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Brendan O'Boyle  

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  • AbbVie's new hepatitis C drug gets boost [View news story]
    I have a crazy feeling this will backfire on ESRX...
    Jan 10, 2015. 09:13 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Ok, I thought you meant the GILD options. Yes for the GE options 4 contracts would be 10k of risk.

    I do this in my IRA, which based on the notional value of the options is about 1.4x leveraged even though ~4% is actually held in options.

    I wrote and article about this a while ago...

    http://bit.ly/17uSy8j

    That's why I was (and still am) long PFE calls. When you can buy a 2 year LEAP for ~$3 and the stock is at ~$30 you can put 3-5% of your money in the options and get a portfolio that is juiced by 1.3-1.5x without margin. And if there is a bear market you aren't facing the same kind of losses that you would experience trading on margin.

    It's a strategy that tends to work with stogy stocks (JNJ, PFE, GE) because investors don't think about potential upside. They just want to sell a covered call and juice the divvy. I enjoy taking the other side of that trade.
    Jan 10, 2015. 05:36 PM | Likes Like |Link to Comment
  • Amidst Rate And Commodity Worries, Oneok Partners Looks Interesting [View article]
    "Not only do these projects increase the company's potential revenue base, but they also will change the nature of the revenue. ONEOK Partners doesn't have as much direct commodity risk as you might think, but these expansion projects will shift even more of the company's revenue base towards fee-based sources and away from percent-of-proceeds."

    Can you give an estimate for what percentage of current revenue is fee based vs. what percentage is a percent-of-proceeds?

    Also, do you have a sense of OKS or OKE's sensitivity toward lower commodity prices? The market seems to be discounting that it is rather sensitive toward these pressures, how much does the price change in NG effect the business?

    Just trying to get a sense for how much the current market perception is overblown and how much is a real headwind. Thanks.
    Jan 10, 2015. 11:12 AM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    @ Menicholas
    No, if I would have bought $10,000 I would instead buy 1 options contract.

    The mistake people make with options is they bite off more than they can chew and take too much risk. I use calls as a substitute for owning stock, but buying 1 contract for a $100 stock is $10,000 worth of risk.

    Finding cheap calls you can put all the risk of a $500k portfolio into perhaps $60k worth of options. That is the allure of options to me, I can have most of my money out of risk assets, but a portfolio that behaves as if I were fully invested. Then you can only lose as much as you put into the options. I don't do this with my entire portfolio, but for the part that I do being in options LOWERS my risk.

    Let's say for example I bought 100 share of GILD at the 52 week high ($116), by the low I would have been down $30/share. No matter what happens I cannot lose $30/share on my current long in GILD. The most I can lose is $20.
    Jan 10, 2015. 12:12 AM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    @ CSYJ

    I think you are right, he seems to be on the wrong side of the debate lately.

    In the WSJ - the real issue is not choice but access:

    http://on.wsj.com/1tUG9oa

    Well that's certainly true at Express Scripts as they have made it very clear to their patients that they have no choice...
    Jan 9, 2015. 11:55 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Clearly this is all my opinion because I don't want to give specific trading recommendations. But if it were me, I would buy the option that best reflects the amount of time I wanted to be in the position. I think the further out you go the more time you give GILD to be priced in line with the market and the lower the time decay, so that's why I preferred the 2017 LEAPS.

    As for the price, I see a last price of ~$24. Remember the option is going to be quite volatile as it is more or less equivalent to owning $10k worth of stock. So I wouldn't buy options that have notional value in excess of how much stock I would have been comfortable owning.

    But my feeling with GILD is that the train is leaving the station. I feel that way because as I explained in the article I think the CVS deal put a lot of uncertainty to rest. Uncertainty is the enemy of higher stock prices so a few months ago I saw a lot of unknowns coming, but now I see more clarity on the way.

    So personally I don't worry too much about getting filled at $22 vs. $24. I may be wrong, but when I studied the CVS deal I started feeling bullish on the stock.
    Jan 9, 2015. 11:44 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Personally, I prefer to hold LEAPS for the long run when the market is moving to my benefit. If I roll the position it is usually when the market moves against me.

    For GILD I am planning to hold to expiration, then maybe sell or exercise depending on where the stock is trading. If it's a big gainer I will exercise to avoid a taxable event and continue to hold the shares.

    But for an example of a trade that hasn't gone my way: I have been long LEAPS on GE for a while now ($25-Jan-2016). I bought them for $2.60 when the stock was trading at about $27 - its been almost a year since and the stock has moved against me, but the option is down $1.40 even though the stock has lost $3.

    Maybe soon I will roll the position down and to a later expiration date, the $23-Jan-2017 LEAPS are $2.75. So I pay another $1.50 to add another year at a lower strike. Eventually the stock will rally and then I get paid.

    But I don't apply huge amounts of leverage, the options I buy are for the same notional value that I would have bought of the stock. It's just nice that you don't have downside below the strike price if the stock falls. Paying 20% for 2 years on GILD LEAPS seems expensive, but you can always park the extra cash in some bonds and almost cut that in half. Plus GILD has a pretty generous buyback, when you add the effect of a diminishing share-count to maybe keeping the extra funds in a bond what you are paying to go long via options isn't too bad.
    Jan 9, 2015. 10:49 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Let's first define "significant discount." If the number were low enough to roil the market I would say that would qualify. If GILD had to give the same price as ABBV likely did for VP that would likely upset the market.

    But if GILD wanted that price they could have just signed with ESRX from the beginning. ESRX would not have cut GILD out at the same price point, cutting a best in class medication at equal price makes no sense.

    So logically, the number must be higher than the ESRX VP discount. This was speculated to be 40% lower than the $83,300 listing price.

    http://bit.ly/1BarUu9

    Strategically, GILD leveraged the brand with CVS to improve bargaining position and price, then they used that price as an anchor to negotiate with other PBMs like Anthem.

    So I think there is <5% chance that GILD had to discount more than 30%. That is about the cut off for a number that would alarm the market. Obviously I am speculating here, but it's an educated guess based on the way the negotiation played out.

    I think the situation has reached equilibrium. ABBV gets a little market share at a lower price, GILD keeps most of the market share at a higher price. Then we have a duopoly in which both ABBV and GILD are not incentivized to cut the price. That is good, because the market will be relieved and prices will probably move higher as investors become more confident in GILD's earnings.
    Jan 9, 2015. 06:26 PM | 2 Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    I'm sure GILD management was working on a deal prior to the 21st of Dec, although I disagree that they must have known of the ESRX announcement in advance.

    The fact that management started working toward a solution with CVS before the ESRX news hit makes me more impressed, not less. They anticipated a threat to the business model and were working on a solution in advance.

    Managing a company is a bit like steering a ship, when you see an iceberg on the horizon you don't wait until the last second to turn.
    Jan 9, 2015. 06:00 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Thanks CSYJ.

    Yes CVS had some interesting press releases that I dug through while researching this article.

    You are correct, maybe that reference could have been presented more clearly. I wanted to include the Pharm Doc SA article because it gave some nice comparisons between Harvoni and VP that shed further light on what I summarized in the bullet points.
    Jan 9, 2015. 05:21 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    I thought about different strike prices and dates: It was either one year or two and I liked the 2017 LEAPS because they give more time for the thesis to play out and the annualized time decay is less.

    Then I tried to think about a price target. I decided on $160/share, which is a 26% CAGR over 2 years - approximating the expected EPS growth.

    I plugged the available options into a spreadsheet to calculate the ROI for each strike price. The deeper in the money the less time value and the lower break-even, but the ROI is lower and you need more money in the position.

    The highest expected ROI was at $115, but I thought being a bit closer to the money balanced the break-even and the ROI nicely. GILD only needs to get a bit above the previous 52-week high to break-even.

    As a bet, I think these LEAPS are a good one. Based on what I paid $160 would be a triple. Thus if odds of my bull thesis being correct are greater than 33% I should expect a positive payout (assuming they expired worthless otherwise, which is too pessimistic). I think the odds are a good deal better than that.
    Jan 9, 2015. 05:06 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    I meant a duopoly in the Hep C marketplace (ABBV and GILD). There may be more entrants (MRK being a potential one), but given the failure rates in the clinic this is far from certain and a ways off as yet.

    I will note a Hep C vaccine would not diminish the patient population still needing treatment and 2020 is a long way off. I think that is a worry for another day.

    Lastly, I would have been happy to reflect on the pricing GILD offered to CVS, but unfortunately I would have had to greatly increase my skills in corporate espionage to accomplish that ; )
    Jan 9, 2015. 04:32 PM | 2 Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Yes VP and Harvoni are different in terms of safety and efficacy, but they are meant to treat the same malady. So in that sense I view them as comparable, although clearly not equivalent, products.
    Jan 9, 2015. 04:07 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    13302632

    "Why was Gilead not discounted for reduced market share a few months ago and now it is at the same stock price? "

    First, I would argue that the stock price alone is not what is relevant. What is relevant is how GILD has moved in price relative to the S&P 500. If the whole market moves up and some stocks are left behind those stocks are being discounted more harshly. i.e. investors are paying more for a dollar of S&P 500 earnings now compared to what they were paying 2 months ago, while investors in GILD are paying about the same.

    Second, it is instructive when making a prediction about the short-term movement to forget the concept of 'what is priced in' altogether. It is very simple: when results fall short of expectations investors sell and the price goes down, when results exceed expectations investors buy and the price goes up. So when I make a short-term call I try to gauge what other investors are expecting, then I try to come up with the probabilities for results beating or missing expectations.

    "Sometimes, too much knowledge is a bad thing as you lose track of the ignorance of the market at large."

    I agree with you. Most long-term investors simply ignore the short-term performance of the market as unpredictable. There is nothing wrong with that.
    Jan 9, 2015. 04:00 PM | 2 Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    I always believed that GILD was a good investment in the long-term (and I stated so in my first article).

    Now I believe it is a good bet in the short term as well.

    And yes, buying a stock is a lot like gambling. Especially in the short-term, which I would define as any time frame of less than five years. I don't see any issue with trying to fill my portfolio with companies that I believe are good bets in the short-term and good investments in the long-term.
    Jan 9, 2015. 03:43 PM | Likes Like |Link to Comment
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