Ariad Volatility Most in Russell 1000 on Drug Scrutiny: Options

Takeover speculation, shareholder activism and regulatory scrutiny that erased about $2 billion from its share value are making options in Ariad Pharmaceuticals Inc. among the most expensive in America.

Ariad’s implied volatility, the proxy for future price movement used to price equity derivatives, was 107.7 yesterday, the highest in the Russell 1000 Index and almost quadruple the average for companies in the gauge, according to data compiled by Bloomberg on three-month contracts closest to the shares. The cancer-therapy developer lost 64 percent of its market value last year and has rallied 19 percent in 2014.

Investors have been whipsawed over the past four months as the company’s only marketed drug, Iclusig, was pulled from the U.S. in October after regulators became concerned about its cardiovascular safety. That decision was partly reversed in December after approval of a new prescribing plan. The stock rose in January as traders bet the company may attract interest from larger drugmakers.

“The market is clearly pricing in a lot of theoretical instability going forward,” Adam Perlaky, chief strategist at New York-based New Albion Partners LLC, said in an interview yesterday. His firm has traded the most Ariad options among brokerages in 2014, according to data compiled by Vesel LLC. “They obviously had a major setback in October, but there have been buyback and takeover rumors.”

FDA Ruling

Shares of the Cambridge, Massachusetts-based company gained 1.8 percent to $8.13 yesterday. They traded as high as $25.16 in October 2012. Daily moves have averaged 8 percent since the FDA ruling in October compared with 3.1 percent in the five years before it, according to data compiled by Bloomberg. Its market value has declined from $3.5 billion four months ago to about $1.5 billion yesterday.

Ariad tumbled 66 percent on Oct. 9 for the biggest decline since the shares started trading publicly in 1994 after U.S. regulators placed a hold on enrollment in all trials of the company’s approved cancer drug Iclusig because of blood clots among participants.

It rallied more than 80 percent in late December as the Food and Drug Administration said the medicine could be sold again, to a narrower population of patients with increased safety monitoring.

The stock soared 34 percent on Jan. 23 and 24 after a report by the Daily Mail on takeover interest from bigger companies. Ariad has attracted interest from Eli Lilly & Co., GlaxoSmithKline Plc and Shire Plc, the U.K. newspaper said. Shire, based in Dublin, and Lilly, based in Indianapolis, both declined to comment at the time. London-based Glaxo didn’t respond to a request.

Intensified Competition

Hedging costs are elevated as the takeover may not materialize and competition around Ariad’s only drug intensifies, according to Lillian Seidman, an options strategist at Miller Tabak & Co. in New York.

The implied volatility on Ariad’s three-month options closest to the stock price has more than doubled in the past 12 months and the measure reached a four-year high of 133.9 in December. That compares with a high of 31.7 last week for the iShares Nasdaq Biotechnology exchange-traded fund. Companies in the Russell 1000 have an implied volatility of 28.2 on average, data compiled by Bloomberg show.

Liza Heapes, a spokeswoman for Ariad, didn’t return a phone call and an e-mail seeking comment on the options trading as well as the merger speculation.

Short Sales

Wagers against the company have risen six-fold since the October regulatory decision with the number of shares borrowed and sold short accounting for a record 24 percent of the shares outstanding on Feb. 6, according to Markit, a London-based provider of financial information services. That’s compares with an average of 2.9 percent for companies in the Russell 1000 where Ariad is the sixth-most shorted stock, Bloomberg data show.

Ariad may report its worst quarterly result since at least 2002 on Feb. 25 when it is projected to say that it lost 46 cents a share excluding some items in the three months ended Dec. 31, according to the average analyst estimate compiled by Bloomberg. The options market is implying a one-day move of 14 percent following the earnings release, compared with an average gain or drop of 7.3 percent after the last eight reports, according to the data.

‘Significant Value’

Takeover activity driven by the attractiveness of the Iclusig drug will push Ariad’s stock higher, according to Jim Birchenough, an analyst at BMO Capital Markets. He is first in Bloomberg’s absolute return ranking for Ariad, measuring the best total return based on the performance of the stock in the last year, the data show.

“There is significant value to be realized from Iclusig, AP26113, and the company’s highly efficient drug discovery platform,” Birchenough, whose $14 price target on Ariad is the highest among the 22 analysts who cover the company, wrote in a research note last month. AP26113 is a drug in development. “Ariad assets are likely to attract large pharma interest.”

In October, the activist investment fund Sarissa Capital Management bought 11.5 million shares, or about 6.2 percent, of the company and asked for representation on the board, according to a regulatory filing. The fund is run by Alex Denner, who formerly worked on health-care investments with billionaire Carl Icahn.

Sarissa Stake

Sarissa, Ariad’s second-largest shareholder, has since increased its stake in Ariad to 12 million shares, or about 6.5 percent, Denner said last month.

The Chicago Board Options Exchange Volatility Index, known as the VIX, fell 1.4 percent to 15.05 at 10:14 a.m. in New York. Europe’s VStoxx Index, a measure of Euro Stoxx 50 Index options prices, retreated 5.1 percent to 18.31.

Traders have increased holdings of bullish options by 15 percent since the end of 2013 to about 218,000 on Feb. 7. Put open interest jumped 11 percent during that time to approximately 98,000 contracts, data compiled by Bloomberg show. Both call and put ownership reached records in January.

“The bull and bear cases of Ariad have pushed open interest to pick up significantly in the past month,” Miller Tabak’s Seidman said yesterday via e-mail. “Since the short interest is so high, the calls could be positioned as a hedge against a short bias or a way to play on the long side.”