On Oct. 27, Ocugen (NASDAQ:OCGN) confirmed the truth of a point I’ve been making for many months: the FDA will require the company to conduct a U.S.-based trial of Covaxin before the agency will even consider approving it. Specifically, on Oct. 27, Ocugen announced that it had submitted an application to the FDA to conduct a Phase 3 trial of Covaxin, a vaccine for the novel coronavirus, in the U.S. As I’ll explain below, that news is extremely negative for OCGN stock.
Earlier this year, Ocugen signed a contract to receive 45% of any profits from Covaxin generated in the U.S. and Canada.
Some of the OCGN stock bulls have, at last, started to internalize the idea that the FDA isn’t interested in approving Covaxin.
Yet now many Ocugen bulls have developed completely unrealistic ideas of other ways that Ocugen can make money from the shot. Others still believe that the FDA will eventually approve the shot and that 2023 won’t be too late for Ocugen to successfully market Covaxin in the U.S. In the paragraphs below, I’ll identify the fallacies behind those misguided theories.
Here are the four main reasons why Ocugen will make very little or no money from Covaxin.
1. Ocugen Is Not Going to Be Paid Hundreds of Millions of Dollars to Manufacture Covaxin
One of the outlandish theories being widely circulated by OCGN stock bulls these days is that the shares will rally because Covaxin’s creator, India-based Bharat Biotech, will pay Ocugen to manufacture the shot for markets outside of the U.S.
This baseless theory, I believe, took hold after Ocugen, on Sept. 2, unveiled a press release with the headline, “Ocugen and Bharat Biotech Announce Execution of Definitive Agreement for the Commercialization of Covaxin in the U.S. Market”
The press release stated that “Under the terms of the agreement, Ocugen will have U.S. rights to the vaccine candidate and will be responsible for clinical development, regulatory approval (including EUA) and commercialization for the U.S. market.”
However, the press release did not make clear the meaning of the latter sentence. The sentence obviously means that Ocugen would have to pay for Covaxin to be manufactured and distributed in the U.S. Typically, in legal agreements, the party that is “responsible for” obtaining goods or services has to pay for them.
Moreover, the idea that Bharat would pay Ocugen hundreds of millions of dollars—the amount needed to boost OCGN stock above its current levels—to manufacture Covaxin defies common sense and all historical precedents.
Ocugen is a tiny company, with no manufacturing capacity of its own. That’s why, in June, Ocugen had to hire another firm, Jubilant HollisterStier, to manufacture Covaxin in the U.S. So for the bulls’ theory to be correct, Bharat would have to pay Ocugen not to manufacture Covaxin itself, but to hire and manage other companies to manufacture Covaxin.
Why would Bharat do that, instead of, (just like every other company I’ve ever heard of) using its own employees to hire and manage manufacturers? Companies don’t burn hundreds of millions of dollars for no reason or to help another, unaffiliated firm.
After all, Apple (NASDAQ:AAPL), Ford (NYSE:F), and Pfizer (NYSE:PFE), don’t hire middlemen to supervise their manufacturers/suppliers, let alone pay middlemen hundreds of millions of dollars to do so; they use their own employees for those tasks.
Similarly, some bulls have said that Bharat will sell Covaxin to the U.S., which will then donate it to developing countries. Under that arrangement, they correctly say that Ocugen would make money.
But why wouldn’t Bharat avoid having to pay Ocugen by simply selling Covaxin doses directly to the developing countries and/or to the organization, Covax, that distributes vaccines to developing countries?
2. WHO Approval Won’t Facilitate FDA Approval
Another one of the bulls’ recent theories is that an approval of Covaxin by the World Health Organization (WHO) will lead to the FDA giving Covaxin a thumbs up.
As others have pointed out, the FDA is not obligated to fall in line with WHO’s decisions. Indeed, WHO has long ago approved multiple vaccines for the coronavirus—including jabs developed by AstraZeneca (NASDAQ:AZN) and China’s Sinovac—that the FDA has not come close to approving.
3. 2023 Would Be Far Too Late for Covaxin in the U.S.
In its Oct. 27 press release announcing that it was seeking permission to conduct a trial of Covaxin in the U.S., Ocugen stated that it “hopes to complete the study” during the first half of 2022. Conservatively assuming that the trial is completed in August 2022 and that the FDA takes another six months to review the findings, that takes us into February 2023.
By the time the vaccines could be distributed, we’d, at a minimum, be well into the spring of 2023, which is roughly 18 months from now.
In October, Scott Gottlieb, the former head of the FDA said, “I think this Delta wave is probably the last major surge of SARS-CoV-2 infection that we have in the U.S., barring something unexpected happening.”
And Gottlieb has said that the pandemic would “enter a more endemic phase” by the end of November. Even Dr. Anthony Fauci, who’s tended to be pessimistic about the pandemic’s course, said that the U.S. may reach “some degree of normality” by next spring. And multiple other experts have said that the virus has already become “manageable.”
So I think it’s likely that most Americans, if not everyone, will not need additional shots by the middle of next year. Indeed, even now, the U.S. CDC is not recommending a booster shot for all Americans.
But let’s say I’m wrong and that the CDC eventually reverses course and recommends that everyone get a yearly booster shot for the coronavirus. And let’s assume that the FDA, despite all indications to the contrary, decides to approve Covaxin.
First of all, many people don’t want to get a coronavirus vaccine now; how many will refuse to get boosters when the disease is fully endemic and causing many times fewer hospitalizations and deaths? The number is probably higher than that of the current holdouts.
Secondly, how many Americans, after years of hearing about and receiving shots from the same three companies, are going to want to get a shot created and marketed by companies most of them have never heard of before? How many drugstores, other retailers, and hospitals, after years of managing and obtaining the same shots, are going to want the headaches of dealing with a brand new shot and new distributors? Those are rhetorical questions; But I think the answers to both are: not many at all.
4. There Are Still Zero Signs That the U.S. Is Interested in Covaxin
Many months after agreeing to buy vaccines from Moderna (NASDAQ:MRNA), Pfizer, AstraZeneca and Novavax (NASDAQ:NVAX), the U.S. has shown zero interest in buying Covaxin. No American officials, to my knowledge, have indicated an interest in acquiring Covaxin doses.
Moreover, as I stated in the past, the FDA rejected Ocugen’s application for an emergency use approval for the shot. And now the agency has apparently decided to force the company to administer a full Phase 3 trial of the vaccine.
Meanwhile, there also appear to be zero signs of concrete interest from Canada. And as I’ve noted previously, even if that country does approve Covaxin, it does not have enough people to generate sufficient profits for Ocugen to boost OCGN stock. Further, Canadians are going to be just as unlikely to suddenly get shots from a new, unfamiliar company as Americans.
The Bottom Line on OCGN Stock
There is no viable way for Ocugen to generate significant profits from Covaxin.
Yet OCGN stock has a market capitalization of over $2.3 billion, based largely on its deal with Bharat. As a result, I continue to recommend that investors sell the shares. And I still believe that patient investors will ultimately make money by shorting the stock.
On the date of publication, Larry Ramer held a short position in OCGN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.