Monday, August 19, 2013

Biodel (BIOD) - Baby Bio-Pharma Set to Explode or Implode Soon; Option Market Points to Huge Upside Potential

BIOD is trading $5.23, up 9.9% with IV30™ up 2.7%. The LIVEVOL® Pro Summary is below.


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Biodel Inc., a specialty biopharmaceutical company, focuses on the development and commercialization of treatments for diabetes in the United States. The company is involved in developing proprietary formulations of injectable recombinant human insulin for the treatment of patients with type 1 and type 2 diabetes. It also develops liquid glucagon formulations for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia, or very low concentrations of blood glucose.

This is a volatility note in a $100MM market cap bio-tech with news coming that should be rip roaring one way or the other in terms of enterprise value. The firm has reported $0 in revenue and expenses lie almost entirely in R&D (and some SG&A).

The firm released earnings on Friday, and ZACKS research published a great summary article. Here are some snippets:

Biodel Inc. (BIOD) reported third-quarter fiscal 2013 loss of 66 cents per share, wider than the year-ago loss of 52 cents and the Zacks Consensus Estimate of 37 cents per share.

Biodel did not generate revenues in the reported quarter and also in the year-ago comparable quarter.

-- snip--

Biodel has finished dosing patients in the phase II randomized, open label, parallel group study conducted across approximately 33 U.S. sites. Approximately 132 patients suffering from type I diabetes were randomized to receive either BIOD-123 or Eli Lilly and Company’s (LLY) Humalog as meal-time insulin during the therapy duration of 18 weeks. In the study, the primary endpoint is HbA1c control. The secondary endpoints are postprandial glucose excursions, glycemic variability, hypoglycemic event rates and weight changes.

Biodel expects to report top-line data from the study in the third quarter of calendar 2013.

Meanwhile, Biodel presented encouraging data from a phase I study on its two insulin Lispro-based formulations, BIOD-238 and BIOD-250, at the American Diabetes Association. Both candidates showed a significantly more rapid rate of absorption compared to Humalog and also compared favorably to Humalog where injection site tolerability is concerned.

Source: ZACKS Research via Yahoo! Finance Wider-than-Expected Loss at Biodel

My oh my... This company is itself an option. There are a number of binary events which will prove the determining factors in the firm's valuation and solvency. But when we look at the Skew Tab, I see some incredible stuff.

So we can see two phenomena that can't be ignored:

1. The front two months are substantially elevated to the third month.  That's likely driven by this news from the article above: "Biodel expects to report top-line data from the study in the third quarter of calendar 2013."  But, the front two months are sort of jumbled with Sep mostly above Oct, but not entirely.  The option market reflects the likelihood of news in the next two expiries, but a greater likelihood of the "event" in the Sep options cycle.

2. Check out the shape of the skew.  It's incredibly one-sided, or more specifically, upside biased.  The option market reflects substantially greater upside risk (potential) than downside risk.  Said differently, the option market is pricing in good news.  Hmmm...

Let's look to the Charts Tab (one-year) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see this was a $2.71 stock a year ago, so it has seen substantial appreciation with no revenue.  The equity market likes what it sees in terms of R&D so in that sense the equity and option markets agree.  The upside here is tangible.  On the vol side we can see huge implied now trading over 210%.  As I said, the news that's coming out is priced as though it will affect the enterprise value massively.

Finally, let's turn to the Options Tab.

Across the top we can see the monthly vols are priced to 214.68% for Sep, 204.70% for Oct and 164.74% for Dec.  So, it's the next two expiries that have this event priced in.  This will be an awesome one to watch. Note that the Sep 11 calls are priced to $0.40 fair value... That's ~120% higher than the current stock price.  Whoa... I also note that the "bankruptcy puts" (the $1 and $2 strikes) are no bid.

For all those in need of this type of medicine, let's hope it's positive results, regardless of equity and option values.

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