Just a few days ago, Ocugen (OCGN 1.41%) was flying high with shares up more than 460% year to date. Investors were hopeful that the small drugmaker would be able to win U.S. Emergency Use Authorization (EUA) for Covaxin, the COVID-19 vaccine developed by Ocugen's partner, Bharat Biotech.
On June 10, though, Ocugen announced that the U.S. Food and Drug Administration (FDA) had effectively shut the door on an EUA filing. The company stated that it will pursue a path to file for full FDA approval of Covaxin. The worst news was that another late-stage clinical study will likely be required to support the regulatory filing.
The biotech stock promptly crashed by more than 30%. What should investors do now? Here are three prudent steps to take.
1. Reevaluate the company's prospects
Investors should definitely reevaluate Ocugen's prospects in light of the company's bad news announced last week. Some were undoubtedly anticipating a relatively quick EUA win for Covaxin followed by strong U.S. sales for the COVID-19 vaccine. That's not going to happen now.
How long might it take for Ocugen to win full FDA approval for Covaxin? It's hard to say for sure.
It took Moderna roughly 10 months from the initiation of the late-stage study for its COVID-19 vaccine to the point where the company filed for full FDA approval. Remember, though, that Moderna achieved this while working closely with the U.S. government (including receiving funding from Uncle Sam) and during a period when vaccines weren't widely available.
Ocugen hasn't stated yet when a potential late-stage study of Covaxin could start. It's likely that the company will take longer to file for full FDA approval of the vaccine than Moderna will. The FDA typically takes 60 days to accept a regulatory filing then 10 months to make an approval decision. For priority reviews, the timeline for an approval decision is reduced to six months.
Realistically, Ocugen is probably looking at potential approval of Covaxin in mid-2023 at the earliest. Assuming it wins approval for the vaccine, the challenge for the company then will be to achieve commercial success. There's no way, however, to know what the COVID-19 vaccine market dynamics will be two years from now.
2. Look at all your alternatives
If you already owned Ocugen stock before the company's disappointing news, you have several alternatives. The simplest thing to do is to hang onto the stock and hope that it recovers sooner or later (which is a possibility). This requires no immediate effort on your part.
Another alternative is to sell some or all of your Ocugen stock and invest the money elsewhere. Investing is always a game of balancing risk and reward. The risk-reward proposition for Ocugen is obviously much different now than it was when individuals were buying the stock over the last several months. There's a pretty good case to be made that other stocks offer even better prospects for returns with lower risk than Ocugen does.
Don't overlook another approach, especially if you're still sitting on a nice gain even after last week's major sell-off. You could sell some or all of your Ocugen shares and buy long-term call options on the stock. These options will be cheaper than owning the stock itself. If Ocugen goes up, you can still profit. If it goes down, your loss won't be as great as it would be if you held onto all of your shares.
3. Identify lessons learned
Probably the most important thing to do after Ocugen's crash, though, is to identify lessons learned and apply them to future investing decisions. Those lessons will vary between different investors, but I'll point out a major one to keep in mind.
Companies will inevitably be optimistic about their prospects for success (at least publicly). However, sometimes the optimism isn't justified.
For example, after the FDA revised its guidelines for the EUA process for COVID-19 vaccines, Ocugen's CEO stated, "Since we have been in discussions with the FDA since late last year, we do not believe that the FDA's recently revised guidance regarding EUAs raises any concerns about our ability to submit the EUA for Covaxin as planned." Objective investors could have clearly seen then that there actually were significant reasons to be concerned.
It's easy to become such a huge fan of a stock that you lose objectivity about its prospects. This can prove to be a costly lesson to learn.