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On April 17 on Discord, I laid out my plan for a series of short-term investments during earnings season. The goal was to find more productive uses for my strategic cash position by taking positions in commercial-stage businesses that were undervalued heading into first-quarter 2025 earnings updates. I decided to only make short-term investments if there was a high probability of earning at least 10%.

The first two positions delivered: Blueprint Medicines returned 11.9% in one day and Exact Sciences returned 18.7% in two days.

I think this third and final earnings trade in Harmony Biosciences could deliver even better returns. Of course, now it will have a negative surprise, like moths ate all their lab coats, and collapse by 50%.

Harmony Biosciences isn't perfect, but there's no denying it controls its own financial destiny. The business is on pace to generate full-year 2025 revenue of $840 million at the midpoint from its narcolepsy drug Wakix. It's on pace to generate at least $175 million in net income this year, good for a net margin of 21%.

It generates so much cash it has a share repurchase program – the only company in the coverage ecosystem with one – with $150 million remaining. That's equivalent to 8.6% of the current market valuation. For comparison, buyback programs of the Magnificent 7 represent roughly 3.5% of their market caps, on average.

It gets better: Harmony Biosciences is valued at just 9.9x forward earnings. Repurchasing shares is actually a pretty good investment.

The primary reason for the company's subdued valuation is the threat of near-term generic competition. However, the business recently settled the first dispute, which will stave off that competitor's Wakix copycat until January 2030. By then, a new formulation of Wakix should be on the market with patent protection into the 2040s. More settlements, announcing pediatric exclusivity for Wakix (meaning that January 2030 launch has to wait until July 2030), and a highly-anticipated pivotal data readout for its lead drug candidate in Q3 2025 should unlock considerable value before the end of the year.

What characteristics give confidence in these short-term trades?

No, I'm not a madman.

It's important to unpack the characteristics of these trades. As we all know, it's not enough to simply identify undervalued businesses. Exact Sciences and Harmony Biosciences have been undervalued for months. These earnings trades are inherently different.

The high cost of capital has frozen the biotech landscape. Here the word "biotech" means biopharma, industrial biotech, agricultural biotech, R&D inputs, and environment biotech. Public and private investors worried about the cash-hungry nature of biotech businesses have reduced their exposures, but the duration of the downturn – it began in 2022 – has led to healthy businesses getting dragged down too. A "baby with the bath water" scenario.

If the headwinds for valuations are financial, then the triggers for unlocking value will be financial de-risking events. Whereas precommercial companies will trade on the whims of data updates and regulatory timelines that can take years to play out, commercial-stage businesses can signal their strength and progress four times per year.

Exact Sciences, Blueprint Medicines, and Harmony Biosciences are each the strongest and healthiest they've ever been. They control their own financial destiny – whether it's tariffs, recessions, or just another Tuesday – and get to remind Wall Street analysts of that during quarterly earnings updates. Execution is always rewarded. Better yet, the vacuum created by outflows in recent years makes it easier for funds and investors to rush back in on earnings updates. Although the resulting valuation bumps might be fleeting, so will my holding periods for these specific positions.

These short-term investments wouldn't work as predictably for precommercial companies. I wouldn't dare try.

The Trade

Harmony Biosciences is considered a Growth (Speculative) position. I purchased 774.83 shares at $30.00 per share on May 2, 2025. A separate transaction for partial shares ($24.99) is not shown.

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Outperformance Scenarios

I usually share a table here with outperformance scenarios measured in years, which doesn't make sense for this short-term trade. I see a good opportunity to make a double-digit gain.

Margin of Safety & Allocation

Harmony Biosciences is considered a Growth (Speculative) position. The estimated fair valuation based on my current model is below:

• Market close May 1: $29.86 per share
• Modeled Fair Valuation: $62.84 per share
• Allocation Range: Up to 5%

Harmony Biosciences reported 57.345 million shares outstanding as of February 21, 2025. The modeled fair valuation above assumes 55.674 million shares outstanding, which is equivalent to repurchasing 5% of common stock.

Further Reading

• April 2025 Member Digest previewing Q1 2025 earnings from the coverage ecosystem