Evaluating Medarex & Bristol-Myers Huge Options Open Interest (MEDX, BMY, DNDN)

We were screening options activity today and something came up that where bets had significantly grown from our prior coverage.  Earlier this year we covered some strange biotech options activity after noting a "Dendreon-esque" amount of longer-term options trading in Medarex (NASDAQ:MEDX) with a huge open interest that has now gotten even larger.  The company has a partnership in melanoma treatment development with Bristol-Myers Squibb (NYSE:BMY).

In 2005 Bristol-Myers Squibb paid Medarex roughly $50 million in cash and it can receive various milestone payments of nearly $500 million more dependent upon the success of tests and on the ultimate success of Medarex’s antibody.  Last June Bristol-Myers and Medarex reported to oncology experts that the drug shrank tumors in 13% of 356 melanoma patients. 

Bristol-Myers and Medarex are expected to finish key trials this fall, although a formal date has been elusive and we are leery of solid dates in this field.  These response rates for overall melanoma seem quite low compared to other benchmarks or endpoints, but from all the poking around that has been done the verdict from the investment community seems to be that the results don’t have to be anywhere close to a majority.  Minimal improvement may ultimately yield approval.  Analysts are mixed with price targets and opinions all over the place and the most recent research reports have been somewhat cautious on the company.

What is interesting is that Medarex may have a lot of potential upside that riding on this, but it will not fail at all as a company on this event alone if this trial fails to tickle investors.  As of its last report the company had over $400 million in cash and short-term investments plus another $312.9 million in long-term investments.  Its market cap is roughly $1.8 Billion.  The company has a huge pipeline with many other partners which you can see on its site.  This is an old figure but the short interest as of September was listed as more than 34 million shares.

But the open interest in the options trading is massive.  Back in APRIL we noted the huge open interest in its options for the JAN-2008 contracts:
JAN $12.50   CALL 60,061 contracts    JAN $7.50 PUTS   19,683 contracts
JAN $15.00   CALL 39,065 contracts    JAN $10.00 PUTS   14.869 contracts
JAN $17.50   CALL 84,943 contracts    JAN $12.50 PUTS   42,187 contracts
JAN $20.00   CALL 9,376 contracts    JAN $15.00 PUTS   19,122 contracts
But now look at the open interest in the same Medarex options contracts for JAN-2008 TODAY:
JAN $12.50   CALL 109,379 contracts    JAN $7.50 PUTS    28,015 contracts
JAN $15.00   CALL 118,995 contracts    JAN $10.00 PUTS   40,392 contracts
JAN $17.50   CALL 251,272 contracts    JAN $12.50 PUTS   114,109 contracts
JAN $20.00   CALL 43,056 contracts      JAN $15.00 PUTS   174,056 contracts
Bristol-Myers Squibb (BMY) has THE LARGEST single open interest for a single contract of all other stock option contracts on the exchange:
JAN08 $32.50 CALLS 223,666 contracts in the open interest.
JAN08 $32.50 CALLS 526,003 contracts in the open interest (Largest)

There wasn’t any major spike in stock trading from it presenting at the Natixis Bleichroeder’s Hidden Gems Conference this last Monday.  In early November it will be at the JPMorgan Ninth SMid Cap Conference.  It looks like there is more bias to the call options, but after the FDA actions of late we won’t really speculate on what the chances of success are.  We noted some Bristol-Myers speculation some time back about takeover speculation, and that may have contributed to the high open interest.

Jon C. Ogg
October 12, 2007

Jon Ogg produces the 24/7 Wall St. Special Situation Investing Newsletter; he does not own securities in the companies he covers.

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