Options Update: Can Teva Pharmaceutical Withstand Today’s Bearish Run?

• July 9, 2008
• Mark Fightmaster

Effectively Bad News

In this morning’s Opening View, my colleagues Andrea Kramer and Joseph Hargett touched on the bad news coming out of Teva Pharmaceutical
, which has had a profound impact on the stock today, and the option activity. Recapping the news, TEVA announced that its multiple sclerosis drug Coapxone produced “disappointing results” in a higher-dose trial. The study compared 20-milligram and 40-milligram doses of Copaxone, and the higher dose was no more effective than the smaller dose. The 20-milligram version is approved for sale in 51 countries, but the company planned to use the larger dose after the smaller dose’s patent protection expires in 2014.

This news has pushed the stock nearly 9% lower this afternoon, and prompted Deutsche Bank to cut the firm to “hold” from “buy.” However, Wachovia analyst Michael Tong noted that the failure will have little impact on TEVA results in 2008 and 2009, adding that TEVA is unlikely to file a new drug application for the larger dose this year. Another analyst, Randall Stanicky from Goldman Sachs, weighed in as well, maintaining a “buy” rating on the stock. Stanicky admitted that the results were “disappointing,” but TEVA’s MS franchise is “protected” from competition thanks to the patent expiring 6 years on the horizon. Furthermore, no generic firms have challenged the patents.

The stock’s drop has prompted heavy put and call activity today, which is what caught my eye.

According to today’s Intraday Volume Explosion List, TEVA was active in both the call and put arenas. The firm’s July 42.50 put (TVQ SV) has seen the heaviest activity today, with volume of 4,170 on open interest of 7,902. As for the calls, TEVA’s July 45 call (TVQ GI) has seen the most activity, with volume of 4,200 contracts on open interest of 4,047.

The largest block of contracts I found was on the call – TVQ GI. At 10:07 AM EST, a block of 1,927 contracts crossed the tape at the bid price. This price suggests that the contracts were liquidated, but that is not a guarantee. The rest of the activity was small in nature, suggesting individual investors may be trying to capitalize on a dramatic drop in TEVA’s price.

Sentiment is Mixed

According to Zacks, TEVA receives 7 “strong buys” and 4 “holds.” Yes, this configuration could result in downgrades – but only 1 downgrade was issued in the wake of today’s news. If news of this ilk doesn’t shake the bulls from their positions, I’m not sure what will.

As for options players, parity reigns supreme. TEVA’s Schaeffer’s put/call open interest ratio (SOIR) of 0.77 ranks in the 51st percentile. This sentiment could unwind in either direction, but let’s keep an eye on both the SOIR and the percentile ranking tomorrow – just to see what happened today.

A Healthy Stock

Let’s see if TEVA can weather the storm that it faces today. If it does, we could be looking at a rather strong stock. While the stock has pulled back today and during the past 4 weeks, it is currently perched on its 20-month moving average. While this trendline hasn’t offered the staunchest of support, it is currently holding up. Further south is TEVA’s 32-month moving average, which has acted as support in the past and could act similarly if given a chance.

Of course, for the aforementioned 32-month moving average to act as support, the stock will have to fall below the 42.50 level. This level is the site of heavy put open interest in the July series. As the month winds to a close, we could see this level act as support if needed. That said, what is today’s low? $42.49 … eerie.

The Verdict? While today’s news isn’t the best, let’s see how the stock closes. A close above the 42.50 level could be a sign of strength, and it could also be a nice entry point for a bullish position. Let’s monitor this stock and see where it goes during the week. While there isn’t a lot of pessimistic sentiment that could unwind and push the stock higher, it is tough to ignore TEVA’s solid performance.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

Want more of my thoughts on the market? Don’t like my views and want to see those of my colleagues Andrea, Elizabeth, Jocelynn, Colleen, or Joe? Make sure to check out our Schaeffer’s Daily Market Blog section throughout the trading day.

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