After Ocugen (NASDAQ:OCGN) came to the public markets last year, the case for OCGN stock centered on the company’s OCU300 compound. The problem at the moment is that case has collapsed.
In early June, Ocugen discontinued Phase 3 trials for OCU300, meant to treat oGVHD (ocular graft versus host disease). An interim analysis suggested the compound was not likely to show sufficient benefit.
OCGN stock fell 26% on the news. But since then, shares have exactly doubled. And that rally seems surprising — and misguided.
To be sure, Ocugen still has some hope. It has other compounds that aim to treat ocular diseases. Aggressive share sales this year have buttressed the balance sheet.
But Ocugen’s newer products are years away from approval — by the company’s own admission. And it looks increasingly unlikely that Ocugen’s cash can last that long. As a result, the path forward looks simply too narrow. Unfortunately, the most likely outcome is that the Ocugen story is over, even if OCGN stock doesn’t yet reflect that fact.
The end of OCU300 is a core problem for Ocugen because it undercuts one of the reasons for optimism toward its pipeline. Ocugen has boasted of a “modifier gene therapy platform”, through which a single functional gene can be used to address multiple conditions. But, in the case of OCU300, that technology simply didn’t work.
The company now is pivoting to focus on three new compounds. OCU200 targets “major retinal diseases” including diabetic macular edema and wet age-related macular degeneration (Wet AMD). OCU400 and OCU410 are part of the modifier gene therapy platform, with OCU400 treating Retinitis Pigmentosa and OCU410 another potential treatment for Wet AMD.
Ocugen plans to be aggressive with its pipeline. According to the most recent investor presentation, the company is targeting four Phase 1 and 2 trials within the next two years. Initial data should be available by 2022.
And if Ocugen can find success, there is hope for OCGN stock. Major pharmaceutical companies like Alcon (NYSE:ALC) or Bausch Health (NYSE:BHC) could be interested in any of these compounds if they work. With the market capitalization currently at just $63 million, it doesn’t take much in the way of good news to move the stock.
The problem is that Ocugen has to deliver that good news, and that will be difficult.
Time and Cash
The problem is that Ocugen wants to be aggressive, but its balance sheet will be a significant stumbling block.
Ocugen closed its second quarter with $15 million in cash. But it also has $4 million in short-term debt (maturing in less than one year) and another $2 million in long-term debt.
Ocugen has issued stock to repay some of its borrowings, but it still has only $9 million in net cash remaining. It burned almost $8 million just in the first two quarters of this year.
The only way to fund the four trials is through continued issuance of more and more stock. Indeed, the company has raised $16 million that way so far this year. But that tactic can only work for so long. Should OCGN stock tip, a vicious cycle emerges. The company needs to sell stock to survive — but it can’t sell that stock without pressuring the stock price.
The issue is that Ocugen doesn’t have to just get through 2022, when it expects initial data to arrive. According to the most recent investor presentation, it has to get to 2025 and 2026, when the company is hopeful for at least one of its drugs to be approved.
It’s simply not clear how the company can make it through the next five years (at least) with the current balance sheet.
OCGN Stock Looks Like an Avoid
Even if Ocugen does find a way to drive some optimism, the continued share issuance will soak up at least some of the benefit to its share price. Ocugen already has diluted shareholders significantly.
At Dec. 9, according to an 8-K filed with the U.S. Securities and Exchange Commission, Ocugen had 52.6 million shares outstanding. The figure at the end of Q2 was 135 million. OCGN stock actually has rallied 17% over that stretch, but its market capitalization has more than tripled.
Here, too, the problem becomes what happens when investors stop buying. If the market value of Ocugen holds, and dilution continues, that alone will push OCGN downward.
And at some point in the next three to five years, investors are going to stop buying. There simply isn’t enough reason for optimism — and certainly no reason that is likely to come before next year at the earliest. OCGN stock has managed to make it through the failure of OCU300 so far, but I’m extremely skeptical it can do so forever.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.