Hedge players win on United Therapeutics; Amerigroup adds; investment-grade paper active

By Rebecca Melvin

New York, Aug. 24 -United Therapeutics Corp. was a centerpiece of convertibles trade Wednesday, with the 0.5% paper trading actively and improved on a hedged basis after the Silver Spring, Md.-based biotechnology company announced a late-stage study of its oral drug treatment for pulmonary arterial hypertension failed to meet its main goal, sending the common shares reeling.

United Therapeutics' convertibles, which mature in October, added 2, 3 to 5 points, depending on the delta on which the paper was held, sources said.

The positive move seemed to spill over onto other convertibles even though the "idiosyncratic" nature of the move didn't have a direct tie to other names.

For example, "there is no correlation between this and other health care names," a New York-based sellside trader said.

But the fact that such a short-dated piece of paper met with sudden volatility and was a homerun may have "opened the eyes of some guys" to other possibilities, a second trader said. "UTHR opened up their eyes to volatility."

The short-dated Amerigroup Corp. 2% convertibles due 2012, as well as the convertibles of Denver-based oil and gas company SM Energy Co. and the 3% convertibles of Denver-based gold and copper mining company Newmont Mining Corp. were names in this category.

"There were a lot of bid in names of shorter duration with gamma," the second trader said.

Amerigroup's 2% convertibles due 2012 improved by about 0.25 point on a hedged basis on Wednesday, which was viewed as a significant move for this bond, which trades very efficiently.

Elsewhere, convertibles of the larger, better credits including Amgen Inc., Medtronic Inc. and EMC Corp. continued to trade actively as per their recent trend.

Amgen was very active, but "that means nothing; people are just pushing dollars around," the trader said.

Overall, the convertibles market felt a little better after stumbling on Tuesday, but there were still more sellers than buyers in the market, a New York-based sellside desk analyst said.

The tone was more sanguine given that players were able to capitalize on volatility at the same time that volatility seemed to be easing a bit.

In the broader markets, equities staged a late rally, closing smartly on the upside after swinging from gains to losses intraday.

High grade has cheapened

Over the past week or so, some of the investment-grade convertible bonds that "were crazy rich" have cheapened, including the convertibles of Microsoft Corp. and Symantec Inc.

"The general trend for a while was toward rich because of the limited supply and guys were forced to own it, but when the world started melting down, the stuff cheapened," a New York-based sellside analyst said, referring to the downdraft in equities in the past month.

In the high-yield arena, pricing has also come down, as a flight to safety has encouraged selling of lesser credits. Part of these trends has been the broader market weakness and part has been a lack of new issuance. No new deals have come to market in the U.S. convertibles market for about four weeks, or since the end of July.

"A lack of new issuance might have been behind some of the weakness, as well as dealers seeing the equity moves as an opportunity to take some risk off their books," a trader suggested.

Going forward, the overall tone is still seen as negative, even though there has been some relief in the equity markets this week.

"I think it's a relief rally," an analyst said of this week's moves. "As soon as we get some more negative economic data coming out of Germany or somewhere, we head south again."

"The equity guys have taken such a drubbing, they are hoping for more from the Fed. It was at the same platform at this time last year from which Bernanke laid out his plans for QE2," the analyst said.

On Friday, Federal Reserve chairman Ben Bernanke is expected to deliver a speech from the annual gathering of central bankers and economists at the Fed's Jackson Hole Summit in Jackson Hole, Wyo.

Last year, Bernanke's speech laid the groundwork for the Fed's unprecedented $600 billion bond buying program aimed at reviving the flagging economy.

"But as long as we have problems in Europe that will constantly be a problem for us," the analyst said.

United Therapeutics active

A trader said that all in all United Therapeutics' 0.5% convertibles, which come due in October, spread out by a point on a hedged basis, although traders cited the paper up to 5.25 points to 6 points of premium over parity on Wednesday, which compared to 1.25 points of premium on Tuesday.

The amount of gain would depend on the amount of hedge the play had, and the bonds moved on about a 60% delta on average on Wednesday.

On an outright basis the paper was down by more than 19 points, but on a hedged basis it was a point or so better dollar neutral. The paper was seen at 109 versus an underlying share price of $39.95 near the session's close.

"This is a very simple set up: it's a short-dated piece of paper, and the company has good cash coverage and the bonds are not subject to any credit concerns," a New York-based sellside trader said, calling the play a 50-day put option, essentially.

"The stock held up well enough, and there's a $37 strike on these, so they are at the money, and they performed well," he said.

A second trader, quoting the notes at 109 versus an underlying stock price of $39.61, said, "They spread out by about a point."

The company announced Wednesday that its oral treprostinil drug for high blood pressure in lung arteries failed its main goal in a late-stage study, raising doubts that the company can get regulatory approval for the ingredient, which is already approved in injectable and inhalable forms.

The trial for oral treprostinil did not achieve statistical significance for the primary endpoint, which was a six-minute walk distance (6MWD) at week 16.

Deutsche Bank downgraded the company to "hold" from "buy," while removing the oral treatment from revenue estimates. Deutsche had previously targeted peak sales of $750 million, which is higher than United Therapeutics' overall sales tally last year. The company gets most of its sales from the injectable and inhaled forms of the drug.

The so-called Freedom-C(2) phase 3 trial involved 310 patients who were already being treated for the condition. Once enrolled, they received either the oral United Therapeutics drug or a placebo.

The company doesn't anticipate filing a New Drug Application with the Food and Drug Administration for oral treprostinil before 2012.

Not for outrights

The United Therapeutics 0.5% convertibles slid more than 19 points outright, and they weren't seen as appealing to outright players now given that they still stand well over par with an upcoming maturity in five-plus weeks.

But it was "a great opportunity to extract value" on such a short-dated piece of paper for the hedged community, a trader said.

While those kinds of moves don't translate to other names due to the idiosyncratic nature of the moves, they still speak well of convertibles in general.

"If a drug underperforms, that doesn't translate into how other companies are going to do," the trader said.

The trader pointed to a situation a few weeks ago in which WebMD Health Corp. shares and convertibles tumbled and shortly afterwards Dendreon Corp.'s shares and convertibles did poorly.

He said those moves were not related. But those deals were longer dated, and Wednesday's United Therapeutics bond was a much shorter duration, which was a good part of the secret of its success.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

Amgen Inc. Nasdaq: AMGN

EMC Corp. NYSE: EMC

Medtronic Inc. NYSE: MDT

Microsoft Corp. Nasdaq: MSFT

Newmont Mining Corp. NYSE: NEM

SM Energy Co. NYSE: SM

Symantec Inc. Nasdaq: SYMC

United Therapeutics Corp. Nasdaq: UTHR

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