Small-cap oncology company AVEO Pharmaceuticals (AVEO) is shaping up nicely as a solid covered call trade. Options on this stock are liquid and premiums are lucrative, allowing for a good return even if the stock trades sideways in the coming months.
What is AVEO? The company’s flagship product is Fotivda, which is a third-line treatment for a type of kidney cancer. Enjoying steady circulation after getting the green light 18 months ago from the Food and Drug Administration, Fotivda is used to treat relapsed or refractory advanced kidney cancer. The company should grow net sales for Fotivda to just over $100 million this fiscal year. Given the stock’s approximate market cap of $265 million, shares are trading at just two and a half times revenue. That’s more than reasonable given that sales are expected to cross the $170 million mark in fiscal 2023 based on the current analyst consensus. AVEO Pharmaceuticals is also expected to become profitable for the first time next year.
The compound is also in several other trials to treat other indications. The company is currently enrolling patients in some phase 3 studies combining the combination of Fotivda with Bristol-Myers Squibb’s ( BMY ) blockbuster oncology drug Opdivo. If the data are supportive, this could lead to FDA approval for second-line kidney cancer, which would open up a much larger target market for Fotivda. Enrollment should be completed sometime in the second quarter of next year. The company has another early-stage pipeline asset that it is seeking a development partner to develop, and the company has frozen some development to reduce research and development expenses to fully focus on building the fotivda franchise.
AVEO fully owns the rights to Fotivda. This makes the company a logical and fairly cheap acquisition target for a larger player looking to expand into this space. Oncology has been the hottest part of M&A in the industry for years. The company has about $75 million in cash. The analyst community has become more optimistic about the company’s history and growth. Since the second-quarter numbers were released a little more than 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.
Here’s how one can initiate a position in AVEO through a covered call strategy:
Using the January $8 call alerts, create a covered call order with a net charge in the range of $6.35 to $6.45 per share (net stock price – option premium). This strategy provides downside protection of about 18% and potential upside of about 25% even if the stock does little during the five-month term of the option.
(Please note that due to factors such as small capitalization and/or insufficient public distribution, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to greater risk than stocks of larger companies, including volatility, lower liquidity and less publicly available information and that publications such as this may have an effect on their stock prices.)
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