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Selling Puts For Merger Arbitrage Candidates (JUNO, BIVV, AKRX)

Merger Mondays never fail to disappoint! On 22nd Jan Monday, both Sanofi and Celgene announced separately that they had agreed on all cash mergers with Bioverativ Inc and Juno Therapeutics for $11.6 billion and $9 billion respectively. The cash deals translate into $105 per share for Bioverativ and $87 per share for Juno Therapeutics. During the previous week, I had picked up Juno Therapeutics after the buyout rumors surfaced and was lucky that the deal was not done at that time and I was able to ultimately pick up 250 shares at around $68 in a rather conservative trade.

Having been inspired by the Money Turtle blog, I decided to try my hand at selling puts for merger candidates especially for biotech as these are relatively low in terms of regulatory risks and merger timeline is rather short (3-4 months).

Let’s analyse the deals individually.

Healthcare giant Sanofi is buying Bioverativ to expand into the hemophilia market. Besides partnering with Alnylam for fitusiran, an investigational RNAi therapeutic, currently in development for the treatment of people with hemophilia A and B, Sanofi has no products in the pipeline for hemophilia market. By buying Bioverativ and gaining its two hemophilia products Eloctate and Alprolix, Sanofi hopes to compete in the hemophilia market and replace declining revenue in its other markets. The acquisition should sail through regulatory scrutiny. Financing wise, Sanofi has enough financial muscle to absorb the cost of the merger. Sanofi has indicated that the merger should be completed shortly after regulatory and shareholder approval and this should happen by the end of Q1 2018.

Bioverativ’s Jul 2018 $100 Put options are selling for $1.40 each with a margin of about $1800 per option contract, giving us a premium of 7.8%. If we are modelling an aggressive closing by 16th March,  we could be gaining about 60% on an annualized basis. With the $100 put options and share price hovering around $103.50, the risk of getting assigned before the merger is completed is low and even if the put option is assigned at $100, the yield to hold stock is at about 5%.

Juno Therapeutics’s merger is slightly riskier. Juno currently has no commerical products but have several candidates in the pipeline. Their CAR-T pipeline is their most valuable asset and Celgene is willing to pay $9 billion to get their hands on these new products. Again there is little product overlaps between the two companies although Celgene is partnering Bluebird Bio on another CAR-T product. Again regulatory approval should be quick and smooth and I anticipate merger completion to happen around the same time as Sanofi/Bioverativ.

Juno’s Mar 2018 $85 March Put options is more risky with share price at $85.70 and puts are selling for $1.00. The premium for the Juno options are about 5.5% with margin required at $1650 per option contract, annualized returns at 43%.

Based on the risk profiles, I would say that the Sanofi/Bioverativ’s merger offers a safer profile and more lucrative returns, although Juno’s Mar Put options will expire earlier and the returns for Bioverativ’s put options will deteriorate if the deal is delayed although that is an unlikely outcome. If investors would like to diversify, they can sell a mix of both options.

Finally, Akorn’s merger with Fresenius Kabi has not been completed yet and Akorn’s share price has started to dip to around $32.5. Maybe there could be some delays in the approval schedule but I still sold a few options at $0.55 for Mar 2018 expiry as I am still confident of the eventual approval.

5 Comments

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  1. Thanks for sharing your trades. For AKRX, what strike/month puts did you end up selling? Any projections for deal closing, its been open for a while now.

  2. Dear DT,

    Thanks for your kind comments. For AKRX I sold March $30… the premium is now going up as the share price goes down.. abit of anxiety there.. I m still projecting end of Feb for deal closing although there is very little news on the progress. One source i depended on is from Fresenius’s events and presentations. Their slides indicated FTC disposal process fully on track and envisioned early 2018 closing…

  3. Appreciate the quick reply. I’m considering selling a few Feb 30 puts. I recall they were guiding for end of 2017 close, so they have to be close now.

  4. Hope you didn’t get burn too bad on AKRX puts.

  5. i was short 5 $30 Mar puts… certainty didn’t foresee such an outcome but these things do happen in merger arbitrage! was assigned 1 put and bought back 4 puts before expiry.. now i am long 100 shares and 1 $20 Apr call

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