Health care names recover; investment-grade names in focus; Incyte, Textron strengthen

By Rebecca Melvin

New York, April 23 - Health care names recovered Friday from weakness earlier in the week, as convertibles players became buyers again.

Players also focused on large, liquid, investment-grade names, like Transocean Ltd., as equity markets notched their eighth consecutive week of gains, leaving the Dow Jones Industrial Average standing at 11,204.28, at its highs for the year.

Given the unbroken string of equity gains, investors have been looking for a pullback of sorts as a means of burning off some of the froth and solidifying the market that remains, but none has been forthcoming.

That situation has contributed to a quieted convertibles market, which is looking for volatility and new issuance as catalysts to get people trading again, sources said.

Gilead Sciences Inc., for example, was active this week after its stock took a hit because of lowered guidance for the year.

"It didn't help everybody, but a least it had a break out event," a New York-based sellside trader said of Gilead, the Foster City, Calif.-based biopharma company. "It's been range bound for so long."

"It's incredible how quiet it is. I'm not sure if its complacency or boredom," a West Coast-based sellside trader said of the convertibles market Friday.

Secondary firm

That said, many convertibles have strengthened along with higher equities, and even with sharp weakness in health care names this week, the convertibles market didn't see a ton of selling, sellsiders said.

Incyte Corp., with a deep in-the-money bond, looked to be stronger on the week Friday, amid no particular news from the Wilmington, Del.-based biopharmaceutical company.

Amgen Inc. had an up day Friday after struggling earlier in the week, although its cumulative price moves weren't overly dramatic.

Textron Inc., an aircraft and industrial company that has another deep in-the-money bond, was another strong gainer for the week, with underlying shares hitting an 18-month high Thursday after the Providence, R.I.-based company reported better-than-expected earnings. The bonds were a little bit lower on Friday from Thursday but were still well up on the week.

Salesforce.com, which was among 2010's first batch of new issues, saw its bonds climb about 4 points since Tuesday on a stock move up of about $3.50.

Qwest Communications International Inc. remained active on Friday, although the paper, which is expected to be paid out by the company upon its November put, ahead of the expected 2011 closing of its merger with CenturyTel. Inc., retraced gains notched Thursday.

Incyte looks fair

Incyte's 4.75% convertibles due 2015 traded at 181 on Friday versus a share price of $14.00, compared to 180.25 versus the same share price on Wednesday.

Incyte common stock ended up 44 cents, or 3.2%, at $14.13, in slim volume.

The main question surrounding this issue, which belongs to a company with plenty of cash, is whether they will be paid out or whether some type of debt-to-equity deal is done, a New York-based sellside trader said.

"What are they going to do with them? Are they going to flush them? You have to be on the long side of that," the sellsider said.

It has a nice coupon that you can lean on to the downside, and its 5.5-year paper, so there's a long time to earn it back. So I'd say they are OK. They are fair," the sellsider said.

Other health care names were under pressure in the past couple of days, and many names came for sale, although not dramatically so, on the overhang of health care reform, and what it means for the drug companies, in particular. Textron, for example, cited health care costs in its earnings report Thursday.

"It's going to create a top on some of the earnings that these companies [pharmaceutical companies] are going to be able to make. If you have to partner with the government on everything you want to do, and you can't make too much money, then you don't want to be in that business anymore," the sellsider said.

That said, Friday's tape was strong and health care seemed to lead the charge.

"They were so beat up, and Amgen actually had an up day [Friday]. You've got a lot of health care up 0.5% to 2.5% on the day. So what is it? Is it short covering? Is it longs?" the sellsider said.

Amgen's 0.125% convertibles due 2011 traded at 98.875 on Friday, which was up 2.875 points on the day.

Amgen's 0.375% convertibles due 2013 traded at 99.5, which was unchanged from Thursday's loss of 1.3 points.

Shares of the Thousand Oaks, Calif.-based biotech giant ended higher by 72 cents, or 1.2%, at $58.88 on Friday.

Amgen used to be active in trade practically every day in the convertibles market, but it had been very quiet of late, up until Wednesday, when the company, as well as others, like Gilead, announced health care reform hits to its bottom line.

Textron puts in strong week

Textron's 4.5% convertibles due 2013 shed a little bit in the early trading on Friday but were still up nicely for the week after a huge jump on Thursday when the underlying stock surged on earnings.

Textron's 4.5% convertibles traded at 191.75 versus a share price of $23.85 on Friday, compared to 175.5 versus a share price of $21.35 on Monday, according to a New York-based sellside desk analyst.

Textron shares shed 38 cents, or 1.6%, at $23.85 on Friday.

Textron reported a loss from continuing operations of $0.01 per share for its first quarter. Excluding an $11 million tax charge related to health care reform and pre-tax restructuring charges of $12 million, the company reported earnings from continuing operations of 5 cents a share, which was better than analysts' estimates.

The Textron 4.5% paper originally priced a year ago on April 30, 2009.

Qwest pulls back

Qwest's 3.5% convertibles due 2025 traded Friday at 109.75 versus a share price of $5.10, which compared to around 115 with the shares at about $5.50 on Thursday. The convertibles and shares traded very heavily on both days.

Qwest shares pulled back 9 cents, or 1.7%, to $5.28 on Friday, compared to a 13-cent, or 2.48%, climb on Thursday, when it was announced that Qwest will be acquired by Monroe, La.-based CenturyTel Inc.

The Qwest 3.5% notes are callable and putable in November. Convertibles players had been weighing call risk, which exposed convertible holders to 5.145 points of risk, or the difference between the convertible price and parity, according to Barclays Capital research published Tuesday.

Qwest has a cash balance of $2.4 billion as of the fourth quarter of 2009 and was expected to generate positive cash flow going forward, the Barclays analysts said.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Incyte Corp. Nasdaq: INCY

Gilead Sciences Inc. Nasdaq: GILD

Qwest Communications International Inc. NYSE: Q

Salesforce.com NYSE: CRM

Textron Inc. NYSE: TXT

Transocean Ltd. NYSE: RIM

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