Sleepy Options Week Disrupted by Activity Around BioChem Pharma

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This week witnessed the options market get a little sleepy after record-setting volume on the major exchanges the week before. However, one name kept jumping up on the screen all week -- BioChem Pharma(BCHE Quote) -- and traders were far from in agreement on the reason.

BioChem, a maker of anti-HIV medicine, saw put volume soar way above its normal level. On Tuesday, investors began snatching up puts as 8,596 contracts were traded as compared with a call volume of 3,219 contracts. Put volume grew to 10,152 on Wednesday and 15,760 on Thursday. Call selling was also popular as 12,574 contracts were traded.

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Some traders chalked it up to pre-earnings jitters -- the company posted earnings on Thursday -- but there's more to it than that. In March, the Canadian-based outfit agreed to merge with Shire Pharmaceutical(SHPGY Quote), a drug company that specializes in treating central nervous system disorders and metabolic diseases. The terms of the deal consisted of a cash buyout at C$54.50, or $36. Under the agreement, BioChem is valued at $4 billion and the combined group at $8.5 billion. Rumors circulated this week that the deal was in jeopardy, which prompted investors to gobble up as many puts as they could get their hands on.

Option strategist Larry McMillan blames the rumpus surrounding the acquisition as the principal cause. In a research note, McMillan said, "BioChem reported worse-than-expected earnings, but it turns out the reason we've seen heavy put volume for the past couple of days was not the earnings. Rather, it was the fact that there are rumors that BCHE's takeover by Shire was in trouble."

The Canadian government initially said last month that it did not see the merits of the marriage, questioning how it would benefit the country. On Shire's request, an additional 30-day review period was granted -- that period ends today. As of the market's close, no news was released.

One trader begged to differ, saying much of the volume could be attributed to investors hedging against outstanding warrants. A subscription warrant entitles the holder to buy a proportionate amount of stock at a given price, typically higher than the share price at the time issuance.

On Friday, Salomon Smith Barney initiated coverage of Shire with an outperform, high-risk rating and target price of $65. Solly analysts said, "Based on fundamentals, we believe Shire has offered a full valuation for Biochem Pharma and at the current share price the deal is dilutive ... the merger has good strategic rationale, but the valuation looks high. It will not be an easy management task but the executive team has a track record that inspires confidence."

Shares of BioChem closed down 58 cents to $30.16 Friday; Shire finished down a nickel at $50.75.

Options Buzz

Elsewhere, investors were expressing bullish sentiment on other biotech stocks, particularly Amgen(AMGN Quote), which narrowly beat the Street's estimates Thursday. The company posted earnings of $305 million, or 28 cents a share for the first quarter.

Shares of the California-based company traded up a hefty $4.41, or 7.8% to $59.88 on Friday. In fact it was a good day all around for the sector. The Biotech Holders Trust traded up 5.1% to $123 at the closing bell Friday.