Taking a Swing at a Developmental Biotech Name

As I noted in my column Friday, I added Humacyte HUMA to my portfolio this week. This is a name James "Rev Shark" DePorre highlighted in one of his columns earlier this month as well. 

For a name with a $630 million market cap, Humacyte's options against the equity have solid liquidity and the option premiums are more than lucrative. Therefore, Humacyte sets up nicely for a covered call play.

Humacyte is an intriguing developmental concern. The company is focused on the development of bioengineered regenerative human tissues that can be implanted off-the-shelf into any patient without the need for immunosuppressive medication. 

The North Carolina-based biotech has three vascular tissue constructs or what it refers to as acellular tissue engineered vessels or ATEVs that have undergone or are undergoing clinical evaluation. The most advanced of which is its trauma repair program.

With a shelf life of approximately a year and a half, the ability to repopulate with the patient’s own cells, and the capacity to self-heal with low rates of infection, these off-the-shelf ATEVs are a potential paradigm-changing alternative to autologous vein harvesting. The latter is a time-consuming and difficult procedure with a ~40% morbidity rate. Side effects also include wound infection, pain, and reduced patient mobility. 

There are also expanded polytetrafluoroethylene grafts available. These can be effective but are dogged by infection risk and high rates of amputation in trauma cases. Humacyte can manufacture approximately 8,000 of these ATEVs but can scale that up to 40,000 from its existing facilities.

Humacyte recently had the date extended indefinitely by the FDA to review the Biologic License Application, or BLA, on its trauma repair ATEV due to the government agency requiring more time to evaluate the first-in-class candidate. However, as Rev Shark has noted this was most likely due to inefficiency at the FDA than anything to do with the application itself.

Humacyte’s technology is impressive with possibly far-reaching applications — and its trauma repair program has seen significant compassionate use utilization in Ukraine. Its ATEVs have shown results against expanded polytetrafluoroethylene grafts and also has Department of Defense backing. Therefore, it seems a good bet the FDA will approved its BLA in the coming quarters without requiring an additional trial. 

EF Hutton initiated Humacyte shares with a new "Buy" and $25 price target in September after the FDA delay. Three other analyst firms have reissued "Buy" ratings on HUMA in October with price targets ranging from $10 to $15 a share. 

The stock currently trades just above $5 a share. I can offset a significant amount of further downside risk using the covered call strategy outlined below that also appears likely to deliver a more than healthy return over the next five months.

Option Strategy

This is how one can initiate a holding in HUMA with a covered call order. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

Using the March $5 call strikes, fashion a covered call order with a net debit in the $3.45 to $3.55 a share range (net stock price - option premium). 

This strategy provides downside protection of nearly 30% with upside potential of more than 40% even if the stock falls slightly over the option duration.

At the time of publication, Jensen was long HUMA.