Strong sell-off hits biotechs, drugs; Tyco pressure eases slightly

By Ronda Fears

Nashville, Tenn., July 1 - Volume was not high, given that it's summer, but traders noted heavy selling as stocks plunged unexpectedly. Some relief was provided with an overnighter from Mirant Inc., but it was getting mixed reactions.

"If you'd have told me Friday that this is what the markets were going to do Monday, I wouldn't have believed it," said John Seibel, head trader at Silverado Capital Management.

"I'm sticking to a bunker mentality. There not really a lot trading. People are sitting on their hands."

There was a sharp sell-off in drug and biotech names as Alkermes Inc. and Johnson & Johnson were rejected in their request for approval to market a drug.

Tyco International Ltd. got some reprieve from selling, however, as it proceeded with the IPO of CIT Group. But the deal got far less than once anticipated, which tempered the market's reaction as most of the proceeds are expected to be used to pay down debt.

Selling also continued in some of the cable and tech names, as Electronic Data Systems Corp. disclosed exposure to WorldCom's demise.

Buying was scarce, traders said.

But Lennar Corp. got a nice lift as investors looked for "any bright spot out there," as one dealer said. The homebuilder also announced an acquisition.

Trading was muted overall, though.

Even Mirant's new deal was not heavily traded in the when-issued market, traders said.

The $370 million of five-year convertible senior notes traded at 0.75 point over issue. Bids were last seen at 0.5 point over par, with the ask price at 1.5 points over.

Mirant's split rating, which skews the credit spreads along with a general skepticism regarding the energy trading industry.

"When the spread on a BBB- credit is somewhere between 800 bps and 1,100, you have to be pretty suspicious," said a convertible trader at a large hedge fund in New York.

"I've gotten burned a little this year, but what is the worst, third degree? I'm not signing up for that."

A convertible fund trader who owns other Mirant converts, however, said he felt like the situation was worth gambling on.

"Mirant is certainly in a better place than, say, El Paso or Calpine, in my opinion," the trader said.

"Certainly, it's no Enron. They [Mirant] really seem to be on the right track with regard to the energy trading business, and I think Moody's will realize that, too, eventually."

Mirant CFO Ray Hill said last week in a conference call that the company hopes to get a new rating decision from Moody's by third quarter.

Mirant's 2.5% due 2021 were quoted down 3.125 points to 71.25 bid, 73.25 asked. The 6.25% convertible trust preferreds dropped 3.34 points to 26.3.

Mirant shares closed down $1.19 to $6.11.

Calpine and El Paso, two other beaten-down power names, were also lower along with the market.

Tyco, however, got a respite from its recent slide.

Tyco raised $4.6 billion from the IPO of CIT Group, about $400 million less than the low end of the range most recently expected and just six months after buying it in June 2001 for nearly $10 billion. It was also lower than a reported $7 billion to $8 billion offered for the finance company earlier this year, according to earlier SEC filings.

"Because the CIT sale was so much lower than what everybody thought it would be and that means there will be less for Tyco to use to pay down its debt, there was just barely a slight positive reaction," said a dealer.

Tyco's 0% convertibles were both higher, though, as the stock edged up 24c to $13.75.

The 2020 issue added 1 point to 62.5 bid, 63.5 asked and the 2021 issue gained 0.5 point to 69 bid, 69.5 asked.

Credit issues were the biggest pull on the market, traders said.

EDS fell dramatically after the company said its 2002 operating earnings could be hurt if WorldCom fails to pay its bills. The computer services company said it might have to write off about $90 million worth of assets if the WorldCom contract falls through.

Also hurting EDS was its disclosure that it had ended talks with Procter & Gamble Co. related to a potential contract said to be worth up to $10 billion.

The EDS 0% due 2021 dropped 2.625 points to 71.875 bid, 72.375 asked as the stock plunged $6.70 to $30.45.

Computer security provider Network Associates Inc. was also sharply lower as it said made another big, its third, for the 25% of anti-virus services company McAfee.com Corp. it does not already own after pulling an earlier offer because of its own accounting problems.

The $180.4 million offer is worth $44 million, or about 20%, less than when Network bid back in April because of the decline in its stock price.

Network Associates spun off McAfee in 1999.

The Network Associates 5.25% due 2006 plummeted 7.5 points to 125.875 bid, 126 asked as the stock fell $1.65 to $17.62.

The market reacted similarly to Northrop Grumman Corp.'s agreed acquisition of defense and auto parts maker TRW Inc.for $7.8 billion, creating one of the world's largest military and satellite contractors.

But the price tag was much larger than Northrop's original bid of $6 billion in February.

Northrop's 7.25% mandatory due 2004 plunged 6.18 points to 126.33 as the stock lost $6.81 to $118.19, but traders noted little activity.

Sell orders were swirling in the biotech and drug sector, though.

In the latest FDA rejection, Johnson & Johnson and partner Alkermes Inc. were denied the ability to market an injectable version of J&J's schizophrenia treatment Risperdal.

The J&J converts, originally sold by Alza Corp., fell hard, as did Alkermes and most of the sector.

The J&J 0% due 2014 dropped 4.5 points to 128.625 bid, 129.125 asked and the 0% due 2021 lost 2.125 points to 73.125 bid, 73.3375 asked. J&N shares closed down $1.76 to $50.50.

Alkermes' 3.75% due 2007 fell about 12.75 points. The issue was quoted at 51.5 bid at one shop and at 52.87 at another. The shares plummeted $10.86 to $5.15.

ICN Pharmaceuticals was another big loser in the group. The ICN 6.5% due 2008 dropped 3 points to 95bid, 95.5 asked. ICN shares ended down $1.27 to $22.94.

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