Wednesday, March 21, 2012

Watson Pharmaceuticals (WPI) - "Low Vol" Pharma Shows Vol Explosion on Deal News

WPI is trading $61.74, up 5.5% with IV30™ up 28.8%. The LIVEVOL® Pro Summary is below.


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Watson Pharmaceuticals, Inc. (Watson) is an integrated global pharmaceutical company engaged in the development, manufacturing, marketing, sale and distribution of generic and brand pharmaceutical products.

WPI is a cool company in that it's a pharma with a vol normally in the 20's. This, however, is a vol note as the stock and vol are popping on news. Let's start with the story:

Watson Pharmaceuticals Inc. (WPI) is in talks to buy Actavis Group hf, a Swiss maker of generic drugs, a person with knowledge of the matter said.

Watson made an unsolicited approach to Actavis, said the person, who declined to be identified because the discussions are confidential. There are no other suitors at the moment and a deal may be weeks away, the person said. Reuters, which reported the discussions earlier today, said Watson may pay 5 billion euros ($6.6 billion) to 5.5 billion euros.

Watson Chief Executive Officer Paul Bisaro said in January the Parsippany, New Jersey-based company was interested in buying either a generic or brand-name drugmaker. “Our appetite for a larger transaction, it’s there,” Bisaro said at the JPMorgan Chase & Co. health-care conference in San Francisco.

Charlie Mayr, a Watson spokesman, said the company doesn’t comment on speculation. Frank Staud, a spokesman for Zug-based Actavis, also declined to comment.

Watson, the maker of the authorized copy of Pfizer Inc.’s cholesterol pill Lipitor, is looking to expand its international reach as well as the company’s portfolio of brand-name drugs.

Source: Bloomberg via Yahoo! Finance -- Watson Said to Be in Talks to Buy Swiss Drugmaker Actavis, written by Aaron Kirchfeld and Naomi Kresge.

Tricky... A vol and stock rise as the potential acquirer. The "appetite" part feels a little scary coming from the CEO, but it makes for some cool vol analysis.

The news has driven some order flow as over 18,000 contracts have traded on total daily average volume of just 2,464. Calls have traded on a 3.8:1 ratio to puts with the action in the May 65 and Apr 65 calls. The Stats Tab and day's biggest trades snap are included below.

The Options Tab (below) demonstrates that the Apr 65 calls are mostly opening (compare trade size to OI). The May 65 calls are more ambiguous. The color I got on the May 65 calls was that the 4,588 lot was a purchase without stock. The Apr 65 calls are hard to tell -- look two sided, although the vol rise is circumstantial evidence of purchases.

Let's turn to the Skew Tab.

It's interesting that the May options are priced to higher vol than Apr given that the news feels "pending." It's also noteworthy that the Aug options show a "normal" skew in that the OTM calls are priced to lower vol than the ATM options. That is not the case for Apr and May where the skew is flattish or even bent up to the upside. The next earnings release should be in the May expiry, but outside of Apr.

Finally, let's turn to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

This was actually a stock trading over $70 as recently as September. It hit as low as $55.89 (closing) in Jan. We can see the stock spike today.

On the vol side we can see a bumpy ride in between ~20% and ~40% in the implied. Before today, IV30™ closed at 22.60%. It's up 28.8% today. The 52 wk range in IV30™ is [19.84%, 41.25%] putting vol in the 45th percentile (annual). As of yesterday's close, IV30™ was in the 6th percentile. My curiosity here lies in whether the upside really has any more legs -- and on the flip side -- if the downside is still a legitimate risk if this "deal" falls apart.

This is trade analysis, not a recommendation.

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