Convertibles drop; PDLI joins ViroPharma, other biotechs in freefall

By Ronda Fears

Nashville, Tenn., March 20 - Convertibles dropped in tandem with stocks as rising interest rate fears spread through the markets in the wake of the Federal Reserve shift to a neutral bias. Trading was still described overall as quiet, but dealers said buyers may soon emerge to take advantage of the weakness.

There was a sharp selloff in drugs and biotechs as ViroPharma Inc. dropped and traders were anticipating more fallout as Protein Design Labs Inc. said after the close that one of its clinal trials had failed.

Protein Design Labs said preliminary results from a Phase II clinical trial of the humanized antibody Zenapax, or daclizumab, for patients with moderate-to-severe psoriasis did not meet its goals for the drug and it was dropping pursuits to use the drug to treat psoriasis. However, the company said it plans to continue to explore its use for other ailments, noting currently there are trials underway in asthma, multiple sclerosis, type I diabetes and uveitis.

Protein Design Labs shares dropped 99c to $15.02 but one trader saw the stock down another $1.02 to $14 in after-hours trading. The 5.5% convertible notes due 2007 (CCC) were essenitally flat at 81.75.

"Biotechs were in a freefall. With ImClone and Sepracor in recent memory, and now iwth ViroPharma and PDLI a lot of people just decided to bail out of that entire sector," said the head trader at a hedge fund in Connecticut.

ViroPharma fell as expected, a day after its common cold drug was rejected by an FDA panel. The 6% convertible due 2007 fell 15 points to 31.5 bid as the common stock sank $7.91 to $5.50.

Dealers said software, semiconductors and health-related issues took a hard hit, but homebuilders and financials also were slammed in light of the anticipation that rising interest rates would put a damper on their businesses. Many, though, said buyers would likely emerge for those sectors because valuations are probably still acceptable and the rate hikes are not expected to kick in for several months.

"It seemed to be knee-jerk selling today, but we expect buyers will show up soon because there is some money to be made in a lot of these names," said the head convertible trader at a major investment bank in New York.

"The rate hikes, if any this year, won't be coming for quite a while, so we think there will be some buying on the weakness and then later some profits to be had."

Among homebuilders with convertibles, Lennar Corp. and D.R. Horton were hammered.

Lennar Corp. beat year-ago results and analysts' expectations for its first quarter as consumer confidence remained high, but the rising interest rate climate sent it southbound Wednesday.

The Miami-based homebuilder reported fiscal first quarter ending Feb. 28 net income of $71.9 million, or $1.03 a share, which was up from $51.3 million, or 75c a share, a year ago and better than the consensus for 95c to $1.05 per share. Revenues rose 13% to $1.2 billion from $1.1 billion.

Lennar's 0% convert due 2018 dropped 2.25 points on the day to 71 bid and the 0% convert due 2021 lost 1.25 to 41.75 bid as the stock lost $2.17 to $52.62.

D.R. Horton's 0% convert due 2021 fell 3.75 points on the day to 70.5 bid as the stock slid by $2.65 to $37.60.

Merrill Lynch convertibles and the Jardine Matheson exchangeable that converts into JPMorgan shares were lower on the rate concerns, traders said.

Merrill's new 0% floater convertible due 2032 was off 0.625 point to 103.625 bid and the old Merrill 0% convert due 2031 edged off by 0.125 to 51 bid.Merrill shares dropped 93c to $55.05.

The Jardine/JPMorgan 4.75% issue due 2007 was down 0.5 point to 44.625 bid with the underlying stock down 90c to $35.19.

In software, there were several names with convertibles leading the decline, including Siebel Systems Inc. and Nvidia Corp. One trader said Nvidia was hurt by worries that it had lost market share and Siebel Systems dropped on valuation concerns.

"Valuation concerns are still a thorn in the sides of a lot of money managers right now, because there are some that are still out of whack or have recently returned to a level that is not where they think they need to be. Siebel Systems has always been a darling, but there is a school of though that they have gone too far," said a convertible trader at an investment bank in New York.

"Nvidia probably suffered as a result of the group's weakness. We feel like its a strong name with a strong presense."

Nvidia's 4.75% convert due 2007 lost 9.5 points on the day to 126 bid with the stock down $5.13 to $46.52.

Siebel's 5.5% convert due 2006 fell 11.5 points to 148.5 bid as the stock lost $3.22 to $31.58.

Lucent rebounded slightly and traders said a fair amount of the slide Tuesday was from short covering. Corning and most of the remaining telecom equipment and telecom sectors went south with the rest of the market, though.

Lucent shares added back 20c to $4.50 and the convertible preferreds were both up 2.25 points, with the new 7.75% due 2017 at 91.75 bid and the 8% due 2031 at 90 bid.

New paper joined the southbound market for the most part, as well, except for Airborne Inc.

Airborne sold an upsized $125 million of 5.75% convertible senior notes due 2007 with a 24% initial conversion premium - at the aggressive end of revised price talk. The issue was quoted 2 points over par in the gray market before the open and closed out at 103.625 bid, 104.125 offered. Airborne shares fell $1.38 to $17.48.

Navistar Finance's 4.75% exchangeable declined by 0.75 point to at 102.5 bid, 103 offered with Navistar International shares off 64c to $43.51.

The Computer Associates 5% convertible due 2007 lost 3 points to 112 bid, 113 offered with the stock down $1.34 to $20.18.

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