A Low-Priced Biotech Stock Rebounds, Lining Up for a Profitable Trade
The issues around this name are likely to be temporary and manageable. Here's the way I'm playing it.
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Today, we are teeing up another small-cap biopharma trade that has served us so well throughout 2024.
I am talking about Ardelyx, Inc. ARDX. The stock has recently started to rebound after a recent selloff and more upside could well be ahead. In addition, I have a covered call trade that will be quite profitable even if the stock falls back more than 10% over the option duration within the covered call holding. Options against the equity are lucrative and also provide solid liquidity.
Ardelyx stock took a bit of a nosedive in early November after a lawsuit the company had filed against the Centers for Medicare and Medicaid Services was dismissed. The lawsuit was seeking to bundle the company’s kidney disease therapy Xphozah (tenapanor) in the Medicare payment system applicable for dialysis services. This decision is likely to cost Ardelyx at least half of its projected sales of Xphozah in 2025 as the company now must negotiate much more complex reimbursement arrangements.
Meanwhile, there is legislation that appears to have bipartisan support called the Kidney PATIENT Act that is slowly winding its way through Congress. If passed, it would kick the can down the road on the bundling issue at least until 2027, if not beyond.
Tenapanor, also approved to treat IBS-C where it is known by its brand name Ibsrela, is unaffected by the recent events around Xphozah. This compound was launched in 2022 and is rapidly gaining market share in what is an approximate $2 billion annual market in the United States. In the first nine months of this year, Ibsrela delivered around $105 million of net revenues. This was just over double its sales in the first three quarters of 2023. For the full year, management has guided Ibsrela revenues to be between $145 million and $150 million.
Ardelyx is sitting on approximately $190 million worth of cash and marketable securities on its balance sheet, plenty of financial flexibility to work through the issues around Xphozah and continue to grow Ibsrela.
Analyst firms are starting to come around to see the company’s issues as likely temporary. Jefferies reissued their "Buy" rating and $11 price target on ARDX on November 20. On December 4, Leerink Partners bumped their price target up to $12 a share from $11 previously, while maintaining their buy rating on the stock.
Even after its bounce off its 52-week lows, the stock trades for just under $5.75. There is likely some more upside here, but with the covered call trade highlighted below, I will make money even if the shares give up their recent rebound over the option duration.
Option Strategy
This is how one can initiate a holding in ARDX with a covered call order. 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 July $5 call strikes, fashion a covered call order with a net debit in the $3.95 to $4.05 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 30%, with upside potential return of 25% even if the equity falls over 10% into mid-July.
At the time of publication, Jensen was long ARDX.
