A ‘Rare' Opportunity in the Biotech Space
I'm taking a position in this promising rare disease concern via covered call orders.
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Today, we are lining up an idea around a mid-cap rare disease concern. While the options around the equity do not have the same liquidity as some of my recent ideas, liquidity is acceptable and made up for by much larger option premiums.
The name of our trade target is Ultragenyx Pharmaceutical RARE, a company with a market capitalization of approximately $4 billion.
Ultragenyx is focused on developing treatments for rare diseases. The firm has been quite successful in advancing its pipeline and now has five FDA approved therapies on the market. The most important one is an antibody targeting fibroblast growth factor 23 for the treatment of X-linked hypophosphatemia, as well as tumor-induced osteomalacia called Crysvita. This therapy makes up just over 70% of the company’s overall revenue.
Ultragenyx grew revenues more than 25% on a year-over-year basis in 2024 and should see close to 20% sales growth in 2025. The company's Biologic License Application, or BLA, was accepted by the FDA in December for its AAV gene therapy to treat Sanfilippo syndrome type A (MPS IIIA), a rare and lifelong genetic disorder. This would mark the company’s sixth approved therapy.
In addition, Ultragenyx’s candidates for the rare neurogenetic disorder Angelman syndrome, a rare, inherited disorder Glycogen storage disease type I, and the rare connective tissue disease Osteogenesis Imperfecta, or OI, are all in late-stage development. OI is the condition the villain "Mr. Glass" had in the 2000 movie Unbreakable.
Ultragenyx is still losing money but is cutting losses as revenues continue to ramp. It burned approximately $400 million of cash net in 2024 but roughly has $800 million of cash and marketable securities on its balance sheet. In addition, its pipeline is wholly owned, which makes Ultragenyx a more attractive buyout target by a larger firm wanting to expand their footprint in rare diseases. BioMarin Pharmaceuticals BMRN would be one potential logical acquirer, in our view.
Lastly, the stock, in the low $40s, is nearer the bottom of a range it has traded in for just over two years now. The shares are well thought of in the analyst firm community with a current median price target in the high $70s.
Option Strategy
This is how one can initiate a holding in RARE with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the August $40.00 call strikes, fashion a covered call order with a net debit in the $32.25 to $32.75 a share range (net stock price - option premium).
This strategy provides downside protection of 25% and upside potential of 23% even if this equity falls some over the option duration.
At the time of publication, Jensen was long BMRN and RARE.
