Call Options Or Put Options On Bristol-Myers Squibb (BMY)?

| March 27, 2013 | 0 Comments

drugsBristol-Myers Squibb (BMY) is a major drug maker.  This ‘Big Pharma’ company has sold many of the non-core businesses in order to focus on biopharmaceuticals.

BMY currently trades for $40.61 per share.  The shares are up 34% from the 52-week low of $30.31 and have been hitting new 52-week highs over the last few weeks.    

Is this an opportunity buy call options on BMY as sales of their expensive new specialized treatments grow?  Or should you buy put options on BMY as the Supreme Court gets ready to rule on pay-to-delay deals?

The bulls make a convincing argument…

There’s no doubt healthcare stocks have had a great run this year.  And BMY’s 28% advance year-to-date is no exception.   

Investors are pouring into BMY because profit margins are expanding, earning per share are growing, and the pay a nice dividend. 

The only thing bad you can say about the company’s performance is their revenue is falling.  But that’s not completely unexpected…

You see, BMY’s business is shifting away from simple drugs that treat chronic conditions like high blood pressure and high cholesterol.  And they’re moving toward more expensive drugs.  These treatments can be specialized to treat individual cases of more complex diseases like cancer and hepatitis. 

BMY will never do the same amount of revenue with these new treatments as they did with their old one-pill-fits-all drugs.  But the profit margins and earnings power they create will more than offset the decline in revenue.

The bottom line is BMY’s growing profits and dividend will continue to fuel more upside in the weeks ahead.

But the bears have a compelling case as well… 

The 23% drop in revenue last quarter was bad.  But it could have been even worse.  And if the Supreme Court rules against Big Pharma’s pay-to-delay deals, revenue could fall off a cliff.

Here’s the deal…

Several name brand drug makers have been paying off generic drug makers.  These so called ‘reverse payments’ delay the introduction of generic drugs for name brand drugs coming off of patent protection. 

The delay in generic drugs is estimated to generate an additional $3.5 billion a year in revenues for Big Pharma companies.  But if the Supreme Court rules these types of payments are illegal, then BMY could see revenue from drugs with expiring patents dry up even quicker.

Simply put, if the Supreme Court rules against pay-to-delay payments, we’ll likely see BMY and the entire Big Pharma industry come under selling pressure. 

That’s never good… it could really take a bite out of BMY because it has had such a great run this year.  This could be a case of – the bigger they are, the harder they fall.

If you think the bulls are right, take a look at buying the BMY June 2013 $40.00 calls for around $1.49.

If you think the bears are right, take a look at buying the BMY June 2013 $41.00 puts for around $1.55.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.