An Up and Coming Company Could Deliver Almost 200% In Less Than a Month
The news pointed to the operational potential for this company. As the Denver Business Journal reported,
“A Boulder-based biotech company that has recently transitioned to a fully-integrated firm with drugs on the market and a pipeline of new cancer-fighting products on the way reported a strong second quarter mostly due to sales of its new drug combo that combats melanoma.”
Array BioPharma (Nasdaq: ARRY) reported sales of $82.5 million for the second quarter ending Dec. 31. That figure is up $25.6 million from the previous quarter.
Traders seemed to like the news.
Insurance For Your Investments? The Answer...Options
Investors are reevaluating how to do things in 2021. With Options, a stock’s price can drop to zero, but you can never lose more than the option’s premium and you know the full amount at risk right from the get-go.
Options are the most dependable form of hedge, and this also makes them safer than stocks.
“This was another strong quarter for us,” said CEO Ron Squarer.
The revenue growth is attributed to the sale of its skin cancer-fighting drug combination Braftovi and Mektovi. The drugs received approval from the U.S. Food & Drug Administration in June 2018.
During the quarter, there were 2,600 prescriptions of the drugs, bringing the total since its launch to about 4,000. CEO Ron Squarer said there are 5,000 new addressable melanoma patients each year, which creates a $400 million opportunity in the U.S. and a $1 billion-plus market globally.
New patients are being prescribed Braftovi and Mektovi every week, said Andy Robbins, the company’s chief operating officer. A majority of the early adoption has been in academic centers, where most melanoma patients receive care.
An early driver in prescriptions of the drugs are patients who are switching from other melanoma therapy drugs, Robbins said. Those “switchers” were either waiting for Array to have its drugs approved or had some kind of intolerance issue to the drug they were previously using.
“The second type of switcher will continue into the future as physicians start on other targeted therapy,” he said. “We don’t have 100 percent market share yet.”
The biotech firm is also testing a triplet combination that would use Braftovi and Mektovi, in addition to a MEK inhibitor and Erbitux, in patients with colorectal cancer. In January, the company said a trial of the combination resulted in a median overall survival of 15.3 months. Squarer said the company will likely seek accelerated FDA approval for the combination this year.
A bulk of Array’s revenue — about $50.9 million — in the second quarter came from collaborations and licenses they have with Bristol-Myers Squibb, Merck and Pfizer.
The company, which has about $478 million cash on hand, still reported a loss of $11.3 million for the quarter, which is an improvement from its Q1 loss of $24.8 million.
Squarer told investors that because this is only the second quarter since the launch of Braftovi and Mektovi it’s “important to wait a few quarters” before building a trajectory.
The stock appears to be breaking out to the up side on the long-term chart shown below.
A Trade for Short Term Bulls
As with the ownership of any stock, buying ARRY could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for ARRY
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For ARRY, the March 15 options allow a trader to gain exposure to the stock.
A March 15 $24 call option can be bought for about $1.57 and the March 15 $28 call could be sold for about $0.55. This trade would cost $1.02 to open, or $102 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $102.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in ARRY the maximum gain is $2.98 ($28 – $24 = $4; $4 – $1.02 = $2.98). This represents $298 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $102 to open this trade.
That is a potential gain of about 192% in ARRY based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.