A Biotech With Potential Gains of 103%
Trade summary: A bull call spread in Denali Therapeutics Inc. (Nasdaq: DNLI) using the December $65 call option which can be bought for about $6 and the December $70 call could be sold for about $4.35. This trade would cost $1.65 to open, or $165 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $165. The maximum gain is $335 per contract. That is a potential gain of about 103% based on the amount risked in the trade.
Now, let’s look at the details.
The news is rather technical according to GlobeNewswire,
DNLI, “a biopharmaceutical company developing a broad portfolio of product candidates engineered to cross the blood-brain barrier (BBB) for neurodegenerative diseases, announced biomarker proof of concept was achieved for its Transport Vehicle (TV) technology in a Phase 1/2 study of ETV:IDS (DNL310) for the potential treatment of Hunter syndrome (MPS II).
Denali’s TV platform is a proprietary technology designed to effectively deliver large therapeutic molecules such as antibodies, enzymes, proteins, and oligonucleotides across the BBB after intravenous administration.
Hunter syndrome is a rare neurodegenerative lysosomal storage disorder caused by a mutation in the gene that encodes for the enzyme iduronate 2-sulfatase (IDS).
The resultant reduction or loss of IDS enzyme activity leads to accumulation of glycosaminoglycans (GAGs), which causes lysosomal dysfunction and neurodegeneration as well as progressive damage to multiple organs including bone, cartilage, heart and lung. Current standard of care enzyme replacement treatment (ERT) does not address neuronopathic manifestations of the disease as it does not sufficiently cross the BBB.
“The robust reduction in cerebrospinal fluid (CSF) GAG levels observed after only four weeks of treatment with DNL310 in the Phase 1/2 study exceeded our initial goal in both magnitude and timing of heparan sulfate reduction after treatment,” said Carole Ho, M.D., Denali’s Chief Medical Officer.
“These results are encouraging because, in preclinical models of Hunter syndrome treated with intravenous DNL310, a 50% reduction in CSF GAGs is associated with protective downstream effects on lysosome function, neuronal health and improvement in neurobehavioral deficits. Our next steps are to continue dose escalation in the Phase 1/2 study and evaluate the effects of DNL310 on additional downstream biomarkers of neurodegeneration. We are most grateful to the Hunter syndrome families and clinical investigators who are participating in the Phase 1/2 study.”
“A long-standing challenge in developing biotherapeutics to treat neurodegenerative diseases is the ability to transport large molecules across the blood-brain barrier safely and at therapeutic levels,” said Ryan Watts, Ph.D., Denali’s Chief Executive Officer.
“These Phase 1/2 data are an important step towards addressing this challenge as they provide the first human biomarker validation of our proprietary TV technology platform for delivering biotherapeutics to the brain. We see significant potential to enhance or enable the delivery of enzymes, antibodies, proteins and antisense oligonucleotides to the brain using our TV platform. Now with human proof of concept achieved, we will apply additional resources to move our promising TV-enabled discovery programs forward.”
The Phase 1/2 study of DNL310 is a multicenter, multiregional, open-label study to assess the safety, pharmacokinetics, and pharmacodynamics of increasing dose levels of DNL310 administered once weekly by intravenous infusion. The study has two staggered cohorts: the first (Cohort A) enrolled a total of five patients with neuronopathic MPS II aged five to ten years; the second (Cohort B) will enroll either neuronopathic or non-neuronopathic MPS II patients aged two to 18 years.
All five patients were previously on idursulfase ERT and were switched to DNL310 on Day 1 of the study. DNL310 is administered once weekly by intravenous infusion starting with a dose level of
3 mg/kg. In Cohort A, after two doses at 3 mg/kg, based on safety and tolerability, intrapatient dose escalation proceeded per the study protocol.
Key findings in five patients enrolled in Cohort A who received four weekly intravenous doses of DNL310 are summarized below:
An independent data monitoring committee (DMC) reviewed the safety data from Cohort A and made a recommendation to continue the study and open Cohort B without protocol modifications, enabling progression to Cohort B, including enrollment of younger patients, and continuation of dose escalation in Cohort A.
Total urine GAG levels were maintained within the same range observed in patients prior to switching from idursulfase ERT to DNL310.
A mean reduction from baseline of 76% (p-value <0.001) was observed in CSF levels of heparan sulfate, a GAG that accumulates in MPS disorders with CNS involvement. In addition, four of five patients achieved normal healthy levels of heparan sulfate; individual percent reductions from baseline of 93%, 91%, 90%, 81%, and 25% were observed.
A mean reduction from baseline of 53% (p-value< 0.001) was observed in CSF levels of dermatan sulfate, a GAG that is a biomarker of IDS enzyme activity that is elevated in MPS diseases both with and without neurocognitive effects; individual percent reductions from baseline were 64%, 64%, 53%, 41% and 39%.
All five patients enrolled in Cohort A continue in the dose-escalation portion of the Phase 1/2 study.”
This news prompted a breakout in the stock that is visible on the weekly chart.
The daily chart shows there was a brief pullback after the rally.
While there is potential for additional gains, risk should be considered and a spread trade could manage the risks while providing upside potential.
A Specific Trade for DNLI
For DNLI, the December options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A December $65 call option can be bought for about $6 and the December $70 call could be sold for about $4.35. This trade would cost $1.65 to open, or $165 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $165.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in DNLI, the maximum gain is $335 ($70- $65= $5; 5- $1.65 = $3.35). This represents $335 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $165 to open this trade.
That is a potential gain of about 103% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DNLI could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.