Endo Health 'comes in' on FDA news; Theravance still trades mixed; Shutterfly on deck

By Rebecca Melvin

New York, May 13 - Endo Health Solutions Inc.'s convertibles dropped Monday on the heels of news that the U.S. Food and Drug Administration has denied the company's petition that would have halted generic competition to its Opana painkiller on safety grounds. Endo said the move will impact its earnings and lead it to explore options to mitigate the damage.

The Malvern, Pa.-based specialty health care company's convertibles dropped about 9 points on an outright basis and contracted between 0.25 point to a point on a dollar-neutral, or hedged, basis, sources said.

Theravance Inc.'s convertibles extended gains on an outright basis, but were down on a dollar-neutral basis, after news that the San Francisco-based biotechnology company has agreed to sell 21% of its royalty stream from four respiratory drugs to Elan plc for $1 billion. The deal pertains to its Breo Ellipta drug for the treatment of chronic obstructive pulmonary disease that received regulatory approval last week. GlaxoSmithKine plc is Theravance's partner for the respiratory drugs.

Salix Pharmaceuticals Ltd.'s convertibles also extended gains in trade Monday after the Raleigh, N.C.-based drug maker reported Friday first-quarter earnings and revenue that missed estimates but guided in line for the second-quarter earnings and reaffirmed full-year guidance.

Elsewhere, Post Holdings Inc.'s convertible preferreds were lower outright after the St. Louis-based cereal maker missed earnings and revenue estimates for its most recent quarter but raised the low end of earnings guidance to include its granola and snack food Hearthside Food Solutions acquisition.

Equities were mostly flat. Retail sales rose 0.1% in April, which was better than the 0.3% drop that had been expected, and were returning to growth following a decline in March. Excluding autos, gasoline and building materials, core sales rose 0.5%.

Convertibles overall were not very active. "There is really very little trading today. There may be multiple names that have traded, but nothing in interesting volume. Total volume is extremely light and typical for a Monday," a New York-based trader said.

Endo Health contracts

Endo Health's 1.75% convertibles due 2015 traded at 126.838, which was down 9 points, according to trace data, and was seen at 127 bid, 127.5 offered versus the underlying shares' closing price of $33.71. Earlier the level was called 127 versus a share price of $33.50.

Sources called this down 0.25 point to a point.

"On a 75% delta, they are in about a point," a New York-based convertibles analyst said.

A second source said "they were for sale."

Shares of the Malvern, Pa.-based specialty health care company closed down $1.26, or 3.6%.

The FDA rejected Endo's petition to protect its Opana painkiller despite the company arguing that its reformulated version of Opana ER would be more difficult to abuse than the original version and therefore asked that generics of the earlier version be barred from the market.

The original formulation wasn't withdrawn for reasons of safety or effectiveness, therefore the generics could continue to be approved and marketed, the FDA said.

It also noted that reformulated Opana ER could still be manipulated for abuse in certain ways.

Following the decision Friday, Endo said it estimates 2013 sales from Opana ER would be about $120 million, reducing operating profit by about 55 cents per share.

Lazard Capital downgraded Endo Health to "sell" from "neutral" and lowered its price target on the common shares to $27.00.

In its note, Lazard said that the FDA denial "calls into question out year growth potential."

Cost cutting could dampen the blow, Lazard said, but the new chief executive has already weighed in on that as a strategy. "We are mindful that expenses could be reduced, but we suspect investors will fret more about longer-term sources of revenues and growth than near-term EPS. We note that the CEO commented 'cost cutting is not a long-term growth plan' on the first-quarter results conference call."

Theravance mixed on drug nod

Theravance's 2.125% convertibles due 2023 zoomed up outright to about 161 from 143 on Monday. On Friday the paper rose to 143 from 138.

Theravance's 3% convertibles due 2015 jumped to about 154, which was up 18 points outright.

But on a dollar-neutral basis "they looked in also," a trader said.

The New York-based trader said that the 3% convertibles with a soft-call trigger were trading below parity.

Theravance shares surged $6.26, or 17.9%, to $41.20. That was on top of a $3.63, or 12%, gain on Friday.

Monday's drive higher was sparked by news that Elan is buying the royalty streams of the Glaxo-Theravance respiratory drugs, including the once-daily Breo Ellipta drug to treat chronic obstructive pulmonary disease, or COPD, which just received regulatory approval on Friday.

Theravance previously announced that it planned to split the company into a royalty stream company, which would keep the convertible bonds, and a biotech development company.

Post lower

Post's 3.75% convertible perpetual preferred stock was seen as 112.5 bid, 112.25 offered versus an underlying share price of $44.51 at the market close Monday, which was down from a previous level of 117.375 bid, 118.375 offered versus a share price of $47.12.

Sources said the Post preferreds are very illiquid and they had not seen the paper trade.

The company reported fiscal second-quarter earnings of $4.3 million, or 13 cents per share, compared to $10.5 million, or 30 cents per share, in the year-earlier period.

Analysts on average had been expecting earnings of 27 cents a share.

Revenue slipped to $248.2 million from $250.5 million and was below the $255.7 million in revenue that analysts expected.

Last week, Post announced that it was buying Hearthside Food for $158 million. The deal is expected to close in June.

Shutterfly to price

Shutterfly Inc., a Redwood City, Calif.-based provider of digital personalized photo products and services, launched its first debt offering Monday, which is for $220 million of five-year convertible notes that were talked to yield 0.25% to 0.75% with an initial conversion premium of 27.5% to 32.5%.

The notes are being priced concurrently with convertible note hedge and warrant transactions.

The underwriters went out with a credit spread of 400 basis points over Libor and 35% volatility for valuation.

Morgan Stanley & Co. LLC is the left lead bookrunner with J.P. Morgan Securities LLC on the right as well as BofA Merrill Lynch and Citigroup Global Markets Inc. Co-managers are Credit Suisse Securities (USA) LLC, Wells Fargo Securities LLC and Evercore Partners LLC.

The notes are non-callable with no puts. There is takeover protection, and there is net share settlement together with contingent conversion at the standard 130% price trigger.

Proceeds are intended to be used to fund acquisitions and other strategic transactions. The company also intends to use a portion of the proceeds to pay the cost of convertible note hedge and warrant transactions and to repurchase up to $30 million of common stock. Any remaining proceeds will be used for general corporate purposes.

The Rule 144A deal has an over-allotment option for $30 million.

"There is a small buyback [of shares] which should mitigate most of the stock move," a syndicate source said of the deal.

Mentioned in this article

Endo Health Solutions Inc. Nasdaq: ENDP

Post Holdings Inc. Nasdaq: POST

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

Shutterfly Inc. Nasdaq: SFLY

Theravance Inc. Nasdaq: THRX

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