Let's 'Sum' Up the Story on This Under $10 Biotech
The stock sets up well for this trade strategy without much risk at current levels.
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The trading week ended on a very sour note Friday as investors were reminded that the market can be a dangerous place, especially when priced at current valuations. The Nasdaq fell 3.5% on the day and the S&P 500 was off 2.7%. Meanwhile, the VIX shot up more than 30% as volatility surged reflecting things unexpectedly exploding on the U.S.-China trade-war front.
On the bright side, the selloff in equities did provide nicely lower entry points to deploy some "dry powder." I added to several positions late on Friday via covered call orders. Here I will highlight one small-cap biopharma name that was on my "buy the dip" list.
Vanda Pharmaceuticals (VNDA) currently trades at around $5.30 a share and sports a market capitalization of approximately $330 million. Vanda is focused on the development and marketing of therapies primarily for the treatment of neurological disorders.
The company has three products on the market. All three are pursuing label expansion. Until recently, Vanda's best-selling therapy was melatonin receptor agonist Hetlioz. However, Hetlioz sales are now being degraded by increasing generic competition.
Vanda is also advancing three late-stage clinical programs. If all goes as scheduled, the company could have six approved products on the market by the time 2026 comes to a close. The first of these could garner FDA approval at the end of 2025.
Vanda is tracking to revenue growth in the low teens in 2025. However, with new approvals, the analyst community is expecting sales growth to accelerate into the low and mid-30s over the next few years.
Vanda is currently unprofitable, but losses should come down dramatically as sales growth gets boosted. The company should burn through approximately $25 million in cash to support all operations in the back half of 2025 and should deliver roughly $230 million in revenues this year.
Vanda’s balance sheet can easily support this cash burn as management has guided that it expects to end 2025 with about $300 million in cash and marketable securities on its balance sheet. This is nearly equal to the stock’s current market capitalization and Vanda carries no long-term debt.
This collection of assets attracted buyout bids in 2024 that valued Vanda at roughly $8 a share, which leadership rejected. This sum-of-the-parts story should have a solid floor around current trading levels, and the stock sets up well for the following covered call trade.
Option Strategy
This is how one can initiate a holding in VNDA 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 March $5 call strikes, fashion a covered call order with a net debit in the $4.10 to $4.30 a share range (net stock price - option premium).
This strategy provides downside protection of 20% with similar upside potential over the option duration even if the stock has a 5% decline.
At the time of publication, jensen was long VNDA.
