Lannett Company, Inc. LCI shares have dropped 58.3% in the past year as traders grow increasingly concerned about drug pricing and opioid litigation, but at least one large option trader is making a big bet on a Lannett rebound.
The Trades
On Tuesday morning, Benzinga Pro subscribers received two options alerts related to Lannett.
At 9:36 a.m., a trader bought 854 Lannett call options at a $7.50 strike price that expire on Sept. 20. The calls were purchased at the ask price of 45 cents and represent a $38,430 bullish bet that Lannett shares will reach at least $7.95 within the next two months.
At 9:42 a.m., likely the same trader bought another 752 Sept. 20 $7.50 Lannett call options at the ask price of 45.1 cents. The trade represented an additional bullish bet worth $33,915.
Why It’s Important
Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.
Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100% certain whether an option trade is a standalone purchase or a hedge against a stock position.
In this instance, given the combined value of the two trades was still less than $75,000, they are unlikely to be institutional bets.
What's Next
The bullish Lannett trades come just a day after Morgan Stanley downgraded Endo International PLC ENDP and Teva Pharmaceutical Industries Ltd TEVA due to concerns over the outlook for generic prescription drug pricing and ongoing opioid-related legislation, both of which have a direct impact on Lannett.
Teva has already paid an $85 million legal settlement with the state of Oklahoma related to its opioid marketing efforts. There are nearly 2,000 ongoing opioid-related lawsuits nationwide. In addition, at least 40 state attorneys general are currently charging Lannett and 19 other generic drug makers of price-fixing.
Morgan Stanley said Monday that pharma investors can expect significant earnings multiple contraction due to extended buying group pricing pressures coupled with increasing competition among generic drug manufacturers. The firm also said heavy debt loads coupled with the legal uncertainty will likely also prevent drug companies like Lannett from aggressively investing in acquisitions and growth initiatives.
Tuesday morning’s trader may believe fears over the impact of opioid and price-fixing lawsuits are overblown and the stock is already reflecting a weak drug pricing environment after selling off by nearly 60% from a year ago.
Lannett traded around $5.69 per share at time of publication.
Related Links:
Morgan Stanley Downgrades Teva, Endo On Drug Pricing And Litigation Concerns
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