Here's A Strategy To Play Amarin's Upcoming Binary Event
(Thomson Reuters ONE) -
Amarin's (NASDAQ:AMRN) sell-off following the largely anticipated FDA approval
of Vascepa has given investors a chance to buy the stock at an attractive
valuation. However, another upcoming binary event is likely to shake up the
stock before focus shifts to the long-term potential of the triglyceride-
lowering drug.
Amarin is expected to hear from the FDA as early as mid-August whether or not
Vascepa will be designated a new chemical entity (NCE), which gets 5 years of
FDA exclusivity, or new product exclusivity (NPE), which only gives the company
3 years of regulatory exclusivity. While Amarin is improving its intellectual
property around Vascepa, there are still a number of patents that have yet to be
issued in the U.S. and the NCE exclusivity from FDA would provide more time
before a generic drug company is actually allowed to submit its application for
regulatory review.
Although a robust patent estate will provide the real protection on Vascepa in
the long run, investors believe that any potential acquirers of Amarin would
like to have NCE rather than NPE status, given the extra time to get the long-
term patents in place without any interference from generic filers. Once the
NCE or NPE status is known, it enables potential acquirers to appropriately
determine the value of Vascepa, given the 3 or 5 year regulatory protection.
Essentially, the bet on Amarin and the NCE decision is that a major drug company
could move to acquire the company for the Vascepa opportunity at a big premium
in the coming months.
The importance, or perceived importance, of the NCE issue is being expressed in
the options market; September call and put options on Amarin imply that the
stock could trade up or down by approximately $7-$8 per share. Analysts speaking
with PropThink believe that the stock could trade up or down by about $5
depending on NCE or NPE exclusivity, respectively, confirming that big potential
swings are likely around this event.
A decision on NCE or NPE status for Vascepa by the FDA is expected by mid-
August, based on past decision patterns of the agency.
Last week, Barron's offered an options strategy developed by analysts and
traders at MKM Partners consisting of a call spread plus a put option in order
to play this event with a cost of less than $1, and the chance to earn about $4
on the upside. The risk is that if Amarin does not receive NCE status and the
shares fall below $8, an investor using this strategy would be required to buy
the shares at $8 with a total cost of about $9, factoring in the cost of the
options trade. For investors that like to speculate, this trade could be smart,
with a strong potential return on investment on a positive NCE outcome (the way
most Wall Street analysts believe the decision will go) and a risk of buying the
stock on a negative outcome (NPE status) at a level that represents a pretty
good entry point from a long-term perspective.
The strategy involves buying the September 13 Calls (a cost of ~$1.60 per
contract) and selling the September $18 calls (income of ~$0.45 per contract).
This call spread represents an option to buy AMRN at $13, but obligates one to
sell those shares at $18 if the stock rises to that price or higher. Hence, this
leg of the option strategy enables a $5 potential profit. The strategy also
recommends selling the AMRN September $8 put options (approximate income ~$0.45
per contract) to reduce the total cost of the options trade. Therefore, at
today's prices, the cost of the options strategy is $0.70 per contract plus
commissions. Note that selling the put option obligates one to buy AMRN stock if
the shares fall to $8 or below, so investors engaging in this strategy need to
be aware that they may become longer-term shareholders of the stock.
In the long run, it is patent protection, not FDA exclusivity, that matters to
get the most value out of Vascepa (AMRN's patents are expected to block generics
through 2030), however, the market's hypersensitivity to the NCE/NPE issue has
created an interesting trading opportunity that is likely better expressed
through an options strategy.
As an aside, a key reason that analysts believe that Vascepa will be designated
as a NCE is because the FDA required Amarin to conduct long-term toxicity
studies, which would not be necessary if the agency believed that this drug was
simply a new formulation of an old agent.
Click here to see the original report
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Unternehmensinformation / Kurzprofil:
Datum: 08.08.2012 - 14:10 Uhr
Sprache: Deutsch
News-ID 172819
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