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I know this is not an option board, but I thinks it’s worth considering a SMALL amount of an options at times. When you see a singularly focused company with a binary event coming, owning an option can be lower risk than owning a stock. I think KITE is an excellent example.
KITE Pharma:
Business: Kite has a cancer therapy supercharging a persons own immune system to fight off cancer. It’s formally known as CAR-T or chimeric antigen receptor T-cell therapy. KITE’s drug, KTE-C19, has a success rates of 52 - 91% with no deaths. Juno Therapeutics is in the same field, but had to pull its lead drug because they caused brain swelling and deaths in 4 patients. KTE-C19 has not had those problems (so far), and it’s drugs are the only option for people with aggressive non-Hodgkin Lymphoma.
Binary Event Sometime during the 1st quarter 2017, the FDA will approve the application or ask for more data. If they do not get approval, my guess is that the stock would drop by ~50%. If they do get the approval, I think the stock will go up 250 - 500%.
Valuation SWAG Kite’s current market cap is $2.5B. As a comparison, Celgene’ Revlimid, J&J’s Imbruvica, and Amgen’s Blincyto run $300,000, $320,000, and $450,000 respectively. Kite estimates 7,400 patients annually so the total value of the therapy using $350,000 as an estimate is $2.6B. If we assume 50% margin and a 25 PE ratio, KITE would eventually be valued at about $32B. Assuming we could capture 50% of the market capitalization this year, we would be looking at a 540% increase during the year.
http://www.mmm-online.com/commercial/kite-pharma-to-keep-ant…
Strategy If I were to purchase this stock, I would have a maximum of 1% of my portfolio in it. My guesstimate for chances of failure is 40%. My guesstimate of a maximum loss is 50% (they have other drugs in the pipeline). My approach is to buy a Jan 2018 Call at $50 strike price (near the current stock price). The cost of the option is about 25% of the stock price. If the drug fails to get approval, I am out 0.25% of my portfolio. Unpleasant, but not a killer to my return. If the drug is approved, I could earn 3 - 5% more on my portfolio which is a pretty nice addition to a yearly return. I think the trick to using this approach is:
- Purchase limit options as if the contract = actual shares. I recommend a portfolio allocation of 1% so if 300 shares = 1% of your portfolio, purchase 3 contracts.
- Make sure the position has a better than 50% chance for success.
- Only use this strategy for Phase 3 testing or in applications in being evaluated.
- Be ready to kiss 0.25% of your portfolio goodbye. worst case, it is still better than losing over 0.5%.
I really like this company so if the NDA works out, I will convert my gains into actual stock and hold onto it for a while. My goal is to get into this stock at a LOW price with minimal risk.
Best,
bulwnkl
PS One of the better biotech analysts, Eric Schmidt rates KITE a buy, and TMFBiologyFool and TMFEBCapital seem to like it too.