Huron slides outright, ‘comes in’ on swap on disappointing earnings; Horizon rebounds

By Rebecca Melvin

New York, Oct. 23 – Huron Consulting Group Inc.’s 1.25% convertibles were slammed on an outright basis and contracted 0.5 point to 1 point on a swap basis on Friday after disappointing earnings and guidance. Shares of the Chicago-based financial consulting company plunged 24%.

The Huron convertibles fell to the lower 90s from about 104 to 105.

Elsewhere, the convertibles of Horizon Pharma plc rebounded along with the common shares of the Dublin-based specialty pharmaceutical company.

Fellow specialty pharmaceutical company and fellow convert issuer DepoMed Inc. was also better, although its convertibles were not as actively traded as those of Horizon’s.

The rebound in these names was strong but not as strong as the downdraft that preceded it. Horizon still remains down at least 7 or 8 points on an outright basis and 3 points on swap from a week ago.

Behind the jump on Friday may have been investors getting comfortable with the idea that the fallout from allegations against specialty pharmacies may be contained, a New York-based trader said.

“It may have been a bit of a relief as investors do their due diligence and determine: is it legitimate and who does it impact; and they may be seeing that there was an overreaction on the credit; although we don’t know yet,” the trader said.

Valeant Pharmaceuticals International Inc. was hit by allegations of fraud in a report published this week by Citron Research, accusing the company of being “the pharmaceutical Enron.”

Enron Corp. was the energy company in 2001 that became the biggest U.S. bankruptcy in history up to that point following an unraveling of its accounting and financial reporting practices that hid billions of dollars in debt from failed deals and projects.

Horizon also came under fire this week after a news article critical of its drug pricing and Prescriptions Made Easy program, under which doctors send prescriptions directly to a mail-order specialty pharmacy outlets rather than to retail pharmacies.

But on Friday, those names were “coming back” along with the broader markets. “We’re seeing DepoMed, Valeant and Horizon, and things are slowly coming back,” the trader said.

“We may have overshot at the beginning,” a trader said.

Also on Friday, there was continued action in Intel Corp. Its two bond issues added in line with the Santa Clara, Calif.-based chipmaker’s common shares, which notched a 52-week high.

In the broader markets, equities gained. The biggest improvement was the tech-heavy Nasdaq Stock Market, which was up 2%.

Helping overall investor sentiment was news that China lowered its interest rates another 0.25%, marking the sixth time in the last year that China’s central bank has cut rates in an effort to kick start slowing economic growth.

China has cut its one-year lending rate to 4.35% from 4.6% and its one-year deposit rate to 1.5% from 1.75%. The China central bank also lowered its reserve requirements at all banks by 50 basis points, with an extra 50 bps reduction for some institutions.

Huron Consulting drops

Huron’s 1.25% convertibles due 2019 fell to about 93 from 104 to 105.

Huron shares fell $14.86, or 23%, to $46.62.

“It was a rich bond to begin with, that is dominated by outright holders,” a New York-based trader said of the Huron convertibles.

The securities fell after the Chicago-based operational and financial consulting services company reported third-quarter earnings that beat estimates by about a cent but missed on revenue. It also lowered its 2015 earnings per share and revenue guidance below consensus.

The company updated its full-year revenue target to $835 million to $850 million. Earnings are now expected to be $165 million to $170.5 million range, with adjusted earnings per share in the range of $3.60 to $3.70.

Horizon recoups some

Horizon’s 2.25% convertibles traded up to about 90 from 81 or 82 on Thursday. The underlying common shares jumped $3.94, or 30%, to $17.06. But last week, the shares closed at $19.25 on Friday.

The company put out a statement defending its current drug pricing and use of specialty pharmacies, saying it does not own or have an ownership stake in any pharmacy and that it does not possess an option to purchase any pharmacy.

“All pharmacies that distribute Horizon branded medicines are fully independent, including those that are part of Horizon’s Prescriptions Made Easy program,” the statement said.

A trader said that he didn’t expect more to come out of Horizon in the near term until it reports earnings on Nov. 6.

“We are getting into their quiet period and we’re in the center of earnings season,” the trader said.

Although Depomed’s 2.5% convertibles due 2021 were not as actively traded. The stock was up 10% to $16.94 and the bonds were quoted at 110.

The Newark, Calif.-based specialty pharmaceutical company was also swamped by the Valeant scandal.

Intel adds again

Intel’s 3.25% convertibles due 2039 moved up to 167.85, which was up 0.75 point on an outright basis, according to Trace data.

Intel’s 2.95% convertibles due 2035 traded at 129.34, which was up nearly a point.

Intel shares ended the session up 50 cents, or 1.5%, to $34.90.

The shares notching a 52-week high was part of the allure for the convertibles, a trader said.

“People are either taking profits or initiating positions,” the trader said.

The headline generates interest from both sets of market players, including people initiating positions like a put, he said.

This past week SanDisk Corp.’s 0.5% convertibles underperformed on the M&A deal that materialized, moving down 3 points on swap.

“Investors would have been better served owning the equity or the 1.5% convertibles,” the trader said.

There will be more consolidation deals in the semiconductor space, but they are likely to involve smaller cap companies, the trader said.

Mentioned in this article:

Depomed Inc. Nasdaq: DEPO

Horizon Pharma plc Nasdaq: HZNP

Huron Consulting Group Inc. Nasdaq: HURN

Intel Corp. Nasdaq: INTC

SanDisk Corp. Nasdaq: SNDK

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