Gilead drops in line with shares on Express Scripts news; MGM weaker; recent deals trade

By Rebecca Melvin

New York, Dec. 22 – Gilead Sciences Inc.’s convertibles dropped sharply on Monday in tandem with the underlying shares of the Foster City, Calif.-based biopharmaceutical giant after news that pharmacy benefits manager Express Scripts Holding Co. has chosen AbbVie Inc. to be its sole provider of hepatitis C treatment, based on cost benefits.

AbbieVie’s Viekira Pak will become the exclusive option for patients with genotype 1 hepatitis C patients starting Jan. 1. The decision is a blow to Gilead, whose Sovaldi hepatitis C drug was expensive but considered by some to be the better drug, a convertibles trader said.

Gilead’s 1.625% convertibles are quadruple par bonds that fell about 70 points to 408 on Monday.

Also in the biopharmaceutical space, Cubist Pharmaceuticals Inc.’s convertible bonds, which were mixed on a hedged basis earlier this month on Merck & Co.’s takeout of the Lexington, Mass.-based biopharmaceutical company, traded up a point or two in tandem with a 1.7% rise in shares.

Cubist had good news that the U.S. Food and Drug Administration approved its Zerbaxa drug to treat urinary tract and abdominal infections.

The Cubist 1.125% convertibles due 2018 traded at 132.58, which was up 1.4 points on the day, and the Cubist 1.875% convertibles due 2020 traded at 136.125, which was up 1.6 points, according to Trace data.

Elsewhere, MGM Resorts International’s convertibles were weaker again on Monday as implied volatility continues to erode on their short dated convertibles that are maturing April 2015, the trader said.

The MGM 4.25% convertibles were seen to have changed hands at 113.45 with shares of the Las Vegas-based casino operator down nearly 2% at $19.93.

More than a couple of 2014’s recognized brand name new issues traded on Monday. They included Red Hat Inc.’s 0.25% convertibles due 2019, which extended gains to 118.125 after charging higher with shares on Friday after the Raleigh, N.C.-based open-source software company reported third-quarter results that beat estimates.

On Monday, Red Hat shares were up 85 cents, or 1.25%, to $68.89.

Priceline Group Inc.’s 0.9% convertibles, which priced in August, changed hands on Monday at 94.9, which was up 0.276 point on the day against shares of the Norwalk, Conn.-based online travel company, which gained 3.6% to $1,149.38.

Citrix Systems Inc.’s 0.5% convertibles were down 0.4 point on the day at 104.386, according to Trace data, with shares of the Fort Lauderdale, Fla.-based cloud computing company up 0.7% at $63.60.

Restoration Hardware Holdings Inc.’s 0% convertibles due 2019 traded down a point on an outright basis to 103.9 with shares of the Corte Madera, Calif.-based specialty retailer down fractionally at $95.95.

Twitter Inc.’s 0.25% convertibles due 2019 added 0.375 point to 88.875 with shares of the San Francisco-based social media company up $1.35, or 3.6%, to $38.43.

Gilead drops

Gilead’s 1.625% convertibles due 2016, or the Gilead Ds, fell 70 points to 408. Gilead shares fell $15.55, or 14%, to $92.90.

The convertible bonds remained 1 point to 2 points below parity, which was essentially where they had been, a convertibles trader said.

The bonds do not represent a good trade for convertible arb players due to the carry cost. It is a relatively short dated bond with 1.4 years left and a low coupon, the trader said.

“There is not much to say here. They are still below parity less two to one,” he said.

The news was bad, and Gilead lost a good chunk of market capitalization with a 14% drop in shares, the trader noted; but it is unclear how significantly Gilead will be affected by the development that AbbVie got its drug approved and Express Scripts granted it exclusivity. “It’s a surprise,” the trader said.

But Gilead has other drugs coming down the pike, he said. “It is not a one-product story. It’s pretty compelling,” he said.

Gilead’s products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus infection in adults; and Sovaldi, Viread, and Hepsera products for the treatment of liver disease.

It also offers Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B.

Gilead has been a major player in hepatitis C treatment, but its Solvaldi treatment has been criticized as being very expensive.

The Gilead D issue was the most actively traded health care convertible in the market on Monday, with about $12 million of bonds changing hands, the trader said.

Mentioned in this article:

Citrix Systems Inc. Nasdaq: CTXS

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Gilead Sciences Inc. Nasdaq: GILD

MGM Resorts International NYSE: MGM

Priceline Group Inc. Nasdaq: PCLN

Red Hat Inc. NYSE: RHT

Restoration Hardware Inc. NYSE: RH

Twitter Inc. Nasdaq: TWTR

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