Small cap oncology company AVEO Pharmaceuticals (AVEO) is shaping up to be a solid covered call trade. The options against this equity are liquid and the premiums are profitable, enabling a good return even if the stock trades sideways in the coming months.
What is AVEO? The company’s flagship product is Fotivda, which is a third-line treatment for a type of kidney cancer. Enjoying a solid launch after being greenlit 18 months ago by the Food and Drug Administration, Fotivda is used to treat relapsed or refractory advanced renal cell carcinoma. The company is expected to achieve net sales for Fotivda of just over $100 million this fiscal year. Given the approximate market value of $265 million, the shares are trading at just over two and a half times earnings. This is more than reasonable as sales are expected to cross the $170 million mark in fiscal 2023 based on current analysis consensus. AVEO Pharmaceuticals is also expected to become profitable for the first time next year.
The compound is also in several other trials to treat other indications. The company is currently enrolling patients in a few phase 3 studies that combine the combination of Fotivda with Bristol-Myers Squibb’s (BMY) cancer drug Opdivo. If the data supports it, this could lead to FDA approval for kidney cancer in a second-tier scenario, this would open up a much larger target market for Fotivda. Application must be completed sometime in the second quarter of next year. The company has another earlier-stage pipeline asset that it is looking for a development partner to develop, and the company has frozen some developments to cut research and development expenses to fully focus on building its fotivda franchise.
AVEO fully owns the rights to Fotivda. This makes the company a logical and fairly inexpensive acquisition target for a larger player looking to expand into this space. Oncology has been the most important part of mergers and acquisitions across the industry for years. The company has about $75 million in cash. The analyst community has become more optimistic about the company’s history and growth. Since the second-quarter numbers released just over two weeks ago, four analyst firms, including Stifel Nicolaus, have reissued buy-in ratings on the stock with price targets ranging from $12 to $17 a share.
Here is how you can initiate a position on AVEO using a covered call strategy:
Using the January $8 buy strikes, create a covered buy order with a net debt in the range of $6.35 to $6.45 per share (net stock price – option premium). This strategy offers downside protection of around 18% and upside potential of around 25%, even if the stock does little during the five-month duration of the option.
(Please note that due to factors such as low market capitalization and/or insufficient public float, we consider this stock to be a small cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies. , including higher volatility, lower liquidity, and less information available to the public, and that publications such as this one can affect its share prices.)
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