Friday, August 8, 2014

* Tekmira Pharma (TKMR) - What's Really Going On in this Ebola Epidemic and This Stock

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TKMR is trading $19.65, up 37.5% with IV30™ up 8.3%. The Symbol Summary is included below.

Provided by Livevol

Update 8-11-2014:

Provided by Livevol

News: 8-11-2014
Shares of Tekmira Pharmaceuticals were up another 20% on Monday after gaining more than 45% on Friday after the FDA loosened a hold on the Ebola treatment in the company's development pipeline.

After closing on Thursday afternoon at $14.27 per share, Tekmira shares were trading north of $25 on Monday.

In Thursday evening's press release, Tekmira said, " the U.S. Food & Drug Administration (FDA) has verbally confirmed they have modified the full clinical hold placed on the TKM-Ebola Investigational New Drug Application (IND) to a partial clinical hold. This action enables the potential use of TKM-Ebola in individuals infected with Ebola virus."

Source: BUSINESS INSIDER via Yahoo! Finance Ebola Drug Maker Shares Are Exploding Higher Again, written by Myles Udland.

This stock is up 125% in four weeks (now up 170% as of this update), but there's so much more to it.

What's Going On - Ebola
* Stock Rises 300% in three-months (details in body of article)
* Stock Drops 70% in next three-months (details in body of article)
* Stock Rises 175% in last four weeks (details right now...)

First, the epidemic.

The outbreak of the Ebola virus in West Africa is an "extraordinary event" and a public health risk to other countries, the World Health Organisation (WHO) has warned.

All of the countries where there has been a breakout of the disease – currently: Guinea, Liberia, Sierra Leone, and Nigeria – should declare a national emergency, WHO recommended. This is already the longest and most deadly outbreak of Ebola recorded, since the virus was first identified in 1976. WHO said 932 people have already died as a result of the epidemic.

Keiji Fukuda, the WHO's head of health security, told reporters: "This is not a mysterious disease. This is an infectious disease that can be contained. It is not a virus that is spread through the air."

The breakout is particularly worrying to the international health body because of the poor health systems in these countries, the "virulence" of the virus, and its transmission patterns, which show that it has passed quickly through communities and hospitals.

Source: CNBC via Yahoo! Finance Ebola outbreak now international emergency: WHO, written by Catherine Boyle

And now, why TKMR is ripping (just headlines as links, they tell the story):

  1. FDA allows limited use of Ebola drug. Stock spikes
  2. Ebola Drug Firm Shares Go Bonkers After FDA Announcement
  3. Tekmira Ebola drug gets regulator change for possible human use

But as we will see, this stock actually was much (MUCH) higher in March of this year ($31.46), then collapsed down below $10, before doing... this.

The one-year stock chart is included below.

Provided by Charles Schwab optionsXpress

Even in just this one year we can see two other stock price cycles equally large (if not larger) than the recent 125% rise.

Cycle #1
From the start of the year to ~ March 11, the stock rose 300%.  the craze there was RNAi biotechnology. On March 5th, 2014, the FDA gave TKMR fast track status for the Ebola drug. So there goes a 300% rise.

Cycle #2
But then... Novartis closed a "significant" portion of its RNAi research endeavors. TKMR fell with that news (that big gap down in April that took the price to $15)... and it kept falling as it was releasing news about FDA trials for other drugs.  All the while, there were these little snippets of news that "Tekmira Ebola drug could see emergency use in U.S" (Source: theflyonthewall).

Cycle #3
And now, finally, we are led back to the part of the story that started this post: An Ebola worldwide epidemic and FDA permission to use the drug. (Update: Cycle #3: Stock is up 175% in four weeks).

Questions to be answered
  1. What if the drug doesn't work at all?
  2. What if the drug does work and the epidemic ends?
  3. What if the drug doesn't work and the epidemic ends?
  4. How big is the market for Ebola treatment after this ends?
  5. Will the Pentagon just purchase $XXX billion worth of it because that's what they do? (as of right now I understand it's a $140 million contract)
  6. Is there an ongoing income stream from this cure (even if it does work)

You see, all of those questions are actually risk in the context of a stock price.  So let's look at the risk, explicitly.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. We can see that the risk right now is elevated, not at an all-time high and in a ll fairness, while it's high implied volatility, 120% isn't like CRAZY CRAZY CRAZY high.  For example, biotechs can get in the 500% realm before an FDA trial result.

So, is this risk CRAZY x3 high and the option market is not reflecting it, or is the risk not CRAZy x3 high and the option market is right?

I don't know. I do know that there is more to look at before we form an answer.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

The red curve represents the options expiring in one week (Aug. 15th).
The yellow curve represents the options expiring on Sep. 19th

That difference between the two curves is the risk reflected by the option market in the immediate-term.  Immediate-term = one-week or less.

I also note a fantastical skew shape in the immediate-term options, but it's easier to see if we isolate that chart. The Skew Tab for just the Aug 15th options is included below.

Provided by Livevol

Look at that shape.  The right side represents the out-of-the-money (OTM) calls.  The implied volatility (risk) in those calls is hugely higher than the at-the-money (ATM) options.

In English, the immediate-term in TKMR stock risk in as reflected by the options is to the upside.  The downside is muted. Hmm...

In the Sep options (the yellow curve in that first skew chart), we do see elevated upside and downside tail-risk.  That makes more sense, as we have sen with the stock price, it has two-tailed risk in a major way.

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.

Finally, the Options Tab is included below.

Provided by Livevol

So here it is in dollars and cents:

Using the at-the-money (ATM) straddle in the Aug 15th options we can see that the option market reflects a price range of [$15.40, $23.60].

Using the Sep monthly options we see a price range of [$13.40, $26.60].

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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