Riding Recent Success in the High-Beta Biotech Sector
As my regular readers on TheStreet Pro know I remain quite cautious about the overall market. I re-emphasized this again in my column Friday as investors continue to overweight the probability of a soft landing and underweight the risks of stagflation.
That being said, one still has to dance to some extent while the music is still playing. Monthly option expiration occurred at the end of the trading day on Friday. Many of my covered call holdings around Krystal Biotech (KRYS) , Ligand Pharmaceuticals (LGND) and other biotech names easily expired in the money. This boosted the amount of "dry powder" in my portfolio.
Since I can only allocate so many proceeds to my short-term Treasury holdings that make up approximately half of my portfolio now, I continue to find new covered call opportunities in the high-beta biotech sector. This week I opened a new holding in Arvinas (ARVN) , whose stock is down some 40% from recent highs after previously more than tripling off its lowest level during the trough of the market selloff in late October.
This New Haven, Conn.-based developmental concern has a market cap of approximately $2.2 billion. Arvinas is focused on producing drug candidates from its proprietary PROTAC protein degraders, which are intended to harness an individual's own natural protein disposal system to degrade and remove disease-causing proteins. The company has several pipeline candidates and is entering Phase 3 development on a few of them.
Arvinas' primary pipeline asset is a compound called vepdegestrant, or ARV-471. This compound is an estrogen receptor (ER) targeting PROTAC protein degrader and is being evaluated to treat locally advanced or metastatic ER positive/human epidermal growth factor receptor 2 (HER2) negative (ER+/HER2-) breast cancer.
The company has two late-stage trials ongoing around ARV-471. One as a monotherapy and the other as part of a combination therapy with IBRANCE from Pfizer (PFE) . This combination demonstrated impressive results from earlier stage studies. The company also has a couple of candidates moving towards late-stage development.
In regard to Pfizer, Arvinas has a significant collaboration deal with the drug giant, which involved a $650 million upfront payment as well as a $350 million equity investment from Pfizer.
In addition to multiple "shots on goal" within its pipeline and a major strategic partnership, the company ended 2023 with $1.25 billion in current assets, which will propel development easily into 2027.
Goldman Sachs initiated ARVN as a new "Buy" in February, partly due to its potential as a buyout target. However, outside of Pfizer taking it over, I don’t put a high probability on that scenario. That said, at current trading levels, ARVN seems a like a compelling sum-of-the-parts investment — and one I have established a starter position in via the covered call strategy highlighted below.
Option Strategy
Here is how one can establish a position in ARVN 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 October $30 call strikes, fashion a covered call order with a net debit in the $25.50 to $26.00 a share range (net stock price - option premium).
This strategy provides downside protection of just less than 20% across the option duration. It also provides upside potential of around 15% over the five-month option duration even if the stock trades down 10% over that time.
More Options Trading:
- Doubling Down on CVS Health
- We've Got You 'Covered' on This Bet on Big Pharma
- I'm Buying the Dip in These Biotech Stocks
At the time of publication, Jensen was ong ARVN.