The shares of Sepracor Inc. (SEPR: sentiment, chart, options) have dropped sharply this afternoon following Wednesday's late-breaking news that its experimental depression medicine failed a clinical trial, putting the drug's future in doubt. SEPR said the depression drug, known as SEP-225289, had been compared against a dummy pill and against Wyeth's (WYE) Effexor XR, another depression treatment, in a clinical study of 514 patients. The experimental pill didn't reduce depression when compared with the placebo.
In addition, the pharmaceutical concern said the Food and Drug Administration (FDA) had imposed a hold on two studies looking at the use of Lunesta, its leading product, in children. Sepracor didn't specify what concerns the FDA had and didn't respond to news media requests for comment. Sepracor's revenues were $1.2 billion last year, of which $600 million came from sales of Lunesta.
In response to the negative news, the shares of SEPR have dropped roughly 17% this afternoon, eating into their year-to-date gain of 62%. The stock has dropped below support at its 10-day and 20-day moving averages and is approaching potential support at the 14 level.
From a longer-term perspective, the equity has been rejected by resistance at its declining 20-month moving average. SEPR has closed only one month above this trendline since February 2007.
Checking on the options front, we find that call trading has been brisk this afternoon. According to data from WhatsTrading.com, more than 8,800 option contracts have changed hands, which is nearly six times the stock's average daily trading volume of 1,485 contracts. Of that volume, more than 80% has crossed the tape on the call side.
Digging deeper into the action, we find that the July 17.50 call has been the most active. More than 5,200 contracts have changed hands today on open interest of 13,823 contracts. At 9:40 a.m. Eastern time, a block of 4,800 contracts crossed the tape at a bid price of $0.03.
Meanwhile, the July 15 call has traded more than 2,100 contracts on open interest of 4,431 contracts. No large blocks have changed hands today at this strike.
The Schaeffer's put/call open interest ratio for SEPR stands at 0.43, as call open interest more than doubles put open interest among options slated to expire in less than three months. However, this reading is in the middle of annual range, indicating that investors are relatively complacent toward the shares.
On the other hand, Wall Street is rather skeptical of the company. According to the latest data from Zacks, the stock has earned four "buy" ratings and seven "holds." In fact, the shares were downgraded by Deutsche Bank this morning from "buy" to "hold." Considering the company's lackluster news, there is still room for additional downgrades.
Overall, there is still room for optimism to unwind among options players as the stock sharply pulls back, potentially creating a fresh wave of selling pressure. Traders should keep a close watch on support at the 14 level. A breach of this support area could signal that the security is poised for a significant downturn.
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