Elan hurt, Biogen stable; Teva up, Schering slips; King trips; Yellow skids; Manpower lower; Saks off

By Ronda Fears

Nashville, Feb. 28 - There was a routing in biotech convertible paper Monday as a selling frenzy ensued after marketing partners Elan Corp. plc and Biogen Idec Inc. voluntarily pulled the multiple sclerosis treatment Tysabri after a patient died. On the news, MS drug competitor Teva Pharmaceutical Industries Ltd. shot up while another rival, Schering-Plough Corp., eased.

Protein Design Labs Inc., which was in line to receive Tysabri royalties from Elan and Biogen, saw its stock plunge $2.35, or 13.56% on the day, to $14.98, but convertible market sources said there still has been no trades seen in its new convertible. The 2% issue was pegged at 91.25 at one sellside shop and at 90.625 at another, while its older 2.75% issue was quoted at 98.75 for a mid-market level.

Merger Monday headlines were equally devastating to the convertible market. A failed merger impacted King Pharmaceuticals Inc., and M&A activity also was detrimental to trucking firm Yellow Roadway Corp. and apparel retailer Saks Inc.

Otherwise, it was a mostly "slumpish" session, one sellside trader said. Outright convertible holders were hit hardest, he said, but arbitrageurs "felt their share of pain, too."

Asked to clarify the coined word, "slumpish," he said the market felt "very weak overall," but, "at the same time, there were some nice moves up, like Charter." Charter Communications Inc.'s convertibles gained about 1 to 1.5 points ahead of an earnings announcement early Tuesday from the St. Louis-based cable company, which also has been the focus of merger speculation in the cable industry.

A couple of surprises elsewhere shook up convertible players, too.

Manpower Inc. announced it would call its 0% convertibles, which had been callable since August. The convertibles traded down about 2 points to 62, which one market source attributed to many holders having been lulled into a false sense of security that it would not be called since there had been no sign of such plans from the company for six months.

General Motors Corp. and Ford Motor Co. both saw their convertibles decline in tandem with their stocks, which dropped rather sharply on a downgrade to the equity by Banc of America.

Elan crashes on drug recall

Elan's market capitalization was more than halved by the news of pulling Tysabri, and convertible holders were devastated as the 6.5% issue followed the stock almost point for point. By volume, the Elan converts saw a lot of action, traders said, but nothing like the stock.

Elan shares dropped 70.26% on the day, or $18.90, to close at $8.00. The 6.5% convertible plunged 230 points to around 140.5, but the impact was not as profound on hedge. Elan's junk bonds, the 7.25% notes due 2008, fell to around 92 from 104.5 on the news.

Following the death of one patient, Elan and partner Biogen said they were halting the marketing of Tysabri due to serious adverse affects in two patients being treated with a combination therapy consisting of Tysabri and Biogen's MS treatment, Avonex. Elan said about 3,000 patients have been treated with Tysabri in trials of MS, Crohn's disease and rheumatoid arthritis.

On a conference call to discuss the recall, executives said Elan's loss of revenues from Tysabri sales were roughly double that of Biogen.

The Elan CEO indicated on the call that the "FDA has no intention to remove Tysabri from the market and suggested reintroduction is possible in the fall," said a buyside market source. Standard & Poor's, which put Elan credit on negative watch, noted, however, that in the near-to-intermediate term Elan's product pipeline is relatively light.

Biogen supported by cash pile

While Biogen shares took a hard hit similar to Elan, its convertibles were supported by the company's large cash cache toward a put coming up in May.

Biogen shares fell $28.63, or 42.55%, to $38.65. The 0% convertible due 2032 lost "maybe a point," a trader said, to 61.5 bid, 61.625 offered.

"The BIIB zeros, which are putable in April, are pretty much unchanged with the shares off 40%," a sellside market source said late Monday morning. "They are trading right at their put price. I guess the $2 billion of cash and investments on their balance sheet is enough to keep convert investors from panicking."

According to Biogen's balance sheet, the company will have $2.2 billion of cash at March 31, against the $1.2 billion face amount of the convertibles. The issue, sold in April 2002, priced at 59.291 and is putable this April at 62.473.

On a conference call with analysts, Biogen chief executive James Mullen said that Tysabri sales accounted for just $3.1 million out of total revenues of $2.2 billion for 2004. However, the company has hired 450 employees to work on the program, equal to about 9% of its total workforce, and those revenues were projected to grow.

Thus, S&P said the event was a setback to Biogen, but the rating agency affirmed its credit, with a positive outlook.

Teva, Schering reaction mixed

Amid a widespread sell-off in the biotech sector in reaction to the Elan/Biogen news, there were several names immediately impacted by the event, such as Protein Design Labs. Meanwhile, rival MS drugmakers reacted to the Elan/Biogen Idec news in mixed fashion, with Teva Pharmaceuticals Industries Ltd. soaring and Schering-Plough AG slumping.

Teva, the world's largest generic drugmaker, shot up nicely as its MS drug Copaxone had already faced stiff competition and was expected to lose sales beginning in 2006 to Tysabri. Now, the picture looks easier for Teva and its stock soared $2.55, or 9.25%, to $30.11.The Teva convertibles gained 2 to 3 points to the 98 to 99 area, a market source said.

Schering-Plough's mandatory slipped by a quarter point to 51.75 as the underlying stock lost 19 cents on the day, or 0.99%, to $18.95.

King 2.75s stumbles to 96

King Pharma's rocky merger plans with Mylan Laboratories Inc. was called off Monday after months of troubled waters stirred up by infamous investor Carol Icahn's noisy objections to the $4 billion deal.

Because the row between Icahn and the managements of the two companies had been ongoing for so long, some convertible players had already begun to unwind positions, but some who had held out were forced to move as the merger was officially nixed.

"We took Icahn's view and did well on the trade," said a portfolio manager at a hedge fund in New Jersey. Another manager at a hedge fund in Chicago said he had looked at the situation in recent weeks, but felt it "seemed boring, guess not," now.

For most of the morning, convertible traders said there was nothing happening in the King Pharma converts as most players were busy unwinding risk arb positions or covering shorts. Then the 2.75% converts traded down by about 0.375 point at 96.

Separately, King Pharma said it is re-positioned for growth, by hiring new personnel in sales and marketing and by re-prioritizing research-and-development projects, among other things. S&P improved its watch on King Pharma credit to negative from developing implications but expressed concern that the company still faces several challenges such as excess wholesale inventories and competition from generic drugmakers.

King Pharma's convertibles had shot up to par last summer when the merger was announced, on the possibility that the notes would get taken out at par or that Mylan would want to keep its debt slate clean and redeem the issue as soon as possible.

Yellow off on cash/stock buy

Yellow Roadway announced the $1.5 billion cash and stock acquisition of USF Corp, which will expand its trucking business into the regional next-day and two-day freight shipping market. A trader said the two convertible issues came in 1 to 2 points on swap, following the stock lower. But the trader noted, too, that Yellow shares were higher in after-hours trading.

The stock closed Monday off $3.56, or 5.81%, to $57.75 and in after-hours trading was seen higher by $1.50, or 2.6%.

"I thought it [the stock decline] looked pretty overdone," the trader said. As for convertible holders, he said holders were basically just a little leery of how the transaction would affect Yellow's capital structure going forward, particularly if more bank debt edges in ahead of the convertibles.

Yellow said around half of the merger cost, which includes the assumption of $99 million in USF debt, would be paid in cash and the company anticipates increasing its bank revolver plus a public debt offering of some sort.

Yellow said it expects the acquisition to add to earnings within 12 months of closing, which is expected by summer. The company also estimated it could find $40 million in net synergies in the first 12 months after the merger and longer-term synergy opportunities of $150 million annually.

S&P put Yellow's ratings on negative watch, saying that while the USF acquisition will significantly increase market share, acquisition-related debt and assumed USF debt will somewhat weaken Yellow's credit measures, which had been improving.

Moody's also put the ratings of Yellow under review for possible downgrade.

Saks slides on Federated/May deal

Saks didn't announce a merger or anything of the sort, although it has been considering separating its moderate-priced department stores from the upscale Saks Fifth Avenue chain. It may never be making such an announcement was the fear in the markets following Federated Department Stores Inc.'s $11 billion purchase of May Department stores.

"Because Federated owns Macy's it was considered probably the most likely suitor for Saks from within the sector," a market onlooker said. "There still is a strong possibility of a private equity group putting something together, though, I think."

Traders said the Saks 2% convertible traded down 1-2 points to 98 bid, 98.5 offered while Saks shares ended off by 29 cents, or 1.87%, at $15.19.

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