Small biotech companies can be explosive. Huge gains above 100% in relatively short periods of time are not that rare. That’s what happened Ocugen (NASDAQ: OCGN) this year. The company’s shares are up 229% since January (at the time of writing). As usual, Ocugen owes this recent run to meaningful clinical advances.
However, despite recent developments, biotechnology remains far too risky for most investors. This is why Ocugen stock isn’t worth it right now.
Promising pipeline programs
Some will remember Ocugen for its failed attempt to become a major player in the COVID-19 vaccine market. However, biotechnology is breaking new ground and pushing several candidates through their later stages of development. The top asset in Ocugen’s portfolio is OCU400, a potential therapy for retinitis pigmentosa (RP). This group of rare eye-related genetic diseases erodes patients’ vision, eventually causing blindness, or at least severely impaired vision.
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 US and Europe.
What is the market potential of OCU400? If we take Ocugen’s estimates seriously, it’s mouth-watering. The biotech projects for which OCU400 could receive 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 capitalization is approximately $488 million at the time of writing. So if these projections come true, Ocugen will be seriously undervalued regardless.
And that’s without taking into account 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 expects sales of $75 billion in the first five years for the OCU410, which is currently in Phase 1/2 testing.
But there is more to the story
With predictions like those for some of its leading candidates, why doesn’t the market adjust accordingly and send Ocugen’s stock price higher than it already has this year? Simple: these are not risk-adjusted estimates. A product in the biopharmaceutical industry that generated $75 billion in its first five years on the market is essentially unheard of outside the COVID-19 vaccine market, and that was under extraordinary circumstances.
Ocugen still faces numerous risks that could completely derail its plans. The most obvious is that OCU400 may not prove effective in the ongoing late-stage clinical trial. If that happens, shares can become almost worthless. There are also a number of other potential clinical and regulatory pitfalls. The same goes for OCU410, which is even more subject to these risks because its research is still in its early stages. It’s telling that Ocugen doesn’t have a larger biotech partner in its corner to help develop these drugs.
With sales projections of the type the company is making for OCU400 and OCU410, you’d think larger drugmakers would rush to sign lucrative licensing deals with Ocugen. Developing new drugs organically is often much more expensive and risky than simply acquiring promising assets. That’s why the biotech industry’s M&A scene has been so active in recent years.
A licensing agreement 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 he thinks he doesn’t need any help.
Or maybe the company’s products aren’t actually that attractive — or maybe they are, and no biotech giant has paid attention to it. Either way, there’s more to this than meets the eye, and in my opinion, the lack of a partner for any of Ocugen’s half-dozen programs is a red flag.
Looking at the company’s financials, it ended the first quarter with $26.4 million in cash and equivalents – barely enough to sustain the various clinical trials it is conducting, including one in later phases.
Ocugen will almost certainly have to resort to one or two rounds of funding soon. Management could take advantage of the rising stock price to make a secondary stock offering, which would likely drive the stock price lower. Or maybe Ocugen will issue debt. That said, Ocugen needs more than just funding to become an attractive company. In my opinion, this biotechnology has too many unknowns, potential pitfalls and warning signs. It’s best to stay far away from the stocks.
Should You Invest $1,000 in Ocugen Now?
Consider the following before purchasing shares in Ocugen:
The Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Ocugen wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $581,764!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
Prosper Junior Bakiny has no position in any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Stock That More Than Doubled This Year That I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool
