FDA Approval Has This Mid-Cap Biopharma Stock Playing Our Song
The prospects for this profitable, low-beta, name brightened this past week. here;s how to play it.
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Today, we are putting mid-cap biopharma in the spotlight for a covered call trading idea.
I have written about Jazz Pharmaceuticals JAZZ a couple of times here in 2024 on these pages. The stock is up only slightly year to date. That said, it has made a solid covered call trade in my portfolio, and I have rolled the options on that position successfully during the year.
Why am I revisiting the name now? The shares could now have put in a floor and I believe they have a more solid 2025 in front of them.
The potential catalyst for that improved investor sentiment could be a key FDA approval that happened this week. Jazz’s bispecific antibody, Ziihera, got the green light from the FDA as a late-line treatment for certain adults with biliary tract cancer, or BTC.
Ziihera was licensed from and developed with Zymeworks ZYME. Jazz will owe milestone payments and tiered royalties between 10% to 20% of commercialized sales on Ziihera, but management believes the drug will eventually do at least $2 billion in annual peak sales, a view echoed by some analysts.
The compound is being evaluated in studies for additional indications as well. Ziihera will now launch before year-end and should be significant given Jazz’s market capitalization is approximately $7.5 billion.
Parts of Jazz’s narcolepsy franchise look like it will be increasingly exposed to generic competition in the years ahead and the company has fought a long fight on the litigation front with Avadel Pharmaceuticals AVDL. That said, Jazz will also have other drugs in its product portfolio that helped it delivered just over $1 billion worth of overall sales in the third quarter of this year with revenues rising 8% on a year-over-year basis. The analyst community expects revenue growth in the mid-single digits in both 2024 and 2025.
The stock is cheap trading at six times forward earnings estimates, albeit those are non-GAAP profits, and the shares see some sort of discount as the company is headquartered in Ireland. The shares also do not pay a dividend.
Jazz’s balance sheet is in good shape, and it should be noted that the company has thrown off approximately $1 billion worth of operational cash flow in the first nine months of 2024, making the stock quite cheap from a free cash flow yield perspective.
A half dozen analyst firms, including Barclays and Needham, have reissued "Buy" ratings since the FDA approval this past week. Price targets proffered range from $160 to $207 a share. Jazz shares current trade at around $127. The approval of Ziihera, while expected, erased some uncertainty around the stock and probably put a floor under the shares.
This is how I added to my position in JAZZ post FDA approval:
Option Strategy
This is how one can initiate a holding in JAZZ 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 June $125 call strikes, fashion a covered call order with a net debit in the $112.00 to $113.00 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 11% with similar upside potential even if this stock falls slightly over the seven-month option duration. Whil that's not a huge return compared to some of the smaller biotech names I have highlighted before in these columns, JAZZ is already very profitable and a low-beta play in the biopharma sector.
At the time of publication, Jensen was long AVDL and JAZZ.
