Cross This Bridge With a Potentially Big Upcoming Catalyst
Here's why this midcap biotech name makes for a solid covered call trade.
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I recently added a midcap biotech name back to my portfolio.
The company is $5 billion market capitalization, Palo Alto, California-based BridgeBio Pharma BBIO. BridgeBio's primary drug candidate is called Acoramidis, a compound to treat transthyretin amyloid cardiomyopathy or ATTR-CM, a serious heart condition.
Acoramidis has a marketing application accepted by the FDA for review, with a decision expected in late November. Based on trial results, Acoramidis is likely to be approved for the rapidly growing ATTR-CM market. The company released the latest set of encouraging study results late in May.
The upcoming marketing application decision is also likely to keep a floor in place for BridgeBio stock. Given my view that there appears little risk for a significant move down until that FDA decision, I took a covered call position using options that expired in August. This should allow me to hit a nice single and put myself in the position to either roll the position close to expiration or initiate a new holding after these covered calls expire in the money in August, betting on FDA approval of Acoramidis.
My confidence in FDA approval is also boosted by BridgeBio inking a collaboration deal with Bayer earlier this year for rights to Acoramidis in Europe. The drug giant will pay $310 million in upfront payments and near-term milestone payouts. BridgeBio also will get very generous tiered royalties starting in the low 30s on a percentage basis for commercializes sales of Acoramidis.
There is only one current medication on the market to treat ATTR-CM, although several are in the works given the growing market. The one approved drug on the market for ATTR-CM is called tafamidis, which Pfizer PFE markets under different brand names in the U.S. and Europe. That drug should do north of $4 billion in annual sales this year, and Pfizer is working hard to extend fast-approaching patent expirations both in the U.S. and overseas.
I have seen peak annual sales estimates around Acoramidis ranging from $3 billion to $6 billion. BridgeBio has also graced the lists of potential buyout lists in recent quarters, more recently making one put out by Wells Fargo WFC.
BridgeBio ended the first quarter with around $500 million in cash and marketable securities on its balance sheet. FDA approval will also trigger a $500 million payout from a couple of lenders in return for 5% of the net global sales for Acoramidus. Meanwhile, BridgeBio has a myriad of other candidates within its pipeline in different stages of development.
I like the sum-of-the-parts valuation around BBIO and the stock has a big potential upcoming catalyst. Ten analyst firms, including Goldman Sachs GS and Citigroup C have reissued "Buy" ratings on BBIO over the past two weeks. Price targets range from $43 to $70 a share. BBIO currently trades at just over $27.00 a share.
Option Strategy
Here is how one can establish a position in BBIO using a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the August $25 call strikes, fashion a covered call order with a net debit in the $21.25 to $21.75 a share range (net stock price - option premium).
This strategy delivers downside protection of 20% across the trade expiration. This strategy also provides upside potential of 16% over the two-and-a-half-month option duration even if the stock trades down 8% over that time.
At the time of publication, Jensen was long BBIO.
