In my first go-around with pharmaceutical company Ocugen (NASDAQ:OCGN), I suggested that its shares represented a stupid gamble. However, sometimes stupid gambles win out every blue moon. On Jan. 6, for instance, Ocugen stock gained 28%. Apparently, investors were impressed with the underlying company’s potential to substantively address underserved rare eye diseases.
Nevertheless, investors have a right to be skeptical about the organization. For one thing, despite the huge single-day rally in OCGN stock, shares remain below $1. Granted, this could change in an instant due to the volatility of speculative pharmaceutical investments. But this subterranean price point underscores the risks traders are taking with this organization.
Plus, Ocugen stock features what I will politely term vulnerable financials. The company doesn’t generate revenue, nor has it for many years. Therefore, OCGN depends on grants and other sources of financing. When you look at its free cash flow statement, that’s exactly the case. In its most recent quarter, FCF was positive due to alternative financing arrangements.
On the flipside, though, OCGN stock has demonstrated the potential for extraordinary returns. Based on low expectations and the law of small numbers, if Ocugen delivers meaningful results, shares will skyrocket. If you’re looking for a single name that can make you rich, this is it.
But how likely is this scenario? Let’s take a deeper look at Ocugen stock.
Wide-open Opportunity for Ocugen Stock
For most of us, our vision is our most precious physical asset. And it’s scary to think that millions of people around the world suffer from retinal disease or macular degeneration, circumstances which can destroy this beautiful gift.
Personally, I know and worked with folks who suffered macular degeneration. It’s no joke and is an incredibly painful condition. Thus, I get it when people talk about OCGN stock in hopeful terms. No one should suffer these dreadful diseases.
To that end, Ocugen has made substantive progress. Back in February of last year, the Food and Drug Administration gave the company’s NR2E3 therapy (to treat mutation-associated retinal degenerative disease) orphan drug status.
Now, this orphan drug status helps to bring the non-revenue generation I mentioned above in proper context. In short, this categorization allows small pharmaceuticals to pursue rare-disease treatment research in an economically viable environment. Essentially, the U.S. government incentivizes pharmaceuticals to invest in rare diseases. Without the incentives, no company would bother because of the small patient base making such pursuits unprofitable.
Thanks to the orphan drug status, Ocugen stock has continued to trade in the markets, with investors somewhat giving it the benefit of the doubt. Ultimately, the main goal here is to see if Ocugen makes good on its potential. If it does, shares again will skyrocket.
Wall Street is also holding out hope for OCGN stock because the opportunity is wide open. Simply put, no FDA-approved therapeutics exist for several rare eye diseases. Theoretically, Ocugen needs to get something on the table and the FDA may be willing to play ball. Then, OCGN becomes a takeover target and you become a richer person for it.
The Skeptical View on OCGN Stock
While I love the concept of serving the underserved, investors should avoid conflating the science of Ocugen stock and its investment profile.
At this point, it’s fair to bring up the skeptical view on this company. Yes, the opportunity for treating rare eye diseases is massive. However, so are the risks. I think there’s a reason why a dearth in FDA approvals clouds this space; namely, treating rare eye diseases is extraordinarily difficult.
Furthermore, Ocugen must be successful in bringing something to the table. If it’s not, the incentives that it receives from orphan drug status may not help. More than likely, the government won’t keep granting incentives indefinitely.
And that brings me back to the financials. If something goes wrong in the pipeline, Ocugen doesn’t have much wiggle room. With widening net income losses, prospective buyers are taking on huge risks.
Additionally, I think it’s worthwhile to bring up the political environment surrounding the pharmaceutical industry. Because of their small patient base, many bad actors in the space have exploited the orphan drug law. With a hostage consumer, you can charge whatever you want, and some have done exactly that.
Of course, that doesn’t sit well with politicians, which have recently blasted pharmaceuticals for price gouging. In a contentious political environment, we can at least anticipate some new laws passing that would present headwinds to profitability.
Now, I’m not saying that Ocugen is a bad actor. However, Ocugen stock features serious risks fundamentally as well as from external factors.
How to Approach This Speculative Idea
From my perspective, I don’t like gambling on speculative pharmaceuticals. I especially don’t like gambling on pharmaceuticals priced into legitimate penny stock territory. Frankly, if shares are that lowly, smarter people than me decided it should be there.
But is OCGN stock completely hopeless? Looking at the underlying company objectively, the opportunity for extraordinary upside exists. But as with anything in life, high reward almost always entails high risk. Therefore, most investors – except for the ones that understand what they’re getting into – should avoid Ocugen stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
