Talk about waking up to good news. There’s no better feeling as an option trader then to start you day off by learning that one of your option plays is up 700% for the day. No that is not a typo. But that is exactly what is happening today as word hit Wall Street that Bristol-Myers Squibb (BMY, $21.17, down $0.34) has made a $4.9 billion bid to purchase ImClone Systems (IMCL, $63.85, up $17.41).
The proposed deal is worth $60 a share and represents about a 30% premium from where Imclone last closed. We made a Biotech Watch List Sunday night and I updated a few of them last night. However, today’s news is so much better. If you’ll notice, Imclone’s stock price is above the $60 offer which could indicate an even higher bid may be needed.
Bristol-Myers Squibb already owns a 17% stake in ImClone and the two companies have been partners since September 2001 in developing Erbitux. Bristol-Myers has felt an “urgency” to do something after its industry-leading cancer treatment Taxol was overtaken by numerous generics brands. The pitch for ImClone was a way for Bristol-Myers to beef up its pipeline not only with Erbitux but other exciting drugs as well. Erbitux is amphibious in way because it treats “land or water”. The drug is approved for treating advanced colorectal cancer and head and neck cancers. And more uses for the drug could be on the way.
And wouldn’t you know it. Our buddy Carl Icahn just made a fortune on this news. Gotta give the dude credit though. He has been investing in ImClone since 1999 and owns nearly 14% of the company’s stock. He took over the board after the infamous securities scandal that I told you about Sunday night involving Martha Stewart.
But here’s the best part of this story. I told you the August 45 calls (QCIHI, $18.87, up $16.52) would be worth $5.00 if ImClone can hit $50 by August 15. I profiled these calls at $2.40 and on Monday they were actually cheaper as ImClone’s stock fell $1.27 by the end of the day. A 10 contract investment of about $2,500 is now worth a stunning $18,500 in just four days. Wow. Now you can see why the option market is one of the single biggest ways to make money in this world. Of course I had no way of knowing that a buyout offer was in the cards for ImClone but the action in the Biotech sector has been noticable.
Another company I talked about was Amylin Pharmaceuticals (AMLN, $31.07, up $3.59) which I said could be headed back above $30 despite reporting a wider-than-expected quarterly loss. Amylin is up on the ImClone news obviously. This has helped the August 30 calls (AQMHF, $2.00, up $1.50) which were profiled at $1.35. The calls were taking a big hit and looked as though they may expire worthless but today’s move took care of that. I would sell the entire position today and book profits.
As far as ImClone, it should be easy to manage stops from here. We can hold out for a higher premium but set stops at $16.00. The calls have a $15 premium built-in based on the buyout offer of $60 and they expire in a couple of weeks. Either way, I’d say we are in good shape.