Biotech Test Results Set Up a Potential 196% Gain
Trade summary: A bull call spread in Ascendis Pharma A/S (Nasdaq: ASND) using the May 15 $140 call option which can be bought for about $7.88 and the May 15 $145 call could be sold for about $6.62. This trade would cost $1.26 to open, or $126 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 $1.26. The maximum gain is $374 per contract. That is a potential gain of about 196% based on the amount risked in the trade.
Now, let’s look at the details.
GlobeNewswire recently reported that ASND, a biopharmaceutical company that utilizes its innovative TransCon technologies to address unmet medical needs, announced “positive top-line results from the four-week fixed dose, blinded portion of PaTH Forward, a global phase 2 trial evaluating the safety, tolerability and efficacy of TransCon PTH in adult subjects with hypoparathyroidism (HP).
TransCon PTH is an investigational long-acting prodrug of parathyroid hormone (PTH) in development as a once-daily replacement therapy for adult hypoparathyroidism designed to replace PTH at physiologic levels for 24 hours each day and address both short-term symptoms and long-term complications of HP.
A total of 59 subjects were randomized in a blinded manner to receive fixed doses of TransCon PTH at 15, 18 or 21 µg/day or placebo for four weeks using a ready-to-use prefilled pen injector planned for commercial presentation.
All doses of TransCon PTH were well-tolerated, and no serious or severe adverse events were shown at any point. No treatment-emergent adverse events (TEAEs) led to discontinuation of study drug, and the overall incidence of TEAEs was comparable between TransCon PTH and placebo. Additionally, there were no drop-outs during the four-week fixed dose period.
In the per protocol analysis (n=57), TransCon PTH eliminated standard of care (i.e. off active vitamin D and ≤ 500 mg per day of calcium supplements) in 100 percent of subjects in the highest dose arm (21 µg/day) and 82 percent of subjects across all dosage arms.
“With TransCon PTH, our goal has always been to improve the lives of patients with hypoparathyroidism, by designing a replacement therapy that restores physiologic levels of PTH 24 hours a day and that sets a new standard of care,” said David B. Karpf, M.D., Ascendis Pharma’s Vice President of Clinical Development.
“These PaTH Forward data show the potential to completely remove standard of care while maintaining normal serum and urinary calcium levels, which could represent a major advance for patients with this complex, debilitating disease.”
These results from the fixed dose portion of PaTH Forward demonstrated that TransCon PTH increased serum calcium levels, enabled discontinuation of active D and continuous calcium reduction of supplements over the four-week period.
TransCon PTH reduced urinary calcium excretion (as measured by Fractional Excretion of Calcium or FECa) despite increased serum calcium, and resulted in sustained reductions in serum phosphate and calcium-phosphate product.
At four weeks, the 21 µg/day arm and the combined TransCon PTH dosage arms showed a statistically significant response (p-value <0.05) in the primary composite endpoint compared to placebo in the per protocol analysis.
Fifty-eight subjects continue in the open-label extension portion of the trial, where they receive a customized maintenance dose of TransCon PTH (6 to 30 µg per day). The company plans to report six-month data from the open-label extension portion of the trial during the third quarter of 2020.
“Hypoparathyroidism has a significant negative impact on over 200,000 patients worldwide and is one of the last hormonal insufficiency disorders without an effective replacement therapy. With TransCon PTH, we have a unique opportunity to make a meaningful difference for patients on a global basis,” said Jan Mikkelsen, Ascendis Pharma’s President and Chief Executive Officer.
Ascendis Pharma plans to engage with global regulatory authorities on next steps for development of TransCon PTH, and submit regulatory filings to initiate a global phase 3 trial in North America, Europe and Asia in the fourth quarter of 2020.”
Traders seemed to like the news and pushed the stock up.
The longer-term chart shows that ASND is near the upper edge of a trading range and a breakout provides a price target of at least $150.
A Specific Trade for ASND
For ASND, the May 15 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A May 15 $140 call option can be bought for about $7.88 and the May 15 $145 call could be sold for about $6.22. This trade would cost $1.26 to open, or $126 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 $1.26.
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 ASND the maximum gain is $3.74 ($145- $140= $5; 5- $1.26 = $3.74). This represents $374 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $126 to open this trade.
That is a potential gain of about 196% 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 ASND 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 ASND 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.