Bottom Fishing for Biotech Bargains

It has been very rough sledding for investors in 2022 to say the least. The S&P 500 has been down for seven consecutive weeks, something that hasn't happened since the Internet Bust. The Dow has an eight-week losing streak going, something very few Americans were even alive to witness the last time that happened. The scary thought is the Dow and S&P, in some respects, have been relative safe havens. Many sectors of the market such as biotech and EV-related concerns have been absolute train wrecks over the past few quarters. I am increasingly doing some bottom fishing in the biotech sector using simple covered call strategies. With volatility rising, option premiums have increased, boosting potential returns and downside protection. I am mostly concentrating on small-cap and mid-cap biotech names with the following features: 1) No reason to raise additional capital. 2) Approved products that make them attractive acquisition targets. Here are some names I have added to so far in May. Exelixis Exelixis, Inc. is a name I have mentioned often in recent months so I will keep it short. The company has a growing flagship oncology product with over $1 billion in annual sales, roughly $2 billion in net cash on the balance sheet, and a market cap of $5.7 billion. I could see Exelixis either using that huge cash hoard to expand its oncology footprint or being acquired itself. Aurinia Pharmaceuticals Next up is Aurinia Pharmaceuticals . The company's main asset is LUPKYNIS, which was recently approved for lupus nephritis or LN. The company sees this drug eventually doing at least $1 billion annually in peak sales. Rollout has been somewhat complicated by the continuing impacts of the pandemic. However, LUPKYNIS should do around $125 million in sales in 2022. The company expects to get approval in Europe for the same indication sometime in the second half of 2022. Approval will trigger a $50 million milestone payout from its marketing partner in Europe as well as 10% to 20% royalties on sales. This will add to the over $400 million of net cash this $1.7 billion market cap concern had as of the first quarter. The stock got into the low $30s last November on a surge of buyout speculation and now trades for $12 a share. If biotech M&A activity does pick up in the second half of 2022, I would expect the stock of AUPH to benefit whether it becomes an actual target or not. Cara Therapeutics We will end with Cara Therapeutics . The company's primary asset is KORSUVA, which received its first FDA approval for one of the several Pruritus indications it is targeting. This IV-delivered compound just launched with marketing partners in April. Rollout should be relatively straight forward given how concentrated the dialysis market is and the breadth in this area from its partners. The company has also gotten some nice shout outs from the analyst community. KORSUVA is in late-stage trials for other indications. The current analyst consensus (and there are wide range of estimates) has the company seeing some $70 million in sales this year and approximately $160 million in 2023. In addition, this just over $450 million market cap concern has over $200 million of cash on its balance sheet as of the end of the first quarter. The stock is currently trading at around $9 a share, while recent analyst price targets have been in the mid $20s.

Bottom Fishing for Biotech Bargains

Here are three names I have added to in May.

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