Last year, I wrote that the most likely outcome for Ocugen (NASDAQ:OCGN) stock was that it would hit zero. Seven months later, OCGN stock is above $7 and Ocugen has a market capitalization well past $1 billion.
Of course, this is a very different Ocugen than it was last August. Given what we knew at the time, particularly concerning Ocugen’s balance sheet, the risk of bankruptcy was significant. The company’s OCU300 candidate for oGVHD (ocular graft versus host disease) had failed. Ocugen itself saw no potential for commercialization elsewhere in the pipeline until 2025 at the earliest.
But in December, Ocugen announced it had partnered with India’s Bharat Biotech to bring Bharat’s Covid-19 vaccine candidate Covaxin to the U.S. market. OCGN stock rose 800% in two days on the news. An equity offering unusually priced at a premium to the market price in February further ignited the rally.
We’ve seen a 50%-plus pullback from the highs, which might in context seem like an opportunity. Bharat has continued to provide positive, if early, data on Covaxin. Ocugen’s balance sheet is improved, and the higher share price alone gives the company the option of raising additional capital.
But even cut in half, and even assuming Covaxin approval, OCGN stock has very real valuation concerns at the moment. We’re perhaps getting closer to where the stock might get interesting, but at the moment this still doesn’t seem like quite the bargain so many bulls believe it to be.
Ocugen now has 188 million shares outstanding. Its market capitalization sits right at $1.4 billion.
At this point, essentially all of that value has to come from Covaxin.
Again, OCGN soared on the initial announcement of the Bharat partnership. Part of why it soared was because of optimism toward the deal. But another cause was the fact that Ocugen wasn’t worth very much before the deal was announced.
In fact, the day before the announcement, OCGN stock closed at 29 cents. At the time, Ocugen had about 162 million shares outstanding (the equity offering this year, along with ‘at the market’ sales, have since expanded the share count).
So, this was a business that, before Bharat, was valued at about $47 million.
And at the moment, that’s probably still our best guess of the value of the ophthalmology franchise. This isn’t a story like Moderna (NASDAQ:MRNA), where success on the Covid-19 front creates additional optimism toward the rest of the pipeline. Ocugen wasn’t even involved in developing Covaxin.
Certainly, the fact that Ocugen has raised some capital, and could raise more by selling additional stock, helps the cause for the legacy business. But even if that access to capital doubles the valuation, it still doesn’t really move the needle against the $1.4 billion market capitalization.
A 45% Profit Split
An investor bullish on OCGN stock has to believe, roughly speaking, that Ocugen can garner something like $2 billion in profit from the Bharat vaccine. That’s enough to account for the time value of money as well as some upside from the current stock price, while also assuming, for now, that Covaxin indeed receives U.S. approval.
Here’s the thing: $2 billion is a big number. Yes, there’s a big opportunity. Yes, it increasingly looks like Covid-19 vaccines will require repeated doses.
But the products from Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX), Moderna, and Johnson & Johnson (NYSE:JNJ) already are on the market. Novavax (NASDAQ:NVAX) might be on the way. Any number of smaller players retain their own hopes.
Meanwhile, Ocugen only gets a 45% share of the profits. It’s only commercializing Covaxin in the U.S. market.
So, the $2 billion figure for Ocugen now moves closer to $4.5 billion total profits for Covaxin. That’s over $13 for every man, woman, and child in the U.S.
Suddenly, a lot of success still looks priced in.
Is OCGN Stock Cheap?
The profit split and the market limitation both hurt OCGN in terms of relative valuation. It’s easy to look at Novavax ($14 billion market cap) or Moderna ($53 billion) and see the $1.4 billion valuation as Ocugen as cheap.
But cut profits by more than half, and limit the market to 5% of the world’s population. Suddenly, those relative valuations make a lot more sense.
Then add in Moderna’s approval and Novavax’s more valuable and reliable existing pipeline and OCGN stock no longer looks like a bargain.
The discussion so far doesn’t even contemplate the two biggest risks. First, Covaxin might not get U.S. approval. Bharat still has only preliminary data. Even the approval in India garnered its share of controversy. In that event, OCGN stock realistically could drop by 90%.
Second, Ocugen still has to build out its infrastructure. It’s responsible for Covaxin in the U.S. That might take more cash. At Feb. 28, the company had $46.6 million in cash. It burned $15 million in 2020.
In theory, that burn rate suggests Ocugen is safe until 2023. Lower spending on the legacy business, with the discontinuation of OCU300, may offset some of the expense related to Covaxin. Still, another equity offering, possibly toward the end of this year, is not off the table. I’m skeptical Ocugen can again do such an offering above the market price. (To be fair, those investors did pay a touch above the current price.)
None of this is to say that Covaxin won’t be approved, or that Ocugen won’t be able to market it. That’s not the problem.
The problem is the risk/reward. There are still a number of risks. And even after the pullback, the rewards don’t yet look all that great.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.