A Clear Look and Play on a Low-Priced Ocular Name

As I thought about an interesting trade idea this weekend, I decided to focus on a low-priced small biopharma concern that trades right around $5 a share. Like most small biotech/biopharma names that haven't achieved profitability yet, shares of Ocular Therapeutix have been hammered over the past couple of quarters as high-beta sectors have been pummeled. The company also still faces coronavirus headwinds, two years after the pandemic first hit our shores. I am seeing this across the biopharma universe as sales traction has been challenged as medical offices still are not back to complete normalcy. This seems particularly true in the ocular space, for some reason, as I see several small ocular names facing the same obstacles. Hopefully, that finally ebbs this year as the effects from the coronavirus fade. Ocular Therapeutix's flagship product is called Dextenza. The product was developed using the company's proprietary, bioresorbable hydrogel platform technology, which reduces the complexity and expenses of current standard treatment and enables extended drug delivery to the eye. It is a cool technology. Dextenza is basically an insert that continuously delivers the steroid dexamethasone to the surface of the eye over a period of 30 days. It then dissolves itself at the end of that month. Dextenza is approved for the treatment of eye inflammation and pain following ophthalmic surgery, primarily the removal of cataracts as that is the most common eye surgery. It replaces the need for eye drops and makes it much easier for the patient recovering from eye surgery and is more effective. There are some four million cataract surgeries in the United States every year, and that number will continue to grow at a solid clip as the population ages. Surgeries should also accelerate as Covid fades as a significant medical concern, given most people that have cataract surgery are high-risk individuals, which is why so many surgeries have been put off over the past couple of years. Ocular Therapeutix also has some earlier stage candidates in its pipeline, but they will not be germane to this analysis. The company has a market cap a little less than $400 million. It has nearly $165 million in cash on its balance sheet, more than enough to get all the way through 2023 at the very least. Quarterly losses should trend down nicely as revenues continue to ramp up. After posting annual revenues of just under $45 million in 2021, analyst consensus sees sales growing at roughly a 75% CAGR over the next two years to $75 million in 2022 and just over $130 million in 2023. Three analyst firms have reiterated Buy ratings on OCUL so far in 2022. All have price targets in the mid-teens. Given that scenario, it is hard to see much further downside from current trading levels, in my view. That might be why a beneficial owner has added nearly $1 million to their stake in OCUL so far this year. Option premiums are solid, and liquidity is good, making the stock an effective covered call candidate. Option Strategy Here is how one can initiate a position in OCUL via 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. Using the September $5 call strikes, fashion a covered call order with a net debit in the $3.80 to $3.90 a share range (net stock price - option premium). This strategy provides both more than 20% of downside protection and approximately 30% of potential upside even if the stock does very little over the option duration.

A Clear Look and Play on a Low-Priced Ocular Name

Option premiums are solid, and liquidity is good, making this $5 stock an effective covered call candidate.

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