Accumulating a Position in an Attractive Mid-Cap Biopharma Stock
Here's how and why I am establishing a position in this California-based name.
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It is nice to see some lower entry points after this week’s selloff in an overbought market. This is especially so if one has plenty of dry powder to slowly deploy in what I believe will be a longer-term pullback. That said, I always like to do things incrementally as I never quite get the exact market inflection points timed out anywhere close to perfectly.
One stock I took a new position in late this week was Neurocrine Biosciences NBIX, an attractive mid-cap biopharma name, with a current market cap around $12.2 billion.
The stock is off some 25% from recent highs due to some trial data that was viewed as disappointing as well as this week’s weakness in the overall market. However, the company’s flagship drug is still seeing more-than-solid growth and the company has a key FDA approval on the horizon. What's more, the stock is more than reasonably valued, and the company has a rock-solid balance sheet. We will discuss all of these aspects below.
The decline in NBIX shares started on August 28 when the company disclosed mid-stage study data around one of its drug candidates targeting schizophrenia. The results met the key primary endpoint, and data were more than solid enough to advance the compound to final stage development. However, the data were not quite as good as a candidate from Bristol-Myers Squibb BMY targeting the same indication and that is likely to be approved later this year.
That said, this is just one arrow in Neurocrine’s quiver. The company’s franchise drug is Ingrezza or valbenazine. This compound was approved in 2017 for the treatment of tardive dyskinesia (TD), a neurological injury characterized by involuntary movements. Sales are still growing at better than a 25% pace year over year and the compound should produce north of $2.3 billion in net sales in 2024.
The company has several other candidates in its pipeline as well. The most immediate catalyst is a compound called crinecerfont. This is a corticotrophin releasing factor 1 (CRF1) antagonist that should be approved at the end of 2024 for the treatment of pediatric and adult patients with classical congenital adrenal hyperplasia (CAH) due to 21-hydroxylase deficiency. If approved as expected, crinecerfont and ingrezza should be delivering some $4 billion in annual sales by 2028.
Neurocrine is already solidly profitable, and has nearly $1.7 billion of net cash on its balance sheet. The current analyst consensus is for the company to post earnings of around $7 a share in 2025. That means the stock is trading for around 17 times estimated 2025 EPS — cheaper if one considers the net cash on Neurocrine’s balance sheet.
Taking everything into consideration, this is a name I have no problem accumulating at slightly lower trading levels with a simple covered call overlay outlined below, or picking up an acceptable profit if my trade expires in the money in March.
Option Strategy
This is how one can initiate a holding in NBIX 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 March $115 call strikes, fashion a covered call order with a net debit in the $104.00 to $104.50 a share range (net stock price - option premium).
This strategy provides downside protection of just over 13% with upside potential of 11% even if this stock falls a bit over the next six and a half months.
At the time of publication, Jensen was long NBIX.
