May 11, 2011United StatesWeekly Options Watch Options ResearchTrades: JOYG, AAPL, VRTX, UTHR Trade Recommendations Summary (2) One Page of WOW! Introducing our new one page brief summary of all of our ideas with upcoming catalysts (3) Options Insight: Government exposure back in the spotlight (4) Detailed Trade ideas: JOYG, AAPL, VRTX, UTHR (5-8) Additional Add Trade Recommendations: ARUN, DELL, ERIC, GPS, JWN, NIHD (2) The Weekly Options Watch Chartbook published today includes our Correlation, Skew, Term Structure and Sector Implied Moves screens as well as most notable moves in the options market on the week.Options Insight: Government exposure back in the spotlightAugust puts are attractive on several stocks with high government Katherine Fogertey (212) 902-6473 email@example.com as momentum behind deficit reduction builds. We highlight nine Goldman Sachs & Co.stocks with an average of 69% of sales coming from government sources,but each has implied volatility below median levels over the past year. LLL, John MarshallLMT, NOC, DELL, RTN, UNH, XRX, HUM, and GD. (212) 902-6848 firstname.lastname@example.org Goldman Sachs & Co.Trades: JOYG, AAPL, VRTX, UTHRTrade 1: Buy calls on JOYG; Expecting a significantly better quarter.We’d buy attractive calls to express a bullish view ahead of the quarter.Our analyst is significantly above the Street; sees strong M&A potential.Trade 2: Buy Apple June Vol for June 6th Dev. Conf., a catalyst morestock moving than earnings. Apple shares tend to be even more volatilearound the Developer’s Conference than earnings. Our analyst sees this asan important positive catalyst for shares and expects the company todiscuss their cloud offering, a critical driver of the longer term outlook forthe company. Implied vol of 21% is near all time lows and not pricing inthis average +/-5.4% moving event, in our view.Trade 3: Buy VRTX July Calls: 3 Important Catalyst, M&A potential.Expecting upcoming Merck Boceprevir data, better than expected cysticfibrosis treatment data, and TVR data on May 23 to drive substantial upsidein shares. Following data, our analyst sees high potential for M&A.Trade 4: Buy UTHR Aug $75 Calls for FREEDOM data in June; CloseJan-12 $90 Call Sale. Our analyst has high conviction in FREEDOM data inJune. We would use gains on the call sale to add to long August $75 callsahead of this key data. Our analyst sees a strong potential for M&A.Trade Update: Close 1 trade at gain (UTHR) and 1 trade at loss (PCLN); 1trade was previously closed at gain (CMCSA).The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg ACcertification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S. This report is intended for distribution to GS institutional clients only.The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research
Trade recommendations summary We recommend adding to 10 positions, continuing to hold 6 positions, and closing 2 positions this week. 1 trade was closed on 4-May. The table below focuses on the catalyst- based recommendations discussed in the WOW; for our macro and thematic recommendations please refer to our other Cross-Product reports on our portal.Exhibit 1: Trade recommendations summaryRecommendations and indicative prices as of 10-May Initial price Current price Stock Trade Description Initiation date Stock Trade Stock Trade Add to these trade recommendations AAPL BUY JUN-11 $350 STRADDLE 11-May-11 349.45 19.40 349.45 19.40 ARUN BUY JUL-11 $33 CALL / SELL JAN-12 $40 CALL 24-Mar-11 31.42 0.30 32.71 -0.30 DELL BUY JUN-11 $15/$16 1X2 PUT SPREAD 4-May-11 15.80 0.06 16.41 0.02 ERIC BUY JUL-11 $15 CALL 4-May-11 14.98 0.75 15.38 0.95 GPS BUY JUN-11 $23 PUT 4-May-11 22.93 0.95 22.98 0.87 JOYG BUY JUN-11 $95 CALL 11-May-11 92.80 3.55 92.80 3.55 JWN BUY JUN-11 $49 CALL 4-May-11 48.10 1.45 48.26 1.36 NIHD BUY JUN-11 $41 CALL 2-Mar-11 39.65 2.67 44.06 3.80 UTHR BUY AUG-11 $75 CALL 9-Mar-11 68.69 8.39 66.69 4.50 VRTX BUY JUL-11 $55 CALL 9-May-11 54.54 3.90 57.05 5.70 Continue to hold these trade recommendations AMT BUY JAN-12 $50 CALL 16-Mar-11 50.02 5.30 53.69 7.00 BAC SELL JAN-13 $12.5/$25 STRANGLE 11-Feb-11 14.49 2.35 12.28 2.25 DIS SELL OCT-11 $45 COVERED CALL 27-Apr-11 42.33 1.54 43.91 2.14 JPM SELL JAN-13 $40/$60 STRANGLE 11-Feb-11 45.53 6.38 45.16 5.89 NOK BUY MAY-11 $8/$9 STRANGLE 6-Apr-11 8.77 0.55 8.74 0.14 VMC BUY MAY-11 $36/$41 PUT SPREAD 9-Mar-11 44.00 1.25 41.76 0.60 Close these trades PCLN BUY JUN-11 $525/$590 1X2 CALL SPREAD 20-Apr-11 525.53 16.05 528.50 14.60 UTHR SELL JAN-12 $90 CALL 9-Mar-11 68.69 5.80 66.69 4.60 Previously Closed Trades CMCSA BUY JUN-11 $25 CALL 20-Apr-11 24.29 0.62 26.22 1.61 Full trade idea references with risks: Legend: GPS, ERIC, PCLN, JWN, DIS, NIHD, DELL trade ideas (3-May) Add to these trade recommendations: These are open https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10965563&fn=/document.pdf trade ideas where we think there remains a good CMCSA trade closing (4-May) opportunity for investors to add new money. We believe the https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10970005&fn=/document.pdf trade is still attractive, the majority of the catalysts have not NIHD, AMT trade ideas (26-April) yet happened and there is still a significant portion of the https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10919110&fn=/document.pdf time to expiration. NOK trade idea (6-April) Continue to hold these trade recommendations: These https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10808751&fn=/document.pdf are open trade ideas where we think the risk/reward on the UTHR trade idea (9-Mar) trade is still favorable; we recommend that investors who https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10647114&fn=/document.pdf hold the position continue to do so. We would not BAC, JPM trade ideas (11-Feb) recommend adding new money for one of the following https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10494465&fn=/document.pdf reasons: (1) many of the key catalysts have passed, (2) the trade has moved significantly toward the place we expected it to move to, or (3) there is not enough time Close these trades: With this report, we close our recommendations on these trade ideas for one of the following reasons: (1) the major catalysts have passed, (2) the fundamental thesis has changed, or (3) the trade has already moved to where we thought it should.Source: Goldman Sachs Global Research estimates, Bloomberg.
Exhibit 1: One Page of WOW!Brief overview of our trade recommendations with upcoming catalysts . Current Price of Imp. Move on Volatility from Trade Earnings from 1- Option Trade Brief Summary of Trade Thesis Recommendation mth Options IdeaTrade Catalyst Stock Option Imp. 8Q Med. Imp. Real. For more details on our trade ideas and risks, please reference Exhibit 1.Thursday, May 12, 2011NIHD BUY JUN-11 $41 CALL Analyst Meeting $44.06 $3.80 9% 5% 31 23 Buy calls ahead of Analyst Day -- our analyst expects management to discuss a software patch that will enable NIHD to offer 3G services. Implied vol of 32% is not pricing in a strong move in our view.ERIC BUY JUL-11 $15 CALL Analyst Meeting $15.38 $0.95 n/a n/a 26 28 With implied volatility lower post earnings ahead of a potential stock moving catalyst (Analyst Meetings on May 12), we view calls as attractive stock replacement to equity positions, especially considering our analysts longer term concerns, including peaking gross margins and business mix. Implied vol is near 1 yr lows.JWN BUY JUN-11 $49 CALL Earnings $48.26 $1.36 5% 3% 30 17 Our analyst sees upside risk to estimates for the quarter and FY2011. JWN is benefiting from a healthy consumer who is less affected by rising gas prices. Department stores are better positioned to get more favorable pricing from vendors, helping to offset cost inflation.Tuesday, May 17, 2011DELL BUY JUN-11 $16/$15 1X2 Earnings $16.41 $0.02 8% 4% 36 28 Options are implying a +/- 8% move on earnings vs median 8 qtr move of +/-4%. With most of the supply chain PUT SPREAD already reporting, our analyst does not see a significant surprise for DELL. Importantly, while tablets are a risk to shares, DELLs heavy enterprise exposure could mitigate the near term impact. Additionally, DELL is developing its own tablet offering geared to the enterprise. Breakeven: $14.06 to $16.06 on expiration.Thursday, May 19, 2011ARUN BUY JUL-11 $33 CALL Earnings $32.71 $2.90 10% 11% n/a n/a Key beneficiary of enterprise tablet adoption. Analyst sees 18% upside to shares. SELL JAN-12 $40 CALLGPS BUY JUN-11 $23 PUT Earnings $22.98 $0.87 4% 2% 30 21 Our analyst sees downside risks to earnings given (1) exposure to lower end consumer makes passing on cost inflation more difficult; (2) tough comps from Old Navy; (3) near peak gross margins; (4) balance sheet restructuring.VRTX BUY JUL-11 $55 CALL Boceprevir Data $57.05 $5.70 n/a n/a 41 50 Our analyst is positive on VRTX ahead of three catalysts, including the all important May 23, 2011 TVR study (this week) / CF data. He sees VRTX as a compelling M&A candidate following approval for this important drug, where he is more Data / May 23 positive on both the label and the pricing potential for the drug. Implied vol of 41% is 89 points below recent TVR Data realized in the name.Thursday, June 02, 2011JOYG BUY JUN-11 $95 CALL Earnings $92.80 $3.55 5% 4% 39 38 Our analyst is expecting a significantly better quarter for Buy rated JOYG, supported by improving seasonality, stronger than expected supply / demand dynamics evidenced by BUCY results this quarter, a bullish view on mining capex budgets, and a longer term bullish stance on M&A potential. Options are implying a +/-5% move on earnings, inline with average. Our analyst has 30% upside to 12-mth price target of $120.Monday, June 06, 2011AAPL BUY JUN-11 $350 Earnings $349.45 $19.40 5% 3% 22 17 Implied volatility of June options appears too low to us, trading close to all time lows, considering that Apple STRADDLE shares have averaged a 5 day move of -5.4% on their Worldwide Developers Conference, more than the average move on earnings of +/-3%. Our analyst sees 35% upside to CL-Buy rated shares and is bullish on near term catalysts.Source: Goldman Sachs Research estimates; pricing as of May 9, 2011. * Option vol for applicable term. For 22mth options, we compare to 24 month realized vol. For all other terms, where applicable, we compare torecent realized for the same term as implied.
Options Insight: Hedge stocks with government spending exposure August puts are attractive on several stocks with high government exposure as momentum behind deficit reduction builds. We highlight nine stocks with an average of 69% of sales coming from government sources, but each has implied volatility below median levels over the past year. LLL, LMT, NOC, DELL, RTN, UNH, XRX, HUM, and GD. Government spending reductions have already impacted company results. Over the past six months, CSC, CSCO, UIS, LLL, IBM and several other companies have noted the negative impact of government spending reductions on their results or orders. We see the potential for more anecdotal evidence to emerge. Deficit reduction momentum likely to continue: Our Washington, D.C. analyst Alec Philips and our Economics Research team note that the growing momentum behind deficit reduction implies the possibility of greater spending cuts and/or tax expirations than they are currently assuming. In light of the upcoming catalysts, they expect investors to continue to focus on the impact of deficit reduction: This week: President is expected to meet with Senate Democrats and Republicans. The House is expected to set top-line appropriations for FY2012. Week of May 16: The debt limit is reached and the Treasury will likely begin accounting maneuvers to avoid increased borrowing. Senator Conrad may release a budget resolution draft. August 2: Our economists expect the treasury to exhaust accounting strategies. August: The Congressional budget office is scheduled to release an updated budget outlook.Exhibit 2: Buy puts to hedge stocks with high government exposure, low implied vol and low put skewGovernment exposure is greater than 25%, Analyst Neutral or Sell Rated, 3-mth implied volatility and normalized skew is below50th percentile over past year Upside YTD 52 Next 3-mth Option Stats 3-month % Sales Analyst Stock to 12m Price Week Earnings Imp. Imp - Norm. 5% OTM Sector to Govt Rating Price Target % Low Date Vol %-ile Real %-ile Skew %-ile put costDELL Hardware 27% S $16.19 (32%) 19% $11.34 17-May 32 40% (2) 22% 0.10 4% 4%LLL Industrials 91% S $83.22 (16%) 18% $66.11 26-Jul 21 6% 4 74% 0.16 17% 3%NOC Industrials 90% S $64.81 (14%) 10% $48.53 29-Jul 22 14% 5 80% 0.11 0% 3%LMT Industrials 97% S $79.93 (12%) 14% $67.68 26-Jul 19 11% 3 47% 0.15 27% 2%RTN Industrials 88% N $49.51 (11%) 7% $42.65 29-Jul 21 13% 4 83% 0.13 9% 3%GD Industrials 80% N $74.57 3% 5% $55.46 28-Jul 22 15% 1 43% 0.19 23% 3%XRX Hardware 30% N $10.18 8% (12%) $7.67 28-Jul 30 28% 6 83% 0.13 21% 4%HUM Healthcare 81% N $77.09 9% 41% $43.17 1-Aug 28 16% 4 20% 0.12 11% 4%UNH Healthcare 36% N $50.47 13% 40% $27.13 19-Jul 26 20% 3 19% 0.16 41% 3% average 69% (6%) 25 18% 52% 17% 3%Source: Goldman Sachs Research estimates. Options prices on stocks with high government sales exposure are in-line with the average stock in the S&P 500, despite higher fundamental risk. 3 month implied volatility for the nine stocks we highlight is 25%, in-line with the average stock in the S&P 500. Despite the increased focus on potential decreases in government spending, implied volatility has traded in-line with the average stock over the past several months. We favor buying puts on these stocks now, while implied volatility is in its 18th percentile on average. We believe that buying puts on these stocks is also attractive for investors looking to hedge government exposure risk in their portfolio. We see the potential for correlation between
May 11, 2011 United States these stocks to rise off low levels as government spending risk comes into focus. Basket option buyers benefit from a rise in correlation. Exhibit 3: Options prices on gov’t exposed stocks are no more expensive than average 3 month implied volatility for our basket of 10 stocks; S&P 500 average stock implied vol 40 Average stock vol 38 Government exposure stock vol 3 month implied volatility 36 34 32 30 28 26 24 22 8-May 8-Aug 8-Nov 8-Feb 8-May Source: Goldman Sachs Research estimates. Puts on defense stocks are particularly attractive (LLL, LMT, NOC) ahead of catalysts Goldman Sachs aerospace and defense analyst Noah Poponak sees headwinds to defense stocks and recommends that investors sell shares. He believes the assignment of Leon Panetta to be the next Secretary of Defense, replacing Robert Gates, and Army General David Petraeus becoming Director of the CIA (pending Senate approval) could have negative implications for defense stocks. He sees these two appointments as likely to curtail spending and focus heavily on expense control. He sees this as one more example of pressure on Department of Defense spending, which he sees lasting for an extended period of time given long spending cycles. Further, he sees valuation as rich taking into account downward revisions to the FY2012 plan. Three month puts capture continued budget catalysts and earnings.Goldman Sachs Global Economics, Commodities and Strategy Research 5
May 11, 2011 United StatesTrade 1: Buy calls on JOYG; Expecting a significantly better quarter Buy June $95 calls for $3.55 (3.8% of stock, $92.80) ahead of earnings 2-June and M&A potential. Goldman Sachs Machinery analyst Jerry Revich sees 29% upside to his 12-mth price target of $120 on Buy rated shares, and sees 13% upside to consensus 2QFY2011 estimate of $1.35 driven by sharply higher aftermarket demand and operating leverage. For next quarter, he expects JOYG to report $1.63, nearly 14% above the Street’s $1.43 estimate. Key reasons why he is bullish: • Strong read-across from competitor BUCY’s results: JOYG’s largest competitor, BUCY, reported 20% sales growth in underground mining and around 10% organic growth in Surface driven by rising parts consumption on recently installed machines. Our analyst notes that new equipment orders were also strong, with a very robust 1.9X book to bill. He sees this as a positive data point for industry demand and supporting his 17% above Street estimates for JOYG (2012E $7.55 EPS vs Street $6.46) and his thesis that seasonality is improving for the mining equipment stocks. • Industry Supply/Demand Dynamics Work in JOYG’s Favor: Tight mine supply constraints will drive mining costs and aftermarket sales meaningfully higher over the course of this cycle. • Mining capex budgets still too low: Consensus views of a meaningful slowdown in mining capex later in this cycle will continue to be revised higher. Options are not pricing in strong fundamental trends for JOYG, or M&A potential. With three month implied vol at 39%, only 5% from one year lows, we recommend that investors buy options ahead of earnings. We recommend June options over longer dated options given a surprisingly flat to upward sloping term structure, in sharp contrast to our analyst’s strong views around the potential for M&A. In fact, he incorporates a 30% probability of M&A in his 12-month price target (M&A Value $136) and sees CAT’s recent bid for BUCY as a strong leading indicator that JOYG too will be acquired. One month normalized skew is moderate, suggesting a more balanced relationship between put and call demand. Investors who buy call options risk loss of the entire premium paid if the underlying security finishes below the strike price at expiration.Trade 2: Buy Apple June Vol for June 6 Dev. Conf., a catalyst morestock moving than earnings Buy June $350 straddles for $19.40 (5.5%, stock at $349.45) ahead of June 6 Developer’s Conference; vol near all-time lows yet shares move more on this event than on earnings. Our Hardware Analyst Bill Shope rates Apple shares CL-Buy and sees 35% upside to his 12-month price target of $470. Apple shares are now trading at just 11X his 2012 EPS, a 50% discount to the average multiple of 22X, despite 22% growth in 2012, largely due to concerns around supply chain disruptions. We view implied volatility in June options as attractive, at just 21% which is near all time lows and a reasonable 4 points over recent realized, ahead of the June 6 Developer’s Conference. June 6: Developers Conference is likely to be an important catalyst for shares, even more than earnings. Our analyst expects Apple to focus on Apple’s upcoming cloud services, which should further propel the company’s iOS platform ahead of the leading tablet and smartphone competition. He views this as an important positive catalyst for the stock and to further solidify Apple’s lasting competitive advantage versus smartphone peers. While our analyst is positive on this catalyst, we note that in each of the seven years,Goldman Sachs Global Economics, Commodities and Strategy Research 6
May 11, 2011 United States Apple shares have traded lower the five days around the WorldWide Developer’s Conference (average move -5.4%). To put this in comparison, the average move of Apple shares on earnings over the past eight quarters has only been +/-3%. Our analyst believes that supply chain hiccups generally offer the best opportunities for Apple’s stock, and he sees this time with iPhone and iPad as no different. The iPhone refresh now is being pushed out to September (which is actually a positive for June sales versus expectations), and the iPad2 sales last quarter were below expectations given tight supplies. Importantly for these two products, he doesn’t see the delay in the iPhone refresh as impacting sales given it will be ready for the all important December selling season. Our analyst views Apple as the best positioned company to handle supply chain disruptions given their large size and importance in the marketplace. We’d buy inexpensive Apple options ahead of the Developers Conference. One month implied volatility of 22% is trading near historical low of 20% (going back to 1996) and versus recent realized of 18%. While options are trading 4 points over realized, typically rich for Apple, we see average move of -5% around the Developer’s Conference, combined with our analyst’s strong upside view on shares, as a key catalyst to buy vol, given the average daily move of shares +/-1.1%. If held to expiration, June $350 straddle buyers profit if shares close up 5.7% to $369.40 or down 5.4% to $330.60 on June expiration. Investors who hold straddles to expiry risk losing their entire premium paid.Trade 3: Buy VRTX July Calls: 3 Important Catalyst, M&A potential Buy July $55 calls for $5.70 (10% of stock, $57.05) ahead of three key drug catalysts and M&A potential. Goldman Sachs SMid Cap Biotechnology Analyst Terence Flynn expects three upcoming catalysts to be positive for Buy-rated VRTX. Following the upcoming May 23 approval date for VRTX’s key drug, TVR, he believes VRTX may become a more attractive M&A value of $87. This week: Approval of Merck’s Boceprevir (and pricing decision) should be stock moving for VRTX. MRK’s competitor drug Boceprevir could be approved first and set the pricing bar. While he is positive on the potential for both drugs, he recommends adding to VRTX positions in the event of any weakness. This month: “Significant” upside potential to shares from CF combo data; market opportunity could be double vs low expectations. While TVR for hepC is the major driver of VRTX, our analyst is bullish on the potential for the company’s emerging cystic fibrosis (CF) drug pipeline. He expects VRTX to report interim data this quarter (he expects May) from a Phase 2 CF trial of VX-770 in combo with VX-770 (less than $500 mn). While this is not central to his bullish view on VRTX shares, he sees the CF pipeline (treatment opportunity) as underappreciated by investors, especially given low expectations for success. May 23: TVR approval date – Broader label, higher pricing, expecting positive catalyst for shares. Our analyst expects TVR to have a broader label than MRK’s Boceprevir and he is above consensus for TVR pricing at $45k/yr. Buy options as these three significant catalysts to drive should drive realized volatility, and shares, higher. We recommend that investors buy the July $55 calls for $5.70 (10% of stock, $57.05). Three month implied vol of 41% is 9 points below realized, and in line with its 1-yr median. We view options as attractive in light of significant stock moving catalysts. We would buy July options instead of June given a downward sloping term structure, opportunity to capture more catalysts, potential risk of key catalystsGoldman Sachs Global Economics, Commodities and Strategy Research 7
May 11, 2011 United States slipping, and M&A potential. Investors who buy call options risk loss of the entire premium paid if the underlying security finishes below the strike price at expiration. Trade 4: Buy UTHR Aug $75 Calls for FREEDOM data in June; Close Jan-12 $90 Call Sale Buy UTHR Aug $75 Calls for $4.50 (6.7%, stock $66.69) ahead of June FREEDOM data and close the Jan-12 $90 call sale at a gain. On March 9, we recommended that investors buy the August $75 call for $8.39 (stock $68.69), and sell the Jan-12 $90 call for $5.80 to help fund the purchase ahead of several key catalysts, including earnings and June data on FREEDOM, the biotech’s main drug to treat Pulmonary Arterial Hypertension (PAH). As we get closer to the critical June date, we recommend that investors close the Jan-12 call sale at a gain (ask $4.60) and add to August $75 calls, to increase upside potential into the event. Our SMid Cap biotechnology analyst Terence Flynn rates UTHR shares Buy and sees 23% upside to his $82 12-month price target. Mid-June Phase 3 trial data is a critical PAH catalyst. Key upcoming catalysts center around Phase 3 trial trail results for FREEDOM-M in June and FREEDOM-C2 in September. These trials are studying FREEDOM as the new oral formulation of the company’s franchise drug Remodulin for PAH. Our analyst is more optimistic than the Street that this drug will succeed in Phase 3 and expects positive data from the first trial in mid-2011 in June. He expects that the approval of oral Remodulin would move this drug class upstream to first/second line patients (a $1bn+ market opportunity) and drive long-term growth; he continues to model 2015 sales of oral Remodulin of $400mn vs. consensus of $0-$200mn. Our analyst is more optimistic than the market that oral Remodulin will succeed in Phase 3 and assigns a 75% probability of success to the FREEDOM trials. (1) While the initial Phase 3 trial of oral Remodulin (FREEDOM-C, released in 2008) did not meet the primary endpoint, he believes the trial demonstrated that the drug has activity, based on a subset analysis of the data. (2) He notes that the new titration schedule of oral Remodulin appears to be having a positive impact on tolerability in the ongoing FREEDOM-M and FREEDOM-C2 Phase 3 trials, based on blinded discontinuation rates from the trials. (3) Dose titration has been used successfully for prostanoid drugs (Remodulin, Flolan and Beraprost). (4) The monotherapy design of FREEDOM-M (the first Phase 3 trial that will read out) represents a low hurdle to demonstrate a benefit. Options are not pricing in nearly enough volatility, in our view, for June – September timeframe, and are not reflecting M&A potential. We’d expect implied volatility to move higher for Aug options given the importance of this catalyst. In fact, we’ve recently seen biotech options trade at much more significant premiums ahead of this type of catalyst. 3m implied vol of 54% is elevated versus 3-mth realized of 20% but likely to stay bid, in our view, until this important catalyst passes. Investors who buy call options risk loss of the entire premium paid if the underlying security finishes below the strike price at expiration.Readers please note, we are now including the screens typically found in the back of our Weekly Options Watch inThe Weekly Options Watch Chartbook, also published today. Rating and pricing information Apple Inc. (B/N, $349.45), Joy Global Inc. (B/N, $92.80), United Therapeutics Corporation (B/N, $66.69) and Vertex Pharmaceuticals, Inc. (B/N, $57.05).Goldman Sachs Global Economics, Commodities and Strategy Research 8
May 11, 2011 United StatesReg ACWe, Katherine Fogertey and John Marshall, hereby certify that all of the views expressed in this report accurately reflect our personal views about thesubject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,related to the specific recommendations or views expressed in this report.DisclosuresOption Specific DisclosuresPrice target methodology: Please refer to the analyst’s previously published research for methodology and risks associated with equity pricetargets.Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market levels.All prices and levels exclude transaction costs unless otherwise stated.Buying Options - Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) thestrike price at expiration. Investors who buy call or put spreads also risk a maximum loss of the premium paid. The maximum gain on a long call orput spread is the difference between the strike prices, less the premium paid.Selling Options - Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors whosell covered calls (sell calls while owning the underlying security) risk having to deliver the underlying security or pay the difference between thesecurity price and the strike price, depending on whether the option is settled by physical delivery or cash-settled. Investors who sell puts risk loss ofthe strike price less the premium received for selling the put. Investors who sell put or call spreads risk a maximum loss of the difference betweenthe strikes less the premium received, while their maximum gain is the premium received.For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at thesettlement price on expiry.Company-specific regulatory disclosuresThe following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companiescovered by the Global Investment Research Division of Goldman Sachs and referred to in this research.Goldman Sachs has received compensation for investment banking services in the past 12 months: Apple Inc. ($349.45)Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Apple Inc. ($349.45), JoyGlobal Inc. ($92.80) and Vertex Pharmaceuticals, Inc. ($57.05)Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Apple Inc. ($349.45)Goldman Sachs had an investment banking services client relationship during the past 12 months with: Apple Inc. ($349.45), Joy Global Inc. ($92.80)and Vertex Pharmaceuticals, Inc. ($57.05)Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Apple Inc. ($349.45)Goldman Sachs had a non-securities services client relationship during the past 12 months with: Apple Inc. ($349.45)Goldman Sachs makes a market in the securities or derivatives thereof: Apple Inc. ($349.45), Joy Global Inc. ($92.80), United TherapeuticsCorporation ($66.69) and Vertex Pharmaceuticals, Inc. ($57.05)Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on theopposite side of orders executed on the relevant exchange: Apple Inc. ($349.45), United Therapeutics Corporation ($66.69) and VertexPharmaceuticals, Inc. ($57.05)Disclosures required by United States laws and regulationsSee company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manageror co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes amarket in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,professionals reporting to analysts and members of their households from owning securities of any company in the analysts area of coverage.Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analystas officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as anofficer, director, advisory board member or employee of any company in the analysts area of coverage. Non-U.S. Analysts: Non-U.S. analysts maynot be associated persons of Goldman Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions oncommunications with subject company, public appearances and trading securities held by the analysts.Additional disclosures required under the laws and regulations of jurisdictions other than the United StatesThe following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States lawsand regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the AustralianCorporations Act. Canada: Goldman Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent itrelates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by thecompany of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research maybe obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in thisGoldman Sachs Global Economics, Commodities and Strategy Research 9
May 11, 2011 United Statesresearch may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subjectcompany or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reportsdistributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having productpromotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Furtherinformation on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number:198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider theirown investment risk. Investment results are the responsibility of the individual investor. 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Where applicable, the Brazil-registered analyst primarily responsible for the content of thisresearch report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise atthe end of the text.European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is availableat http://www.gs.com/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing Conflicts ofInterest in Connection with Investment Research.Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the KantoFinancial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan(FFAJ). 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The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in anadvisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). GoldmanSachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis fordetermining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating andprice target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspendedcoverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The informationis not available for display or is not applicable. Not Meaningful (NM). 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