Sell Human Genome 2012 convertibles, buy 2011 issue, Barclays advises

By Rebecca Melvin

New York, July 27 - In light of the huge move up in Human Genome Sciences Inc.'s convertibles and stock from last week, Barclays Capital convertibles analysts recommend swapping out of the Human Genome 2.25% convertibles due 2012 and into the company's 2.25% convertibles due 2011.

The outright trade will shorten the position's maturity to 0.8 year, lower the premium by 7.5%, increase the bond floor by 10.6 points, while maintaining a similar delta.

As an arbitrage play, volatility is likely to remain high and the stock is likely to have "significant binary moves based on further results."

This month's huge move in the name was due to positive phase three study results for its Lupus drug Benlysta. Further results are expected in November.

Both bonds can be set up on a full hedge. "Incrementally we prefer the shorter bonds for their convexity," the Barclays Capital analysts Manoy Shivdasani, Venu Krishna, and Peng Cheng wrote in their report Monday.

The advantages of an equity-to-convertible swap include being higher in the capital structure, significant equity market cap cushion of nearly $2 billion, superior risk/reward profile, and potential make-whole with improved credit if Human Genome gets acquired, the analysts said.

GlaxoSmithKline is a partner on Benlysta, the analysts noted.

Rockville, Md., based Human Genome is a biopharmaceutical company.

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