After the FDA basically told Ocugen (NASDAQ:OCGN) that it wouldn’t even consider granting an emergency use authorization (EUA) to Covaxin, the game is all but over for OCGN stock as a Covid play.
Put another way, the agency’s decision shows that Covaxin’s chances of ever being approved in the U.S. are somewhere between infinitesimal and none.
As a result, Ocugen’s shares are overvalued at their current levels and are a very low-risk, high-return target for short-sellers.
Covaxin is the vaccine for the novel coronavirus developed by an Indian pharmaceutical company, Bharat Biotech. Bharat gave Ocugen the right to 45% of the profits generated by the vaccine in the U.S.
The FDA and OCGN Stock
After Ocugen intimated for many weeks that it was on the verge of submitting an EUA application for Covaxin and suggested that the FDA was ready and willing to, at a minimum, accept the submission, the company hit its shareholders with a huge, unexpected (to them) blow on June 10.
Specifically, on that day, the company revealed that, based on the FDA’s feedback, it had decided not to seek an EUA for Covaxin. Instead, Ocugen announced it would seek a biologics license application for Covaxin i.e. a full approval, for the shot.
Moreover, Ocugen divulged that the FDA was seeking “additional information and data” about Covaxin.
Although Ocugen’s CEO, Shankar Musunuri, said he was “encouraged” by the data on Covaxin when he said that the company was preparing its EUA application on May 7, I was not at all surprised by the agency’s decision.
As I’ve noted in multiple previous columns, all published well before June 10, U.S. coronavirus deaths, hospitalizations and cases have all been falling, indicating that the vaccines already approved by the FDA are more than adequate.
Additionally, there was and is no evidence to support the contention by OCGN stock bulls that Covaxin is more effective against the coronavirus variants than the approved vaccines developed by Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA), and Johnson & Johnson (NYSE:JNJ).
Finally, the Phase 3 trials carried out by Bharat did not meet the FDA’s preference for Phase 3 trials with at least 30,000 participants and at least one site in the U.S.
Given all these points, there was and is no remotely compelling reason for the Biden administration in general or the FDA in particular to upset Pfizer, Moderna and Johnson & Johnson by approving Covaxin and purchasing a significant number of the shots.
Understanding the FDA’s Decision
I believe that the agency’s call on Covaxin shows that it has no interest in ever approving the shot. The fact that it was unwilling to even consider granting an EUA, and did not indicate that it could change its mind anytime soon, suggests that it thinks the vaccine is of very little or no use to the U.S.
Here’s an analogy to Ocugen’s situation with Covaxin that I think is fairly accurate and will help illustrate the FDA’s likely mindset towards Covaxin.
Imagine that a person applied for a job, and the company to which they applied sent the candidate an e-mail that said, “Thank you for applying, but we don’t think you have the necessary qualifications. However, in the future, if you acquire more experience and additional skills, it’s possible that we will consider you for the position if it is open.”
In all probability, the company is basically saying that the candidate is and probably never will be a good fit for the position, but it’s trying to be courteous by giving the applicant a tiny sliver of hope for the future.
Some of those who are bullish on OCGN stock have now tried to pin their hopes on a new deal that Ocugen recently announced with Bharat.
Under the agreement, Ocugen would receive 45% of the profits generated by Covaxin in Canada. Ocugen will also provide Bharat with “an upfront payment and milestone payment upon first commercial sale in Canada,” Ocugen reported.
But I doubt whether Canadian regulators will grant an EUA for Covaxin after the shot was turned down by the FDA. America’s rejection would undermine Canadians’ confidence in the shot, and if anything goes wrong with the jab in Canada, Canadian regulators would have egg on their faces.
Finally, even if Canada does approve Covaxin, Ocugen will have trouble generating a profit in the relatively sparsely populated country, which is estimated to have had fewer than 38 million people last year, about the same as the combined population of New York and Texas.
The Bottom Line on OCGN Stock
Ocugen has almost no chance of generating meaningful profits from Covaxin, and the rest of its pipeline appears to be in the preclinical stages. However, OCGN stock still somehow has a market capitalization of over $12 billion.
As a result, I think that the risk-reward ratio of shorting OCGN stock at this point is extremely favorable.
On the date of publication, Larry Ramer held a short position in Ocugen and a long position in Moderna. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Ford, Exxon, and Snap. You can reach him on StockTwits at @larryramer.