I don’t believe there’s much value in the ophthalmology portfolio for Ocugen (NASDAQ:OCGN). The failure of OCU300, the company’s primary candidate, seemed to end the bull case for OCGN stock.
Ocugen does have other candidates, but as I wrote last year those candidates appear to require too much money and too much time for Ocugen to have much chance of success.
But OCGN stock isn’t about ophthalmology anymore. The company has joined the Covid-19 vaccine race. A partnership with India’s Bharat Biotech gives Ocugen exclusive rights to the U.S. market. That partnership in turn has sent OCGN stock soaring.
Indeed, on Dec. 21, the day before the partnership was announced, OCGN stock closed at 29 cents. The company had a market capitalization under $50 million. A little over two months later, OCGN has stunningly gained more than 3,600%. Thanks to a higher share count, its market cap is over $2 billion.
Broadly speaking, the optimism seems to make some sense. Looking closer, however, it looks like far too much.
The Case for OCGN Stock
Covid-19 vaccine plays unsurprisingly have rallied sharply. That alone perhaps supports some optimism toward OCGN.
It’s not necessarily the size of those rallies, though a name like Novavax (NASDAQ:NVAX) has gained a stunning 2,900% over the past year. Rather, it’s the absolute valuation at which vaccine plays.
Novavax has a market capitalization of $14.6 billion. Moderna (NASDAQ:MRNA) is worth $55 billion. Neither Inovio (NASDAQ:INO) nor Sorrento Therapeutics (NASDAQ:SRNE) have an approved product (Sorrento is working on treatments as well), yet they are valued at $2.5 billion and $2.8 billion, respectively.
So even after the rally, OCGN stock seems like it could, and should, be cheap enough.
Obviously, Ocugen and Bharat won’t be first to market. But Covid-19 vaccines aren’t like standard pharmaceuticals, in which the product with earliest approval has the biggest chance of becoming the standard of care. There will be more than enough demand to support multiple vaccines. It appears highly likely that sales will depend not on the time of approval, but the suitability for various subgroups.
And Bharat’s product, covaxin, has shown early promise. We don’t have Phase 3 trial results yet, though it should arrive soon, but early data suggests covaxin has solid efficacy. Indeed, the vaccine has been granted emergency use authorization in India.
If the Phase 3 trial data is strong, it would seem like OCGN stock is cheap enough to rise further, even after the tremendous gains so far.
There are two big problems, however.
The first is that Ocugen’s opportunity simply isn’t as large as those of other vaccine developers. Ocugen has rights to the U.S. only. Companies that own their vaccines can sell worldwide.
Even in the U.S., Ocugen is only keeping 45% of the profits. But it’s 100% responsible for “researching, developing, manufacturing and commercializing” the vaccine.
The profits Ocugen drives even assuming U.S. approval of covaxin simply aren’t going to be as great as those of other companies in the same market.
Ocugen also needs to find a way to fund that manufacturing. It needs to build out a sales force. Neither will be cheap, yet Ocugen doesn’t have all that much in the way of cash.
The company closed the third quarter with $19 million in cash. It raised another $23 million in an equity offering that closed earlier this month.
That’s not nearly enough. The legacy business burned over $10 million in cash just in the first nine months of 2020. And covaxin needs to be approved in the U.S., which includes separate trials — a long and expensive process.
Simply put, Ocugen doesn’t have the resources to commercialize Covaxin in the U.S. and maintain its pipeline. New capital will need to be found.
That in turn will require another equity offering, which could burst the OCGN bubble.
Be Careful Out There
To be fair, Ocugen could find another partner for its covaxin efforts, for either manufacturing and/or sales. But such a deal in turn would eat up even more of the profits from vaccine sales, if they even arrive.
None of this is to say that Ocugen stock is worthless, or that the company has no chance. But at the end of the day, Ocugen needs to earn roughly $2 billion in profit simply to support the current OCGN stock price (assuming that another equity offering further dilutes current shareholders).
In the context of the split with Bharat and the capital questions, that figure seems awfully high. And that’s without contemplating the scenario in which covaxin stumbles in trials, either in India or the U.S.
OCGN stock seems to be pricing in an awful lot of success already. Investors should remember that success is far from guaranteed.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.