New Cubist trades slightly over par; Amylin gets slammed but pares losses; Gilead quiet

By Rebecca Melvin

New York, Oct. 20 -Cubist Pharmaceuticals Inc.'s newly priced 2.5% convertibles traded marginally above par on their debut in the secondary market on Wednesday, with market players saying the new paper didn't look particularly good or bad.

"It was a big yawn," a New York-based sellside trader said.

But the new Cubist issue traded pretty actively, and given how the underlying stock has come off since launch, the convertible deal - which was upsized by $150 million to $400 million in size - probably did better than it appeared on an absolute basis, the trader said.

Amylin Pharmaceuticals Inc.'s convertibles were under a lot of pressure early in the session, but pared losses later on, on news that U.S. regulators asked for further study on the new once-weekly diabetes drug Bydureon, which has been co-developed by Amylin, Eli Lilly and Co. and Alkermes Inc.

Despite posting positive earnings, Gilead Sciences Inc. was not much of a focus for the session, given attention paid to Cubist and Amylin, a New York-based sellside trader said.

Gilead's $2.2 billion of newer paper was pretty quiet, he said.

But Gilead's two older issues, the 0.5% convertibles and the 0.625% convertibles, saw some action after the Foster City, Calif.-based biopharmaceutical beat third-quarter estimates, which lifted the underlying shares by nearly 5%.

The session was an example of what the market has been seeing a lot of lately.

"There's focused activity in the mornings when we see one or two names in focus because of earnings or a new issue or something, and it creates a little bit of frenzy. But when you get away from that, you're hard pressed to find anything that investors really care about one way or another," he said.

There's not a lot of natural buying and selling going on at this point, he said, and it's not just a feature of convertibles. He surmised that investors are now watching for mid-term election results Nov. 2 to make their next round of investment decisions.

The primary market saw no new issue launches Wednesday, and a lack of new issuance was also seen as a culprit for suppressed activity.

"We've got this little trickle of new issuance, but still it doesn't compare to what's coming out of the market, in terms of maturities, calls and puts and repurchases," a sellsider said.

Cubist marginally higher

Cubist's newly priced 2.5% convertibles due 2017 traded between 100.25 and 100.5 early Wednesday and were seen higher by 0.375 point to 0.625 point near the close of the session, according to market sources.

The Cubist deal was seen in the gray market Tuesday at 100.5 bid, which was in line with valuations that put the deal about 1% cheap.

"I think it traded as expected," a sellsider said.

Cubist's older 2.25% convertibles due 2013 traded down about a point to 104.50 to 104.75.

Shares of the Lexington, Mass.-based drug developer extended the prior day's losses, to close at $23.02, which was down 32 cents or 1.4%. On Tuesday, the shares dropped 8%, which compared to shares at $25.25 at launch late Monday.

The new paper traded actively, with some flipping back to the underwriter and trading again despite the fact that market players didn't seem very excited about it.

"With the stock being down, people might not want to short it down there and are waiting to hedge it up when it goes a little higher," a sellsider said.

The fact that it's seven-year paper makes it vulnerable if and when the convertibles market becomes less buoyant than it is right now, one sellsider said.

Players eye seven-year paper

"Optically, the bonds are appealing," a New York-based sellside trader said. "But it's a bit of an illusion because it is seven-year, put-free paper....They won't do particularly well the next time the sushi hits the fan in the convert market."

The sellsider was referring to what might happen if there are broader credit problems or if there is a significant rise in general interest rates.

Another sellsider concurred that Cubist's new seven-year paper "will be among the most exposed" in the near to medium term. But presumably later, "say three years from now," a later crop of new issuance will have grown up to respond to any bumps in the market.

In addition, the company's business could be negatively impacted depending on the result of patent litigation, in which it is expected to prevail.

But if it doesn't prevail, it will affect revenue projections and weaken the credit because the rest of the company's drug pipeline is all in phase 2 and "nothing will be ready to fill the gap in time," a sellsider said.

The deal was notable in that it was substantially upsized like the Ciena Corp. deal.

Cubist priced an upsized $400 million of convertibles at the middle of price talk late Tuesday. The deal was initially talked at $250 million in size.

Amylin gets hit

Amylin's longer-dated paper, the 3% convertibles due 2014, traded down about 4 points to 82 in the early going Wednesday. But later the issue rebounded to about 86. This paper was 88 to 89 back in August.

The Amylin 3s trade outright as well as on a 50% hedge.

Amylin 2.25% convertibles due April 2011, which trade basically outright and are essentially money good, slipped to about 98.

But later the Amylin 2.25% convertibles were inching back up toward par and were seen at 99 to 100.

Shares of the San Diego-based drug discovery company got crushed, settling down $9.46, or 46%, at $11.03.

Amylin, Eli Lily and Alkemes said in a joint news release that the Food and Drug Administration issued a complete response letter regarding their Bydureon New Drug Application and requested a thorough study with (NDA) for Bydureon.

Additionally, the FDA has now requested the results of the Duration-5 study to evaluate the efficacy, and the labeling of the safety and effectiveness, of the commercial formulation of Bydureon.

The letter didn't cite any manufacturing processes referenced in the FDA's March 15 complete response letter, according to the release.

The companies' goal is to submit their reply to the complete response letter by the end of 2011, pending discussions with the FDA, the companies said.

Bydureon is a once-weekly formulation of exenatide, the active ingredient in Byetta (exenatide) injection. Byetta has been available in the United States since June 2005 to improve glycemic control in adults with type 2 diabetes.

"It's a pretty adverse FDA decision, with probably another 20 months of study on Bydureon wanted. It's a development that could have a severe impact on projected revenues going forward and cash burn," a New York-based sellside trader said.

"You'll want to push the credit spread out on the longer ones, and that could affect some delta; but the shorter ones have just six months left and are considered money good," the sellsider said of the two Amylin convertible issues.

"They got slammed and traded fairly heavily before buying came in later. But that's where most people came out on it later in the day," the trader said.

"It's still definitely a real company, and people would expect that they are going to be able to do whatever refinancing they need to get through," the trader said.

"It's not a one-trick pony, and they didn't absolutely need this, but they do have a cash burn that they are going to have fund with something over the next couple of years," the trader said.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Ciena Corp. Nasdaq: CIEN

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Gilead Sciences Inc. Nasdaq: GILD

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