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Traders Pounce on ViroPharma Puts After Drug-Related Setback

General drug approval sends VPHM on a downward spiral

by 4/11/2012 10:03 AM
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Shares of ViroPharma Incorporated (VPHM - 21.66) plummeted on Tuesday, after the Food and Drug Administration (FDA) approved the generic versions of its Vancocin antibiotic manufactured by rival drug makers Watson Pharmaceuticals and Akorn Inc. The FDA also denied VPHM's request for an additional three years of exclusivity for the drug, which made up more than half of the biotech firm's sales in 2011. The news prompted a downgrade to "hold" from "buy" at Brean Murray, as well as a price-target cut to $32 from $35 at JMP Securities.

It's no surprise that this glut of negative developments attracted a slew of bearish bettors to VPHM yesterday, as more than 9,600 puts crossed the tape, reflecting a whopping 150 times the equity's average daily volume. Most popular were the April 25 and 30 strikes, where nearly 7,600 of these puts were exchanged, collectively. Digging deeper into the data, it appears that a block of 3,500 puts was sold at the 30 strike, while an equal number of puts were simultaneously bought at the 25 strike. Because open interest rose overnight at the latter strike but not the former -- and given Tuesday's sharp drop -- this activity suggests that one trader rolled down his put position, thus strengthening his bearish stance on VPHM.

This affinity for puts over calls is more of the same for the drug manufacturer. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 4.09 for VPHM, confirming that puts bought to open have more than quadrupled calls during the last two weeks. This ratio ranks in the 92nd annual percentile, meaning that traders have been snatching up bearish bets over bullish at a much faster-than-usual clip.

Technically, VPHM has shed nearly 21% year-to-date, and has underperformed the broader S&P 500 Index (SPX) by more than 9% during the last 40 days. Thanks to yesterday's nosedive, the stock is now trading beneath its 50-day moving average -- a trendline that has not been breached, on a weekly closing basis, since mid-September.

In the opening hour of the session, VPHM is down another 3.5% to trade at $21.66, after receiving additional bearish brokerage notes from Jefferies, Lazard Capital, and Oppenheimer earlier this morning.


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