A Timely Biotech Buy-Write – Advaxis, Inc. (NASDAQ:ADXS)


Things move fast in biotech. Early in August cancer specialist Advaxis, Inc. (NASDAQ:ADXS) announced it had partnered with, and received an equity infusion from, Amgen, one of the giants of the industry.  The Amgen deal was for a $25 million equity investment with the stock at $8.20 per share, plus a $40 million payment and future payments worth potentially up to $475 million. The stock, which had been vacillating for some time between $7 and $9, shot up above $11 the day of the announcement. After further gains Advaxis sold $30 million of shares to institutional investors at $13.50 in mid-August. That’s how you average up!  (The arrows in the chart below indicate both transactions). The stock then came off sharply, closing as low as $10.27 last Friday.  As I write the stock is about $11.30, rallying today to a market capitalization of about $450 million.

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ADXS is a volatile, high-beta stock. It can move three or four times as much as the market in the absence of any news.  But the news flow of late has been uniformly favorable. While this is not an earnings story, the company will not report again until, most likely, early January.

While it’s hard to know what any company is really worth, and a lot harder for a development-state biotech, we can learn a lot from reading the tea leaves. In the absence of significant news flow, the combination of the pre-Amgen-deal and post-deal prices, recent lows, and the new institutional money all help suggest that even given the stock’s volatility a reasonable trading range is around 10-14, with a narrower 11-13 range seemingly tradeable.

But another way to capture this volatility is through the option market. With no company-specific news flow expected before October expiration, traders might want to consider a buy/write using the October 12.5 calls. Even with today’s rally the stock is still almost 30% below the recent highs briefly reached a week after the Amgen deal. The stock is also only about half its year-ago level before some patient trials were delayed.  The buy/write can probably be done at a net cost of around $10.55 with the stock around $11.30. This puts the downside breakeven only marginally above the recent lows.

The called return is better than 18% for just over a month.  Of course, that requires stock appreciation of about 10% from here.  But even the standstill return is better than 7% for that period.  The trade hinges upon willingness to own ADXS shares in the mid-10’s, which seems like a fair price to get long based on the recent history.

Disclosure: The author has a position in ADXS.

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