Like so many biopharma stocks, Aurinia Pharmaceuticals (AUPH) was in need of care over much of 2022. But things are now looking better for the company and the shares have started to rebound.
The stock trades just under eight bucks a share and sports an approximate market capitalization of $1.1 billion. Let’s review some positives for Aurinia and explore a covered call idea that will have solid potential returns — even if the shares give back a good bit of their recent gains over the option duration.
The company’s main asset is a drug called Lupkynis, which is also known as voclosporin. This compound became the first Food and Drug Administration-approved oral therapy for lupus nephritis when it was approved two years ago. Initial sales were initially somewhat disappointing, as happens frequently in the early stages of a new marketing rollout. However, Lupkynis seems to be gaining some traction. In early January, management gave preliminary fourth-quarter sales guidance that was nicely above analysts’ expectations. Overall, revenues will have nearly tripled in fiscal 2022 to just over $130 million.
Wall Street is expecting little in the way of revenue growth in the current fiscal year. Lupkynis was approved in the U.K in early December, which should be marginally helpful to sales growth. Importantly, the company has started to pick up some key patent wins in 2023 which are likely to extend exclusivity around Lupkynis up to 2037.
Four analyst firms including RBC Capital have reissued Buy ratings on the stock so far this year. Price targets proffered ranged from $11 to $14 a share. Buyout speculation around the company also seems to be picking up here in 2023. The company also has a couple of promising, but very early-stage candidates in development ended 2022 with approximately $375 million in net cash as well.
I am going to take a conservative approach and pick a call strike price more than 10% below current trading levels, given the nice rally in the stock so far this year. To establish an initial position in AUPH using a covered call strategy, do the following: Selecting the October $7 call strikes, fashion a covered call order with a net debit in the $5.30 to $5.40 a share range (net stock price – option premium). This strategy provides downside protection of approximately 35% and potential upside of just over 20% even if this stock drops by roughly 15% over the option duration.