Small-cap oncology company AVEO Pharmaceuticals (AVEO) is setting up nicely as a solid covered-call trade. The options against this equity are liquid and premiums are lucrative, enabling a good return even if the stock trades sideways over the coming months.
What is AVEO? The company's flagship product is Fotivda, which is a third-line treatment for a type of kidney caner. Enjoying solid rollout after getting green lighted 18 months ago by the Food and Drug Administration, Fotivda is used to treat relapsed or refractory advanced renal cell carcinoma. The company should ring up net sales for Fotivda of just over $100 million this fiscal year. Given the stock's approximate market cap of $265 million, the shares are trading at just over two and a half times revenues. That's more than reasonable given sales are projected to cross the $170 million mark in fiscal 2023 based on the current analysis consensus. AVEO Pharmaceuticals is also expected to become profitable for the first-time next year.
The compound is also in numerous other trials to treat other indications. The company is currently enrolling patients in a couple of phase 3 studies pairing the combination of Fotivda with Bristol-Myers Squibb's (BMY) blockbuster oncology drug Opdivo. If the data is supportive, that could lead to FDA approval for the kidney cancer in a second line setting, this would open up a much larger target market for Fotivda. Enrollment should be complete sometime in the second quarter of next year. The company has one other earlier stage pipeline asset it is looking for a developmental partner to develop, and the company put a freeze on some development to cut research and development expenses to focus fully on building out its fotivda franchise.
AVEO fully owns the rights to Fotivda. This makes the company a logical and fairly cheap acquisition target for a larger player wanting to expand into this space. Oncology has been the hottest part of M&A across the industry for years. The company has some $75 million of cash on hand. The analyst community has been growing more sanguine around the company's story and growth. Since second quarter numbers posted just over two weeks ago, four analyst firms including Stifel Nicolaus have reissued Buy ratings on the stock with price targets ranging from $12 to $17 a share.
Option Strategy
Here is how one can initiate a position in AVEO via a covered call strategy:
Using the January $8 call strikes, fashion a covered call order with a net debit in the $6.35 to $6.45 a share range (net stock price - option premium). This strategy provides downside protection of some 18% and potential upside of approximately 25% even if the stock does little over the five-month 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.)
