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Wednesday, February 8, 2023

Long-Term Investors May Want to Keep Away from Ocugen

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In 2020, the public focus on health has brought many small biotechnology companies and penny stocks, such as Ocugen (NASDAQ:OCGN), into the limelight. On June 1, OCGN stock was 17 cents. In late July, it jumped to almost $1. As I write, it’s trading above 50 cents.

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Ocugen was formerly known as Histogenics Corporation, a cell therapy company focused on orthopedics. The two companies had a reverse merger in September 2019. Pennsylvania-based Ocugen is a biopharmaceutical firm focused on discovering and commercializing therapies to treat rare eye diseases. It has a gene-therapy ophthalmology portfolio for the treatment of diseases of the eye and visual system. Its technology platform, called the OcuNanoE, offers a proprietary nanoemulsion technological approach.

Now, a large number of market participants have put OCGN stock on their radar. However, I believe it remains a risky investment. Therefore, long-term investors should proceed with caution. Here’s why.

How Ocugen Makes Money

As InvestorPlace’s Matt McCall has recently highlighted Ocugen has no revenue, so it does not make any money. I’d encourage potential investors to study the fiscal year 2019 and first-quarter FY20 results in depth.

It has incurred recurring losses and negative cash flows from operations since inception. It has funded its operating losses through the sale of common stock, warrants to purchase common stock, the issuance of convertible notes and debt. Net losses were $3.9 million and $6.3 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, it had an accumulated deficit of $55.4 million. Cash and cash equivalents stood at $3.3 million.

Ocugen is currently developing OCU400, a small molecule therapeutic. It aims to treat symptoms associated with RHO Mutation-Associated Retinal Degenerative Disease. This disease can ultimately lead to visual impairment and blindness. OCU400 has recently received orphan drug designation (ODD) from the U.S. Food and Drug Administration (FDA).

The FDA Office of Orphan Products Development grants ODD for new drugs that treat a rare disease affecting fewer than 200,000 patients in the country. According to the FDA website:

During this public health emergency associated with the COVID-19 pandemic, the Office of Orphan Products Development (OOPD) is providing sponsors with increased flexibility for submission of orphan drug designation requests and related submissions… [However] the granting of an orphan designation request does not alter the standard regulatory requirements and process for obtaining marketing approval. Safety and effectiveness of a drug must be established through adequate and well-controlled studies.

Put another way, having an ODD may sound good on paper. Yet it does not mean that there will be an approved drug or revenue any time soon.

OCGN Stock Is Risky

Ocugen is a penny stock. U.S. Securities and Exchange Commission (SEC) describes a penny stock as “a security issued by a very small company that trades at less than $5 per share… Investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).”

In recent research led by Kar Kei Lo of the University of Hong Kong, the authors conclude, “some individual investors may prefer stocks with lottery features involving low-priced stocks.” If you are among those market participants, then OCGN stock may have a place in your speculative portfolio. However, you have to be well aware of the risks involved in putting capital into such shares.

Another research paper by Faris Sumadi of University of Massachusetts, Boston also states “Biotech is driven by stories, but those stories don’t always have happy endings, as the current valuations might imply they do. The logic of the science combined with the hope of the people adds up to huge optimism.”

It’d also be important to remember the history of the merger between Ocugen and Histogenics. Their reverse merger, which was announced in April 2019, finalized in late September 2019. Then the newly formed Ocugen initiated a 60:1 reverse stock split, resulting in a major loss of value for the shares. In early September 2019, prior to the merger, the stock was over $17. Yet on its first trading day as OCGN stock, it traded around $2.5. And in November, it fell below 30 cents.

At the time, investors wondered about the potential synergies of such a union between two companies that hardly had anything in common. Those questions are still valid.

The Bottom Line

Ocugen is working on the discovery of treatments for rare eye diseases. However, it has no approved therapies or revenue. Its dwindling cash position is not likely to change or improve much any time soon.

Unless you are one of those investors who has risk capital that can be lost without hurting personal financial circumstances, you may want to keep away from Ocugen shares.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.

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