Aldeyra Therapeutics (ALDX) is a small-cap biotech company that's got potential for two Food and Drug Administration approvals this year. It's nice sum-of-the parts story and sets up well for a covered call strategy.
Based just outside of Boston in Lexington, Mass., the company is focused on developing drugs for eye-related diseases, skin conditions and other illnesses, such as those of the liver. Its approach is to influence the immune system response by inhibiting inflammatory cells linked to ocular and systemic diseases. Currently the stock trades for around $10.50 a share and sports a market capitalization of just north of $600 million.
As you can see below, the small-cap company has several compounds in mid and late-stage development.
In early March, the FDA accepted Aldeyra Therapeutics' methotrexate injection as a new drug application. That's an investigational drug candidate for the treatment of primary vitreoretinal lymphoma. The company is also evaluating the drug to treat retinitis pigmentosa. Top-line results from a Phase 2 study around this use should be out shortly.
But the company's most important candidate is called reproxalap. This compound would be used to reduce ocular inflammation, and the company believes it has advantages over similar treatments. Reproxalap would also be used to treat dry eye disease, or DED. Its FDA date for that use is slated for Nov. 23. This is a somewhat crowded space, but I have seen an analysis or two projecting this could eventually be a potential peak sales market of $400 million annually for Aldeyra.
In addition, top-line results from a Phase 3 study called INVIGORATE-2 evaluating reproxalap to treat allergic conjunctivitis are expected out sometime this quarter. If eventually approved, this could add another $100 million in peak market potential for reproxalap.
Finally, Aldeyra is also developing a compound called ADX-629, which is being evaluated to treat five different conditions. Phase 2 top-line data from a Phase 2 trial against chronic cough should be out this quarter. Enrollment also recently commence around a Phase 2 Clinical study of ADX-629 in atopic dermatitis.
The company ended the first quarter of 2023 with approximately $165 million in cash and marketable securities on its balance sheet after posting a net loss of $15.5 million for the first quarter of 2023. The company seems to be marching towards its first FDA approvals and has several 'shots on goal'. Add in strong analyst support, and a catalyst rich 2023, ALDX seems like a solid covered call candidate at current levels. In addition, recently the company has been subject of buyout speculation, which makes sense given it wholly owns the rights to its pipeline.
Option Strategy:
To establish an initial position in ALDX using a covered call strategy, do the following. Selecting the December $10 call strikes, fashion a covered call order with a net debit in the $7.50 to $7.80 a share range (net stock price - option premium). This strategy provides downside protection of approximately 27% including dividend payouts. This strategy also has approximately 30% potential upside even if stock drifts down a little over the option duration.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock 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.)
