The novel coronavirus vaccine data recently released by Ocugen (NASDAQ:OCGN) is unquestionably good news. I’m just not sure the news is quite that good for OCGN stock.
The news is good because in the fight against Covid-19, we need all the help we can get. Ocugen’s partner, India’s Bharat Biotech, has developed Covaxin as a potential Covid-19 vaccine.
Over the past couple of weeks, Bharat and Ocugen have detailed hopeful efficacy results. Most notably, Covaxin appears to be effective against some of the coronavirus mutations that are causing concern at the moment.
But as far as OCGN stock goes, investors need to remember a key fact: Covaxin is not Ocugen’s product. The company is simply Bharat’s partner. And the partnership is established under terms that are not exactly advantageous.
So like everyone else, I’m hoping Covaxin proves to be as successful as early data suggests. But that doesn’t mean I’m going to buy, or recommend, OCGN stock.
OCGN Stock Soars
Until late last year, Ocugen was a struggling developer of ocular treatments — and one that had shown little success. In June of last year, Ocugen’s flagship product, OCU300, flunked a Phase 3 trial. OCGN stock plunged and with cash limited and the rest of the pipeline still in the clinical stages, bankruptcy appeared a possible, and maybe probable, outcome.
But on Dec. 22, Ocugen announced its agreement with Bharat. OCGN stock soared.
A capital raise in February added another leg to the rally. From there, despite solid early data disclosed in early March, the stock faded. But over the past few weeks, the rally has resumed. And for seemingly logical reasons.
The news coming from Bharat has been positive. Second interim results released on Apr. 21 showed 100% protection against hospitalization. Then, this week, Ocugen released early data showing effectiveness against several important variants of the novel coronavirus.
As a result, OCGN stock has almost tripled in two weeks. Shares are just pennies shy of the all-time closing high reached at the peak of the February rally.
What’s It Worth?
Again, the efficacy data is good news.
But as far as Ocugen stock goes, it’s important to remember how the deal between Bharat and Ocugen is structured.
Ocugen has the rights to Covaxin in just one market: the U.S. In that market, it gets just 45% of the profits. For that share, Ocugen has to fund the manufacture, marketing and distribution of the product.
That creates a couple of fundamental problems. First, Ocugen needs cash to do all that. The way it can and will raise cash is to sell stock.
Indeed, Ocugen did exactly that last week, raising $100 million at $10 per share. It seems likely that more sales will follow, and potentially interrupt, any additional rallies.
But from a longer-term perspective, there’s a real question as to just how profitable Covaxin will be even assuming approval. After the equity offering, Ocugen has a market capitalization over $3 billion. The existing ocular portfolio has little value.
Given a 45/55 profit-sharing agreement, it takes an awful lot of vaccine doses to support a $3 billion valuation.
Is Success Priced In?
What worries me about OCGN is that I’m not sure all of the investors chasing the buzz quite understand the structure of the deal. They’re seeing good data that supports OCGN as a vaccine play, and not taking it much further.
But there are stumbling blocks here, even if the early data proves to be conclusive. Profitability is a concern, given the profit-sharing arrangement and given that larger U.S. developers often are pricing at or near cost. At $20 per dose (a higher price than some of the alternatives), Ocugen would have to sell 333 million doses simply for its share of revenue to total $3 billion.
Obviously, Ocugen’s profit margins aren’t going to be 100%. The CDMO (contract development and manufacturing organization) that winds up manufacturing Covaxin in the U.S. will get a cut. Corporate, marketing and regulatory expense all need to be considered.
And because the company didn’t develop Covaxin itself, it’s not as if the vaccine’s success would read across to the rest of the company’s pipeline.
All told, the optimism toward Covaxin makes some sense. But what investors absolutely must remember is this: Optimism toward Covaxin and optimism toward OCGN are not the same thing.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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