The stock market has gotten downright ugly in many areas over the past few weeks. Indeed, the carnage in many small-cap spaces, especially sectors like biotech and biopharma has been palatable. Trading action has been abysmal and the SPDR S&P Biotech ETF (XBI) is trading at 52-week lows. Sentiment seems lower than it has been since the pandemic selloff in spring of last year.
Still, I have been biting my tongue and incrementally buying this pullback via covered call orders. It is times like this I am more than happy to give away some potential upside for the additional downside protection. One name I added exposure to via this strategy as we closed out the week on Friday was Paratek Pharmaceuticals (PRTK) .
Paratek is a nice conservative play in the biotech space for a couple of reasons. First, its franchise product is already on the market, removing any uncertainty from FDA actions. The agency seems completely overwhelmed with pandemic-related work and it seems almost every other drug application by small firms has been impacted in some way by this. Second, Paratek has a nice slug of cash on the balance sheet and should be able to get to cash flow breakeven status without any additional capital raises, the last thing a company wants to be trying to do in the market right now.
The company's primary asset is NUZYRA, a once-daily IV and oral modernized tetracycline that has been approved for the treatment of adults with community-acquired bacterial pneumonia (CABP) and acute skin and skin structure infections (ABSSSI). NUZYRA was launched in 2019.
Paratek reported third-quarter results that beat expectations on Nov 8. NUZYRA should deliver just over $100 million in revenues in 2021 and the company ended the quarter with just over $110 million in cash on its balance sheet.
Paratek's market cap is right at $200 million, which makes this a cheap stock at current trading levels. The company has a supply/development contract with BARDA with an approximate $300 million value. The company is also working to expand NUZYRA to other indications such as NTM abscessus pulmonary infection, which is a rare affliction with no currently approved therapies and a potential $1 billion market. It Is currently in mid-stage development for this indication.
All of this hasn't been enough to shield PRTK shares from the huge bearish trend in the sector, especially over the past two weeks. However, the stock does seem to be trying to form a bottom at current levels. I want some downside protection, but I also want to keep some potential upside as I think when the sector rebounds, PRTK will quickly get back to where it was trading before this wind chill swept over the market.
Here is how one can initiate a position in PRTK 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 June $5 call strikes, fashion a covered call order with a net debit in the $3.50 to $3.60 a share range (net stock price - option premium). This strategy provides both nearly 15% of downside protection, and if I am right and PRTK rises back to the $5 level by option duration, it sets up a nice potential 40% return.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider PRTK to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)