Sunday, May 11, 2014

* Vertex Pharma (VRTX) - Huge Enterprise Changing Event Brings Decade+ Risk in Biotech & Unknown Timing.

Note the original post date: Sunday, May 11, 2014

VRTX closed at $65.05 on Friday, up 2.0% with IV30™ at 102.76%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 5-12-2014 (11:45am EST)

Provided by Livevol

UPDATE 5-30-2014

Provided by Livevol

Note the rising implied volatility (forward looking stock price risk for the next 30-days as reflected by the option market)

Vertex Pharmaceuticals Incorporated (Vertex) is in the business of discovering, developing, manufacturing and commercializing small molecule drugs for the treatment of serious diseases.

This is a $15.4B market cap firm with $1.2B in revenue, and negative earnings.  And there is some enterprise changing news coming very soon and the option market reads one thing:

Huge Risk & Unknown Timing.

Let's start with the Charts Tab (two-years) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see this was a $60 stock two-years ago, and although it saw an incredible pop on 4-19-2013 from $52.87 to $85.60, the stock price now is right about where it was two-years ago.  The equity price hit an all-time high in the mid $90's back in October of 2000 (remember those days?).

Of late, the stock has fallen rather abruptly from $85 (1-22-2014) to now $65 less than four months later.  Before we get into the volatility, which is the entire story, here's a quick news snippet from a few days ago:


Vertex (VRTX) Drops Hepatitis C Portfolio: Vertex, which was once known for changing the treatment paradigm for hepatitis C virus (:HCV) following the launch of Incivek, has decided to exit this market. The company will now focus on its cystic fibrosis portfolio.

The decision doesn’t really come as a surprise. Incivek’s sales slumped almost 60% last year due to the warehousing effect -- patients and physicians postponing treatment with existing drugs so as to avail better new treatments once they are launched. With Gilead’s Sovaldi on the market, Incivek sales would have slumped further this year. So, it makes sense for the company to focus on its cystic fibrosis franchise which is doing well.

Source: Biotech Stock Roundup: Endocyte Tumbles & Merrimack Soars on Pipeline News, written by Arpita Dutt.

But there's much more news... and it's called risk.  Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

The 30-day implied volatility has risen from 39.90% on 3-18-2014 to now over 100%.  And I'll tell you what, it's going higher.  The option market is reflecting event risk - the kind you mostly see in bio-techs.

So when is the event?... Let's turn to the Skew Tab, below.

Provided by Livevol

Check out how the Jul monthly options (brown line) lie above the Jun monthly options (pink line) which lie above Jun13 weekly options (blue line).  There's unusually high risk in all of those three expires for this firm, but as of right ow the option market reads the greatest likelihood of an event is in fact after Jun monthly expiration.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

But there's a kicker here... The option market isn't really sure when the event will occur.Let's turn to the Options Tab to see that explicitly.

Provided by Livevol

Check out those green numbers at the very top of the image. The vols by expiry read:

Jun6 weekly: 86%
Jun13 weekly: 94%
Jun21 monthly: 102.76%
Jun 27 weekly: 103.87%
Jul monthly: 113.47%

So we see the to phenomena.
1. Normal:  There is an event coming, the option market reflects it in July expiration so the vol is elevated.

2. Weird: The implied volatility (forward looking volatility) rises for each expiry as we approach July, which is in fact a reflection of unknown timing to the risk.

If the option market was certain the event was coming out in Jul and not before or after, the months (and weeks) prior to Jul expiry would be significantly lower and rather stable volatility.  But of course, we don't see that.  And since we don't see that, we do see what the option market reads:

Huge Risk & Unknown Timing.

Though not pictured here, The July monthly options price a stock price range of ~[$40, $90] by the end of trading on July 18th.

That $90 price would near the level hit in late 2000 and the last bio-tech bubble.

This is trade analysis, not a recommendation.

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