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This $1.8 Million Drug Might Be Too Much For Investors

This $1.8 Million Drug Might Be Too Much For Investors

High priced drugs are in the news lately and one company recently set the price for their breakthrough treatment at almost $2 million.

Traders seem to be concerned about the price, perhaps because the news is already priced into the stock or perhaps for other reasons.

As BizJournals reported, “…biotech bluebird bio (Nasdaq: BLUE) set a price tag of $1.8 million over five years (315,000 euros per year, or the equivalent of $356,000 annually) for its first commercial drug [recently], for which it received approval to sell in Europe last week.

Zynteglo treats beta thalassemia, an inherited blood condition that leads to low levels of red blood cells and oxygen in the blood.

The overall condition is fairly common, according to the NIH, but children and adults with severe forms of the disease can face life-threatening effects like liver, heart and hormone problems.

The company plans to file for FDA approval later this year.

Bluebird has been a vocal part of the industry’s cell and gene therapy pricing discussion, suggesting an installment plan in which patients pay for the drug over five years, forgoing payments if the treatment doesn’t work as intended.

The conversation has heightened in recent months, as more gene therapies move to the market.

There are currently a handful of gene-augmenting treatments on the market, including Spark Therapeutics’ $850,000 retinal disease drug and Novartis and AveXis’ spinal muscular atrophy drug, which became the world’s costliest drug when it was approved last month with a cumulative $2.1 million price tag (The cost is spread over five annual payments of $425,000).

The number of these drugs is expected to ramp up in the coming years as the FDA anticipates approving between 10 and 15 gene therapies annually.

Wedbush analysts David Nierengarten and Jeffrey La Rosa wrote in a May, investors note that they were cautious ahead of the Zynteglo launch, given concerns that the pricing model could create “air gaps” in the company’s cash flow.”

The stock was little changed on the news.

BLUE daily chart

The stock is also well below its highs and this could reflect a “buy the rumor, sell the news” trade as the stock has been falling while the company moved closer and closer to the news that the drug was approved.

BLUE weekly chart

The decline could be due to the fact BLUE is expected to report losses for at least the next two years.

 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.

bear call spread

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 BLUE

For BLUE, we could sell a July 19 $120 call for about $5.80 and buy a July 19 $125 call for about $4. This trade generates a credit of $1.80, 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 $180. The credit received when the trade is opened, $180 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $320. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($180)

This trade offers a potential return of about 56% 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 BLUE is below $120 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 $270 for this trade in BLUE.