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March 14, 2024

Trade Idea: ALT $10.02 (Altimmune Inc.)

Buy June 21st $12 Calls for $2.10

Altimmune, a smaller biotechnology firm with a market capitalization of ~$500 million, is developing an obesity treatment named pemvidutide that shows great promise.

Timeline Overview

Let me bring you up to speed with the key events.

November 7th
During Altimmune's earnings call, Chief Medical Officer Scott Harris mentioned:

“We're optimistic about the pending results and look forward to ongoing discussions with the FDA about the design of our Phase 3 program, which we hope to commence with a partner in the second half of 2024.

In a later Q&A session, Altimmune's CEO, Vipin Garg, remarked:

“As we have said before, obviously, this 48-week data is very fast moving our partnership discussions forward with… we've already received multiple discussions out there, and our goal is to be Phase 3 ready by the second half of next year, and that gives us enough time, plenty of time to also line up a partner to initiate that Phase 3 program. So that's really what we are executing to, we feel that with the data that we are expecting at 48-week read out that would give us the best opportunity to line up a partner to move forward into Phase 3.”

November 30th – December 1st 

Altimmune announced encouraging preliminary results from Phase 2 trials of pemvidutide. The announcement led to a surge in stock price in after-hours trading and nearly doubled at the opening of the next trading session, though it eventually retreated as investors took profits.

Focus then shifted towards initiating Phase 3 trials, especially since management had indicated just three weeks prior that they were already in discussions with several potential partners for these trials.

December 4th

Over the subsequent weekend, Roche made a decisive move by acquiring Carmot Therapeutics for $2.7 billion in cash. Carmot Therapeutics, still in the private sector and specializing in obesity drugs, had a lead drug that had only completed Phase 1.

This acquisition by Roche made headlines and significantly impacted Altimmune's market position, propelling its stock price to around $12 over the following four weeks.

Multiple Buyers?

It's plausible to suggest that Roche might have been in discussions with Altimmune.

Roche's rapid acquisition move, coming just a weekend after Altimmune's positive Phase 2 results were announced, indicates a sense of urgency, likely spurred by competition from other interested parties.

The leap from Phase 1 to Phase 2 in drug development is considerable. While about 70% of drugs move from Phase 1 to Phase 2, only 33% progress from Phase 2 to Phase 3. This makes Altimmune's strong performance in Phase 2 potentially as valuable, if not more so, than Carmot Therapeutics' Phase 1 asset, especially considering both companies have other promising candidates in their pipelines.

One could speculate that Roche might have attempted a bid for Altimmune over that weekend and concluded that $2.7 billion would not suffice.

Considering Altimmune's market cap of ~$500 million and a stock price of $10.02, bids in the range of $2 billion to $3 billion would significantly revalue the company, suggesting share prices of $40 to $60, respectively.

In the current market environment, such a scenario is conceivable.

Partnership vs. Buyout

Altimmune could also opt for a more traditional route via an "option," partnering with a major pharmaceutical firm that would invest funds to support the Phase 3 trial for a share in the future revenues. 

This approach can attract a wider pool of competitors, as more companies might be willing to invest several hundred $millions to fund Phase 3 trials than those able to commit several $billions on a speculative basis. 

Given the fierce competition in the weight-loss drug market, the entry price for these "options" has surged. Altimmune's management might leverage this into a higher upfront payment than usual, asserting that companies are ready to invest heavily without requiring Altimmune to shoulder further risk. 

Altimmune, therefore, finds itself in a favorable position. Roche's quick acquisition of Carmot Therapeutics signals a heated race among major pharmaceutical companies to secure a stake in promising weight-loss treatments.

Options Flow & Targets

The surge in ALT options volumes caught my attention in late-December and January.

On December 27th, someone bought 1,000 ALT January 2025 $10 - $25 Call Spreads for $2.50. This setup offered a maximum potential return of $12.50 for every $2.50 invested, translating to a 5 to 1 payout ratio.

This individual opted for the call spread rather than acquiring the ALT January 2025 $10 Calls directly for $5.50.

This choice suggests a belief that achieving more than a $27.50 profit per option (equivalent to a 5 to 1 payout) by holding the $10 calls alone was unlikely. Had they believed otherwise, they would have preferred the $10 calls for their unlimited upside potential beyond the spread's cap.

Breaking down the math: combining the strike price ($10) with the premium ($5.50) and the targeted profit ($27.50) points to a breakeven stock price of $43. 

In essence:

  • Opting for the call spread means aiming for a 5X return on investment with ALT's price reaching or surpassing $25.
  • Purchasing outright calls at $5.50 seeking the same 5X return ratio requires ALT's stock to exceed $43. However, these calls offer unlimited upside beyond $43, enhancing potential profits per dollar invested beyond what the spread allows.

The preference for the first option implies a belief that ALT's share price won't climb above $43.

Further intriguing activity was noted on January 9th, with an acquisition of 2,500 ALT March 15th $20 calls at approximately $1.00 each. The implied target range for ALT's stock price, based on the new options chain, was around $30 to $35.

This speculation continued on January 18th, as another transaction involved buying 10,000 ALT March 15th $20 calls at roughly $0.91, suggesting a similar target price range of $30 to $35.


The Trade

The ALT management team is actively seeking a partnership, and it's clear to me that there are numerous contenders eager to join the fray.

For major pharmaceutical companies, the opportunity in weight-loss medications is too significant to ignore. Obesity is a pivotal issue, contributing to a myriad of severe health conditions affecting individuals across all age groups.

To put it in simpler terms, let's consider the perspective of a large pharmaceutical corporation...

Addressing obesity effectively could reduce the prevalence of numerous "other diseases" for which your company markets treatments, thereby potentially diminishing your profits from these drug sales. Consequently, you wouldn't want to be left with a surplus of medications that have become unnecessary.

This underscores the reason the stake in the weight-loss medication market is valued so highly.

However, this Trade Idea is not without risk.

It's important to mention that on February 12th, short-sellers entered the scene with a critical report from Kerrisdale. This report cast doubt on the Phase 2 results, raised questions about the integrity of the management, and speculated on the drug's competitiveness against leading market options. 

Two days later, Jefferies countered these claims, arguing that the report had misinterpreted or incorrectly categorized the data presented by Altimmune. They stood by their $35 Price Target for Altimmune's stock.

In light of these developments, the following trading strategy presents a compelling risk-reward opportunity:

Buy ALT June 21st $12 Calls for $2.10.
The ALT Target Stock Price is $22.50 - $25.00.


Please note: This is a Winning Picks Premium Trade Idea and we at OptionsGeek are long Call Options in this name.

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4th Quarter 2024 Results
Oct. 1st - Dec. 31st

28 Trade Ideas were given during this period with 19 reaching Triple-Digit Returns, or 68%. One Trade Idea is still pending. Of the 9 Trade Ideas that did not reach 100%, 6 of them were Puts.  

+1,351%   TSM Calls
   +738%   IOVA Calls
   +525%   NVO Calls
   +480%   OSTK Call Spreads
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   +150%   PYPL Calls
   +132%   MGM Calls
   +129%   LVS Calls
   +120%   GLD Call Spreads
   +115%   KVUE Call Spreads
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   +108%   MGM Calls 108%
   +100%   AFRM Calls

This presentation is for educational purposes only and is not a recommendation or endorsement of any particular investment or investment strategy. Past performance does not indicate or guarantee future success. Returns will vary and all investments involve risks, including loss of principal.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker, The Options Industry Council at One North Wacker Drive, Chicago, IL 60606, or by visiting www.OptionsEducation.org.

Felix Frey Is not registered as an investment adviser nor a broker/dealer with either the U.S. Securities and Exchange Commission or any state securities regulatory authority. All users of this video and/or website must determine for themselves what specific investments to make or not to make and are urged to consult with their own independent financial advisors with respect to any investment decision. The viewer bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. All opinions, analysis and information included on this report, video and/or website are based on sources believed to be reliable and written or produced in good faith, but should be independently verified, and no representation or warranty of any kind, express or implied, is made, including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, I undertake no responsibility to notify such opinions, analysis or information or to keep such opinions, analysis, or information current. Also be aware that owners, employees, writers, or producers of and for Felix Frey or OptionsGeek,LLC. may have long or short positions in securities that may be discussed on this report, video and/or website. Past results are not indicative of future profits.


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