Salix flat to lower in active trade after merger news; Spectrum sinks on patent ruling

By Rebecca Melvin

New York, Feb. 23 – Salix Pharmaceuticals Ltd.’s convertibles were flat to lower in active trade on Monday after news that Valeant Pharmaceuticals International Ltd. has agreed to buy the Raleigh, N.C.-based specialty drug company for $158.00 per share, or about $10 billion in cash.

The purchase price came in a little lower than many anticipated, a convertibles trader said, noting that had the takeout price been higher at about $180.00 per share, hedged players would have made as many as 5 points on a lighter delta, a trader said. As it was, many light on their deltas lost 0.125 point to 0.25 point.

Elsewhere, Spectrum Pharmaceuticals Inc.’s 2.75% convertibles due 2018 plunged about 10 points on an outright basis, but were said to have held in pretty well nevertheless with a share drop of 16% after a patent ruling that was not favorable to the Henderson, Nev.-based biopharmaceutical company.

In the primary market, price talk was revised for Actavis plc’s planned $4.2 billion of mandatory convertible preferred shares. The dividend talk was tightened to 5.5% to 5.75% from 5.75% to 6.25%, and the premium talk was tightened to 20% to 22.5% from 17.5% to 22.5%. The timing of pricing was also pushed up to late Tuesday from late Thursday.

The repricing took about 1.5 points of value out of the deal, but it was still seen as cheap, a trader said.

The bonds were offered in the gray market on Monday at 101.

Also noted in trade, Wright Medical Group Inc.’s 2% convertibles continued to improve after the Arlington, Tenn.-based orthopedic medical device company priced an upsized $632.5 million of the five-year notes in the middle of the month. The bonds are at about 105.

Theravance Inc.’s 2.125% convertibles were down about 3 points on an outright basis to about 90.35 as shares of the San Francisco-based biotechnology company retreated about 4% following a strong advance on the back of earnings last week.

Salix flat to slightly lower

Salix’s 1.5% convertibles due 2019 traded at around 140 and change, which is up from about 132 to 133 early last week but down from 142 to 144 on Friday.

Salix shares were also a little lower, settling down $2.09, or 1%, at $155.76.

Salix’s 2.75% convertibles didn’t trade but were seen at less 0.125 point to 0.75 point over parity.

The Salix 1.5% convertibles were atop Finra’s Trace volume chart.

“The deal came in a little bit below what people were thinking, a trader said of the Valeant takeout price.

Pointing to Valeant shares’ 15% surge, investors were “rewarding the company for a getting a good deal,” the trader said.

Still, the trader thought “the odds were pretty low” of another offer coming in to unseat Valeant’s.

On a 93% delta, the bonds broke even, the trader said.

“Given that the deal was widely speculated, some guys were light. If you were five to eight deltas light [at 85% delta], you lost a little,” he said.

But in any case most didn’t lose much and “you weren’t making much,” he said.

The chunky $690 million of 1.5% convertibles has been a mainstay of convertibles players in the past year as the company has been involved in an M&A saga worthy of a Jane Austen novel.

In October, Salix scuttled a planned merger with Italy’s Cosmo Pharmaceuticals SpA following new Treasury Department rules aimed at cracking down on so-called inversion deals that seek to take advantage of lower tax rates abroad.

Before that, there were rumors that Allergan Inc. was mulling a takeover of Salix.

Valeant had also been attempting to merge with Allergan, which has now inked a deal with Actavis plc.

In November, Salix shares plunged more than 30% after it reported an earning miss and announced a revision of its accounting of drug inventories. But shares climbed back steadily in the last several months to above where they were in November.

The Valeant-Salix tie up is expected to occur in the second quarter.

Spectrum drops outright

Spectrum’s 2.75% convertibles due 2018 traded late in the session around 89.875 bid, 90.375 offered with the underlying shares settling at $6.28, which was down 16%.

The shares had dropped as much as 24% before paring some of the loss.

“They came in but not that bad,” a trader said.

The company suffered a negative ruling in patent litigation for its Fusilev cancer drug. Spectrum, which previously sued generic drugmaker Sandoz for allegedly infringing on the claims, said in a filing Monday that it intends to appeal the decision of the U.S. District Court for the District of Nevada.

They got lifted at 90,” a trader said, which was up from earlier levels in the upper 80s. The bonds had previously been at about 98.

Actavis price talk revised

Talk on Actavis’ $4.2 billion of mandatory convertible preferred shares was tightened Monday to a 5.5% to 5.75% dividend and a 20% to 22.5% initial conversion premium, with the deal’s timing pushed up to Tuesday after the market close.

The registered deal was initially talked at a 5.75% to 6.25% dividend with a 17.5% to 22.5% premium, and timing had been set for Thursday after the market close.

Actavis is also pricing a concurrent issue of $4.2 billion of common stock in a separate registered offering.

Proceeds from the two deals, together with additional debt financing, will be used to finance the cash consideration for its acquisition of Allergan Inc.

There is a greenshoe for up to $630 million of the mandatories, which are being sold via joint bookrunning managers J.P. Morgan Securities LLC, Mizuho Securities, Wells Fargo Securities LLC, Morgan Stanley & Co. LLC, Barclays and Citigroup Global Markets Inc.

The series A preferred shares have a $1,000 liquidation preference and mature March 1, 2018.

The offerings are not contingent upon each other or on the consummation of the Allergan acquisition. If the acquisition doesn’t close, Actavis will use proceeds for general corporate purposes.

Actavis is a global specialty pharmaceutical company with headquarters in Parsippany, N.J. Allegan is a health care company based in Irvine, Calif. The new company will be called Allergan.

The deal was seen cheap using a credit spread of 175 basis points over Libor.

Mentioned in this article:

Actavis plc NYSE: ACT

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

Spectrum Pharmaceuticals Inc. Nasdaq: SPPI

Theravance Inc. Nasdaq: THRXV

Wright Medical Group Inc. Nasdaq: WMGI

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