Chemed expands on hedge on lawsuit news; TTM adds on hedge; Regeneron steady to lower

By Rebecca Melvin

New York, May 3 - There were at least two notably positive names for convertible hedged players on Friday, including Chemed Corp. and TTM Technologies Inc..

Chemed dropped sharply on an outright basis but expanded on a dollar-neutral, or hedged, basis on news that the U.S. Justice Department is suing the Cincinnati-based hospice operator for false billing of Medicare services. Chemed shares skidded 17%.

TTM Technologies gained on both an outright and hedged basis after the California-based technology company reported earnings that beat estimates by 3 cents on better-than-expected revenue. The company also guided second-quarter earnings in line with previous estimates, but lowered revenue below consensus.

Regeneron Pharmaceuticals Inc. jumped again on an outright basis, and was steady to lower on a hedged basis, after the Tarrytown, N.Y.-based biotechnology company reported first-quarter results that beat estimates on stellar sales of its Eylea eye drug.

The Regeneron securities also jumped earlier in the week on Wednesday when Allergan Inc. said it is halting a trial of its macular degeneration drug that was pegged as a contender for Eylea.

Stocks rallied on Friday with the Dow Jones industrial average and the S&P 500 stock index both hitting intraday record highs after a better-than-expected April jobs report.

Non-farm payrolls rose by 165,000 last month and the unemployment rate ticked lower to 7.5% from 7.6%, the Labor Department reported. Analysts expected payrolls to expand by 140,000 jobs.

The Dow gained 142.30 points, or nearly 1%, to 14,973.88; the S&P 500 index finished up 16.82 points, or 1%, at 1,614.42; and the Nasdaq stock market rallied 38.01 points, or 1%, to 3,378.63.

Chemed expands 2-3 points

Chemed's 1.875% convertibles due 2014 traded down to 102.097 versus an underlying share price of $65.67 on Friday, compared to a level of 110.75 bid, 111 offered versus an underlying share price of $81.75 previously.

That was down about 8 or 9 points outright, but it represented a 2.125 point expansion on about a 60% delta hedge, one trader said. A second source put the expansion at 3.25 points.

"This is a textbook example why one plays short duration names," a New York-based trader said of the Chemed convertible, which matures May 2014.

The bonds held their value against the shares because of the view that the company's credit will not be hurt by the Justice Department's suit, as least not in the short- or medium-term.

The Chemed bonds traded very actively on Friday. The stock, which hit a 52-week high on Thursday, slumped $13.82, or 17%, to $67.97 in active trade.

"This bond is a non-callable, high gamma name. The stock went out on a 52-week high that was above the strike price; it was a good set up for someone on a 60% delta," a New York-based trader said.

Going into the day the delta was 60% and it slid to 30% to 35% with the shares lower.

The Justice Department is suing Chemed and its hospice subsidiaries, alleging that the chain submitted false claims for crisis care services.

In its complaint, the Justice department said that the companies used aggressive marketing tactics and pressured staff to increase the numbers of crisis care claims submitted to Medicare whether valid or not. The false bills for crisis services resulted in tens of millions of dollars in Medicare funds being misspent.

Chemed said Friday that it intends to defend the lawsuit vigorously.

Chemed and its Vitas subsidiary "have made significant investments in controls, systems and procedures to uphold the highest industry standards and to maintain compliance with all regulatory requirements. Our compliance efforts are designed to ensure our services are provided only to eligible patients," a company release stated.

The government filed a False Claims Act complaint against the company and certain hospice-related subsidiaries in the Western District of Missouri, captioned as United States of America v. VITAS Hospice Services, LLC, et al., Case #4:13-cv-00449-BCW.

TTM adds on hedge

TTM's 3.25% convertibles rallied to 100.75 versus an underlying share price of $8.35, which was up from 99.50 bid, 99.75 offered versus about $7.10 previously, traders said.

On a light delta of about 20%, the bonds expanded about 0.5 point. The bonds were said to have been held on a 10% to 20% delta.

Shares of the Santa Ana, Calif.-based technology company surged on Friday, ending the day up $1.09, or 15%, to $8.18.

"It's an interesting name today," a New York-based trader said.

TTM, a printed circuit board specialist, posted better-than-expected first-quarter profit of 13 cents per share on revenue of $325.4 million. That was better than the 10 cents per share profit on $320.5 million in revenue that analysts were expecting.

Looking ahead, the company said it sees second-quarter earnings of 8 cents to 14 cents per share on revenue of $320 million to $340 million.

Regeneron steady to lower

Regeneron's 1.875% convertibles due 2016 were seen at 315.75 bid late in the session versus an underlying share price of $256.00. It printed in that area multiple times, a New York-based sellsider said, and it compared to trades at 291 and 293 on Wednesday.

That level was seen as parity plus 0.50 point, which was steady to lower compared to parity to 0.75 point on Wednesday.

The convertibles are seen as being held on a 100% delta.

Shares of the company jumped $17.53, or 7%, to $266.16. On Wednesday, the shares surged 10%.

Late Thursday, Regeneron posted a net profit of $99 million, or 90 cents per share, which was up from $12 million, or 11 cents per share, in the year-earlier period.

Excluding one-time items, the company earned $1.78 per share, which was well above the consensus estimate of 98 cents per share.

Revenue rose 90% to $40 million, which was better than the $428.3 million analysts' estimated.

On Wednesday, Regeneron securities surged when Allergan, a former convertible bond issuer, announced a setback for its DARP in-eye drug during an earnings conference call, when it said that results of a mid-stage trial did not justify moving the drug into late-stage testing immediately.

Mentioned in this article

Chemed Corp. NYSE: CHE

Regeneron Pharmaceuticals Inc. Nasdaq: REGN

TTM Technologies Inc. Nasdaq: TTMI

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