Amylin gains with stock; Knight prices upsized deal at the middle of talk; Group 1 to price

By Rebecca Melvin

New York, March 15 - Amylin Pharmaceuticals Inc. convertibles gained in line with their underlying shares Monday after news that the Food and Drug Administration asked for more information about the biopharmaceutical's potential once-a-week diabetes treatment, but didn't ask for additional studies.

But MannKind Corp. moved the opposite direction after the FDA asked for more information on its inhaled insulin device. The FDA also didn't require additional trials in this case but the market viewed negatively questions regarding the clinical utility of the inhalation device, Afrezza.

Convertible traders said Monday was a slow session overall. Investors continued to eye headlines coming out of Washington on banking reform and health care overhaul legislation, but participation was light ahead of the Federal Open Market Committee's latest policy statement expected Tuesday afternoon.

Senate Banking Committee chairman Chris Dodd on Monday released a broad outline of his regulatory reform bill, which was less comprehensive than president Barack Obama has called for, but still proposed stringent policies to limit risk imposed on the financial system by major institutions.

"It was pretty slow today," a New York-based sellside desk analyst said.

In the primary market, Knight Capital Group Inc. launched a deal ahead of the market open, and after the close priced a $325 million deal of five-year convertibles, which came at the midpoint of talk.

Also after the market close, Group 1 Automotive Inc. launched a $100 million offering of 10-year convertible notes that was talked to yield 2.5% to 3% with an initial conversion premium of 22.5% to 27.5%. Pricing was expected Tuesday.

Outside the United States, Ascendas Real Estate Investment Trust launched an offering of S$300 million of seven-year exchangeables that were talked to yield 1.6% to 2.1% with an initial conversion premium of 20% to 25%. This deal represents the only AAA rated convertible in the Asia-Pacific universe, according to a note put out by U.K.-based Barclays Capital convertibles research, which saw the deal attractive at the midpoint of price talk.

Amylin gains in line

Amylin 2.5% convertibles due 2011 traded last at 101, after having risen to as high as 102, which was up 3.5 points on the day.

Amylin 3% convertibles due 2014 traded at 89 versus a share price of $23.80, according to a New York-based sellsider.

Shares of the San Diego-based biopharmaceutical company surged $3.24, or 16%, to $23.50 after Amylin and its partners announced that the FDA had issued a complete response letter regarding its new drug application. There were no requests for new pre-clinical or clinical trials in the complete response letter, and requests made related mostly to finalizing product labeling.

"This is a significant step forward in our ability to bring this important therapy to patients," said Orville G. Kolterman, Amylin's senior vice president of research and development, in a news release. "We have a clear path forward and are working diligently to submit our response to the FDA in the next few weeks."

Amylin was one of 15 stocks highlighted by Credit Suisse equity research analysts on their high conviction list; and in addition, the Credit Suisse analysts said the convertibles of these companies offer attractive opportunities.

The convertibles offer equity investors attractive yields, a superior capital structure position with better downside protection and also "fairly good" participation on a stock's upside potential, the Credit Suisse analysts wrote.

The average premium of these convertibles is 64% and average delta is 45%, and these positives are only partially offset by the converts' lower liquidity relative to common stocks.

"We believe improved confidence in next generation, once-weekly Byetta (EQW) should generate upside potential, while acquisition interest offers downside risk support, and the obesity franchise is a free option," Credit Suisse analysts wrote.

"The limitations of first-generation diabetes drug Byetta are largely overcome by second-generation EQW, and Novo Nordisk's promotion helps market expansion. In our view, EQW has the most impressive collective efficacy data of any diabetes drug and upside potential to EQW expectations should build in 2010," they wrote.

"Our 2010 forward EPS estimates are $0.11-plus above consensus, with 2012 and beyond pegged to higher Byetta franchise revenues."

The analysts said approval is "likely" in 2010, adding that they expect it will come earlier than the market is forecasting.

"Furthermore, even if it is not granted, the risk/reward profile on this near-term catalyst favors buying the stock (5% downside risk on non-approval, 10% or more upside potential if approved), and the entry point," they added.

The convertibles should capture about 15% of the stock's upside while only about 3% of its downside, the Credit Suisse analysts said.

For the Amylin 3% convertibles, the yield is 6.8% with about 25% equity participation to the upside and only about 8% equity participation to the downside. The converts can benefit if Amylin were acquired, triggering a change of control put at par, Credit Suisse wrote.

The analysts suggested companies with a strategic interest in diabetes, include Pfizer, Johnson & Johnson, Merck, and AstraZeneca, which have the financial flexibility to pay more than Eli Lilly, Amylin's partner for Byetta, while market speculation focuses solely on Lilly.

"We do not believe that the change-in-control or standstill provisions in the Byetta agreement would be obstacles to an acquisition," they wrote.

MannKind seen at 68 bid, 69 offered

MannKind's 3.75% convertibles due 2013 were seen during the session at 68 bid, 69 offered, according to a Connecticut-based sellside trader.

Shares of the Valencia, Calif.-based biopharmaceutical company focused on therapeutic products for diseases such as diabetes plummeted $2.59, or 25%, to $7.89.

MannKind said the FDA has completed its review of its inhaled insulin Afrezza, but needs questions answered before it can approve the company's application. Among other things, the FDA said it wanted clinical data regarding Afrezza and information about the comparability of the commercial version of the MedTone inhaler to the earlier version of the device that was used in pivotal clinical trials.

Knight prices at middle

After the close of markets Monday, Knight Capital priced $325 million of five-year cash convertibles. The deal was upsized from $300 million.

The Knight Capital 3.5% convertibles have an initial conversion premium of 32.5%.

The Rule 144A offering came at the midpoint of price talk, which was 3.25% to 3.75% for the coupon and 30% to 35% for the premium.

J.P. Morgan Securities Inc. was running the books on the convertibles.

There are no calls or puts and the notes will be cash settled, which is less dilutive to shareholders, as opposed to net-share settled.

Concurrently with the pricing of the notes, Knight Capital entered into privately negotiated cash convertible note hedge and warrant transactions.

Proceeds will be used to repay $140 million in a senior secured term loan facility and senior secured revolving facility and to pay for hedge and warrant transactions. The remainder will go toward general corporate purposes.

Based in Jersey City, N.J., Knight Capital Group is a financial services firm.

Group 1 launches

Group 1 Automotive's $100 million offering of 10-year convertibles was being talked to yield 2.5% to 3% with an initial conversion premium of 22.5% to 27.5%.

The Rule 144A offering has a greenshoe of $15 million and was being sold via joint bookrunners J.P. Morgan Securities Inc. and Bank of America Merrill Lynch.

The senior unsecured notes will be non-callable for life with no puts. There is a contingent conversion trigger at 130% and net share settlement for cash up to the principal amount and the remainder in shares.

Concurrently with the offering, Group 1 will enter into convertible note hedge and warrant transactions.

Proceeds will be used to redeem Group 1's existing $74.6 million balance of 8.25% senior notes and to pay the cost of the convertible hedge and warrant transactions.

Houston-based Group 1 is an automotive products and services retailer.

Ascends seen attractive at the mid-point

Ascendas REIT's S$300 million of seven-year exchangeables - talked to yield 1.6% to 2.1% with an initial conversion premium of 20% to 25% - were seen attractive at the mid-point of talk or better, according to Barclays Capital analysts.

The issue was indicated at 101.3 at the middle of talk in the gray market.

"We value the new convertible at 100.6 to 104.0 at issue. This equates to an implied volatility of 19% on worst terms, a bond floor of 94.2-96.4, an equity delta of 35%, rho of 3.5 and vega of 0.65," the analysts said.

This assumes a credit spread of 75 basis points, 20% volatility, 3% dividend, 0.5% borrow and 2% stock skid.

"We view the AAA rating, the only one in the Asia-Pacific universe, as attractive to investors in conjunction with the security on the bonds. The high bond floor and ease of stock borrow may also appeal to investors. However we would note that this new issue would have one of the highest interest rate [sensitivities] in our universe," according to Barclays analysts Heather Beattie, Luke Olsen and Angus Allison.

Citigroup Global Markets Singapore Pte. Ltd. is bookrunner for the issue.

Ascendas is a business space and light industrial real estate investment trust with a diversified portfolio in Singapore.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Group 1 Automotive Inc. NYSE: GPI

MannKind Corp. Nasdaq: MNKD

Rovi Corp. Nasdaq: ROVI

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.