A Boring Biopharma Can Be a Good Bet
Here's a cover-call play for ANI Pharmaceuticals.
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Investors have finally seen some long awaited and much needed breadth within the market rally in recent trading sessions. The fall in interest rates has made attractive some of the more oversold parts of the market, like small caps. The Russell 2000 had its best daily performance of the year this week and its seventh best day of the century.
Even the long-beleaguered small biotech and biopharma sectors are finally seeing an increase in enthusiasm. After once again holding long-term support levels, the SPDR S&P Biotech exchange-traded fund XBI has seen a sharp move up since the end of October. So let's play a small biopharma name, ANI Pharmaceuticals ANIP , for our covered call trade idea of the week. This stock has not participated in the recent rally in the sector. In fact, the shares have succumbed to some recent profit taking after the company posted third quarter results on Nov. 8.
That provides a solid entry point on this boring biopharma name. ANI Pharmaceuticals is executing well and is more than reasonably valued at current trading levels. The small drug manufacturer has several products on the market and sports an approximate $1 billion market cap.
It is hard to find much wrong with the third-quarter results ANI Pharmaceuticals disclosed 10 days ago. The company posted a profit of $1.27 a share, more than 40 cents a share above analyst expectations, as revenues rose just over 57% on a year-over-year basis to nearly $132 million. Management even lifted full year revenue guidance by 10% as well. The stock has rose more than 50% since early May going into the report, so this feels like some "buy the rumor, sell the news" trading action.
The company has benefited from recent product launches and revenues should grow around 50% for the year. Sales will slow significantly in FY2024 as only mid-single digit sales growth is expected. That said, the stock is more than reasonably priced at just under 12 times forward earnings. At its current run rate, the stock also has an approximate operational free cash flow yield of 10% and its balance sheet is in good shape. The stock trades just above fifty bucks a share and a couple of analyst firms reiterated Buy ratings with price targets in the low $70s after third quarter earnings were posted. I expect one or two more to follow the same path in the weeks ahead.
My only complaint about the stock is that it doesn't pay a dividend. And I create a synthetic dividend stream via the simple covered call strategy outlined below.
Option Strategy:
Here is how I would establish a new holding in ANIP using a covered call strategy. Selecting the April $50 call strikes, fashion a covered call order with a net debit in the $44 to $44.50 a share range (net stock price - option premium). This strategy provides downside protection of approximately 14% during the five-month option duration. This strategy also provides 13% return potential, even if the stock falls approximately 3% during the option duration.
Positions: Long ANIP and XBI
At the time of publication, Jensen was long ANIP and XBI.
