I've Got My Eye (And Money) on This Ocular Biopharma Name
After a 50% selloff, it makes for a compelling trade. Here's my strategy.
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For today's covered call trade idea we are going to circle back to the biopharma space and tee up a fast-growing ocular-focused concern. I will begin with the caveat that the liquidity in the options against the equity is not ideal. However, even at the top of the recommended trading range, the trade is potentially lucrative and provides significant downside protection.
The company in question is Harrow, Inc. HROW, a name I have made several successful covered call trades around over the past few years. The stock is down approximately 50% since its recent highs in October. The major trigger for the decline was the company’s third-quarter 2024 numbers did not meet top or bottom-line expectations. That said, Harrow did deliver nearly 45% year-over-year revenue growth in the quarter. This pace of sales growth is expected to continue in 2025, moving Harrow to profitability in the new fiscal year.
A few factors contributed to the prior quarter's somewhat disappointing results. One was seasonality, and Harrow had a minor inventory shortage of its dry-eye therapy Vevye. The good news was the inventory shortage was largely the result of robust demand for this product, which was just launched at the beginning of 2024. Prescriptions grew 55% sequentially from the second quarter.
Harrow is a somewhat complicated, but compelling "sum of the parts" story with quite a few moving parts. It has more than a dozen treatments on the market. In addition, the company owns a compounding business that contributes around 45% of overall sales.
Harrow also holds minority ownership interests in two small drug concerns, the most important of which is a clinical stage developmental company called Melt Pharmaceuticals. This company is focused on the development of non-intravenous, sedation and anesthesia drugs for medical procedures. Melt’s primary pipeline candidate should hit the market in 2027 if all goes according to schedule and could make a meaningful contribution to Harrow’s top line.
One of the company’s more important products on the market is Iheezo, which is an ocular anesthetic gel that was launched in the spring of 2023 and now makes up approximately 20% of overall sales. Demand for Iheezo rose 15% sequentially in the third quarter.
Harrow also just launched a product called Triesence, which is a potential complement to Iheezo. Triesence is a preservative-free, short-acting corticosteroid triamcinolone acetonide injectable indicated for visualization during vitrectomies and posterior uveitis, among other procedures.
Given its sales growth and potential move into profitability in 2025, the stock is attractive here after its recent pullback to just under $29 a share. That values the shares at a more-than-reasonable just under 4x estimated 2025 revenues.
Price targets from the analyst firms that follow Harrow range from mid-$50s to high $60s. With the covered call trade outlined below, a nice profit can be made even if the stock just trades sideways from here.
Option Strategy
This is how one can initiate a holding in HROW 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 $28 call strikes, fashion a covered call order with a net debit in the $21.00 to $22.00 a share range (net stock price - option premium).
At even the top end of this range, the strategy provides downside protection of nearly 25% with upside potential of 27% even if the equity trades slightly down over the option duration.
At the time of publication, Jensen was long HROW.
