SanDisk 0.5% contracts on swap as SanDisk 1.5% rides higher; Horizon Pharma, Tesla drop

By Rebecca Melvin

New York, Oct. 20 – SanDisk Corp. was a centerpiece of trade in U.S. convertibles again on Tuesday as shares of the Milpitas, Calif.-based flash memory chip maker moved up again amid reports that a potential acquisition of the company may be imminent.

Talks between SanDisk and Western Digital Corp. accelerated over the weekend and a deal could be forthcoming as early as this week, according to a Bloomberg report. A sale price of between $80.00 and $90.00 per SanDisk share was discussed.

The longer-dated SanDisk 0.5% convertibles, which have been weaker than its sister 1.5% convertibles because it has weaker prospects in the event of a takeout, contracted 2 points on a dollar-neutral, or swap, basis initially on Tuesday. But they rallied back by about 0.5 point to end down 1.5 points on the day, a New York-based trader said.

The SanDisk 1.5% convertibles continued to push higher on a swap basis.

Although SanDisk has been a feature of trade for several days amid takeover chatter, Tuesday’s action was especially strong because “the market is getting more confident that the takeover is going to go through,” the trader said.

Micron Technology Inc., which had been named as a potential suitor of SanDisk, was weak. The Micron 3% convertibles due 2043 dropped about 3 points in active trade to 92.5, with the underlying shares of the Boise, Idaho-based chipmaker ending down $2.07, or $11, to $17.09.

Elsewhere in the chip space, Rambus Inc.'s convertibles were indicated to have dropped sharply on an outright basis in tandem with sharply lower shares after the Los Altos, Calif.-based memory chip designer warned that its results in the fourth quarter and in 2016 will be weaker than expected due to general weakness in the chip industry and due to technical issues with one of its chips. In response, Rambus said it is cutting about 8% of its workers.

For the fourth quarter, Rambus expects revenue in the range of $71 million to $77 million, which was lower than the $83.4 million previously expected. Full-year revenue will be lower at $291 million to $297 million, which was below the $305.5 million analysts were expecting. For 2016, Rambus expects revenue will be flat on 2015.

Rambus' 1.125% convertibles due 2018 were indicated down at 107 from 128 as shares tumbled $3.98, or 28%, to $10.00.

In the biotech sector, many shares were selling off. Horizon Pharma plc’s 2.25% convertibles dropped into the upper 80 range from the upper 90s and shares skidded 20% after a damaging news report on pricing of its Duexis pain reliever drug and Prescriptions Made Easy program.

Duexis is a combination of two drugs, which are generic versions of Motrin and Pepcid, but with a pricetag of $1,500 per month, according to the New York Times report.

But Horizon has been able to increase sales of this drug, even though insurers have clamped down on paying for it, through its PME program, which keeps regular pharmacies, which may have steered patients to other cheaper alternatives, out of the mix.

While the Horizon convertibles fell hard, it appeared that the drop was in line with the share drop, a New York-based trader said.

“It’s been volatile,” he said.

Elsewhere, Tesla Motors Inc. was also in focus after news that Consumer Reports had pulled its recommendation for the company’s Model S electric car based on surveys of Tesla car owners.

Consumer Reports said that it had heard of many similar stories across the surveys, including problems with the car’s hardware and software over the past three model years.

Tesla’s 0.25% convertibles due 2019, or the A tranche, was not actively traded but was down a couple points to 90 to 91 from about 93 plus. The move lower was said to be in line with the underlying shares of the Palo Alto, Calif.-based electric car maker.

Tesla shares ended down $15.07, or 6.6%, to $213.03. But intraday, shares had gone to as low at $202.00.

One trader said that contrary to the in line move, he “would have thought the bonds would have expanded.

“The Tesla convertibles are still lagging the broader market rally,” the trader said.

SanDisk convertible contracts

The SanDisk 0.5% convertibles traded up a couple of points to more than 108 initially but were last seen around 106, which was little changed on an outright basis from Monday. On swap, however, they were down by about 2 points, a New York-based trader said.

Later they came back for a 1.5 point contraction, he said.

The bond came in because of its takeover matrix. “This was a popular hedge fund short, which worked out,” the trader said.

The SanDisk 1.5% convertibles continued to push higher and were last seen at about 161, which was up about 9 points on the day.

The 1.5% bonds were seen to have expanded another 0.5 point.

SanDisk shares ended up $3.19, or 4.4%, at $75.19.

“You had a lot of outright guys long the bond under par, and they were taking profits, while swap guys could cover their shorts, or buy the bonds with a relatively break even matrix,” a trader said of the 0.5% bonds.

The favorable takeover matrix for the 1.5% convertibles keeps them going higher, he said.

“Outright guys think the stock is going to $80, so there is a fair amount of ramp to go. They were happy to sell their 0.5s and buy the 1.5s and did so in decent size,” he said.

Horizon Pharma trades down

Horizon Pharma’s 2.5% convertibles due 2022 right traded down to around 88.5 to 88.875 with the stock down at about $15.15.

The move was roughly in line with shares, which closed down $3.81, or 20%, to $15.26.

“I would say they moved in a straight line down with the stock,” a New York-based trader said.

The Irish pharmaceutical company is under fire for its drug pricing and PME program, which has doctors send prescriptions directly to a mail-order specialty pharmacy outlets affiliated with Horizon. The program averts the hazard of regular pharmacies switching patients to generic components or even to over-the-counter versions.

Mentioned in this article:

Horizon Pharma plc Nasdaq; HZNP

Micron Technology Inc. NYSE: MU

Rambus Inc. Nasdaq: RMBS

SanDisk Corp. Nasdaq: SNDK

Tesla Motors Inc. Nasdaq: TSLA

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