Wednesday, November 21, 2012

Amarin (AMRN) - Bio-tech Day of Reckoning Approaches; Vol Elevates, Skew Points to Upside Risk

AMRN is trading $11.30, up 7.7% with IV30™ up 20.9%. The LIVEVOL® Pro Summary is below.


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Amarin Corporation plc (Amarin) is a late-stage biopharmaceutical -company with expertise in lipid science focused on the treatment of cardiovascular disease.

This is a vol and stock note on a bio-tech with impending news due out soon with some awesome skew. Here's the news:

With Amarin's (Nasdaq: AMRN) new triglyceride-lowering drug Vascepa approved and potentially ready for launch starting in 2013, some decisions have to be made now about how the drug is going to be marketed -- and who's going to do it. Many investors want to see a buyout so that a drugmaker with a larger marketing department can more easily promote Vascepa. However, with the drug's new chemical entity, or NCE, status still up in the air, it seems as though buyout negotiations are on hold. This means that Amarin might be launching this drug on its own.

Source: The Motley Fool via Yahoo! Finance Why Do Amarin Shareholders Want a Buyout?, written by Max Macaluso, Ph.D. and David Williamson.

That article also has a great video which explains the three scenarios for AMRN:
(1) Buyout
(2) US partner with deeper pockets to market
(3) Do it yourself -- build sales team, build a marketing campaign (which means raise money and create dilution, likely).

That same video does point out that if scenario #3 is the only way to go, that AMRN's management does have experience in this same field, so it's still a viable and semi-attractive alternative. Of course, everyone long the stock loves a buy-out...

Let's turn to the Charts Tab (one year) 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 a nice return over the last year from $6.73 to now over $11.  Looking back two years, the stock is up from $3.61. So, shareholders of longer-term horizons have done well with AMRN and have reason to believe that they will continue to do well in the future.

To examine the vol I have included a two-year IV30™ chart, below.

We can see how elevated the implied has gotten over the last couple of years, so the level today is high, but not out of the ordinary. The 52 wk range in AMRN IV30™ is [62.95%, 161.50%], putting the current level in the 64th percentile.

But, it's the Skew Tab (below) that tells the story.

We can see a few phenomena:
(1) The Nov30 weekly options show an extreme upside skew reflecting greater upside potential than downside risk in the very near-term.

(2) the ATM vol in Dec is the highest of all three expiries pictured, reflecting that the risk of "news" is greatest in the Dec cycle.

(3) Dec also shows an upside skew and a large vol diff has opened up between the Dec and Jan'13 upside calls.

Finally, let's turn to the Options Tab.

Across the top we can see the vols are priced to 99.53%, 125.15% and 119.82% for Nov30(W), Dec and Jan'13, respectively. The highest risk is priced into Dec, though Jan'13 is right behind it. What's so interesting is the different pricing in the OTM calls (see Skew Tab). The option market certainly reflects elevated vol in the near-term, but in particular, upside risk (potential). This will be a very interesting one to watch unfold and I would not discount the downside risk, even though the skew points the other way.

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