Moving Out on the Risk Curve With a Small-Cap Biotech Play
This low-priced stock offers compelling risk/reward using this trade strategy.
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Over the past month or so, my covered call trade ideas around biotech and pharma names have been a bit on the mundane side. Low P/E, large-cap concerns with solid business models, consistent revenue flows and generous dividend yields. These included well-known names such as Gilead Sciences (GILD) and Novo Nordisk (NVO) . These were conservative trades in what I continue to believe is an overbought market.
Today, we are going to move out on the risk scale, with a small-cap, approximate $450 million market cap name that is trading around $1.50 a share. Despite that, the liquidity in the options against the equity is quite liquid and lucrative. The name in question is Ocugen, Inc. (OCGN), a clinical-stage developmental concern focused on the development of gene therapies for the treatment of inherited retinal diseases.
Ocugen is currently moving four programs forward via its pipeline targeting retinitis pigmentosa or RP, Stargardt disease, geographic atrophy, and other ophthalmic indications. The Pennsylvania-based company’s developmental platform takes a "gene agnostic" approach to treating inherited disorders. Most other concerns are developing individualized gene therapies for rare diseases. However, this is challenging due to the large mutational diversity and lack of a definitive genetic etiology.
Ocugen’s approach consists of leveraging modifier genes such as nuclear hormone receptors (NHRs). These are master regulators of multiple molecular pathways, potentially reversing pathological phenotypes of inherited retinal dystrophies harboring multiple gene mutations by restoring physiological balance (homeostasis) in the retina.
Ocugen’s lead candidate is dubbed OCU400. This is a single sub-retinal injection of NHR gene NR2E3. OCU 400 is currently undergoing evaluation in a 150-patient Phase 3 trial. Positive results could lead to marketing applications in the U.S. and Europe by the end of 2026. OCU400 has garnered Orphan Drug and Regenerative Medicine Advanced Therapy designations and had solid mid-stage trial results.
Moreover, OCU400 received further validation earlier this month when Kwangdong Pharmaceuticals elected to enter into a collaboration deal with Ocugen around the Korean commercial rights to OCU400 in the treatment of RP. This provided Ocugen with a $7.5 million upfront payment just for the Korean rights to OCU400 in RP. Ocugen also can garner another $180 million in potential milestone payouts and will receive 25% royalties on commercial sales.
The company’s candidate targeting Stargardt disease has a Phase 2/3 study that just initiated in July. Ocugen does have some potential competition looming with privately held Nanoscope Therapeutics, which is taking a similar approach. However, this is fully reflected in Ocugen’s sub $500 million market cap. I also could see either or both firms eventually being buyout targets by larger concerns.
Ocugen is covered only by a small coterie of Wall Street analysts. They have price targets ranging from $4 to $8 a share. The risk/reward around OCGN is compelling enough for me to start to either accumulate a position or pick up a significant return on a covered call trade, which is highlighted below.
Option Strategy
This is how one can initiate a holding in OCGN 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 April $1.50 call strikes, fashion a covered call order with a net debit in the $1.00 to $1.05 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 40% with upside potential of around 45% even if this equity does little over the option duration.
At the time of publication, Jensen was long GILD, NVO and OCGN.
