Triple Digit Gains for $109 in Risk
News recently drew our attention to a stock chart. Business Wire reported, Epizyme, Inc. (Nasdaq: EPZM), a late-stage biopharmaceutical company developing novel epigenetic therapies, today announced that it has submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for accelerated approval of tazemetostat for the treatment of patients with relapsed or refractory follicular lymphoma (FL), both with or without EZH2 activating mutations, who have received at least two prior lines of systemic therapy.
Tazemetostat is an oral, first-in-class EZH2 inhibitor being developed for a range of cancers and treatment settings.
“We are very pleased to have submitted this NDA in hopes of bringing tazemetostat to FL patients and their physicians,” said Dr. Shefali Agarwal, chief medical officer of Epizyme.
“FL remains a devastating and incurable disease. We believe that if approved, the durable responses and favorable safety observed in patients both with and without an EZH2 activating mutation support tazemetostat’s potential to make a meaningful difference for these patients.
This FL NDA submission, on the heels of a positive Oncology Drug Advisory Committee meeting for our epithelioid sarcoma program just yesterday, sets us up for a transformational year in 2020. We are grateful to the patients and medical teams who have meaningfully contributed to advancing tazemetostat to this stage.”
Epizyme’s FL NDA submission follows a pre-NDA meeting held with FDA in October 2019, in which the Agency indicated that it considered the proposed clinical package to be sufficient for inclusion as part of the NDA for accelerated approval.
The submission is based primarily on updated Phase 2 efficacy and safety data on tazemetostat in this patient population, which were presented at the 2019 American Society of Hematology (ASH) Annual Meeting.
The data demonstrated that treatment with tazemetostat resulted in clinical benefit as assessed by both investigators and an Independent Review Committee (IRC), and was shown to be generally well tolerated in FL patients with EZH2 activating mutations (n=45) and FL patients with wild-type EZH2 (n=54).
To support a full approval of tazemetostat for FL, Epizyme is conducting a single, global, randomized, adaptive trial to evaluate the combination of tazemetostat with “R2” (Revlimid® plus Rituxan®), an approved chemo-free treatment regimen, for FL patients in the second-line or later treatment setting.
The trial is expected to enroll approximately 500 FL patients, stratified based on their EZH2 mutation status. Site initiation is underway, and the safety run-in portion of the trial has begun.
“Today’s submission marks the second NDA for tazemetostat that Epizyme executed this year, a significant milestone for our company, and a strong conclusion to 2019 across all aspects of our business,” said Robert Bazemore, president and chief executive officer of Epizyme.
“I am incredibly proud of what this team has achieved this year, which includes two NDA submissions, a favorable ODAC meeting for our epithelioid sarcoma program, important clinical data readouts, expansion of our tazemetostat clinical program into new indications and combinations, and a significant strengthening of our balance sheet with capital to support our planned operations into 2022.
We are on the cusp of a potential first approval of tazemetostat and are ready to make the transition to a commercial-stage organization in early 2020.”
The stock chart highlights recent volatility in the stock price.
The next chart using weekly data shows volatility comes at an important resistance level and the recent breakout could be the beginning of a new up trend.
A Trade for Short Term Bulls
As with the ownership of any stock, buying EPZM 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 EPZM
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 EPZM, the February 21 options allow a trader to gain exposure to the stock.
A February 21 $22.50 call option can be bought for about $2.94 and the February 21 $25 call could be sold for about $1.85. This trade would cost $1.09 to open, or $109 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 $109.
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 EPZM the maximum gain is $1.41 ($25 – $22.50= $2.50; $2.50-$1.09 = $1.41). This represents $141 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $109 to open this trade.
That is a potential gain of about 129% in EPZM, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.