2 Pharma Stocks Popping on Upbeat Drug News

Eli Lilly and Co (LLY) and Horizon Pharma PLC (HZNP) are making big upward moves, thanks to positive drug news

by Kirra Fedyszyn

Published on Jun 29, 2016 at 2:41 PM
Updated on Jun 24, 2020 at 10:16 AM

Biotech stocks are in the spotlight today, with several names making big moves on the charts thanks to a slew of drug news and notes from the U.S. Food and Drug Administration (FDA), not to mention attention from analysts. Among the stocks on the rise amid encouraging drug news are Eli Lilly and Co (NYSE:LLY) and Horizon Pharma PLC (NASDAQ:HZNP).

LLY is trading 3.7% higher at $77.94 on news that an FDA panel has recommended the approval of the company's drug, Jardiance, to reduce the risk of cardiovascular death in adults with certain conditions, including type 2 diabetes. The shares are also breaking out above their 120-day moving average -- a trendline that has contained their upward moves for most of 2016 -- but are still sitting 7.5% below their year-to-date breakeven level. Plus, it looks like today's rally may again be running out of steam around the $78 mark, which shut down LLY's two most recent runs in April and May.

Despite the stock's less-than-impressive technical performance of late (today excepted), traders and analysts have kept a rather upbeat view of LLY. Though short interest rose over the past two reporting periods, these bearish bets still account for only 1% of the stock's available float. And of the 13 brokerage firms providing coverage, eight call LLY a "strong buy."

In the options pits, traders have also been bullish, buying to open more than three LLY calls for each put over the last two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The resulting call/put volume ratio of 3.17 sits higher than 81% of the past year's readings.

Near-term options traders appear to be more put-heavy than usual, however. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.15 sits in the 94th percentile of its annual range. That said, these positions aren't necessarily bearish -- peak open interest in the July series sits at the 72.50 put, where the ISE confirms that a bulk of the positions have been sold to open. Sellers of the put are expecting the strike to serve as a floor for  shares of Eli Lilly and Co (NYSE:LLY) through the front-month expiration, at the close on Friday, July 15.

Meanwhile, HZNP has added 7.1% at $16.78 after the company reported it has submitted a supplemental New Drug Application (NDA) for RAVICTI -- used to treat urea cycle disorders. Nonetheless, the shares have given up more than half of their value year-over-year, with this year's rallies being repeatedly shut down in the $18.50-$19 region.

Also boosting the stock today is new coverage from BMO, which gave HZNP an "outperform" rating and a lofty $29 price target -- representing a level not seen since the stock's late-September sell-off. This only echoes
the withstanding trend among brokerage firms. In fact, the average 12-month price target sits even higher, at $30.23 -- an 80% premium over current trading levels.

Short sellers have begun backing off of HZNP, with their bearish bets falling by nearly 9% over the last two-week reporting period. But the 12.7% of the equity's float still sold short would take a full week to buy back, at HZNP's average daily volume.

Options traders have taken a more upbeat view lately. Though the stock's options volume tends to be light on an absolute basis, HZNP's 50-day call/put volume ratio at the ISE, CBOE, and PHLX sits just 2 percentage points from an annual peak, at 5.58. Meanwhile, the stock's SOIR of 0.42 reiterates this call-skewed pattern, ranking lower than 76% of readings taken in the last 12 months.

There could be another explanation for this call preference, however. With short interest still elevated, it's possible some short sellers have been picking up calls to hedge against a big upside move. In fact, heavy call open interest at out-of-the-money strikes -- such as the August 17 call, which leads among near-term options -- support this theory, especially since most of these calls have been bought to open, per ISE data.

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