This week, as we continue to keep the portfolio diversified, we are adding a biotech/pharma play that recently reported strong earnings.

Cabot Profit Booster Issue: May 17, 2022

Market Overview
With earnings season largely in the rearview mirror rising interest rates, inflationary pressures, talk of a recession, and of course ongoing geopolitical uncertainties will be front and center once again this week.

And while that is a lot to worry about, and the latest AAII survey shows that bearish sentiment hit its highest levels since the Global Financial Crisis back in 2008, Friday’s rally MAY be the start of some market stability.

This week, as we continue to keep the portfolio diversified, we are adding a biotech/pharma play that recently reported strong earnings.

The Stock – Halozyme (HALO)
Why the Strength
While Halozyme engages in research, development and commercialization of human enzymes and drug candidates, its main attraction is its Enhanze delivery platform, based on the proprietary enzyme rHuPH20, which cuts the time normally required for intravenous infusions from hours to minutes. Enhanze is used by some big players in the pharma industry, including Pfizer, Johnson & Johnson and Bristol-Myers Squibb, and has treated well over half a million patients.

What sets Halozyme apart from other biotechs is that since 2019 its focus has shifted from developing proprietary drugs to securing a steady royalty and milestone stream from its Enhanze platform, a strategy that has paid off handsomely. Halozyme licenses the right to use its delivery technology to other biotech companies that make infusion-related drugs (its partner pipeline has 23 drug candidates in various stages of clinical testing), providing Halozyme with continuous royalties and dramatically boosting the firm’s cash reserves in the last two years. This also means the company isn’t forced to rely on its own funds for future drug development, giving it a huge advantage over biotechs.

Last week, Halozyme reported Q1 results that featured a 32% revenue increase, to $117 million, while per-share earnings of 47 cents beat estimates by a penny and were up 27% from a year ago. Management offered full-year sales guidance that calls for 25%-ish growth (including 50% royalty growth), and predicted the firm will bring in around $1 billion in royalty revenue alone by 2027 (versus an estimated $300 million this year), representing a 27% compound annual growth rate, which should prove conservative. A modest valuation doesn’t hurt the cause, either.

Technical Analysis
Like many biopharmas, HALO has spent a sizable chunk of the last year trending lower and hasn’t attracted much interest from the momentum crowd. But unlike most of its peers, the stock began to bottom out last December, turned a corner in March and has shown tremendous improvement since then. From a yearly low of 32 in January, HALO rose to just over 44 in late April before pulling back to 37 with the market where it found support around the 40-week line on good volume last week. Expect some volatility, but we’re fine taking a small swing here or on dips of a point or two. Stop – 35.5

The Covered Call Trade
Buy Halozyne (HALO) Stock at 42.5, Sell to Open June 42 Strike Calls (exp. 6/17) for $2, or a Net Price of 40.5 or less

Static Return: $150 per covered call (3.70%)

Breakeven: 40.5

Covered Call Return (if assigned): $150 per covered call (3.70%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 40.50 less. (In this case 42.5 minus 2 = 40.5. Or another example is you could pay 42.75 for the stock and sell the call for 2.25, which also equals 40.5)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on May 24, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.