Morning Commentary: InterMune surges outright on takeout; Illumina in line; Qihoo in demand

By Rebecca Melvin

New York, Aug. 25 – InterMune Inc.’s 2.5% convertibles of 2018 surged more than 50 points on an outright basis early Monday as shares skyrocketed 35% on news that Swiss pharmaceutical giant Roche AG is buying the California-based biotechnology company for a 38% premium to shares on Friday.

InterMune’s 2.5% convertibles were seen around 229, up from 177 last, in heavy volume. On a dollar-neutral basis, the significance was minimal, a New York-based trader said.

“You make 0.1 point plus the carry, the trader said, referring to hedged players, assuming the bonds are purchased Monday and held until the deal is done.

InterMune’s 2.5% convertibles due 2017 trade less actively generally. They were very deep in the money prior to the deal, trading in the 200s. There is also a third convertible said to be in the 400s prior to the day.

“The other ones are equity surrogates and are going to be converted out. The news is of greater significance on the outright side. The winners are the outrights,” the trader said.

Many biotech names were up in sympathy with the deal as market players eyed other companies that are likely takeover candidates, assuming that big pharmaceuticals are going to continue to look for smaller biotechnology companies to boost their drug pipeline.

Illumina Inc.’s dual tranches of convertibles, which have been trading very actively in recent sessions, were said to be trading in line, or flat, on a hedged basis.

Elsewhere, Qihoo 360 Technology Co. Ltd.’s convertible bonds were said to be trading “fine,” with shares of the Chinese internet company lower after the company reported earnings. The Qihoo 1.75%, or B, convertibles were “richening up a little bit, with buyers stepping in with the dip in the stock,” a New York-based trader said.

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