Ocugen Inc. (NASDAQ:OCGN) spiked to $10.19 recently from just $2.23 a month ago, a gain of more than 350%. But it seems clear that OCGN could have further to fly, as I believe the stock might be worth as much as $12.73 or so under a positive scenario.
On Feb. 2, Ocugen signed a definitive agreement for a partnership with an Indian novel coronavirus vaccine developer, Bharat Biotech. The deal allows Ocugen to distribute the vaccine, called Covaxin, throughout the U.S. if the FDA approves an emergency-use authorization.
Ocugen will retain 45% of the profits from the sale of Covaxin in the U.S. with Bharat Biotech. Analysts say it has a good chance of not only getting approved but also in being effective. It attacks the Covid-19 virus in a different way than other vaccines.
Recently, an H.C. Wainwright analyst said that Covaxin “has generated antibody levels comparable to those in human convalescent serum.” This apparently bodes well for the vaccine getting approved. Cantor Fitzgerald analyst Kristen Kluska said that it is a whole-virion vaccine. This means it targets the whole virus unlike other established vaccines against the specific proteins of the coronavirus.
Modeling Out Ocugen’s Opportunity
OCGN stock has a $1.9 billion market capitalization. We need to see if that makes sense from the standpoint of how much money Ocugen can make if Covaxin attains EUA and is used in the U.S.
Let’s make some assumptions. First, the average vaccine dose costs between $32 to $37 per dose for Moderna (NASDAQ:MRNA) and $19.50 for the Pfizer (NYSE:PFE) vaccine. Let’s assume that Ocugen will charge $25 per dose for Covaxin.
Next, let’s assume that just 10% of the U.S. population gets the Covaxin vaccine, or 33 million people. Therefore, the total revenue to the Bharat Biotech-Ocugen partnership will be $825 million. Let’s say 20% of that goes to overhead and market costs. The profits to be distributed will be $660 million.
Now Ocugen gets to have 45% of that $660 million in profits, or $297 million. Let’s call it $300 million. Here is how I would value that. Assuming the vaccine is good for 10 years, the revenue would work out to $3 billion. That is 58% higher than the $1.9 billion valuation for OCGN stock today.
This represents a potential price gain of up to $16.23 per share (i.e., 58% higher than the Feb. 19 price of $10.27 for OCGN stock).
What to Do With OCGN Stock
This is just one set of assumptions about how the deal will work out for Ocugen. It could turn out that well less than 10% of the population uses the Covaxin vaccine.
But don’t forget it seems to have the ability to fight against various strains of the Covid-19 virus. That could potentially make it popular with health care workers and doctors.
In these kinds of situations, I like to use probability analysis to help sort out the odds. Let’s say there is a good chance that OCGN could double, about a 50% chance. That gives it an expected return of +29% (i.e., 50% x 58%).
However, there is also a 25% chance it could fall 50%. That means the expected return is negative 12.5% (i.e., -50% times 25%). Lastly, let’s assume the stock has a 25% chance of rising 30%, for a total expected return of 7.5% (i.e., 0.25 times 0.30).
Note how all the probability events add up to a possibility of 100% (i.e. 50% plus 25% plus 25%). Therefore, we add up the sum of the expected returns. So +29% plus -12.5% plus +7.5% equals +24%. In other words, the expected return for OCGN is that it will gain 24% to $12.73 per share.
We used both scenario analysis and probability analysis. Scenario analysis had an expected return of 58% for OCGN stock. Probability analysis lowered this by half to 24%. That way we have reduced the risks in our estimate.
On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.