Today I want to discuss a small-cap biopharma name that looks well positioned as a covered call candidate. The options are nicely lucrative and have decent liquidity. The shares have been de-risked by a recent approval from the U.S. Food and Drug Administration and the company is seeing a lot of positive post-approval commentary from the analyst community as well.
The name of the company is BioXcel Therapeutics (BTAI) , which currently trades at right around $17 a share and sports an approximate market capitalization of $550 million.
Last Wednesday the FDA approved BioXcel's marketing application for Igalmi, for the acute treatment of agitation linked to schizophrenia or bipolar I or II disorder in adults. It was good to have a "no-drama" decision for once from the government agency given the inconsistency of decisions for so many small firms since the pandemic seems to have overwhelmed the approval process at times.
BTAI shares initially soared 20% on the news, but by the end of the week were down some 20% for the five trading days. Part of this is due to "buy the rumor, sell the news" trading action as the stock had risen around 30% over the past few weeks in anticipation of Igalmi getting the greenlight. In addition, equities were lower for the week, especially small-caps and the biotech sector.
The analyst community was encouraged by the FDA action, however. Five analyst firms, including Guggenheim, UBS and Bank of America have reissued "Buy" ratings since the FDA approval. Price targets for BTAI range from $27 to $125 a share. Bank of America bumped up its price target a few bucks a share to $80 as its analyst highlighted the potential of Igalmi to reach pivotal trials in additional indications and believes BioXcel will transition nicely to a commercial-stage biopharma company.
Those indications can be seen in the table above. The company's other main pipeline asset is BXCL701, which is in mid-stage combination oncology studies with Merck's (MRK) blockbuster Keytruda. This compound has the potential to convert cold tumors to hot as a novel systemic innate immune activator.
BioXcel is utilizing artificial intelligence to improve the drug discovery process, somewhat unique still in the industry. Just over seven million Americans are affected by the indications Igalmi was just approved for and eventual approval for the agitation associated with Alzheimer's disease would more than double the Igalmi's potential target audience.
The company plans to roll out Igalmi in the U.S. on its own but is looking for a potential marketing partner in Europe to lead things there once approval is achieved. This most likely scenario would involve a decent initial payment as well as milestone payments and a percentage of commercial sales as royalties. The company plans to submit a marketing application for Europe before the first half of 2022 is over.
BioXcel ended the 2021 with around $230 million in cash on hand so it is in good shape there to support the initial rollout of Igalmi.
Option Strategy
Here is how one can initiate a position in BTAI 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 November $17.50 call strikes, fashion a covered call order with a net debit in the $12.50 to $12.80 a share range (net stock price - option premium). This strategy provides nearly 30% of downside protection as well as almost 40% of potential upside even if the stock does little over the option duration.
(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders.)
