Roche Is Not The Father
That’s the possible result after today's shocking DNA test. What am I talking about? The ongoing saga between Swiss drugmaker Roche Holdings and Genentech , of course.
Today, Roche made a lower, hostile bid for the remaining stake in DNA that it doesn’t already own. The latest salvo comes after its earlier offer of $89 bucks, which many (including the DNA board) deemed too low when it was originally made in July.
They were not alone in asking for more.
Option traders had been positioning themselves for a higher bid, buying the March & June 90/95 call spreads. By buying the 90 calls, option investors are giving themselves the right to get long at $90. By selling the 95 call, they are capping their upside in exchange for offsetting the cost of the 90 call purchase. In short, they were saying Roche might “up” its original bid of $89 to $95.
The March 90/95 call spread was a trade that was covered on "Options Action" by our own Stacey Gilbert. At the time, it cost a total of $130 to put on, and would have returned $370 had Roche come back with a $95 bid. The options market priced in a 30% chance of success; not great odds, but certainly a nice payout if the deal went through.
The key point here is how much money you would have saved gaming DNA for a takeover using options. Had you used stock and purchased 100 shares last week, you'd be out about $300 and facing the prospect of additional losses. If you had put on Stacey's March 90/95 call spread, you would have lost a little more than half that $130. Currently, that March 90/95 call spread is going for $50, a loss of $80. Again, not great, but a lot better than the $300 stock loss.
One more point to make here: few expect the revised offer to succeed.
"Shareholders will see this for what it is - a poorly thought out gimmick," said Eric Schmidt, equity analyst over at Cowen and Company. (He rates DNA “Outperform”).
And the timing is particularly interesting. In April, Genentech will release Avastin trial results for use in colon cancer patients. If the results are successful, analysts say a higher Roche bid will be in the offing. If the results are poor, expect an even lower bid.
"April is key," said Schmidt.
One thing is clear: DNA isn't falling off option traders’ screens anytime soon.