Drug Stock Swings Lower on CEO Switch

Analysts have yet to hand out a single "sell" rating on the underperforming drug stock

by Emma Duncan

Published on Oct 9, 2018 at 11:42 AM

Shares of Perrigo Company Plc (NYSE:PRGO) are notably lower in midday trading, down 3.6% at $70.17, after the company announced the departure of CEO Uwe Roehrhoff and named former Lorillard CEO Murray S. Kessler as his replacement. Roehrhoff, who served as CEO for roughly 10 months, is stepping down from his role as president and board member, as well. 

While the CEO switch may come as a shock, PRGO's negative price action is not so much of a surprise. The pharmaceutical concern has been stuck in a long-term downtrend since its late-January peak, with a few recent breakout attempts capped by the 140-day moving average. Notably, Perrigo stock suffered a post-earnings bear gap Aug. 9, which eventually lead to its Aug. 13 annual low of $67.53 and current year-to-date loss of 19.5%. 

Daily Chart of PRGO with 140 MA

Coming into today, analyst sentiment is grim toward the drug stock, with 10 of 13 in coverage sporting tepid "hold" ratings. On the flip side, however, options traders have been leaning bullish, with data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) showing PRGO's 50-day call/put volume ratio of 7.49 in the 89th annual percentile. This suggests calls have been purchased over puts at a faster-than-usual clip in recent weeks.

What's more, short interest on Perrigo stock fell 8% during the most recent reporting period, and now represents 5.7% of its total available float. Following this latest bout of profit-taking, it would take short sellers just over a week to buy back their remaining bearish bets, at PRGO's average daily trading volume.

Short-term options on PRGO are priced to move, from a volatility perspective. This is according to the security's Schaeffer's Volatility Index (SVI) of 32%, which sits in the 26th percentile of its annual range. In other words, muted volatility expectations are being priced into short-term contracts.

With options priced cheaply, and PRGO recently testing its footing again around those August lows, it's possible that some of the remaining short sellers have picked up out-of-the-money calls to lock in paper profits and hedge against an upside pop in the short term. In fact, the most popular Perrigo strike is the overhead November 75 call, with 8,144 contracts in open interest.

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