This Drug Stock Could Help Traders Make 127% in Short Term Gains
Drug stocks are often volatile, especially when they are in China. GlobeNewswire recently reported,
“Zai Lab Limited (Nasdaq: ZLAB), a China and U.S.-based innovative commercial stage biopharmaceutical company, today announced the China National Medical Products Administration (NMPA) approved the New Drug Application (NDA) for ZEJULA (niraparib), an oral, once-daily poly (ADP-ribose) polymerase (PARP) inhibitor as maintenance therapy for adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer, who are in a complete or partial response to platinum-based chemotherapy.”
The stock was up on the news.
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The report continued, “ZEJULA is a potent and highly selective PARP1/2 inhibitor that does not require BRCA mutation or other biomarker testing prior to administration.
“The NMPA approval of ZEJULA, our first product to be approved in Mainland China, is a testament to the hard work and dedication of the entire Zai Lab team,” said Dr. Samantha Du, Founder and Chief Executive Officer of Zai Lab.
“We are grateful to all of the patients and investigators who contributed to the success of the ZEJULA clinical development program. Additionally, we appreciate the NMPA for their partnership through this rapid and thorough assessment of the ZEJULA application, recognizing the high unmet medical need it serves.
As the first PARP inhibitor with Category 1 designation and manufactured in Mainland China, we are very excited to bring ZEJULA to Chinese patients following the successful launch in Hong Kong. With enrollment completed with 265 patients, we remain committed to finish our pivotal trial for maintenance therapy for Chinese patients with recurrent ovarian cancer (the NORA study) by third quarter of next year.”
“The approval of ZEJULA in Mainland China is welcoming news for the ovarian cancer community, where advances in treatment have been very limited despite the clinical need,” said Dr. Xiaohua Wu, Professor and Chair of Gynecologic Oncology Department of Fudan University Shanghai Cancer Centre.
“The NOVA study shows that ZEJULA is a potential best-in-class PARP inhibitor for ovarian cancer patients, regardless of BRCA mutation or biomarker status, due to its compelling clinical data, convenience of once-daily dosing and attractive pharmacokinetic properties, including its ability to cross the blood brain barrier.”
The Committee of Gynecological Oncology, Chinese Anti-Cancer Association (CACA) has updated its clinical practice guidelines in Consensus of Chinese Experts on Recurrent Epithelial Ovarian Cancer to recommend ZEJULA (I/A category) as a maintenance treatment option for platinum sensitive recurrent ovarian cancer.
“Ovarian cancer is a devastating disease with a 5-year survival rate that hasn’t improved in a decade,” said Dr. Lingying Wu, Director of the Department of Gynecologic Oncology of the Cancer Hospital of China Academy of Medical Sciences.
“In addition to helping patients with recurrent ovarian cancer, ZEJULA’s recent PRIMA study demonstrated significant PFS improvement when given as monotherapy in women with first-line platinum responsive ovarian cancer, resulting in a 38% reduction in the risk of disease progression or death in the overall study population.
Clinically meaningful reduction in risk of disease progression or death was further demonstrated with hazard ratios (HRs) of 0.40, 0.43 and 0.68 for BRCA mutant, HRD positive and HRD negative tumors, respectively. This study showed ZEJULA as the first PARP inhibitor to significantly improve PFS in this setting, regardless of biomarker status.”
Zai Lab anticipates filing a supplemental NDA for ZEJULA (niraparib) with the NMPA as a first-line monotherapy maintenance treatment of platinum-responsive ovarian cancer patients soon after GlaxoSmithKline plc (GSK) files with the relevant global health authorities.
Ovarian cancer is one of the most common gynecologic cancers in China with more than 52,000 newly diagnosed cases and 23,000 deaths in China each year. The 5-year overall survival rate of ovarian cancer patients is 46% across all stages, but only 29% in patients diagnosed with distant metastatic disease.
While platinum-based chemotherapy is effective at inducing an initial response in ovarian cancer, the disease will recur in the majority of women. Effective treatment options for patients with platinum-sensitive recurrent ovarian cancer remain limited.”
This could explain the potential for the stock which has been rallying for a year.
A Trade for Short Term Bulls
As with the ownership of any stock, buying ZLAB 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 has 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.
A Specific Trade for ZLAB
Every day, we scan the markets looking for trades with 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.
For ZLAB, the March 20 options allow a trader to gain exposure to the stock.
A March 20 $40 call option can be bought for about $4.10 and the March 20 $45 call could be sold for about $1.90. This trade would cost $2.20 to open, or $220 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 $220.
The maximum gain on the trade in ZLAB is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in ZLAB the maximum gain is $2.80 ($45 – $40= $5; $5-$2.20 = $2.80). This represents $280 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $220 to open this trade.
That is a potential gain of about 127% in ZLAB based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.