Earnings Preview: Mylan NV and AstraZeneca plc

Drug stocks Mylan NV (MYL) and AstraZeneca plc (ADR) (AZN) are burning higher ahead of earnings, thanks to Donald Trump's big win

Nov 9, 2016 at 10:51 AM
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Drug stocks are driving higher on Donald Trump's stunning victory in the U.S. presidential election. This has spelled big gains for shares of drugmakers Mylan NV (NASDAQ:MYL) and AstraZeneca plc (ADR) (NYSE:AZN), ahead of their respective turns in the earnings confessional. Below, we'll take a closer look at earnings expectations for MYL and AZN, in the options pits and beyond.

While EpiPen parent MYL tends to fare well on Democratic presidential wins, the stock seems to be doing just fine this morning. In the wake of Trump's triumph, Mylan shares are 5.5% higher at $39.15, and on track for their highest close since late September. However, with earnings coming up after the close, the positive momentum could change in a hurry.

Looking back eight quarters, the stock has struggled in the session following earnings, giving up ground 63% of the time. February's post-earnings performance was especially poor, with MYL tanking 18% in a single trading day. This time around, the options market is pricing in a 9.4% single-session swing in either direction, following the quarterly results. Speaking of which, hopes appear to be high in the options arena. MYL's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.25 ranks in the bullishly skewed 78th percentile of its annual range.

On the other hand, short interest rose in recent reporting periods to a lofty 27.3 million shares, or 7% of Mylan NV's float. Taking this into account, it's possible some of the recent call buying has been the work of short sellers scooping up calls to hedge against upside risk.

Meanwhile, AZN will report earnings tomorrow morning, and the drug stock is sizzling in the build-up to this key event. At last check, the shares had spiked 2.2% to trade at $28.62 -- though, they've been in absolute free-fall since their August highs around $35.

Whether the stock can sustain its rally into tomorrow is another question altogether. Earnings reactions over the past eight quarters have left much to be desired. Specifically, AZN has been lower in the session after earnings five out of eight times. That said, the company's late-July report was a notable exception to the rule, with the stock bursting 8.7% higher in one day -- en route to that aforementioned peak.

Shifting to sentiment, options traders have been bearish toward the underperforming drug stock. During the last two weeks at the ISE, CBOE, and PHLX, speculators have bought to open three times as many puts as calls. The resultant put/call volume ratio of 3.32 ranks only 4 percentage points from a 12-month peak. Related to this, AZN's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) sits at a top-heavy 3.04, suggesting the November series is very put-heavy, when looking at near-the-money strikes.

Short interest is also high on AstraZeneca plc, at 27.5 million shares -- the most since mid-August. At the stock's average trading rate, it would take roughly seven sessions for these bears to cover their positions.

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