Salix surges on takeout rumors; Illumina paper trades actively; PDL BioPharma in line

By Rebecca Melvin

New York, Aug. 19 – Salix Pharmaceuticals Ltd. added a little spice to what was shaping up to be an otherwise boring summer session on Tuesday.

The Salix 1.5% convertibles surged about 30 points on an outright basis and expanded on a hedged basis, following a report after mid-session that Allergan Inc. has approached the Raleigh, N.C.-based drug maker about a possible merger.

The Allergan initiative comes as the Irvine, Calif.-based maker of Botox tries to fend off a hostile takeover from Valeant Pharmaceuticals and as Salix is a month-and-a-half into a deal with a unit of Italy’s Cosmo Pharmaceuticals SpA, which hasn’t closed yet and would involve moving the company’s domicile abroad.

Otherwise, the convertibles market was pretty much a snoozer on Tuesday as the summer hiatus appeared to be firmly set in place now and with market players consigned to a break in the action for at least the next two weeks through Labor Day.

There was no new issuance for the second day this week, nor did market players anticipate any despite a deluge of new paper that launched and priced unexpectedly last week.

The $1 billion Priceline Group Inc. convertibles that priced late last week were still active on Tuesday, and they looked about unchanged on the day, a New York-based trader said.

There was a chunk of the Priceline 0.9% convertibles that traded at 98.5 and also a chunk at 98.35 with shares down fractionally on the day.

Illumina Inc.’s dual tranches of convertibles were trading actively but more or less independently from the common stock, which swung to losses from gains on Tuesday. Demand was seen from funds and others that desire to own Illumina for its investment-grade rating, rather than for the merits of the company itself, a New York-based trader said. He deemed the trading action “uninteresting,” as well as “silly and boring.”

Elsewhere, PDL BioPharma Inc.’s 4% convertibles due 2018 “traded some,” another New York-based trader said.

The PDL BioPharma 4% convertibles were quoted at 109.75 bid, 110.75 offered with stock around $9.38.

Meanwhile, Chesapeake Energy Corp.’s 2.5% convertibles due 2037 traded higher on an outright basis in the early going as shares of the Oklahoma City-based natural gas company rose. But the convertibles contracted on a dollar-neutral, or hedged, basis, a New York-based trader said.

Chesapeake’s 2.5% convertibles (Cusip: 165167BZ9) traded at 103.375 bid, 103.5 offered, the trader said, and “looked lower by 0.5 point.” Chesapeake shares were up 2% at the time.

Chesapeake has another 2.5% convertible due 2037 that didn’t appear to be trading on Tuesday.

Salix ‘opens up’ on rumor

The Salix 1.5% convertibles due 2019 surged nearly 30 points to 248 bid, 249 offered at the market close, with the underlying shares at $160.80. The stock was up 15.5%.

That was up from 217.25 bid, 218 offered versus a share price of $139.17 at the close on Monday.

On a delta of about 92%, the bonds were seen to have expanded about 0.5 point. On a 90% delta, the bonds would have expanded about a point, a trader said.

“They did open up based on the takeout rumors,” he said, but how much “depends on your delta going in.”

Salix also has a 2.75% convertible that trades in the 300 range, but that issue was not a focus of trade.

What caused the 30-point surge in the 1.5% bonds was a Wall Street Journal report that said Allergan has approached Salix and at least one other company about a potential acquisition. The news comes as Salix is in the process of merging with a unit of Cosmo.

This situation will remain a focus of speculation, the trader said. Salix was always the focus of speculation about a possible takeover, but when the company announced its tie up with Cosmo July 8 “some money started to move” away from that theme, the trader said. “Today things got moving the other way.”

Meanwhile Allergan was “kind of sleepy until Valeant tried to bid for them. It’s a defensive move and Allergan is rumored to be looking at certain targets,” the trader said.

The Salix move arises on the back of a similar situation in InterMune Inc. earlier this month, the trader said. The stock surged and the performance in the bonds was relative to a holder’s view.

“Some guys did fine; some, it would have hurt a little bit,” the trader said about InterMune.

Salix shares surged $21.63, or 15.5%, to $160.80.

Illumina remains rich

Illumina’s 0% convertibles due 2019 changed hands on Tuesday at 105.875, which was in line with where they had been.

Illumina’s 0.5% convertible due 2021 traded at near 109, which was also in line with previous levels given what happened with the underlying shares.

The two tranches amount to about $1 billion of notes.

“The bonds are richer, maybe,” said a New York-based trader, who viewed the trading action as based on funds and others that are looking to hold the paper because of its official, IG-rated status, and the position it will hold in indices.

“People indiscriminately say, ‘we have to add another 10% of IG paper,’ and it forces buyers,” the trader said.

PDL BioPharma in line

PDL BioPharma’s 4% convertibles due 2018 were quoted at 109.75 bid, 110.75 offered when the shares were $9.38.

PDL shares ended higher than that at $9.55, which was up 23 cents, or 2.5%, on the day. When the bonds were around 110 the shares were up about 0.5%.

The notes “look in line with where they had been after having come in a couple of weeks ago with everything else,” a trader said.

The PDL BioPharma 2.875% convertibles due February 2015 and the PDL BioPharma 3.75% convertible due May 2015 were not heard in trade.

PDL posted second-quarter earnings of 52 cents per share, which was below consensus estimates, on revenue of $162.8 million, which was up 10% from the year-earlier quarter and above company guidance of $140 million.

Mentioned in this article:

Chesapeake Energy Inc. NYSE: CHK

Illumina Inc. Nasdaq: ILMN

PDL BioPharma Inc. Nasdaq: PDLI

Priceline Group Ltd. Nasdaq: PCLN

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

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