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Option Game Plan for October $NPSP Advisory Commitee

publication date: Oct 10, 2012
 | 
author/source: Steve Johannsen

The following article was published for BioRunUp subscribers on October 10th, 2012.

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Option Game Plan for October NPSP Advisory Commitee

By Steve Johannsen

Note: This article is intended for informational and entertainment use only and should not be construed as professional investment advice. This article contains my opinions as a writer and my personal trading plan. Always do your own complete due diligence before buying and selling any stock or options. 100% loss with options is possible (I typically risk 1-5% of my total account value depending on my conviction)

Important Trade Considerations

  • Catalyst Date: Oct 16th Ad-Com (Panel notes released Oct 12th) for Orphan indication of short bowel syndrome.

  • Option Expiration: Oct 19th, 3 trading days following the Ad-com

  • Implied Volatility: ~180-250

  • Options implied trading range: ± $2.50 ($7-12)

  • Sentiment: Positive Ad-com vote and approval expected in Dec. EU granted marketing authorization on 9/4/2012

  • Institutional ownership: 90.8%

  • Market Cap: ~$832 M

  • Outstanding Shares: 86.3M, Fully diluted: 91.5 M

  • Cash Balance: $135 M (6/30/2012)

  • Burn rate (R&D + SG&A): estimate ~$115M/yr (2012 guidance was $86M, as of 6/30/2012 have burned $70.3M)

  • Insider sell Oct 3, 2012 at $9.50 (140K shares)

Brief Overview

NPS Pharmacaeuticals is a virtual company that outsources all development work focusing on rare and orphan diseases. The company has yet to turn a profit but receives royalty payments from Amgen (cinacalcet HCl), Nycomed (Preotact), and Kyowa Hakko Kirin (REGPARA) of ~$100M/year combined. In addition to Gattex the next big drug in the company's pipeline is Natpara for hypoparathyroidism replacement therapy. They expect to submit a BLA in 2013 (orphan indication of ~65K patients).

As traders we are most interested in the advisory committee meeting on Oct 16th for Gattex indicated for adult Short Bowel Syndrome (SBS). Recent EU approval suggests that a positive Ad-com vote and approval are likely, however if approval was a sure thing then the FDA would not waste time with the advisory meeting. SBS occurs after surgical shortening of the small intestine resulting in patients unable to absorb nutrients from food. Patients are typically tube feed through a vein (parenteral nutrtition) at a cost that can exceed $100K/year.

In January 2011 NPS reported positive phase 3 results (STEPS) for Gattex (teduglutide). The study reached statistical significance for the primary efficacy endpoint, defined as the percentage of patients who achieved a 20 percent or greater reduction in weekly parenteral nutrtition (PN) volume at Weeks 20 and 24, compared to baseline. NPS estimates the US market to be ~10-15K patients. Teduglutide is also being tested in Crohns Disease (phase 2) and in preclinical testing for other pediatric indications. The EU granted marketing authorization in Sep of 2012.

For a detailed review of the clinical trials see the full text available here: Therap Adv Gastroenterol. 2012 May; 5(3): 159–171

Trade Idea and Thoughts

The biotech sector has been hot over the last few months and was recently further ignited by huge gains on positive clinical trial results for SRPT. Over the last two days we have seen experienced a slight pull back. With the bullish market possibly fading and sentiment leaning towards approval I expect that a positive panel vote is priced in between $9-10. NPSP is 90% institutionally owned and institutions are likely holding long term which is probably why the stock seems to move quickly, similar to a lower float stock.

On Oct 3rd Morgan Stanley came out with a $17 price target sparking a run from ~$9.30 to a high of 10.07 before fading back down to the 9.30 level. Option max pain is the $8 strike but we only have three trading days following the ad com vote. I think NPSP will get a positive panel vote and open at $10 before fading down to the $9-10 range for option expiration (this could also be a good entry for a run up to PDUFA).

 

Steve's Trade

I chose to put on an Iron Condor with the following structure for a credit of $1.24/spread (I did 10 spreads, risking $760 ~1% account risk):

Buy 1X $7 put

Sell 1X $9 put

Sell 1X $10 call

Buy 1X $12 call

 

 

 

I also have a 7/8 call spread that was entered into as a free trade. I purchased the $7 call for $1.55 and sold the $8 call against them at $1.55.

The combined trade has a PnL shown below:

 

(Note: I use Think or Swim to calculate the PnL for spreads of more than 4 contracts)

 

As you can see from the chart I am risking $760 (negative Ad-Com vote) to profit anywhere above $7.30. I earn $2740 maximum profit anywhere between $9 and $10

How to Close the Trade

7/8 Call spread - If NPSP is above $8 on expiration I will let them be exercised in my account. (check with you broker first for fees, etc.) It is essentially the equivalent of buying at $7 and selling at $8. If you try to close them out you will likely lose 0.05-.10 on slippage since you have to buy the ask and sell the bid.

If NPSP is < $7 then both options expire worthless. If NPSP is between 7 and 8, buy back the short $8 call (or let it expire worthless) and sell the $7 call.

 

Iron Butterfly - If stock is between $9-10 then all options expire worthless and you do nothing. The trade was put on for a credit and you get to keep the credit.

If the is trading below $7 or above $12 then just let the options be exercised (max loss).

If it is trading between 7-9 or 10-12 you have to buy back one of the short options. Profit or loss will depend on the purchase price.

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