Biopharma's Intriguing Pipeline and Valuation Offer a Smooth-Sounding Play
This reasonably priced name strikes the right chord, while churning out consistent growth with a rock-solid balance sheet. Here's how to trade it.
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Equities continue to be more than resilient, confounding us skeptics who remain concerned about the valuations of the overall market. The Nasdaq added another 2.2% this past week as the tech-heavy index continues to rally off its mid-April lows. Elsewhere, the Dow was up 1.2% on the week. The S&P 500 rose 1.5% and is now just over 2% lower than its all-time high.
As they say, when the music is still playing, one must continue to dance.
For today's trade idea, we return to the biotech/biopharma sector. This time we are teeing up a reasonably priced biopharmaceutical name within a largely overbought market.
Harmony Biosciences HRMY is delivering consistent growth, has a rock-solid balance sheet (approximately $450 million in net cash), and interesting assets within its pipeline. The stock currently trades around $35.50 and has a market capitalization just north of $2 billion.
Harmony’s flagship product is called pitolisant, known by the brand name WAKIX. This compound treats narcolepsy, which affects around 80,000 people in the U.S. WAKIX, which competes against offerings from Avadel Pharmaceuticals AVDL and Jazz Pharmaceuticals JAZZ, has been on the market in the U.S. for a half a dozen years and continues to grow. It has approximately 10% of the market share in this space.
Harmony has done a good job pushing off potential generic competition for WAKIX until 2030. meanwhile, thecompany is in late-stage development for a more effective version of pitolisant that should garner patent protection until 2044, once approved. The company should kick off two pivotal studies in this area by the end of this year.
If all goes to schedule, the upgraded version of pitolisant should be approved by the FDA sometime in 2028. In the meantime, WAKIX continues to deliver revenue growth in the mid-to-high teens and should do around $850 million in sales in 2025.
Harmony is trying not to be a one-trick pony. It has an ongoing Phase 3 study around the potential first FDA approved treatment for Fragile X syndrome. Top-line data from that pivotal trial should be out sometime next quarter. Harmony acquired this asset when it purchased Zynerba Pharmaceuticals in the summer of 2023 for approximately $200 million.
The company is also developing EPX-100. This candidate is targeting two other rare afflictions, Lennox-Gastaut syndrome and Dravet’s syndrome. Harmony is currently in the enrollment stage of registrational trials on that front.
Given these assets and revenue growth from its primary asset, Harmony stock is too cheap, in our view, trading at just under 9x trailing earnings. All in all, this all sets up for a solid single. Here is how I am playing this opportunity.
Option Strategy
This is how one can initiate a holding in HRMY 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 October $35 call strikes, fashion a covered call order with a net debit in the $30.00 to $30.60 a share range (net stock price - option premium).
This strategy provides downside protection of 15% with slightly higher upside potential even if this equity trades down slightly over the option duration.
At the time of publication, Jensen was long AVDL, HRMY and JAZZ.
