Friday, June 29, 2012

Orexigen Therapeutics (OREX) - FDA Approval in ARNA Has Huge Impact on OREX; Now What?

--- OVERVIEW ---
OREX is trading $5.75, down 2.5% with IV30™ up 0.4%. The LIVEVOL® Pro Summary is below.


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Orexigen Therapeutics, Inc. (Orexigen) is a biopharmaceutical company focused on the development of pharmaceutical product candidates for the treatment of obesity.

This is a stock and vol note in a bio-tech that just saw one of its competitors get some very good news. Let's start with the news yesterday in ARNA and then move on to examine OREX.I do note the very high volume today in OREX options and stock -- more on that later.

Shares of biotech companies in the anti-obesity market surged on the announcement that the Food and Drug Administration had approved the first weight loss pill since Roche Holding AG's Xenical in 1999. According to data from the National Institute of Health obesity related spending could rise to $343 billion in 2018.

Arena Pharmaceuticals anti-obesity drug Belviq was approved by the FDA on Wednesday. The drug was cleared for use in obese/overweight adults who have at least one medical condition. Obesity has become a major problem in the U.S. as it is estimated roughly 35 percent of the population is obese.

Source: Market wire via Yahoo! Finance; Arena Pharmaceuticals Shares Soar as FDA Approves First Weight Loss Drug in Over a Decade

--- ANALYSIS ---
That news matters to OREX for a simple reason -- OREX is trying to do the same thing. As the article reads, the FDA has not approved a weight loss drug in over a decade. It seems the door may finally be opening.

Let's turn to the Charts Tab (six months) for OREX, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see that six months ago OREX was trading at ~$1.60. In fact, the 52 wk low is $1.22. The $5.95 52 wk high was reached yesterday on the ARNA news. In fact, in the last three trading days (highlighted in the chart), OREX has popped from $3.91 to now $5.75, or up 47%. JPM came out with an interesting take on OREX today. I've included a little snippet, below.

Orexigen Therapeutics (NASDAQ:OREX) shares move (way) up again Thursday, riding the FDA approval of Arena Pharmaceuticals’ (NASDAQ:ARNA) Belviq weight loss drug. Shares were moved up to Overweight by JPMorgan, which said that they “stand to be the biggest beneficiary”, since approval for OREX’ own weight loss med, Cintrave, remains far in the future [.] The situation leaves a valuation gap with competitors whose drugs are closer to being okayed.

Source: WALL ST. CHEAT SHEET via Yahoo! Finance; Healthcare Business Recap: Orexigen RIDES Arena, Anthera IMPLODES, written by Mark Lawson.

Note the phrase, "far in the future." Looking to the vol side, we can see how the implied has climbed in lockstep with the short-term historical realized vol. In English, the implied has risen to match the actual short-term movement of the stock. The 52 wk range in IV30™ for OREX is [62.73%, 114.67%], putting the current level in the 80th percentile (annual). This is a great reminder of the fact that while company specific news is the greatest driver of vol, correlation (especially in bio-tech) can make another company's firm specific news incredibly meaningful.

The fact that vol has remained elevated for OREX is a bit curious -- actually, more than a bit. Note that the vol in ARNA has come down from 245.82% to 93.58% (as of this writing) in the last three days.  The news is out, now it's a quiet(er) period.  I'm not sure what's going on with OREX -- the vol isn't high enough to reflect company specific FDA news, and it's too high to be considered "normal."

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols.

We can see a monotonically increasing vol from the back to the front -- the option market reflects greater near-term risk than medium-term. The next earnings release for OREX should be in the Aug expiry, so it's a non-trivial phenomenon that Jul is elevated to Aug. Tricky...

--- SUMMARY --
Finally, let's turn to the Options Tab for completeness.

We can see (from the green numbers next to the strike prices) the volume has picked up today in OREX. In fact, over 8,400 contracts have traded today on total daily average volume of just 1,224. The call:put ratio today is ~ 1:1.2, so no real one-sided trading happening. I do note that over 12 million stock shares have traded on total daily average volume of just 1.9 million and we're just two hours into the trading day. People want to position themselves in OREX, but why now?...

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