A Checkdown Play on a Promising Small-Cap Biopharma
This trade offers a large potential return and a significant margin of safety.
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Today, we are highlighting small-cap biopharma Corbus Pharmaceuticals CRBP as a covered call trade idea. The stock has been one of the best performing in the entire market in 2024 after very encouraging trial data early this year sparked a large rally in the equity. However, the shares have recently pulled back around 10% to around $53.50.
The analyst community continues to remain bullish on the prospects of Corbus. Since early July, five Wall Street firms, including Wedbush, RBC Capital and Oppenheimer have reissued or assigned "Buy" ratings on the stock. Price targets range from $80 to $88 a share.
Corbus has a market cap of approximately $650 million but the liquidity around the options against this equity is decent. The company has two early-stage but intriguing drug candidates, which we will discuss below and also has funding in place to advance its pipeline well into 2027.
The premiums in the options around this equity are quite huge. Therefore, I can execute covered call orders with call strikes significantly below the current trading levels of the stock and still get more than a solid return while enabling huge downside protection. I may leave some money on the table if the rally continues or if the company gets bought out. And antibody-Drug conjugate (ADC) companies have been hot targets for M&A over the past year. However, no one ever went broke booking a profit.
Drug Candidates
Corbus is positioning its lead drug candidate, CRB-701, as a potential ADC upgrade over a compound on the market called PADCEV, which despite a black-box warning along with potential side effects such as peripheral neuropathy, could be doing $5 billion in annual sales by 2028. PADCEV was approved in 2019 and is used to treat bladder and urinary tract cancer.
In January, Corbus disclosed initial data from a small cohort (18 individuals) of a Phase 1 trial that was encouraging. Data showed an objective response rate of 43%. Fuller datasets were published in June that showed similar response rates for both urothelial and cervical cancer, and with individuals that had failed or were intolera,nt to standard treatment. These results have powered a monster move in the stock which started the year trading just above $6. It also made Corbus a potential buyout target given the potential market for CRB-701 even if data are early in the development cycle.
Corbus also owns another candidate dubbed CRB-913 that has shown good results in pre-clinical testing. This is a peripherally restricted cannabinoid type-1 (CB1) receptor inverse agonist. The company is targeting obesity with CRB-913, both as a potential monotherapy or as a potential combination therapy with blockbuster GLP-1 drugs such as Novo Nordisk's NVO Wegovy and Eli Lilly's LLY Zepbound. That said, dosing for Phase 1 development won’t start until the second half of 2025. However, CRB-913 is a nice "wildcard" asset at the moment.
Corbus is a nice story and could shoot higher or be purchased. The shares could also be vulnerable to a further pullback if volatility spikes again in the market. Therefore, I have executed covered call trades with a significant margin of safety on this name.
Option Strategy
This is how one can execute a covered call position in CRBP. As a reminder, covered call orders involve buying an equity and simultaneously selling just-out-of-the-money call strikes against the new position.
Using the March $40 call strikes, fashion a covered call order with a net debit in the $30.50 to $31.25 a share range (net stock price - option premium).
This strategy provides downside protection of better than 40% with upside potential of approximately 30% even if this stock falls significantly from here over the next seven months.
At the time of publication, Jensen was long CRBP.
