InterMune (ITMN) Shares Hang on FDA Playing the “make or break” event with options:
by Kevin Cook March 8, 2010 4:06 EST
Kevin Cook is an options instructor for the Options News Network. He was an institutional foreign exchange market maker and arbitrageur for nine years, where he worked with futures.
http://www.onn.tv/buy-and-trade/intermune-itmn-shares-hang-on-fda/
We know that the stocks of young biotech companies with experimental drugs in the works trade “make or break” around FDA approval events. Friday’s action in InterMune (NASDAQ: ITMN), which sent the shares up over 60%, was another classic example and something we had been anticipating since January 4th when the FDA granted “Priority Review” status to ITMN’s idiopathic pulmonary fibrosis drug, pirfenidone.
Last week, I decided to write—for the next 20 weeks—about all 20 stocks in my favorite biotech ETF, the FBT. This week was made for ITMN, one of the top-ten holdings, with its scheduled FDA review date of March 9th and stock-moving news posted Friday in briefing documents on the FDA website. The optimism expressed in ITMN’s rally is built around speculation that the FDA analysis of pirfenidone’s Phase 3 clinical trials may be more favorable than previously expected.
The final word of approval from the FDA for pirfenidone is not due until May 4th, but the company and investors may be hanging their fortunes on the fact that the findings of Advisory Committee meetings, like tomorrow’s, are often the direction the agency is headed. In other words, while the FDA is not held to judgments by its advisory panels, it usually follows them. Before we look at how options traders might be playing the event, let’s review some of the key facts about InterMune and pirfenidone.
Key Facts on ITMN:
InterMune, Inc. is a biotechnology company focused on developing and commercializing innovative therapies in pulmonology and hepatology. Their only drug approved in the U.S. currently is Actimmune, which treats both CGD and severe, malignant osteopetrosis, two rare congenital disorders.
Pirfenidone is the only drug designed to treat idiopathic pulmonary fibrosis (IPF), an unexplained inflammation and scarring of the lungs, which hinders the ability to process oxygen and causes shortness of breath. A progressive disease, symptoms increase in severity and usually result in death within two to five years of diagnosis.
200,000 people are affected by IPF in US and Europe; there are an estimated 30,000 new cases each year.
Pirfenidone is approved and marketed in Japan as Pirespa
FDA granted Fast Track/Priority Review status for the US New Drug Application (NDA) on January 4, 2010.
On Friday March 5, FDA posted a March 9 Review briefings document, signaling that prior criticisms of ITMN research may be alleviating.
Proposed U.S. name for pirfenidone is Esbriet.
Neutral and Bearish Strategies:
For investors and traders who believe that we won’t know enough after tomorrow to take ITMN’s stock above $30 or below $15, this short iron condor offers significantly high implied volatility to temper the risk. We recommended this play in our Trading Ideas section on Friday when it was garnering only $2.50 in total premium. With implied volatility climbing yet again today to over 300%, this iron condor could now collect more than $3.00.
And for those who think that a severe disappointment and pullback is likely after tomorrow, in our OTA Portfolio we looked at a bear ratio put strategy where you could buy a March 17.5 put and sell two 12.5 puts for nearly even money. With essentially zero cash outlay, and a max profit potential of $5.00, this play doesn’t begin to lose money unless the stock falls below $7.50. (The chart below was created with a virtual trading account, something I recommend especially for anyone who wants to experiment with new option strategies).
All of these March strikes have seen significant trading today with the March 30/35 call spread trading over 10,000 by noon and now edging closer to 20,000 contracts each as the day winds down. On the put side, the March 12.5 and 15 puts have seen more than 12,000 contracts trade in each, while the 17.50, 10, and 7.50 strikes all have close to 5,000 contracts. All of these volumes are well above normal and indicate many players positioning for any possible news tomorrow.
Short Interest and Insider Buying:
Also worth noting about ITMN shares is that since the early January announcement about FDA’s track for approval of pirfenidone, short interest in the stock climbed significantly from around 11% of float to near 16%. This may explain much of the move we saw Friday that vaulted the shares from below $15 to above $25 at one point.
And late January saw significant buying by insiders, with Director Jonathan Leff buying 2.1 million shares at $14.10 and Director James Healy exercising 5,000 options at $4.50 per share.
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