Ocugen (NASDAQ:OCGN) is a small biotech that is trying to cure several forms of blindness using gene therapy. The FDA has not approved any of its therapies, and there is a huge set of downside risks, but OCGN stock might still be worth a look.
The reason I say this is because the company has a “cash runway” as they call it until some of their therapies get approved. On Aug. 14, Ocugen signed up Cantor Fitzgerald and Oppenheimer & Co. to raise up to $30 million in equity for the company.
This shelf registration for more sales of OCGN stock using an At Market Issuance Sales Agreement. This cash will be needed to keep the business running. So, although it provides needed cash, it will always dilute existing shareholders. But let’s look at the cash runway first.
The Cash Runway and OCGN Stock
Keep in mind that Ocugen already has $14.968 million as of June 30. In a business update on Aug. 14, the company said that this cash provides them a cash runway until the first quarter of 2021.
It is going to need all of that cash plus the new shelf registration At Market Issuance. This is because the company reported that in the first half of 2020 to June 30, it used up $7.8 million or so in cash outflow.
This means that the June 30 $15 million in cash will last only to the end of this year. That is why Ocugen said it provides a cash runway “into the first quarter of 2021.”
So you can be sure that more equity sales of OCGN stock will occur all throughout Q3 and Q4. That puts huge selling pressure on the stock. For example, at the end of 2019, there were just 52.6 million shares outstanding. But by June 30, there were 135 million shares outstanding. That represents an increase of 157% in total shares in just six months.
Moreover, since OCGN stock trades for just 41 cents per share, it has a market capitalization of $55.35 million, before any warrants or options. Therefore, in order to issue another $15 million to get through 2021, Ocugen will have to issue at least 27% more stock (i.e., $15 million divided by $55.35 million). And that assumes OCGN stock won’t fall due to the higher dilution.
The Goal Is to Get Through 2022
Based on a recent slide presentation by the company, it expects to file with the FDA for two of its gene therapies to start Phase 1/2 clinical studies. This will be sometime in the first half of 2022. By the end of 2022, they hope to have the results.
The problem is that is going to mean another $15 million or more in equity capital raise. This is why the company signed a $30 million equity sales agreement with Cantor Fitzgerald and Oppenheimer & Co. It will cover $15 million of expenses in 2021 and $15 million in 2022.
What will happen then? I suspect the company hopes by then it will have received approval either by the U.S. FDA or some other country, including China. Ocugen has signed a manufacturing agreement with a Chinese company to commercialize one of its gene therapies OCU400. I wonder if they have plans to commercialize first in China if it has to.
What to Do With OCGN Stock
We know that Ocugen has to issue up to 54% of its existing market value. For example, $30 million divided by $55.35 million market cap is 54%.
That means this is a good stock worth shorting. The reason is in order for the stock have the same market cap as today, with 54% more shares outstanding the price has to fall by the same amount.
If you can’t short the stock, consider buying puts if they are available. The point is that Cantor Fitzgerald and Oppenheimer need to help the company stoke up the price while they sell shares. Otherwise it is going to fall as it sells new shares to fund the company’s operations over the next two and half years.
So the look that I am refering to with OCGN stock is figuring how to benefit from its coming stock price decline.