Is This the Next Hot Midcap Biotech Target?

We are heading back to familiar territory today for our latest covered call trade idea. Our target this week is midcap biotech Cogent Biosciences (COGT) . 

I originally established a decent position in Cogent back in July via covered call orders. The stock has more than tripled since then. Obviously, I left considerable money on the table by owning COGT within covered call positions instead of via straight equity. That can be the downside to a covered call strategy. However, I will still book a nice profit when these positions expire in the money in December and January. 

There are good reasons that Cogent has rallied strongly since my initial holdings. I still would like to maintain a position in this promising concern once my current holdings get cashed in. I would just like to do so at a significantly lower entry price. A covered call strategy allows me to act upon that goal.

Cogent’s main asset in its pipeline is a selective tyrosine kinase inhibitor, or TKI, designed to target mutations within the KIT receptor tyrosine kinase called bezuclastinib. This promising TKI has potential both as a monotherapy, and as a component of a combination therapy. 

Cogent has seen some positive news flow over the past six weeks. In the back half of October bezuclastinib garnered Breakthrough Therapy designation from the FDA to treat NonAdvanced Systemic Mastocytosis or Non-AdvSM.

Bezuclastinib has showed promise in treating both AdvSM and non-AdvSM in early studies. Currently the TKI is being evaluated to treat both AdvSM and non-AdvSM as a monotherapy in two late-stage studies. Top-line results from these trials should be out shortly. Leadership has pegged the potential market for AdvSM in the $1.5 billion range.

What really triggered the recent rally in the stock, however, was recent trial results around bezuclastinib as part of a combination therapy. Specifically, in combination with sunitinib, this combination therapy to treat a certain form of Gastrointestinal Stromal Tumors, or GIST, showed very encouraging top-line results from a late-stage study. This data was disclosed three weeks ago.

Sunitinib is better known as Sutent and used to treat GIST and some kidney cancers. The top-line results from this combination therapy showed much better outcomes to treat a form of GIST than Sutent alone. This data caused the stock to more than double. Management smartly raised additional capital on this rally and now has over $850 million of cash and marketable securities on its balance sheet.

This capital raise should allow the company to be successful as a standalone entity, but given the potential of bezuclastinib, Cogent could be the next mid-cap biotech concern to find itself a buyout target. 

There has been a recent notable uptick in M&A activity across the industry in the past couple of months, it should be noted. After recent trial results, JP Morgan reissued its buy rating on COGT and boosted its price target to $65 from $44. The stock currently trades at around $40. 

Here is how I have added to my position in COGT.

Option Strategy

This is how one can initiate a holding in COGT 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 May $37 call strikes, fashion a covered call order with a net debit in the $29.50 to $30.50 a share range (net stock price - option premium). 

This strategy provides downside protection of 25% with upside potential of 23% over the option duration even if the stock trades down 8%.

At the time of publication, Jensen was long COGT.