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Amgen Offers a Potential Triple Digit Trading Opportunity

Amgen Offers a Potential Triple Digit Trading Opportunity

Trade summary: A bull call spread in Amgen Inc. (Nasdaq: AMGN) using the July $260 call option which can be bought for about $3.70 and the July $265 call could be sold for about $2.18. This trade would cost $1.52 to open, or $152 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 $1.52. The maximum gain is $348 per contract. That is a potential gain of about 128% based on the amount risked in the trade.

Now, let’s look at the details.

Bloomberg reported that “Amgen Inc. won an appeals court ruling that would block a biosimilar of its top-selling rheumatoid arthritis drug Enbrel by Novartis AG’s Sandoz until 2029.”

The stock was up on the news.

Bloomberg explained, “Two patents on the drug were upheld [recently] by the U.S. Court of Appeals for the Federal Circuit. Sandoz, which is seeking to sell a copycat version that it calls Erelzi, had argued that the patents shouldn’t have been issued.

Enbrel, which is heavily promoted in ads featuring pro golfer Phil Mickelson, generated more than $5 billion in sales last year, 22% of Amgen’s revenue. It’s been on the market since 1998, and the ruling gives Amgen a total of 31 years of exclusivity.

Sandoz can ask the three-judge panel to reconsider its decision, or request that the case be put before all active judges of the court. That the decision was 2-1 could give it better odds, but such requests are rarely granted. Sandoz said it’s ready to go all the way to the U.S. Supreme Court.

“Sandoz will continue its efforts to make Erelzi available to U.S. patients with autoimmune and inflammatory diseases,” Carol Lynch, head of Sandoz’s U.S. unit, said in a statement. “Our company respects valid intellectual property, however Sandoz continues to believe the patents asserted by Amgen are not valid, and that it should not be able to use them to extend the drug’s exclusivity.”

Erelzi has had U.S. Food and Drug Administration approval to be sold in the U.S. since 2016, but the patents have blocked Sandoz from entering the market. Biosimilars, which are copies of the living organisms used to create biotech drugs, have had a harder time getting traction in the U.S. than in Europe because of patents and regulatory delays.

The patents in this case, which cover the drug’s active protein, etanercept, and a process to make the drug, expire in November 2028 and April 2029, respectively. Enbrel blocks the action of tumor necrosis factor, or TNF, a protein that regulates immune cells. When the body produces too much TNF, it can cause the immune system to attack healthy tissue and lead to inflammation.

Novartis had conceded infringement of the patents, a common legal tactic that allows the two sides to focus on the validity of the patents. The original patent on Enbrel expired in 2012.

Amgen’s Immunex, then a standalone company, bought the patent rights from Roche Holding AG since both companies were working in the same TNF area, though the companies said Roche retained ownership of them.

The dissent by Circuit Judge Jimmie Reyna hinged on a legal theory that prevents inventors from later filing an application that’s essentially the same as an earlier patent just to extend their rights. It’s a stricter requirement than if two patents have different owners.

The majority ruled that Roche still had substantial ownership rights in the patents so the newer ones were distinct from an earlier Immunex patent. Reyna called Roche’s rights “illusory,” and said it enabled “gamesmanship” by Amgen to extend patent protection for Enbrel.

Sandoz also unsuccessfully argued that the Enbrel patents didn’t adequately describe the compound Roche claimed to have invented, and that the patents merely combined ideas already known before the applications were filed. The trial court had ruled that Enbrel’s success was “largely rooted in the unexpected ability of etanercept” to bind and neutralize TNF.

Amgen’s win “removes a binary overhang” and further supports Jefferies analyst Michael Yee’s thesis that the company has a “clean story with several potential blockbuster assets coming in the pipeline.” Yee sees less downside risk for shares as the appeals court ruling enables more investors to buy shares ahead of data through the end of the year.”

The longer-term chart shows the price move pushed AMGN to new all time highs, a bullish scenario for the stock.

AMGN weekly chart

A Specific Trade for AMGN

For AMGN, the July options allow a trader to gain exposure to the stock. This trade will be open for about four weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

A July $260 call option can be bought for about $3.70 and the July $265 call could be sold for about $2.18. This trade would cost $1.52 to open, or $152 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 $152.

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 AMGN, the maximum gain is $348 ($265- $260= $5; 5- $1.52 = $3.48). This represents $348 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $152 to open this trade.

That is a potential gain of about 128% 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 AMGN 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 usually 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.

bull call spread

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.