Drug Addiction?

The news that Elan has set aside $206 million to settle claims on sleazy marketing of an epileptic drug they divested in 2004 simply adds to the pain I’ve been feeling in this name lately.

That’s really drastic when you think about it, since they only had gross revenues of $219 million on the drug over a five year period, but they feel that the US legal system is likely to hand them a bill that large.  Pretty amazing when diabetes drug Avandia stays on the market in spite of heart attack risk the company knew about and failed to disclose.

I overweighted Elan when it fell to the mid $4’s, and then sold July $5 calls to lighten up.  Now it looks like the options will expire, much to my surprise.

Meanwhile, another of my low-priced developmental drug specialists, Arena (symbol ARNA) is running nicely on the news that the FDA advisory panel was positively recommending it to the rule-making board of the Agency.

Anyone doing this with their own money should take a lesson from yesterday’s news on Elan.  These companies are vulnerable to lightning strikes (both good and bad), so don’t risk money you can’t lose.  Also, being involved with  a number of them may help with the pain of one, the way ARNA is helping me deal with the Elan misery.

Of course, the other part of how I deal with them is to sell covered calls.  Add in the HGSI $25 calls I sold seven weeks ago (another that was a cheapie until its run, like DNDN), and the strategy of selling volatility on these smaller drug companies seems to be working.  Most of the ones I play in pay out 5%, 8% or even 10% of the stock price in time premium for options with just a month or two left in them.

In this case, HGSI is trading right now, the last day of the option, at almost exactly the price I bought it six Fridays past.  I’ll probably end up keeping the $2.25 in option premium, and looking to write another set of them next week with a month or two of time value when I sell.  As I post this, the August options are trading around $1.65 and the Octobers are north of $3.  I’ll wait and see where they price the Septembers when that series opens on Monday.

So, to answer the question this post raises, I suppose I have to admit a drug (stock) addiction.  It does have a casino quality about it, but a little research and paying attention to what the true gamblers (call buyers) are paying can make it less of a gamble and more of an investment strategy.



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