There is a lot to like about Axsome Therapeutics (AXSM) . There's even more to like about the stock when using the right covered call strategy.
We'll get to the trade method below, but first, let's look at what the company offers. It already has two products on the market. The first is called Auvelity, which was approved for the treatment of major depressive disorder just over one year ago. The drug is gaining traction in the market as it gets into more approved plans. Sales in the second quarter were up 75% sequentially from the first quarter, topping $25 million. Global Data sees peak sales of $1.3 billion for Auvelity in fiscal 2029. The company also markets Sunosi. This compound was approved in 2019 to treat narcolepsy or obstructive sleep apnea, and Axsome licensed this drug from Jazz Pharmaceuticals (JAZZ) . This product is seeing revenue growth in the mid-teens and management believes Sunosi will eventually see peak sales of $300 million to $500 million annually.
With a market capitalization of just south of $4 billion, Axsome recently made secondary a offering to raise additional capital. Management has given assurances that this will be the last capital raise before the company achieves self-sustaining status. The company is focused on the development and commercialization of therapeutics targeting the central nervous system with high unmet need.
The company is evaluating Auvelity, also known as AXS-05, for other uses as well. Auvelity is currently undergoing evaluation in late-stage studies for the treatment of Alzheimer's disease agitation and smoking cessation. The former could be a huge potential market as 70% of the six million Alzheimer's patients in the U.S. suffer from agitation. A Phase 3 pivotal study should be fully enrolled by the first half of 2024. This compound has Breakthrough Therapy Status for smoking cession and a pivotal trial should kick off for this indication late this year or early in 2024.
The company also has three other late-stage compounds (AXS-07, AXS-012 and AXS-014) in development. Two of which should have New Drug Applications submitted on them over the next few quarters. The company should see roughly $200 million in sales from its two products on the market in fiscal 2023 and $400 million in fiscal 2024.
Management believes the company's current product portfolio and pipeline should deliver eventual peak sales of between $4.5 billion to $8 billion. I like to be conservative and think it should do at least $3 billion in eventual peak sales which makes the shares more than reasonable value.
The stock trades just over $80 a share. I don't mind owning a small position in these shares at current trading levels.But I would prefer either a much lower entry point or implementing a strategy that will generate a low-mid teens return over the next six months even if the stock drifts down just over 70% over that time. Fortunately, with a covered call position I can ensure either.
So let's see how covered call orders can be used here and how flexible this simple option strategy can be.
Option Strategy:
Here is how I opened a new position in AXSM this week using a conservative covered call strategy with a strike approximately 7% below the current trading level of the stock. Selecting the March $75 call strikes, fashion a covered call order with a net debit in the $65.50 to $66.00 a share range (net stock price - option premium). This strategy provides downside protection of roughly 20%. This strategy also has 14% potential upside if the stock drifts down to the $75 level during the six-month plus option duration.
