This week, some interesting news came out from Bristol-Myers (BMY), Eli Lilly (LLY), and Johnson & Johnson (JNJ). This interesting news pushed me into buying call options in Mylan (MYL), with an expiration dating out to January 2011. Mylan, a manufacturer and distributor of generic pharmaceuticals, seems only poised for significant upside coupled with minimal risk.
Consider the following:
- Bristol-Myers gave a 2013 forecast rather early to comfort investors who have been worried about generic competition. This primarily stems from its bread-winner, PLAVIX, which the patent will expire for on November 17, 2011. PLAVIX earned BMY $1,627 million for the 2010 quarter ending June 30.
- Sales in Eli’s GEMZAR decreased by 17% in its most recent quarter from the same quarter last year due to the influx of generic competition. GEMZAR’s patent just expired on May 15, 2010. The patent for CYMBALTA, another top earner for LLY, will expire on June 11, 2013. The company referenced their pipeline to make up for lost revenue. However, this soon to be lost revenue will be found elsewhere – in the generics.
- Johnson & Johnson cut its 2010 profit forecast over recalls. I think this forecast cut also has to do with generic competition. In a JNJ press release, the company did say that sales results in RISPERDAL and TOPAMAX were negatively impacted because of ongoing generic competition. The patents to RISPERDAL and TOPAMAX expired on December 29, 2007 and September 26, 2008, respectively.
Clearly, BMY, LLY, and JNJ are worried about generic competition. Generic drug companies such as Mylan and Teva Pharmaceuticals (TEVA) are thus poised for significant upside due to patent expirations and to add, healthcare reform, which will prohibit medical companies from canceling coverage for ill patients and grant more individuals with health coverage from the insurers.
Once investors catch on to this all, shares of generic drug companies should appreciate. I also feel that Mylan is a solid takeover candidate. Larger drug companies should consider such an acquisition if revenues dwindle as a result of generic competition. From a risk management perspective, if larger drug companies begin to rely on their pipelines to make up for lost revenue, what will happen if a clinical problem occurs or a drug is denied approval? The shares of those companies will be simply more susceptible to depreciation (and volatility).
Click here for the source that contains drugs’ patent expiration dates.
Disclosure: Long MYL calls at time of writing.
Friday, July 23, 2010
Tuesday, July 13, 2010
Still Eager to Buy Puts on Apple
Apple (AAPL) declines more than 3 percent while the broader markets rally more than 1 percent. At last, a recent influx of negative sentiment towards Apple. We have the following:
- Consumer Reports not recommending the Apple iPhone 4 because of technical issues resulting in signal loss if the smart phone is held in a particular way
- Competition – but who cares about competition, this is Apple (please notice my sarcasm)
My point is very general. For those who have read books like The Big Short or Fooled by Randomness, we know that unexpected events have crippled investors and those investors have always acted naïve as they have overlooked what they think are such rare situations, which interestingly, become common sense after they occur.
Who thought that there would be any problem with Apple’s new iPhone 4? Are analysts really in any position to assure the public that similar problems will not happen again?
What analysts who cover Apple or investors who own Apple will even mention the possibility of Apple losing market share to rivals such as Dell (DELL), Google (GOOG), and Sprint (S), among other companies down the road, and that at some point in the future, it is possible that the iPhone loses its edge?
My biggest concern is that Apple’s market cap dwindles as a result of investors overlooking the influx of other non-Apple products equivalent to the iPhones and iPods into the market and rather anticipating that Apple’s share value will realistically reflect competition throughout time, Apple will, at some point in the future, surprise during some quarter, only not to the upside. Either way, downgrades would then follow, and the ardor for Apple will shift towards another player, as history shows us, prevalently happens.
I am eager to buy puts on Apple expiring out in 2013, primarily because my catalyst carries a longer-term theme. I will not commit significant capital to outright short the company as it could easily be very burdensome and must wait until September 13, or when the equity LEAPS are added to make my move.
Full Disclosure: No Positions.
- Consumer Reports not recommending the Apple iPhone 4 because of technical issues resulting in signal loss if the smart phone is held in a particular way
- Competition – but who cares about competition, this is Apple (please notice my sarcasm)
My point is very general. For those who have read books like The Big Short or Fooled by Randomness, we know that unexpected events have crippled investors and those investors have always acted naïve as they have overlooked what they think are such rare situations, which interestingly, become common sense after they occur.
Who thought that there would be any problem with Apple’s new iPhone 4? Are analysts really in any position to assure the public that similar problems will not happen again?
What analysts who cover Apple or investors who own Apple will even mention the possibility of Apple losing market share to rivals such as Dell (DELL), Google (GOOG), and Sprint (S), among other companies down the road, and that at some point in the future, it is possible that the iPhone loses its edge?
My biggest concern is that Apple’s market cap dwindles as a result of investors overlooking the influx of other non-Apple products equivalent to the iPhones and iPods into the market and rather anticipating that Apple’s share value will realistically reflect competition throughout time, Apple will, at some point in the future, surprise during some quarter, only not to the upside. Either way, downgrades would then follow, and the ardor for Apple will shift towards another player, as history shows us, prevalently happens.
I am eager to buy puts on Apple expiring out in 2013, primarily because my catalyst carries a longer-term theme. I will not commit significant capital to outright short the company as it could easily be very burdensome and must wait until September 13, or when the equity LEAPS are added to make my move.
Full Disclosure: No Positions.
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