Amylin Pharmaceuticals (AMLN): FDA Decision Imminent

Amylin Pharmaceuticals, Inc. (AMLN) is a biopharmaceutical company engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes, obesity and other diseases. AMLN markets two medicines to treat diabetes: BYETTA and SYMLIN. 


Here is a note from CNBC reporter Mike Huckman earlier:


"This morning, BMO Capital Markets biotech analyst Jason Zhang downgraded shares of AMLN to "Sell."


On or before March 12th, the FDA is scheduled to decide whether to approve the first once-a-week drug for diabetes. It's a reformulated version of twice-a-day Byetta. Zhang thinks the FDA is going to punt. He tells clients in the research note that he believes the agency will want more data about possible side effects, which will push approval of the drug until mid or late 2011. His call moved the stock, which Zhang now targets as being headed for $12, down from his previous $14.


But on the flip side, biotech analyst Thomas Wei at Jefferies put out a note this morning saying, "We acknowledge a higher chance of approval....We see the risk-reward on AMLN as favorable." He has a $27 target on the shares. Wei's call is based on his conversation with a former senior FDA official. "We were surprised by his assessment that our previous thesis on the need for AMLN to add more thyroid data is unlikely to cause a delay in approval." The thyroid data he's referring to is a problem that was seen only in lab rodents given a similar drug from Novo Nordisk."

That's two conflicting analysts.  Separately, Credit Suisse and Goldman are also divided on the decision.  CS believes the stock is heading to $28 regardless of FDA decision and simply using the revenue generation from existing pipeline.  CS doesn't expect more than 5% sell-off on a bad news.  However, GS is cautious like BMO Capital Markets.

March at-the-money straddle is suggesting 25% move.  Implied volatility is sharply elevated to 130 or higher.  Sentiment from ISE data suggests 6.6 puts being bought for every 1 call.  I also checked all block order option trades of greater than 1000 contracts for last two weeks.  It appears traders are generally dumping calls and buying puts (probably as a collar against long equity), though there were a few with bullish stance.

I like the following trade going into FDA decision in two separate orders (calendar and straight call):

- Buy to open 3x Jan'11 $12.50 puts
- Sell to open 3x March $12.50 puts, for a net debit of $0.95 or less (that's slightly above mark)

- Buy to open 1x Jan'11 $30 calls for $1.10 or less (also slightly above mark)

Note that I am buying 3x calendar spreads than the straight call.  The reason is I am using Jan'11 calls as an insurance policy in case the stock shoots up.  This has an affect of keeping the trade profitable anywhere above $9.50 (see the P&L chart).  Also note that in the attached P&L chart I have adjusted March IV down to 65 to see the true nature of P&L potential.

Also, I am using Jan'11 instead of any earlier months to minimize any erosion in IV after the news.  Jan'11 IV is around 60 vs. 130 in March.  Lastly, there is always a risk with FDA that the final decision will be delayed as BMO Capital Markets suggested in the note above.  By using Jan'11 for long options, if a delay is announced it gives us an opportunity to continue to hold Jan'11 options and keep selling front month options against them.  We can keep doing this for next nine months if we choose to, and there will be many opportunities to trade it around through iron condors, calendars, etc.

This is a low risk trade because it remains profitable above $9.50 (50% below current price) and the most bearish analyst on Wall Street has $12 price target.  Straddle is pricing 25% move.  I like the odds.

Good luck!