A Rare FDA Announcement Creates a Trading Opportunity
Nektar Therapeutics (Nasdaq: NKTR) is a biopharmaceutical company that discovers and develops medicines in areas of high unmet medical need. The company’s research and development pipeline of new investigational drugs includes treatments for cancer, auto-immune disease and chronic pain.
It leverages its chemistry platform to discover and design new drug candidates. These drug candidates utilize its polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action.
Its programs include Immuno-oncology (I-O), Immunology, Pain-NKTR-181 and Oncology-ONZEALD. It is developing medicines designed to directly or indirectly modulate the activity of key immune cells, such as cytotoxic T cells and Natural Killer (NK) cells, to increase their numbers and improve their function to recognize and attack cancer cells.
Bizjournals recently reported,
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“A rejection of its experimental pain drug [recently] forced Nektar Therapeutics Inc. to dump the program.
In a rare indisputable rejection, two Food and Drug Administration advisory committees voted 27-0 to recommend that the FDA not approve the San Francisco company’s oxycodegol, a slow-acting opioid aimed at chronic lower back pain.”
The stock sold off on the news.
The news release continued, “The FDA isn’t required to live by the advisory committees’ recommendation, but six hours later Nektar said it would withdraw its approval request and make no further investment into the oxycodegol program.
The move, the company said, would save $75 million to $125 million this year because Nektar won’t have to roll out a sales plan or conduct post-approval studies for the tablet drug.
Nektar, run by President and CEO Howard Robin, said it was “disappointed” by the vote by the FDA’s drug products advisory committee and drug safety and risk management advisory committee.
The company tested the drug in more than 2,000 people, including a small study that showed that drug abusers didn’t “like” the drug because it didn’t bring an immediate high.
New opioids have faced pushback, namely from watchdog group Public Citizen, which has demanded that the FDA not approve more opioids until it crafts a plan to minimize potential abuse and misuse of the powerful but highly addictive painkillers.
That comes as America’s opioid epidemic translates into dozens of overdoses daily.
Nektar thought it had an answer in oxycodegol, or NKTR-181. It could have been the first full “mu” opioid — “mu” being one of three receptors of opioids — to be approved by the FDA in more than 50 years.
Because the drug enters the brain slowly, Nektar argued, it didn’t addict people initially seeking pain relief or cause the quick euphoria that drug abusers seek.
FDA staff soured on the drug in review documents submitted for the advisory committees, noting that Nektar performed one late-stage clinical trial when the FDA requested a second to confirm efficacy.
One advisory committee member wanted more data from Nektar about what would happen if someone tried to inhale or inject the drug, according to Xconomy, while others were concerned that approval would imply that oxycodegol was a “safer” opioid.
The news comes as the stock trades near 52-week lows.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
A Bear Call Spread in NKTR
For NKTR, we could sell a February 21 $20 call for about $3.30 and buy a February 21 $23 call for about $1.40. This trade generates a credit of $1.90, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $190 The credit received when the trade is opened, $190 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $110. The risk can be found by subtracting the difference in the strike prices ($300 or $3.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($190).
This trade offers a potential return of about 72% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if NKTR is below $20 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $110 for this trade in NKTR.