There are a number of online max option pain calculators: OptionPain, OptionCalc, MaxPain, MaxPa.in, Strike Pegger, etc.  Unfortunately, these online calculators do not have much historical data, so it’s difficult to determine how well the theory predicts stock prices at option expiration.  I’ve created a Max Pain calculator in Excel that allows you to enter historical option interest data to back-test how well the theory works.  For more on how Max Pain is actually calculated, see Optionetics.

From my limited analysis, the theory is somewhat useful for certain stocks.  The stocks should have a ton of open option interest like AAPL.  Not surprisingly, the theory works better as the option expiration date nears, i.e. the forecast tends to be more correct at two weeks vs. four weeks from expiration.  People (e.g. Travis Lewis at AAPLPain) are using variations on the theory to trade stocks and options successfully.

Bewick et al. Crit Care. 2004 Oct;8(5):389-94.

Clark et al. Br J Cancer. 2003 Jul 21;89(2):232-8.

Unfortunately, Excel does not include a function to graph Kaplan-Meier curves.  You have to reformat the data to be able to create survival curves in Excel.  Check out SCEW, an Excel add-in that allows you to create Kaplan-Meier curves.  You do not have to download the add-in if you’re willing to manually type in the spreadsheet formulas that reformat the data (see Appendix A).  Once you have reformatted the data, you can use the scatter graph function to create the Kaplan-Meier curve.  For your convenience, I have created an Excel spreadsheet on Scribd that you can use.

Companies developing oncology drugs continue to attract the most of money (34% vs. 31% for 2010).  CNS companies attracted 15% of VC investments, and anti-infectives got 12%.

Unfortunately, the downward trend is not surprising considering that the VC industry itself continues to contract.  LPs want liquidity in times of uncertainty, and venture capital as an asset class is not very liquid.  Other headwinds that may be contributing to the declines VC drug investments include a conservative FDA regulatory environment, as well as Medicare reimbursement uncertainty, expanding development timelines, and increasing costs.

That being said, there’s still a ton of unmet need in the drug therapy space and a ton of very exciting technology being developed.  Hopefully, enough money will be available to commercialize these new technologies.

Let’s say that you invested in Gilead (GILD) stock, and the probability that it goes up $1 is 25%.  In other words, the probability that you will make $1 is 25%:

P(G)=25%

Now, let’s say you also invested in Allergan (AGN) shares, and the probability that the stock increases by $1 is also 25%:

P(A)=25%

So if you invested in both GILD and AGN stocks, the probability that you make $1 is now:

P(G or A)=P(G)+P(A)-P(G and A);

where P(G and A)=P(G)xP(A) assuming that P(G) and P(A) are independent events

P(G or A)=25%+25%-6.25%=43.75%

In the previous example, diversifying your investments improves your odds of making $1 from 25% to 43.75%.  More often than not, however, the probability of success for different investments is not the same.  Let’s say that the probability that GILD stock increases $1 is only 5%:

P(G)=5%

Therefore, your probability of making $1 is not as good as before:

P(G or A)=25%+5%-1.25%=28.75%

In this last example, diversification does not reduce portfolio risk very much.  Keep in mind that the odds of the individual events will impact the odds of the entire portfolio before diversifying.  This is a common mistake made even by professionals.  It was “diversification” that led to the subprime crisis.  By combining a bunch of subprime home loans, bankers thought that they could reduce the risk of defaults.  Unfortunately, combining pieces of turd and putting frosting on it doesn’t make it a cake.

If you’re totally unfamiliar with patents, the USPTO patent site is a good place to start; take a look at the Concept to Protection video presentation.  Also check out Introduction to Patent Law from Fenwick & West LLP.  Brown & Michaels has a comprehensive site on intellectual property; I found the How Do I Read a Patent section very informative.  For more specific information regarding biotechnology patents, I suggest taking a look at How To Read a Biotech Patent by Carol Nottenburg.  All of these articles are helpful in understanding some of the legal terms commonly used in patents.

The FDA approved Dendreon’s cancer vaccine, Provenge, last year for the treatment of prostate cancer. Dendreon’s market cap is now over $4.5 billion. More recently, Amgen acquired BioVex for its oncolytic virus, OncoVex, currently in Phase 3 trials to treat metastatic melanoma and head and neck cancer. Amgen agreed to pay up to $1 billion for BioVex depending on sales milestones. Immunocellular Therapeutics just raised $8.1 million in a PIPE to complete a Phase 2 trial for its dendritic cell vaccine, ICT-107, to treat gliobastoma.

After reading Malcolm Gladwell’s Outliers, my perspective has changed a bit.  In Outliers, Gladwell suggests that people start to enjoy doing something once they get good at it.  Like playing a musical instrument, you don’t really enjoy it until you get proficient.  If anything, if you’re good at a certain type of work, it should give you more time to do what you enjoy outside of work.

I believe SNY will eventually get a deal done for a number of reasons. Mainly, SNY has a huge revenue hole to fill due to upcoming patent expirations. The French drug maker is also very interested in GENZ’s biologics technology. Many of SNY’s competitors, such as Pfizer, Merck, etc., have already made biologics acquisitions in recent years.

So what is the probability that SNY and GENZ will close the deal? If the two companies fail to reach an agreement, one could argue that the price of GENZ shares will fall to approximately $53, the price prior to SNY’s announced acquisition intentions. It’s difficult to say exactly what the price will be if the two companies do reach an agreement. Let’s assume that SNY will be willing to pay $79 (half way between $69 offered by SNY and $89 that GENZ is asking for). I actually think it will be more like $75 + $4 with CVRs, but I’m not accounting for CVRs just to keep the math simple. GENZ is now trading at about $73.5 a share. Based on these assumptions, the market is forecasting a 79% probability that SNY will acquire GENZ for $79 and a little over 93% that the acquisition price will be $75 (see calculations below).

(79% x $79) + (21% x $53) = $73.5

(93% x $75) + (7% x $53) = $73.5

These probabilities seem pretty reasonable considering how close to an agreement the two companies are. Keep in mind that these numbers should be taken with a grain of salt. The probability calculations are simple but flawed; there’s no chance that the final price will be greater than $89 and the numbers break down if you assume the acquisition price is less than the current share price. Nonetheless, the probabilities provide you with an idea of what the markets might be thinking.

“Avoid stocks whose names begin with Bio or end in -ics or -ix.”

-David Brown, Producer, New York City

Source: Esquire Magazine.