Pharmboy’s Update

Courtesy of our friend Pharmboy

The Healthcare sector (as noted in the Bespoke chart below) did quite well in 2009 (what didn’t?)! Now that it’s a new year, I decided to review some of our trades and add a few words expressing my feelings about the companies.

In my very first write-up, I summarized a few picks and Phil took the liberty to provide entry points for us to consider. The picks were:

GlaxoSmithKline (GSK) – Dividend play so, best to go with the long play here with the stock at $38.83, selling the Jan $37.50 calls for $3.40 and the Jan $35 puts for $1.50. That’s a net of $33.93/34.37, an 11% discount if put to you and 14% if called away in 5 months plus .92 expected dividend (.46 in late October and late January (so you’ll need to roll to get the 2nd dividend). 2010: Stock is currently $41.10 after a run up to $43 in early December. Selling front calls is still the way to go, as it appears that it could continue to fall and I would not want to sell puts until we find the floor. ½ 40 Feb10s for 1.80 should be good for a cover, and they can be rolled out to 42.5 May10s easily, which is the top end of their range. I still like GSK long term.

AstraZeneca (AZN) – Sept $45s at $2.67 (delta .62) can be sold against the Jan $50s at $2.12 (delta .36). Stock is currently at $46.78, so time to think about an entry. AZN has some interesting drugs in the pipeline, but they are several years out.

Merck (MRK) – Jan11 $25 call for $6.95 (now $12.80). This means we have the right to own the stock at net $31.95 in 2011. 2010: Well, these have worked out quite well and it is time to take some premium off the table and start the covers. Current play in my book is the $35/45 Jan11 bull call spread, selling front month C/P against it to reduce the basis ($40/36 Febs for $1 or better!).

Ariad (ARIA) – You can buy the Feb $2.50s for .70 and sell the Feb $5s for .40. 2010: Many of us still own or have just entered this one. I love these guys long term, and see them being acquired by MRK if the trials are successful.

Oncothyreon (ONTY) – So $5.44 seems like a fair price but expect them to fill that gap to $4.50. If we buy here and sell Feb $5 puts and calls for $2.70 that’s $2.74/3.87 not bad as they are too early in trials to definitively fail and have plenty of cash so not much worry of a BK. 2010: These guys have moved little from the intial entry, so everything still holds for a similar position noted above.

OncoGenex (OGXI) – this one was a bit more complicated and we decided that it would not be worth the overall risk, as there were others that were more fruitful. 2010: These guys have signed their deal, and I am not following as much anymore.

In the second installment, we discussed the following:

Abbott (ABT) – I exert a bit more caution on ABT due to Humaria and the drug business being more or less the cash machine, and thus recommend $42 Feb10 @ $6.1, and waiting to see if ABT can make it through the $48 price range, then selling ½ $48 Oct09 for $1 or better, otherwise ½ the $47s can be sold and rolled to $49 Nov09. 2010: Abott is at $55, and whilst the run up has been good for us, the medical device unit needs to pick up the slack. Stints are on their way out, and were huge business for ABT and JnJ. Earnings are coming up, so I would wait to see what they are and what is going to drive future growth.

Shire (SPHGY) – Buying $47.5 Apr10s C for $7.5 as well as selling ½ 50 Oct09 C for $3.5 or better. 2010: These guys rocketed up, and the calls are worth $14.8. Not too shabby. I would wait for a pullback here, but they have some nice sales growth, and are always a candidate for takeover by the big boys.

Gilead (GILD) – $41 Feb10 for $6.6 when I mentioned them a few weeks ago (now $7.3), and selling ½ $47s Oct09 for $1.5 or better. 2010: Rolled these out last month to 45 Jan11s (and bought more 40 Jan11s on the dip), and currently sold the 45 Jan10 C (3/4 cover) and 42 Feb10 P. I will roll to 46 Feb10 C here by week’s end.

Late September brought the following stocks in the limelight:

Bristol Meyers (BMY) – Buy outright for the dividend, or buying the $20 Jan10 C @ 2.80 ($0.5 premium), selling $22.5 Sept09 C @ $0.55 and $22.5 P@ $0.7. I think this company has room to run. 2010: BMY has had a nice run, and is hovering in the $25 range. I like them for the possibility of a takeover by SNY or NVS, but beware that they could go after a mid-tier Pharma as well.

Sanofi-Aventis (SNY) – Not as confident on the SNY story as of yet. I would sell the $32.5 Sept09 P, being prepared to roll down to the $30 Dec09s. 2010: No re-entry on these guys, but they have had a good run like everyone else! I would be very conservative and sell the 37.5 P on a pullback, but I am still uncertain about the pipeline with them. They did purchase the rest of Merial (animal health) from Merck, and that was a very smart move! If I was a biotech company, it may not be sexy, but animal health is still BIG business, and many medicines work for dogs, cats, horses, etc that work for humans!

Johnson & Johnson (JNJ) – Buying the $55 Jan10 C @ 6.50 ($0.5 premium), selling $60s Sept09 C/P for 2.20. 2010: JNJ makes 30% of their profits from the Pharma unit and they just went through a massive amount of layoffs. Most of that comes from biologics, and a bit from small molecule. They have lost or will lose patent protection on Topomax and Resperdal, both having sales over $2B. The company did purchase Mentor and Cougar biosciences, but I don’t see much impact on the bottom line for a while for both of these.

Genzyme (GENZ) – Buying the $50 Oct09C @ 4.2 ($1.5 premium), letting it run for the next few days, and then selling $55 Sept09 for 1.25 or better (all premium). 2010: We are currently in the 45 and/or 47.5 Apr10s, selling the 52.5 Feb10 C and getting ready to sell the 52.5 Feb10 P (still in the 50 Jan10s).

Novartis (NVS) – Buying the $40 Jan10 C @ 6.40 ($1 premium), selling $45 Sept09 for 1.35 (also $1 premium. 2010: NVS has some interesting things in the pipeline, and along with MRK and PFE, they have one of the richest in the business. NVS also is moving out to biologics and generics, and has been very aggressive in purchasing other small companies to bolster its pipeline.

Spectrum (SPPI) – That means these guys are very attractive as buy and accumulate so we can buy write at $7.10, selling Sept $7.50 puts and calls for $2.75 for net $4.35/5.92. If they drop to $3, just buy more and wait. At $360M the buyout would be $10 so the Feb $5s at $3.20, selling the Feb $7.50s for $2.15 is net $1.05 with a nice 128% profit if the stock can just pretty much maintain its current price for 6 months. You can just sell the Jan $5 puts naked for $1.10 and that puts you in for net $3.90 and, finally, there’s a nice spread of buying the Feb $2.50s for $4.80, selling the Feb $10s for $1.35 and buying the Feb $7.50 puts for $2.50. You spend net $5.95 for the right to make $7.50 (as you can buy the stock for $2.50 and sell it at $10) and you have a guaranteed way to put the stock to someone at $7.50 so the most you can lose is .95. You don’t make this play for the .50 upside advantage though, this is a play where, if the stock goes higher, you can buy more Feb calls or take out some callers. If they fall all the way to $1 again – just DD and you are ling at net $2 – that worked out very well for all the people who bought last year (and early this year) at that price. 2010: Currently in the 2.5 Jan11s for 2.2. One ounce of good data or earnings beat and these guys will double easily.

Three medical record companies were noted in my August 15th write up: Cerner, (CERN) was at $62, Eclipsys (ECLP) was at $16.80, and Emdeon (EM) @ $17 (just went public and received the Cramer bounce then fell down). Only Cerner has continued to move up, the others have moved sideways or down slightly. Probably best to wait until after earnings to make any decisions.

Until next time…