Wyeth convertibles up on pact; Cephalon adds; Mercury Interactive mostly flat

By Rebecca Melvin

Princeton, N.J., Jan. 3 - The convertible market snapped back into action on Tuesday - the first session of 2006 - but traders viewed many of the trades as a reshuffling of positions that had been adjusted ahead of last week's year-end.

In addition to window dressing, company-specific news from the likes of Wyeth and Cephalon Inc. factored into the session, which had a mostly upward bias even before the stock markets rallied in the last couple of hours of the day, traders said.

The Federal Reserve at 2 p.m. ET released the minutes of its Dec. 13 Federal Open Market Committee meeting. The minutes signaled that the Fed may be willing to stop its current campaign of interest rate increases soon.

The Dow Jones Industrial Average, which had been lagging before the minutes, closed up 130 points, or 1.2%. The S&P 500 gained 20.5 points, or 1.6%, and the Nasdaq stock market jumped 38 points, or 1.7%.

Still, aside from the jockeying of positions, the convertibles market was pretty tame.

"It was rejiggering. People are not necessarily thinking that things are a lot cheaper," a New York-based buyside trader said.

"We didn't do any convertibles today; but there were a few issues up," the trader said, mentioning Cephalon, PMC Sierra Inc. and Imclone Systems Inc.

Staffs were full and players were poised, nevertheless. "Everybody is here. People are not straggling back from vacations," a New York-based sellside desk analyst said.

Among convertibles sparked by company-specific news were the floating-rate coupon notes of Wyeth, which gained about a point after the Madison, N.J.-based pharmaceuticals giant said it inked a strategic alliance with Seattle-based biotechnology company Trubion Pharmaceuticals Inc. for discovery and development of treatments for inflammatory disease and cancer.

Cephalon, which jumped last week after the Food and Drug Administration issued an approvable letter for Vivitrol, an experimental alcohol-dependence treatment that the Frazer, Pa.-based biotech is developing with Alkermes Inc., continued to see strength. Cephalon shares have popped up in the last two weeks, going from about $55 a share to about $65 a share.

On the downside were airlines, including JetBlue Airways Corp., which had a downgrade of its shares to "neutral" from "buy" by Merrill Lynch.

And Mercury Interactive Corp.'s two convertible bonds traded mostly flat, albeit inactively, after the Mountain View, Calif.-based business software maker announced its stock is being delisted from the Nasdaq starting Wednesday due to its inability to meet compliance deadlines.

As for new issues, no new deals materialized for January, but they should be forthcoming on the heels of a very active December, according to Citigroup Global Markets, which tallied December at $8.2 billion raised in 18 issues, making it the single most active month in convertibles new issuance since July 2003.

As for issues that mature or are putable in January, there are only two issues that are putable, including Health Management Associates Inc.'s 0% of 2022 and International Game Technology's 0% of 2033.

Given the current price of the International Game Technology's $930 million issue at several points above the put price, it seems unlikely that the bond issue will be put, according to Citigroup.

That leaves at potentially putable only the $330 million Health Management 0% convertibles, which are presently trading right around their put price.

The only issue set to mature is the Emeritus Corp.'s 6.25% bonds that were issued back in 1996 and of which only $6 million remain outstanding following a recent exchange offer, Citigroup said.

Cephalon gains as much as 0.5 point

The convertibles of Cephalon were up as much as 0.5 point on delta, with the 0% A tranche due 2033 up 0.5 point and the Cephalon 2% convertibles due 2015 up a little less than that amount on a dollar neutral basis.

The 2s traded early in the day at 147.125, versus a share price of $64. The bonds closed at 151 bid, 152 offered, versus a share price of $66. The Cephalon shares actually closed off a little from that level at $65.63, up 89 cents, or 1.4%.

"I've been recommending it for awhile. The pipeline is strong; that's how it is continuing to go up," a sellside trader said.

On Dec. 28, the FDA granted an approvable letter for Vivitrol, which is a monthly injection of the drug naltrexone, which has long been used to treat alcoholism. The FDA was expected to make a decision on whether to approve Vivitrol by year-end. The agency had been first slated to make a ruling by Sept. 30 but moved the deadline back after requesting additional information.

Cambridge, Mass.-based Alkermes said the drug should be on the market during the second quarter of 2006. Vivitrol, which the company had originally named Vivitrex, is believed to be an improvement on existing formulations of naltrexone because it is administered only once a month, whereas other forms of naltrexone generally have to be taken daily.

Wyeth gains on Trubion pact

The 3.32% floating-rate convertibles of Wyeth gained about a point to trade at 105 versus a share price of $46, according to a New York-based sellside desk analyst. Shares actually closed higher at $46.50, up 43 cents, or nearly 1%.

"We're going to be seeing more of this from Big Pharma having to either buy or partner with smaller more nimble companies. You might see it from Pfizer. Those moves will drive activity in the space and will help the credit of the smaller players," a New York-based sellside trader said.

On Tuesday, Wyeth Pharmaceuticals, a division of Wyeth said that it had formed a strategic alliance with Trubion for the discovery, development and commercialization of novel biopharmaceutical products to treat inflammatory disease and cancer. The alliance will utilize Trubion's proprietary Small Modular Immunopharmaceutical technology.

SMIPs represent a novel class of immunotherapeutics with enhanced drug properties over monoclonal and recombinant antibodies, according to a press release from the companies.

SMIPs are smaller than antibodies and can reach sites unavailable to larger molecules while exhibiting selective binding and long in vivo half-lives, which mean the medicine is metabolized more slowly by the body suggesting less frequent dosing will be needed. These novel compounds can be expressed in mammalian cells and customized for many disease targets, the release said.

As part of the alliance, Trubion, which was founded in 2002 in Seattle, received an initial $40 million payment. Wyeth will be responsible for future development and commercialization costs for the alliance. The agreement also provides for additional payments to Trubion upon the achievement of certain development milestones, royalties on product sales, and a stock purchase when Trubion makes a qualified initial public offering.

If all milestones are achieved the total payments to Trubion could exceed $800 million, excluding royalties and co-promotion fees.

Mercury Interactive mostly flat

As would be expected, Mercury's delisting news didn't have much of an impact on the company's two convertible bonds. But the same filings that caused the Nasdaq to delist the company's stock for non compliance will come up in the credit world on March 31, when the waiver on the indenture relating the filings expires.

If the necessary financial reports were to be "filed tomorrow, I would expect the bonds to trade up a little, especially the 0s, by a couple of points," a New York-based sellside trader said.

"But since we don't know what the timeline looks like, and there is no clarity from the company, it looks like a lot of people are saying it's not worth it," he said.

Mercury's stock will be traded over-the-counter on the Pink Sheets starting Wednesday, the company said Tuesday.

Mercury said it's committed to regaining compliance with all Nasdaq filing requirements and hopes to relist "on Nasdaq in a timely manner."

A week ago, Mercury reported that it had notified the Nasdaq that because of the significant volume of work involved in completing its financial restatements related to inaccurate options reporting the company wouldn't meet its Jan. 3 deadline.

The company said that it believes that it has made substantial progress in the completion of its restatement efforts, but wants to ensure that the restated financials are completely accurate.

"I think that with the departures of the CFO and CEO, they are going through everything with a fine tooth comb before the auditors will sign off on the numbers," the sellside trader.

"The 7% yield to put on the 0% is kind of interesting, but there's no comfort from management," he said.

The 0% convertibles were 100 bid, 101 offered, little changed from Friday. And the 4.75% convertibles were roughly at 96.

Shares of Mercury actually closed up a little bit, possibly on short covering, one trader said. They closed up 9 cents, or 0.3%, at $27.88.

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