Sizing Up Sarepta Therapeutics for a Trade
We're lining up another biopharma concern as a solid covered call candidate.
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First off, I am happy to report that last weekend’s covered call trade idea around Corbus Pharmaceuticals CRBP got off to a good start. The stock rose more than 10% in trading this week. LifeSci Capital initiated the stock as a new Buy with a Street high $105 price target during the week.
For this week, we are sticking with the biopharma/biotech space. Our covered call trade play this time is around a mid-cap company that comes up often in conversation in Doug Kass’s Daily Diary and is held by several subscribers to that blog on TheStreet Pro.
The name of the company is Sarepta Therapeutics SRPT. I have had several successful covered call trades against this equity over the years. I also opened a new position in Sarepta this week using covered call orders as the stock has pulled back just over 15% over the last month from previous highs.
The Cambridge, Mass.-based rare disease concern is focused on treating Duchenne Muscular Dystrophy or DMD. This affliction causes progressive muscle degeneration due to mutations in the dystrophin gene in boys in approximately one out of every 5,000 births.
Sarepta's flagship product Exondys 51 was approved in the late summer of 2016 under the accelerated approval pathway after some controversy and much lobbying at the time. Early last summer, the company’s Elevidys became the first and only gene therapy available for ambulatory DMD patients. In June of this year, Elevidys garnered a label expansion to include non-ambulatory DMD individuals.
In the second quarter, net product revenues grew 51% on a year-over-year basis to $360.5 million. Elevidys contributed just over $121 million of that total and the recent label expansion should boost that growth. The company is expected to become profitable for the first time this year and the current consensus estimate is for around $1.60 a share of profits on revenue growth in the low to mid-40s.
Profits are projected to post a huge rise in 2025 to a median north of 11.00 a share, although there is a fairly wide variance from analyst firms (roughly between $7.50 to $16.00 a share). Revenue growth should accelerate to the mid-70s next year.
Price targets this month from Piper Sandler and Needham are right at $200 a share. The stock currently trades at around $140 after being north of $160 one month ago. Sarepta's balance sheet is solid and options against this equity have more than acceptable liquidity. They are also lucrative enough that I can execute a covered call trade with solid downside protection with a good potential return.
Option Strategy
This is how one can execute a covered call position in SRPT. 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 $135 call strikes, fashion a covered call order with a net debit in the $118.50 to $119.00 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 15% with upside potential of nearly 14% even if this stock falls roughly 4% over the next seven months.
At the time of publication, Jensen was long CRBP and SRPT.
