed 25% to $46.2 million due to the company's efforts to develop its pipeline, and SG&A expenses climbed 3.1% to about $36 million.

Ingersoll-Rand drops

Ingersoll-Rand's 4.5% senior exchangeables due 2012 were seen last at 155 bid, 156 offered, according to a trader. They had traded down to 153.647 during the session, according to Trace data, a 15-point decline.

The Dublin, Ireland-based company now expects to earn 64 to 70 cents per share from continuing operations for the fourth quarter, short of the 71 cents analysts anticipated.

For the full year, the company expects to earn $2.70 to $2.76 per share on an adjusted basis, which was slightly below its lowered full-year forecast compared to the September estimate and below analysts' anticipated $2.76 per share.

Ingersoll, which warned about third-quarter results at the end of September, said order growth slowed for the second consecutive quarter and that it no longer expects to reach its 2013 targets.

September and October bookings in its climate solutions business, which includes air conditioning units, were "light" in North America and Europe, the company said.

It cited continuing weakness in the depressed housing and consumer markets for its results.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Ingersoll-Rand plc (Ireland) NYSE: IR

Medtronic Inc. NYSE: MDT

Old Republic International Corp. NYSE: ORI

ON Semiconductor Corp. Nasdaq: ONNN

Transocean Ltd. NYSE: RIG

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