I've Got an Options Bandage for a Sick Economy

As the economic outlook grows sicker and sicker, one of the areas I am looking to bandage up any potential bleeding is health care. I’m already into Gilead Sciences (GILD)  and Merck (MRK) via covered-call orders, as I wrote earlier on Friday. Now, I’m taking aim at another health care name: Lantheus Holdings (LNTH) .

Financial stressors are already infecting the nation: Consumer demand is ebbing quickly putting retail under distress and feverish interest rates are is giving the housing market chills and cooling durable good concerns like auto manufacturers.

But in times of economic health and sickness, drugs tend to be a fairly recession-resistant.

That’s why I’m exploring another covered-call idea in the health care sector. This one is a bit riskier compared to the two drug giants I’m already into, Gilead and Merck. But an investor is compensated for that risk via higher option premiums.

I first became aware of Lantheus Holdings in late 2019 when it purchased Progenics Pharmaceuticals (PGNX)  in an all-stock transaction. I had a fairly large holding in Progenics and it was acquired for a considerable discount to its asset value. Sure enough, Progenics’ cancer imaging agent pipeline has paid off for Lantheus in a big way.

Lantheus develops, manufactures and commercializes diagnostic and therapeutic imaging products and artificial intelligence software including those for cancer detection.

The rollout of Pylarify, an imaging agent for prostate cancer that came with the buyout of Progenics, has been more than impressive. After posting sales of just over $35 million in the fourth quarter of last year, sales were up over $90 million in this year’s first quarter. This was a key reason that Lantheus crushed top- and bottom-line estimates when it reported first quarter results in late April. The company also took up its full year revenue up by more than $100 million to $800 million to $835 million in fiscal 2022. Leadership believes Pylarify has just over $1 billion in peak annual sales potential. The company is also seeing good growth from some of the other products in its portfolio including Definity, an ultrasound enhancing agent. The company has a robust pipeline in development, and most of its efforts are partnered with larger drugmakers like Novartis (NVS) .

The stock rallied on these earnings, which garnered a couple of analyst “Buy” reiterations. But, with the recent selloff in the market, the shares are back down to where they traded before the big earnings beat right at $60 a share. Recent analyst price targets are in the $90-to-$100-a-share range. Based on guidance, revenues will be up over 90% in fiscal 2022 and the stock sells for 20-times forward profits.

Option Strategy:

This is how one can execute a covered call position in LNTH. Using the November $60 calls, fashion a covered call order with a net debit in the $49.00 to $49.50 range (net stock price – option premium). Options are decently liquid and the order should fill during the day. This strategy provides downside protection of nearly 20% and around 22% of potential upside over the option duration of just five months even if the stock does nothing