InterMune jumps on Roche buyout news; Illumina in line; Qihoo finds buyers on stock dip

By Rebecca Melvin

New York, Aug. 25 – InterMune Inc.’s 2.5% convertibles of 2018 surged more than 50 points on an outright basis Monday and gained on a dollar-neutral, or hedged, basis, as well 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 traded actively at around 229, which was up from 177 last. On a hedged basis, investors gained 6.5 points, if they were on a lighter, 82% delta, a trader said.

Other biotech names were up in sympathy with the deal news as market players anticipate additional companies that may become takeover targets by big pharmaceutical companies.

Illumina Inc.’s 0% convertible due 2019 was also a big trader on the day, but those bonds were seen up in line, or flat, at best, in heavy volume. Another Illumina issue, the 0.5% convertible, was not as actively traded.

InterMune’s 2.5% convertibles of 2018 and the Illumina 0% bonds were really the focus of the day’s trade, sources said.

Elsewhere, Qihoo 360 Technology Co. Ltd.’s convertibles were said to be trading “fine” in the early going, with shares of the Chinese internet company lower after the company reported earnings that beat estimates but disappointed on profit margin.

Otherwise, traders said that the secondary market was quiet on Monday, with “nothing major going on.” And the primary market, which has been effectively shut for a week, extended its quiet period amid late summer vacation season. Many market players said they anticipate a quiet week overall ahead of the long holiday weekend for Labor Day.

Equities rallied, with the Standard & Poor’s 500 stock index rising for the first time above 2,000 intraday before pulling back slightly from those highs before the market close. However, the S&P settled at 1,997.92, which was up 9.5 points, or 0.5%.

The S&P has nearly tripled since hitting a low of 676.53 on March 09, 2009, which marked the end of the financial crisis and the beginning of the current run higher.

The other stock indices also gained on Monday, with the Dow Jones industrial average rising 75.65 points, or 0.4%, to 17,076.87, and the Nasdaq stock market adding 18.8 points, or 0.4%, to 4,557.35.

“The gains were on light volume, though; we’ll have to see if there is meaningful follow-through,” a New York-based trader said.

InterMune surges

InterMune’s 2.5% convertibles due 2018 traded up to 229 from 175ish. The 50-point outright move was in tandem with 6.5 points of hedged player value.

InterMune’s other convertibles were not as actively traded. But InterMune’s 2.5% convertibles due 2017 were quoted up to 566.59 from 419.42, and InterMune’s 5% convertibles were quoted up to 386.23 from 285 previously.

InterMune shares surged $19.05, or 35%, to $72.85 on Monday.

“The InterMune bonds of 2018 are trading close to parity on a delta of 82%, and many traders had not been on anything heavier. Arbs made about 6.5 points on a delta,” a trader said.

“They made money on light deltas on M&A speculation,” the trader said.

The InterMune convertible trade going forward is going to be insignificant in comparison, a second trader said.

“You make 0.1 point plus the carry,” a New York-based trader said, assuming the bonds are purchased Monday and held until the deal is done. For that carry trade, the delta would be much higher at between 97% and 100%.

“If the deal cracks, this is a deep in bond, and it might make trading interesting. But the deal is expected to get done,” the trader said.

InterMune’s 2.5% convertibles due 2017 and InterMune 5% convertibles were less active generally. They are very deep in-the-money prior to the deal and essentially equity surrogates that are going to be converted out.

Illumina trading ‘in line’

Illumina’s 0% convertibles due 2019 also traded in heavy volume and closed at 106.375 bid, 106.375 offered versus the closing underlying share price of $177.91, which was up $5.91, or 3.4%.

“These were the other big issue today,” a trader said.

Illumina’s convertibles have been active generally since the company received an unsolicited S&P investment-grade rating a couple of weeks ago.

Illumina’s 0.5% convertibles due 2021 were not heard in trade. The two tranches priced in early June and amount to about $1 billion of notes.

Qihoo trades ‘fine’

Qihoo’s 1.75%, or B, convertibles were seen at 102.1 at the close, compared to 106.5 previously.

“They were richening up a little bit, with buyers stepping in with the dip in the stock,” a New York-based trader said early Monday. At that point the stock was down about 6%. Later the stock moved further down, closing down $7.88, or nearly 8%, at $93.87.

Qihoo’s 0.5% convertibles were also seen in the 102 range from about 106, while the Qihoo 2.5% convertibles were seen at 112.92 from 117.14 previously, according to a market source.

The company beat analysts’ estimates for earnings and revenue but reported lower margins.

For the second quarter Qihoo reported earnings of 50 cents a share, beating the consensus estimate of 48 cents a share. Revenue rose to $317.9 million, which was higher than analysts’ expectation of $310.5 million. But margins of 22% for the quarter were down from 34% in the year-earlier quarter.

Mentioned in this article:

Illumina Inc. Nasdaq: ILMN

InterMune Inc. Nasdaq: ITMN

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

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