Saturday, January 19, 2008

A Trade on Genentech Inc (DNA)

Dear fellow options traders :

Noted that Genentech Inc (ticker : DNA), a major pharmaceutical/biotech company which research and market mainly oncology drugs, would be reporting earnings on 14 Jan 2008 (Monday) after-market-closed (AMC).

Pharmaceutical companies seldom gapped up or down dramatically after earnings announcement. Their price gapping action derives mainly from FDA decisions on their Phase III clinical trials or New Drug Approval (NDA) applications, but that's another big topic altogether. But there were occasional exception to this instances though...

1) Amgen Inc (ticker : AMGN) : On 20 July 2005, AMGN gapped up +$7.00 to $77.51 and went up intra-day another +$4.00 to close at $81.17 when this biotech company's Q2 earnings-per-share (EPS) beat consensus by $0.16 and revenues rose 22.7% year/year to $3.17 bln. The company also issued upside guidance for FY05.

2) Invitrogen Corp (ticker : IVGN) : This biotech company makes and markets research tools in reagent, kit, and applications forms for the life sciences research, drug discovery, and diagnostics customers, as well as biological products manufacturers. It has good price gapping habit after earnings announcement in the past few quarters. I would share with my opt-in subscribers about the gapping behavior of this company when they report Q4 earnings sometime in Feb 2008.

Then why do I want to trade an option on Genentech Inc (DNA) since it has not much gapping action for earnings, you may ask.

Well, what caught my attention was that this company's share price went up +$5.00 to $71.50 for past few days before earnings announcement without really "fantastic" news. In fact, some comments from the research analysts were somewhat "conflicting". For example, I've read one of the following...

"We remain bullish on DNA's performance, adjusting their estimates, but remaining above consensus. Due to lower than expected script trends,we reduce their revenue ests for 4Q07 to $3.03 bln from $3.04 bln, slightly above the Street estimate of $2.93 bln. For the quarter we expect non-GAAP EPS of $0.70, three cents above consensus at $0.67. We have observed a continued reduction in Lucentis use, and speculate that this is due to cannibalization from off-label Avastin use. Based on available script data, we do not expect to see an appreciable impact of the recent ODAC meeting on the use of Avastin factoring into fourth quarter numbers."

I don't know whether you understand the above but to me the comments were neither positive nor negative. I felt that if DNA couldn't report a spectacular Q4 earnings on 14 Jan 2008 AMC, the earlier $5.00 rise in stock price earlier might not be justifiable and the stock price might suffer after earnings announcement.

On eve of DNA's earnings announcement ie. 14 Jan 2008, when I saw the support price level of $71.80 was broken, I bought a just-out-the-money Jan 70 put contract for about $55.00 per contract.

As I monitored that the stock price kept breaking down intra-day and that I've researched that DNA didn't gap much for previous earnings announcement, I set a stop loss for the position to be closed if the bid price hit $1.00 (I bought at the limit price of $0.55). The bid price was hit intra-day and I gained a profit of $45.00 (excluding commissions).

On 14 Jan 2008 AMC, Genentech Inc (DNA) reported Q4 earnings of $0.69 per share, $0.02 better than the $0.67; revenues rose 9.4% year/year to $2.97 bln vs the $2.97 bln consensus. The company only issued in-line guidance for FY08 The company also reported revenue of some of their companies' drugs which fell short of the consensus numbers.

On 15 Jan 2008 when market opened, DNA gapped down -$1.20 to $68.50. I could have sold the option position at a slightly higher price if I'd held on but I was contented I was able to get out of the position with a small profit. It also show that this company did not have much gapping price movement for earnings announcement.

Yours Truly,

Tony Chai
Options Trading Resources

Note : Lucentis and Avastin are both drugs manufactured by Genentech Inc (DNA)


Anonymous said...

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I would like to know more about the freely 4 days Seminar.and also your personal opinion about his seminar as I noticed that some people complain about his seminar.And what does he teaches at hi seminar? If you don't mind, can you please advice me by emailing me?

Tony Chai said...

Hi :

Just emailed you.


Tony Chai
Options Trading Blog