Dendreon declines after J&J drug news; Patriot Coal keeps sliding; Chesapeake lower again

By Rebecca Melvin

New York, May 17 - Thursday's convertible bond market was hit hard by a bout of selling.

The market didn't disintegrate into panic, sources said, but it seemed that overall the universe of convertible bonds was down 0.25 point to 0.5 point, if not more.

"Everything is for sale!" a New York-based trader said.

Many things coming for sale were the risky, high-beta names, a New York-based convertibles analyst said. For example, Dendreon Corp. was down owing to its own story and not related to global economic recovery concerns, and trading in Patriot Coal Corp. touches on the global economy, but it is a combination of economic factors and company-specific factors such as a credit facility withdrawal and the possibility that a key customer has defaulted, he said.

Fear and limited liquidity has been plaguing the market for several days, but perhaps the reason why everything was weaker on Thursday, and not on Wednesday or earlier in the week, was due to the fact that "there's no clear indication what Europe is doing to contain the crisis," the analyst said. "I think it is related to that."

Dendreon's convertibles tumbled 6 points and came back 3 points toward the end of the session, and Dendreon shares moved sharply lower after word that Johnson & Johnson's advanced prostate cancer drug, Zytiga, had shown surprisingly strong beneficial results in a study.

Dendreon's move off its lows was not viewed positively by one New York-based trader, who said, "The J&J drug is a huge risk to their franchise going forward, unless someone picks them up."

The trader was referring to the possibility that a buyer could take out Dendreon, and then the bonds, which ended the day at 73.5 bid, 74.5 offered, would be worth par.

Patriot Coal's convertibles plunged for a third straight day, with the market for the convertibles reportedly touching 79 from near par early Tuesday.

Sparking the slide were liquidity concerns that flared after the St. Louis-based coal producer warned that one of its key customers may default on a sales contract, and the plunge was exacerbated by withdrawal of a credit facility. Meanwhile, demand and pricing for both thermal and metallurgical coal remain depressed.

Chesapeake Energy Corp.'s convertibles were also lower again as speculation began to build following an article in the Financial Times that said the oil majors are looking at what it would look like to acquire Chesapeake, a New York-based analyst said.

Meanwhile, United States Steel Corp.'s convertibles were lower again, and seen 0.5 point to 0.75 point lower dollar neutral on the week so far.

Dendreon torpedoed

Dendreon's 2.875% convertibles due January 2016 traded down to 70 and then back up to 73.5 bid, 74.5 offered. At its lows, it was down 6 points, but it ended down 3 points, a New York-based trader said.

Shares of the Seattle-based biotech company fell 97 cents, or 11%, to $7.65.

Dendreon was torpedoed the day after positive news that Johnson & Johnson's Zytiga prostate cancer had eradicated tumors in some men with high-risk forms of the disease in a mid-stage trial.

Six months of treatment with the combination therapy completely or nearly eliminated the cancer in a third of patients.

Zytiga is already approved to treat advanced prostate cancer in patients who previously received chemotherapy. J&J expects to file for regulatory approval of the drug as a treatment for men with metastatic prostate cancer who have not yet received chemotherapy in the second half of this year.

Zytiga costs about $5,000 a month.

Provenge, approved in April 2010, was the first therapy in the United States that trains the body's immune system to attack cancer cells as if they were a virus. The treatment, which costs $93,000, was cleared for patients with advanced cases of the disease.

Dendreon shares plunged 25% on May 8 after the company said that growth this year will be modest and its first quarter loss fell short of estimates. The drug maker also disclosed in a May 7 filing that the U.S. Securities and Exchange Commission opened a probe that may be related to the company's withdrawn revenue estimate last year, when slower-than-expected sales of Provenge prompted the dropping of the $350 million to $400 million projection.

Elsewhere in the biotech space, Human Genome Sciences Inc., which was actively traded on Wednesday, was quiet.

Human Genome's 2.25% convertibles which mature in six weeks were still trading at 101.

"It's still too high. These should be trading at par. No one is taking these out for $18 per share; why am I the only one who has figured that out."

Patriot slide continues

Patriot Coal's 3.25% convertibles due May 31, 2013 were seen last at 79 bid, 84.5 offered, according to what a New York-based trader heard. That was about a 5-point slide, he said Thursday, on top of a 5-point slide Wednesday and about the same-sized drop on Tuesday.

One trader said in notes Thursday, "Coal companies are being treated like they're Greece."

Shares of the St. Louis-based coal miner dropped another 22 cents, or 6%, to $3.52. on Thursday.

The downdraft in the notes is related to a credit facility that was pulled Tuesday. The facility was supposed to fund redemption of the bonds next year.

Also on Wednesday, Standard & Poor's lowered its credit ratings on the company, citing weaker market conditions. It lowered Patriot's corporate credit rating to B- from B and the issue-level rating on the company's senior unsecured debt to B- from B.

Chesapeake lower again

Chesapeake's 2.75% convertibles due 2035 traded last at 83, according to Trace data, which was down from 84.5 on Tuesday, and lower by 2 points on a dollar-neutral, or hedged, basis, a market source said.

Chesapeake's 2.5% convertibles due 2037 were last at 76.5, according to Trace data, which was down from 78 on Tuesday. These bonds were lower by 1.5 points on a dollar-neutral basis.

But Chesapeake's 2.25% convertibles due 2038 were seen last at 73.95, which was basically flat from Tuesday's 74.

Shares of the Oklahoma City-based natural gas company fell 49 cents, or 3.5%, to $13.55, which was down from $14.65 on Tuesday.

Chesapeake stock lifted from its lows. One source cited an FT article that oil majors are looking at the financially strapped Oklahoma City-based natural gas company. A bid may not be such a long shot given that the company's market capitalization has dropped sharply to about $9 billion.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Dendreon Corp. Nasdaq: DNDN

Human Genome Sciences Inc. Nasdaq: HGSI

Patriot Coal Corp. NYSE: PCX

United States Steel Corp. NYSE: X

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