Dendreon higher after wider loss; Vertex up on hedge after earnings miss; Chesapeake quiet

By Rebecca Melvin

New York, Nov. 2 - Dendreon Corp.'s convertibles were higher in active trade Friday after the Seattle-based biotechnology company reported a better-than-expected quarterly loss and improved sales of its centerpiece prostrate drug therapy.

The Dendreon convertibles added more than 3 points to 68.

Vertex Pharmaceuticals Inc.'s convertibles were lower outright, but higher on a hedged basis, after the Cambridge, Mass.-based biopharmaceutical company reported a disappointing quarter that missed estimates.

The Vertex convertibles were marked 5.5 points lower outright, but were seen up 1.25 points to 2 points on hedge depending on delta, sources said.

Alpha Natural Resources Inc.'s two convertible bond issues were seen quiet and little changed after the Bristol, Va.-based coal producer reported a better-than-expected quarterly loss. Production cuts were said to have aided performance.

Chesapeake Energy Inc.'s convertible bonds and convertible preferreds were "surprisingly" quiet after the Oklahoma City-based natural gas company posted a drop in revenue and quarterly loss and said it may push some of its asset sales and debt reduction targets into 2013.

Chesapeake was not seeing any significant trading, a New York-based trader said.

"People get ahead of these things," he said regarding the mute response.

But he added, "People are tired from the whole week," referring to the fact that many market players were still dealing with the aftermath of Hurricane Sandy, which slammed into the eastern U.S. Monday, shuttering financial markets until Wednesday and causing widespread devastation to public infrastructure and private property.

Barclays said for the week ended Thursday that convertible equities outperformed broad equity indices, creating a 0.75% return for the Barclays Convert Composite index.

Credit was mixed with investment-grade bonds up 0.53% and high-yield debt down 0.1%, while valuations for the top-traded convert names by volume were "largely unchanged this week," Barclays' convertible analysts Manoj Shivdasani, Venu Krishna, and Piyush Anchliya wrote in a note Friday.

The report, called Convert Vantage, said that for the year to date, convertibles have returned 13.13% versus 15.56% for the S&P 500, 13.06% for convert equities, 15.73% for the Russell 1000, 9.80% for the Barclays IG Corporate index, and 13.25% for the Barclays HY index.

Volumes were lower this week, with only $600 million of convertible bonds changing hands on Wednesday and $700 million changing hands on Thursday, according to Trace data, an analyst said.

Equities, which surged with positive economic data Thursday, sold off on Friday. The Dow Jones industrial average dropped 139.46 points, or 1.1%, to 13,0932.16, the Nasdaq composite stock index retraced 37.93 points of Thursday's 42.83-point jump, ending down 1.3% at 2,982.13, and the S&P 500 stock index closed down 13.39 points, or 1%, at 1,414.39.

In economic news, the U.S. Labor Department's jobs data for October showcased a rise in payrolls by 171,000 jobs, which outpaced the 114,000 job increase in September, and strongly outdid the 125,000 job increase that analysts were expecting.

But the unemployment rate ticked up to 7.9% from 7.8%, which was in line with expectations.

Dendreon gains after earnings

Dendreon's 2.875% convertibles due 2016 traded up to 68 on Friday, which was higher compared to their Thursday closing level of 64 bid, 64.75 offered, a New York-based trader said.

"They are definitely doing better" on an outright basis, the trader said of the convertibles.

He said the convertibles can and do trade on swap on about a 35% delta, but he didn't know whether the new pricing was better or worse on a hedged basis because they don't frequently trade on hedge.

Dendreon shares surged 62 cents, or 16%, to $4.47. Earlier in the session shares were up as much as 32%.

The catalyst pushing up securities was Dendreon's wider quarterly loss that was better than expected, and word that Provenge sales were up and that the reimbursement landscape had improved.

Dendreon has struggled to launch its Provenge prostate drug therapy and faces competition issues from such drugs as Johnson & Johnson's Zytiga drug and Medivation's enzalutamide drug.

Early Friday, Dendreon reported a net loss of $154.9 million, or $1.04 per share, compared to a year-earlier loss of $147.1 million, or $1.00 a share.

Excluding non-recurring items, the company lost 59 cents per share, which was better than the 86-cent-per-share loss that analysts were expecting.

Revenue rose 27% to $78 million from $61 million in the year-earlier period but was down 2.5% on a sequential basis.

Full implementation of its restructuring plan, including layoffs and a plant closing, is expected to take a year, with the aim of reducing costs by $150 million per year.

Vertex adds on hedge

Vertex Pharmaceuticals' 3.35% convertibles due 2015 were marked at 116.75 versus an underlying share price of $44.48 on Friday, compared to 122.25 versus an underlying closing share price of $50.48 on Thursday, according to a New York-based bank analyst.

The 5.5-point decline outright was in contrast to about a 2-point expansion on a hedged basis using a 60% delta or a 1.25-point expansion using a 55% delta, a New York-based trader said.

Vertex shares fell $5.47, or 11%, to $45.01 Friday. Earlier in the session, shares had been down as much as 16.5%.

Vertex reported a net loss for the third quarter and weaker sales of its Incivek hepatitis C drug.

The company's net loss of $58 million, or 27 cents per share, compared to profit of $221.1 million, or $1.02 per share, in the year-earlier quarter.

Excluding one-time items, the company reported earnings of 13 cents a share, which missed the per-share estimate of 34 cents.

Revenue fell to $336 million for the quarter from $659.2 million in the year-earlier period and missed expectations of $377.1 million. Revenue included a one-time milestone payment of $200 million.

Incivek revenue fell 40% to $254.3 million, compared to a year earlier.

Looking ahead, the company maintained its full-year forecast for Incivek revenue at $1.1 billion to $1.25 billion.

Dendreon's cash position as of Sept. 30 was $1.3 billion, which was better than the $969 million of cash it had as of Dec. 31, 2011.

Vertex also announced two non-exclusive agreements with GlaxoSmithKline plc and Janssen R&D Ireland and Medivir AB to test various combinations of its own next-generation hepatitis C drugs with those companies' hepatitis drugs.

Alpha Natural little changed

Alpha Natural's 3.25% convertibles were seen around 95 bid, and the Alpha Natural 2.375% convertibles were about 91 bid, according to a Connecticut-based trader.

Alpha Natural's shares ended higher by 20 cents, or 2.3%, to $9.06 after trading to as high as $9.71 in Friday's session.

The company reported a net loss of $46 million, or 21 cents per share, for the third quarter. Revenue fell 30% to $1.63 billion.

The consensus estimates put the loss at 45 cents per share on revenue of $1.68 billion.

Cost cutting and production cuts allowed the company to reduce overhead by $150 million, the company said.

Chesapeake quiet

Chesapeake's 2.5% convertibles were probably around 91 versus an underlying share price of $18.85 on Friday, a trader said.

"There was nothing trading, surprisingly," he said.

Chesapeake shares fell $1.58, or 8%, to $18.49.

The dominant headlines from Chesapeake's third-quarter earnings release was that the company reported a $2 billion impairment on the carrying value of natural gas and oil properties, plus additional non-cash impairments/charges on derivatives and certain asset sales, Gimme Credit analyst Philip C. Adams wrote in a note Friday.

The company announced that it is lining up a $2 billion bank facility to take out the remaining balance of its $4 billion bridge loan for asset sales in May.

In Adams' note, he wrote the company remains committed to its $17 billion to $19 billion in asset sales for 2012 to 2013 but has moved the precise targets.

Previous guidance was for sales of $13 billion to $14 billion by year-end 2012 and $4.25 billion to $5 billion for 2013.

"It sounds as though the process of selling the rest of the midstream assets (multiple basis, multiple parties involved) is part of the delay," Adams wrote.

"Either way, CHK says its long-term debt, which was $15.8 billion at the end of Q3, will be below $9.5 billion, if not by YE2012, then early in 2013," Adams said.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Chesapeake Energy Inc. NYSE: CHK

Dendreon Corp. Nasdaq: DNDN

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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