Using Celgene Option Income To Speculate On Biotech

by: Todd Johnson

I am setting a strategy to buy four speculative biotechnology stocks. The net position to my portfolio will be 1% - 2% in total. I will be selling Celgene Corporation (NASDAQ:CELG) covered calls and using the option premium to buy a basket of speculative names. Celgene has a vast and growing biotechnology pipeline. I want to buy the basket of four speculative names in the hope one has a significant market appreciation due to FDA approval or FDA approved drugs with increasing revenues.

I am looking to buy the basket of names on continued market weakness. I am setting low bids to catch these names at favorable prices. These are speculative names and I am purchasing to add beta to my portfolio, and watch the four companies progress. My goal is to have just one name gain significant stock appreciation.

Celgene Corporation (CELG) is a global biopharmaceutical company focused on developing, researching, and commercialization of innovative therapies. Celgene (CELG) focuses upon cancer treatments and immune-inflammatory related disease treatments. The key commercial stage products include Revlimid, Vidaza, and Thalomid. I want to own Celgene Corporation (CELG) as a long-term blue chip biotechnology holding. The company is a $27-billion market cap company trading at a 2012 14x Price-to-Earnings multiple.

Human Genome Sciences Inc. (HGSI)

With one FDA approved drug, this company is a growing biopharmaceutical company. Its principal products in development include Benlysta for systemic lupus erythematosus. This is the first new FDA lupus product in fifty years.

Raxibacumab is also in Human Genome Sciences' pipeline. The U.S. Government is working with Human Genome Sciences to potentially treat the dangers of inhalation anthrax. Human Genome Sciences is trading at a 52-week low. The stock traded at the $30 range just a few months ago.

Keryx Biopharmaceuticals Inc. (NASDAQ:KERX)
Keryx Biopharmaceuticals Inc. (KERX) is a biopharmaceutical company engaged in the following product development stages: the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of cancer and renal disease. Most operations are based in the U.S.

The company's key drug, Perifosine, is the near-term product to watch. The drug is an anti-cancer drug focused on treating advanced colorectal cancer. Near term dates to watch include a primary completion date by late 2011. The study should be complete by the 1st quarter of 2012. Perifosine was built upon a multi-year licensing agreement with with Zentaris AG. Approximately 50,000 citizens die each year from colorectal cancer. New cases of colorectal cancer range between 150,000 - 175,000 per year.

As per the company's latest 10Q filing, KERX has built up its cash base with a secondary offering. Keryx Biopharmaceuticals has $43-million to offset research and development costs until, hopefully, a core product is given FDA approval. This date should be within the first quarter of 2012. Keryx Biopharmaceuticals Inc. (KERX) has generated a net loss of $353.3-million through June 30, 2011.

The company's source of funding has been through: 1) private placements of equity securities, 2) option and warrant exercises, 3) public offerings of our common stock, 3) interest income, 4) and from the upfront and milestone payments from our sub-license Agreement with Japan Tobacco Inc. Torii Pharmaceutical Co., Ltd.

Dendreon Corp. (NASDAQ:DNDN)
I believe the market has overreacted on the negative side of Dendreon Corp. (DNDN)’s second quarter results. On September 9th, Dendreon management did provide a release on FDA approved Provenge. The product is on the market, as most investors know to treat prostate cancer.

My view is the price will come down to a manageable level and Provenge’s benefits will be recognized by an increasing number of strong-hands investors. The company, as of August 31st, did have $600 million in cash, short-term liquid investments, and long-term liquid investments.

Antares Pharma Inc. (AIS)
Antares Pharma, Inc. (AIS) a pharmaceutical company's business model is focused upon self-injection products and technologies, and topical based gel products. The company is currently unprofitable but did raise cash in stock offering. Per the latest 10Q filing, Antares Pharma, Inc. (AIS) has $26-million cash on its balance sheet. If an unprofitable biotech stock lacks cash, then it is likely a good short candidate. I am confident in Antares Pharma’s financial condition to warrant a position.

The key product watch is Anturol, a topical based gel product, which will receive a FDA ruling by late 2011. Anturol, if FDA approved, will treat overactive bladders. 33-million users in the U.S. could use this product for immediate help. Watson Pharmaceuticals Inc. (WPI) would serve as the United States and Canada distributor. The overactive bladder market is anticipated to be in excess of $2-billion.

Disclosure: I am long CELG.

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