Small biotech companies can be explosive. Massive gains above 100% in relatively short periods aren't that rare. That's what happened to Ocugen (OCGN -6.58%) this year. The company's shares are up 229% since January (as of this writing). As per usual, Ocugen owes this recent run to meaningful clinical progress.
However, despite recent developments, the biotech remains far too risky for most investors. Here is why Ocugen's shares aren't worth the trouble right now.
Promising pipeline programs
Some will remember Ocugen for its failed attempt to become a major player in the COVID-19 vaccine market. The biotech is turning a new leaf, though, and it is pushing several candidates through their later developmental stages. The lead asset in Ocugen's portfolio is OCU400, a potential retinitis pigmentosa (RP) therapy. This group of rare eye-related genetic diseases erodes patients' visions, eventually causing blindness, or at least highly compromised sight.
If approved, OCU400 could be a one-time curative gene therapy for RP. Ocugen has started a phase 3 clinical trial for the treatment. It plans to pursue approval in the U.S. and Europe.
What is OCU400's market potential? If we take Ocugen's estimates seriously, it is mouthwatering. The biotech projects that OCU400 could earn approval in 2026. Ocugen thinks the therapy could generate between $30 billion and $47 billion in total revenue in the five years after approval. The company's market cap is about $488 million as of this writing. So by any standard, if these projections work out, Ocugen is severely undervalued.
And that's without considering the rest of the company's pipeline. The biotech is developing OCU410 as a potential treatment for dry age-related macular degeneration, another eye-related disease. Ocugen projects sales of $75 billion in the first five years for OCU410, which is currently in phase 1/2 testing.
But there is more to the story
With projections like those for some of its leading candidates, why isn't the market adjusting accordingly and sending Ocugen's share price higher than it already has this year? Simple: Those aren't risk-adjusted estimates. A product in the biopharma industry generating $75 billion in its first five years on the market is basically unheard of outside the COVID-19 vaccine market, and that was under extraordinary circumstances.
Ocugen still faces plenty of risks that could completely derail its plans. The most obvious is that OCU400 may not prove effective in its ongoing late-stage clinical trial. Shares might become next to worthless if that happens. There are also a range of other potential clinical and regulatory pitfalls. Same with OCU410, which is even more subject to these risks since it is still in early-stage studies. It is telling that Ocugen does not have a larger biotech partner in its corner to help develop these medicines.
With sales projections of the type the company is making for OCU400 and OCU410, one would think larger drugmakers would rush to sign lucrative licensing deals with Ocugen. Organically developing new medicines is often much more expensive and risky than simply acquiring promising assets. That is why the mergers and acquisition scene in the biotech industry has been so active over the past few years.
A licensing deal would help reduce Ocugen's risk associated with these therapies. The company would likely receive an upfront payment and the help of a more experienced team to get these products to the regulatory finish line and beyond. Perhaps Ocugen is so sure of the outcome that it feels it does not need help.
Or maybe the company's products aren't actually that attractive -- or maybe they are, and no biotech giant has taken notice. Either way, there is more than meets the eye here, and in my view the lack of a partner for any of Ocugen's more-than-half-a-dozen programs is a red flag.
Now turning to the company's financial situation, it ended the first quarter with $26.4 million in cash and equivalents -- hardly enough to sustain the various clinical studies it is running, including one in the later stages, for long.
Ocugen will almost certainly have to resort to a round or two of funding soon. Management may take advantage of the soaring stock price to run a secondary stock offering, which would likely drag down its shares. Or maybe Ocugen will issue debt. That said, Ocugen will need more than funding to become an attractive company. In my view, this biotech has too many unknowns, potential pitfalls, and red flags. It's best to stay far away from the stock.
