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A Controversial Drug Makes This Company Tradable

A Controversial Drug Makes This Company Tradable

Source: Mallinckrodt.com

In the stock market, traders value volatility. And, volatility rarely occurs in a vacuum. There is often news creating volatility and at times the news can be controversial. This can be especially true in the pharmaceutical sector where controversies over pricing have become increasingly common.

Among the more controversial drugs is H.P. Acthar Gel which has been approved by the Food and Drug Administration (FDA) for 19 indications, including for the treatment of Infantile Spasms, following a full label review by the Agency in 2010.

One reason patients and practitioners like Acthar is the fact that the drug is not a steroid, and is thought to work differently than steroids. Acthar is believed to work by helping your body produce its own natural steroid hormones. Natural steroid production helps your body regulate inflammation.

Acthar is also believed to work with your immune system throughout various parts of your body and potentially in your kidneys. The drug may work directly with your body to help impact inflammatory and immune processes Acthar may also work by helping your body make its own natural steroid hormones.

The effectiveness is why patients turn to the drug but the price of H.P. Acthar Gel today is $38,892, before discounts provided to payers. The drug is now owned by Mallinckrodt Public Limited Company (NYSE: MNK) which bought the previous owner, Questcor Pharmaceuticals.

Questcor had increased the drug’s price from about $40 a vial to more than $28,000 a vial in less than ten years. Mallinckrodt bought Questcor in 2014. The drug now accounts for a significant portion of MNK’s revenue.

2017 product mix

Source: Mallinckrodt

Acthar Pushes MNK to a Strong Quarter

MNK recently reported earnings. In the most recent quarter, Acthar sold much better than Wall Street expectations, bringing in $293 million in sales, compared with the consensus of about $267 million.

According to MarketWatch, “Company executives said that the beat was driven by demand for the product and predicted that the drug will continue to bring in more than a billion dollars in sales this year.

Acthar has been a blockbuster product since 2015, according to FactSet, defined as one with more than $1 billion in annual sales.

It sold well in the second quarter despite the fact that most prescriptions must go through prior authorization, a time-consuming and complicated process that health insurers use to restrict use of certain drugs, the company said on a Tuesday conference call.”

For the quarter, the company reported “net income fell to $15.6 million, or 19 cents per share, from $62.8 million, or 64 cents per share in the year-earlier period. Adjusted earnings-per-share were $1.78, above the FactSet consensus of $1.48.

Revenue rose to $631.7 million, above the FactSet consensus of $620.1 million.

The company now expects 2018 adjusted EPS of $6.50 to $6.70, representing an increase from previous guidance of $6 to $6.50.”

The stock jumped on the news.

MNK daily chart

But, the recent rally has not pushed the stock even close to its former highs. About three years ago, MNK was trading for more than $130 a share.

MNK weekly chart

There is potential up side, especially when the stock trades at less than six times this year’s expected earnings. However, there is risk based on the controversial pricing of Acthar and there is also the risk of a pullback after the stock more than doubled in the past three months.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for MNK

For MNK, a bull put spread could be opened with the August 17 put options. This trade can be opened by selling the August 17 $30 put option for about $0.80 and buying the August 17 $35 put for about $0.10.

This trade would result in a credit of $0.70, or $70 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($35 – $30). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $430 ($500 – $70).

The potential gain is about 16% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.