- The Ruthigen IPO will add an immediate 46% to 100% increase to Oculus’s valuation.
- Oculus and Ruthigen are undervalued, which should amplify share price appreciation.
- Positive clinical data provides high probability of FDA approvals.
- Oculus and Ruthigen own the patents to a technology that could revolutionize how infections are prevented and treated.
Oculus (NASDAQ:OCLS) investors were rewarded on December 4th when the shareprice went from $2.33 to $7.21 based on FDA approval of the company's scar product. The sharp rise was justified given the $6.2 billion market this new product will be addressing.
Investors have been given another gift because now the shares are trading at $4.36, a huge discount. As Wall Street becomes aware of the level of undervaluation, the company's 8 FDA approvals, and excellent clinical data, the company's shareprice should rise significantly.
But there is a short-term catalyst that could double Oculus's shareprice. When the company's subsidiary, Ruthigen, completes its IPO within the next two weeks, that will add 46% to 100% to Oculus's valuation, instantly. Most of Wall Street is not aware of this, but immediately following the Ruthigen IPO, Oculus will own 48% of Ruthigen's common stock.
In my opinion, the Ruthigen IPO will occur as scheduled and within the projected pricing parameters for the following reasons:
Number 1: There is a tremendous demand for biotech IPOs. In 2014, the top 5 IPO performers have all been biotechs, generating average returns well over 100%.
Number 2: Microcyn, the predecessor to Ruthigen's lead product has already demonstrated exceptional clinical data, so Ruthigen presents a rare opportunity in the biotech world; a high probability of FDA approvals.
Number 3: Ruthigen's IPO price is very low when compared to peers, and I believe the IPO will be oversubscribed. In other words there should be strong demand, with a limited supply.
Number 4: All investors who participate in the IPO will receive 2 warrants for every one common share they purchase. This warrant coverage should increase the level of oversubscription which is good, because investors who couldn't participate in the IPO will buy on the open market which could result in substantial share price appreciation.
Number 5: Ruthigen's lead product will be addressing a $5.14 billion market, which again demonstrates how low the $35 million IPO price is.
Number 6: Dawson James is managing the Ruthigen IPO. I have participated in numerous offerings with Dawson James, all of which have been well-managed, and completed within the timeframe and pricing that was projected. In my opinion, Dawson James would not have agreed to manage this IPO unless the firm was confident in its success. Dawson James specializes in offerings of this size, and has a large retail and institutional client base that should be very interested in the Ruthigen IPO.
What makes this trade particularly attractive is that the IPO will probably be completed in the next few days, but no later than March 31st, a deadline imposed by Oculus. This gives investors the opportunity to realize 46% to 100% gains within two weeks.
If you missed my previous biotech articles and the subsequent 50% to 200% gains, this Oculus/Ruthigen trade provides a similar opportunity.
Microcyn technology: the next-generation anti-infective
Oculus and Ruthigen own the patents to a technology that could revolutionize how infections are prevented and treated. I personally have witnessed numerous cases where Microcyn technology has healed life-threatening infections that were not responding to standard of care treatments. The primary reason I have invested in Oculus and will invest in Ruthigen is based on the high level of safety and efficacy demonstrated by the companies' patented products.
Ruthigen plans to sell 2.2 million units at $7.25-$9.25. At the $8.25 midpoint, Ruthigen would raise $18.15 million and be valued at $35 million.
The IPO will immediately add 50% to 100% to Oculus's valuation
Oculus is currently valued at $41 million. With an $8.25 pricing, Ruthigen will be valued at $35 million. Oculus will own 48% of Ruthigen following the IPO, so 48% of Ruthigen's valuation will be applied directly to Oculus's valuation.
In other words, if Ruthigen is valued at $35 million, Oculus will have $16.8 million added to its valuation instantly. Another $1.5 million will also be added because Ruthigen is obliged to reimburse Oculus immediately after the IPO for incurred expenses. That will bring the total IPO based value added to Oculus to a minimum of $18.3 million. Over time, another $8 million in milestone payments will be added to the Oculus balance sheet.
With 9.4 million Oculus shares outstanding (I've included the common shares and warrants issued in the latest financing), if Ruthigen does not appreciate above the midpoint pricing level, that will equate to a shareprice increase of $2 for Oculus, or a 46% increase from today's shareprice of $4.36. If Ruthigen shares rise above the pricing level on the first day of trading, which is probable, that number could be substantially larger and Oculus's shareprice could double.
Ruthigen is addressing a $5.14 billion market
Ruthigen's lead product is focused on the prevention and treatment of infections during surgery. In the United States alone, there are 51.4 million surgeries performed every year. Worldwide the figure jumps to 234 million. This presents a large addressable market for Ruthigen, primarily because the current standard of care, saline laced with antibiotics, does not provide an ideal solution.
In most surgeries, 1 liter to 3 liters of Ruthigen's product will be used, and in trauma surgeries, up to 7 liters will be used. In terms of estimating the addressable market, if 2 liters are used for each surgery at $50 per liter, the total addressable market in the US is $5.14 billion.
Why Ruthigen could capture a large market share
After much research, I have determined that Ruthigen has one of the most effective antimicrobials available. I began my investigation by speaking with doctors who have been using Microcyn, the predecessor to Ruthigen's product, during their surgeries. According to the doctors I spoke with, Microcyn is less expensive and more effective than saline laced with antibiotics.
Specifically, doctors preferred Microcyn because it is antimicrobial in nature and kills bacteria, fungus, and viruses. Saline alone has no antimicrobial capability; the removal of pathogens is purely mechanical so much more saline is required to "wash" the site than would be the case with Microcyn. While surgeons do use saline if there is an infection or the possibility of one, they typically must infuse the saline with an antibiotic. If it is a MRSA infection, the antibiotic would most likely be vancomycin, which can have many nasty side effects including:
Severe allergic reactions (rash; hives; itching; difficulty breathing; tightness in the chest; swelling of the mouth, face, lips, or tongue); bloody stools; chest pain; decrease in the frequency of urination or in the amount of urine; fever, chills, or sore throat; flushing; irritation, pain, or swelling at the injection site; numbness of an arm or leg; red, swollen, or blistered skin; ringing in the ears or sudden loss of hearing; severe diarrhea; severe stomach pain or cramps; sudden leg pain; sudden severe dizziness, nausea, headache, or vomiting; sudden shortness of breath; unusual bruising or bleeding; wheezing.
With a list of side effects like that, you can see why doctors and patients would prefer an antimicrobial like Microcyn which produces no side effects.
Also, antibiotics must be disposed via a costly biological waste process, whereas Microcyn can simply be poured down the drain at no cost. Another problem is that many times the antibiotic in the saline may foam making it difficult for the MD to see the wound site or incision clearly. Microcyn does not foam, which enables the doctor complete visibility.
Most importantly, Microcyn does not facilitate bacterial resistance whereas antibiotics do. This is important because at a certain point, doctors are not sure whether or not the antibiotic will even work.
The antibiotic resistance problem is detailed in this USA Today article, where President Obama has just proposed doubling the spending for combating the "nightmare bacteria" acquired in hospitals. This problem will only grow worse over time unless hospitals start using products like Microcyn, which kill the deadly bugs without promoting antibiotic resistance.
I believe market penetration will be fairly easy for Ruthigen, because it will primarily be addressing hospitals, which means that a relatively small sales staff can cover the entire market. This will keep sales and marketing costs down, while keeping margins relatively high. Also, this highly concentrated market could allow Ruthigen to gain market share fairly quickly.
Another factor that should help Ruthigen gain market share is the Affordable Care Act. This act has punishing language for hospitals that have high infection or readmission rates. Obviously the current standard of care is not working because infection rates and readmission rates are so high.
Bacterial and parasitic diseases have become the second leading causes of death worldwide, according to a report on antibiotic research released Sept. 18th by the London School of Economics. Hospital acquired infections are the fourth leading cause of death. These untreatable infections are costing the healthcare systems billions of dollars annually.
For that reason, hospitals are seeking out technologies like Ruthigen's, and Ruthigen stands to benefit as hospitals convert to more effective means of reducing infections.
It should be noted that Ruthigen's product is a more advanced formulation of Microcyn and could provide even better safety and efficacy data. And as I have explained below, Microcyn has generated excellent FDA Phase 2 clinical data, which bodes well for the future of Ruthigen's product.
Microcyn/Ruthigen technology could save the healthcare systems billions of dollars annually
I like Ruthigen's business model because it should be attractive to all levels of healthcare providers. For a relatively small investment, $100 per patient, Ruthigen believes it can significantly decrease surgical infections which in turn can save billions of dollars in healthcare costs.
Let's say that an average surgical infection ends up costing the healthcare system tens of thousands of dollars per patient. If Ruthigen can eliminate a large percentage of these infections for a cost of $100 per patient, I believe healthcare providers will embrace this product. Companies like Ruthigen that can demonstrate healthcare cost reductions will be well received by Wall Street as well, given the focus of our current administration.
TetraPhase provides a good comparison to Ruthigen
The best comparison for Ruthigen, is a biotech company called TetraPhase (NASDAQ:TTPH). TetraPhase and Ruthigen are both clinical stage and focused on preventing drug-resistant infections; however, each company is using a different approach. TetraPhase conducted a successful IPO last year with a $7 pricing. TetraPhase's shareprice has doubled since then and the company currently has a valuation of $350 million.
TetraPhase just began Phase 3 clinical trials, which puts it about 18 months ahead of Ruthigen. Ruthigen's Phase 1/2 trials will be finished in about 12 months. The primary reason for TetraPhase's valuation being significantly higher than Ruthigen's is that TetraPhase is more advanced in terms of clinical trials.
But when Ruthigen reports Phase 1/2 clinical data next year, if the data is positive, Ruthigen's valuation will increase significantly. When Ruthigen begins Phase 3 trials, it will be at the same clinical level as TetraPhase is now and Ruthigen could receive a valuation in line with TetraPhase's $350 million valuation, providing a 10X return for Ruthigen investors.
Ruthigen could surpass TetraPhase
In some ways Ruthigen's product appears to be superior to TetraPhase's synthetic tetracycline antibiotic. The predecessor to Ruthigen's product, Microcyn, has generated strong efficacy and safety data, both in clinical trials, and by the 4 million patients that have used the product.
Given the excellent data generated by Microcyn, we can assume that Ruthigen data should be as good or better because its product is an advanced formulation of Microcyn. With that in mind, Ruthigen could ultimately have a higher valuation than TetraPhase, but for now it just demonstrates how low Ruthigen's IPO valuation really is.
In my opinion, Ruthigen's product will prove superior to TetraPhase's in the following ways (based on data we have from Microcyn):
Number 1: It mimics the body's natural immune system's response to an infection. Within 30 seconds, it kills Staph, E. coli, and even MRSA. Many infections that are unresponsive to normal antibiotic treatments are eradicated with Microcyn.
Number 2: It does not develop antibiotic resistance, whereas TetraPhase's antibiotic probably will.
Number 3: It can be used in 100% of all surgeries to prevent infection, whereas TetraPhase's antibiotic will generally be used once an infection has developed. This should give Ruthigen a far larger percentage of the market share than TetraPhase.
Ruthigen's total addressable market is larger than TetraPhase's
Another important factor is the difference between the two companies' total addressable markets. TetraPhase's lead product, Eravacycline, is a synthetic form of tetracycline, and was just put into Phase 3 clinical trials late last year. Commercially available Tetracycline is currently generating about $800 million in annual revenue. Even if TetraPhase's lead drug proved far superior to previous versions of tetracycline, which will probably be the case, I wouldn't project the total addressable market to go beyond $2 billion. Ruthigen on the other hand has a total addressable market of $5.14 billion
Ruthigen's primary competition will come from companies producing antibiotics, such as TetraPhase. As a result of the increasing prevalence of multi-drug resistant bacteria, some antibiotics targeting these bacteria have been highly successful commercially. These include:
- Linezolid, an intravenously and orally administered antibiotic marketed by Pfizer (NYSE:PFE), as Zyvox, which had worldwide sales in 2011 of $1.3 billion.
- Levofloxacin, an intravenously and orally administered antibiotic marketed by Ortho-McNeil and Johnson & Johnson (NYSE:JNJ), as Levaquin, which had worldwide sales in 2011 of $623 million down from worldwide sales of $1.4 billion in 2010 after losing U.S. market exclusivity in June 2011.
- Meropenem, an intravenously administered antibiotic marketed by AstraZeneca (NYSE:AZN), as Merrem, which had worldwide sales in 2011 of $583 million down from worldwide sales of $817 million in 2010 after losing U.S. market exclusivity in June 2010.
- Daptomycin, an intravenously administered antibiotic marketed by Cubist Pharmaceuticals, Inc. (NASDAQ:CBST), as Cubicin, which had worldwide sales in 2011 of $736 million.
All of these products have been effective, however with time antibiotic resistance becomes a factor. Ruthigen's products will be important because they will offer physicians and alternative to traditional antibiotic and will help solve the problem of antibiotic resistance.
Limitations of other anti-infective products
Commonly used topical antiseptics, mechanical washes, such as saline or Ringer's solution have limitations and negative side effects that may constrain their usage. This could provide additional market opportunity for Ruthigen. For example:
- Many topical antiseptics, including Betadine, hydrogen peroxide and Dakin's solution, can be toxic, can destroy human cells and tissue, may cause allergic reactions and, as a result, these side effects that can impede the healing process of the surgical site.
- Advanced care products, such as silver based products, are expensive and require precise dosage and close monitoring by trained medical staff to minimize the potential for tissue toxicity, allergic reactions and bacterial resistance.
- The increase in antibiotic-resistant bacterial strains, such as MRSA, VRE, and C. diff, has compromised the effectiveness of some widely used topical and systemic antibiotics, such as Neosporin and Bacitracin.
- Oral and systemic antibiotics often are not effective in treating topical infections, especially if the patient does not have adequate blood flow to the infected site, may cause serious side effects, and also may promote future antibacterial resistance.
- Growth regulators, skin substitutes and mechanical closure treatment may accelerate the healing of the surgical site, but do not actively cure infection.
Given the side effects and limitations of these products, Ruthigen could have a significant competitive advantage, because not only does Microcyn demonstrate a high level of efficacy, it also produces no side effects.
TetraPhase IPO bodes well for Ruthigen
The success of TetraPhase's IPO demonstrates the tremendous appetite that investors have for biotechs in general, and especially companies that are finding ways to successfully treat and prevent drug-resistant infections.
I expect the Ruthigen IPO to perform well, based on the exceptional biotech IPO performance over the last few years. According to IPO Monitor, the top 5 IPO performers in 2014 are all biotech companies.
#1: Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE): up 406%, market capitalization: $1.6 billion.
#2: Dicerna Pharmaceuticals, Inc. (NASDAQ:DRNA): up 145%, market capitalization: $600 million.
#3: Auspex Pharmaceuticals, Inc. (NASDAQ:ASPX): up 105%, market capitalization: $615 million.
#4: GlycoMimetics, Inc. (NASDAQ:GLYC): up 84%, market capitalization: $288 million.
#5: Cara Therapeutics Inc. (NASDAQ:CARA): up 81%, market capitalization: $461 million.
Since the beginning of 2011, nearly a dozen young biotechs have soared to valuations of $1 billion or more, even though most of these companies have not even sold any products yet. One of these companies, Intercept Pharmaceuticals (NASDAQ:ICPT), is up more than 2,300% since its October 2012 IPO and is now worth $8.13 billion despite still being in clinical trials.
When looking at the $288 million to $8.13 billion valuations of these other biotech IPOs, you gain perspective on just how low Ruthigen's $35 million IPO valuation really is. Ruthigen's extremely low valuation provides solid downside protection and significant upside potential.
Why FDA approval is likely for Ruthigen
Another important factor that suggests Ruthigen should be given a higher valuation is the reduced clinical risk. With the clinical data generated by Microcyn, it's highly probable that the Ruthigen's clinical trials will be successful, and the company will receive FDA approvals. After all, a less advanced formulation of Ruthigen's product has already demonstrated very positive clinical data (see below).
This factor should add a premium to Ruthigen's shareprice once investors realize the quality of the Microcyn data and the fact that Ruthigen data could be even better, given the advanced formulation of the Ruthigen product.
Microcyn's Phase 2 clinical trials have already demonstrated strong efficacy
When Oculus announced the results of an FDA Phase 2 clinical trial for the treatment of diabetic foot ulcers, I realized that Microcyn could become the standard of care for the prevention and treatment of all types of infections. Anyone familiar with diabetic foot ulcers is well aware that in many cases, the only option is amputation. In other words, diabetic foot ulcers have basically been untreatable because there was no effective technology available.
In this clinical trial, patients treated with Microcyn alone achieved a 93.3% success rate, compared to 56.3% for patients treated with the standard of care: Levofloxacin plus saline. Microcyn has literally prevented scores of amputations amongst diabetics.
This clinical trial demonstrated how powerful and effective Microcyn technology is. And, given that it was able to produce positive results for an extremely challenging medical condition, that leads me to believe that Microcyn technology will be successful in preventing and treating most types of infections.
In another study with 178 heart surgery patients, Microcyn proved to be almost three times as effective as the standard of care for preventing infections during heart surgery. Given the complications involved with heart surgery infections, I imagine any physician who sees this data would prefer to use Microcyn over the current standard of care. This study is also important because the results are coming directly from the surgical suite which is exactly where Ruthigen's product will be used.
And of course we have the positive data from the recent scar trial, which preceded the FDA approving Oculus's scar product. What's remarkable about all of Oculus's products, is that they cover such a broad spectrum of applications.
My point is this; both Oculus and Ruthigen have Microcyn technology at their foundations, and with all the positive data generate thus far, I would expect future data and FDA responses to be positive as well.
Ruthigen warrants should fund the company through most clinical trials
In Ruthigen's S1, the company stated that it needs $50 million to get to commercialization. Ruthigen should generate about $18 million with the IPO, and given the 2:1 warrant coverage, another $30 million should be generated when investors exercise the warrants. This $48 million, minus milestone payments that will go to Oculus, should fund Ruthigen almost to the point of commercialization. This means that there will be no dilution for at least a couple of years, and if lucrative pharmaceutical partnerships are formed, no dilution will be necessary at all.
Ruthigen is already in discussion with pharmaceutical companies
While reading through Ruthigen's S1, I discovered that the company was already in discussion with various pharmaceutical companies for potential partnerships. In one regard this is not surprising, given the efficacy and probable demand for a product like Ruthigen's. I cannot predict when a partnership announcement would occur, but if that happens, it would be very beneficial for shareholders.
Ruthigen's strategy: establish a strong relationship with the FDA
Ruthigen began the IPO process in January 2013. Ruthigen has stated in its S1 that the IND will be filed with the FDA in April of 2014. This implies that Ruthigen has spent the last year setting the stage for a series of successful outcomes with the FDA, the first of which being the IND.
In other words, the IPO is perfectly timed with the filing of the IND. The FDA does not accept IND's without a solid base of preclinical data, so it appears Ruthigen has been preparing the groundwork during this past year. Also, the fact that the IND will be filed immediately following the IPO is attractive to investors because it eliminates a considerable amount of preclinical and FDA related risk.
How much could Ruthigen add to Oculus's valuation?
Whatever valuation Ruthigen achieves once the shares begin trading publicly, 48% of that value will be immediately added to Oculus's valuation since Oculus will own 48% of Ruthigen's common shares. The Oculus shareprice should rise in direct proportion to Ruthigen's valuation. With that in mind, the most important question is: what is Ruthigen going to be worth?
When you consider Microcyn's proven efficacy via Oculus Phase 2 clinical trials, TetraPhase's $350 million valuation, and Ruthigen's $5.14 billion total addressable market, I would expect Ruthigen to have a market capitalization higher than $35 million. When you include time to commercialization, expected positive clinical trial results, analysis of other comparable companies, and operating profitability of over 20%, an even stronger case can be made for a much higher valuation.
Here are the most likely scenarios and how they could immediately affect the Oculus shareprice:
Scenario 1: Ruthigen's valuation rises 50% following the IPO, to $52.5 million. This would add $26.25 million to Oculus's valuation and $2.76 to the Oculus shareprice, bringing it to $7.12. Oculus shareprice increase: 63%.
Scenario 2: Ruthigen's valuation rises 100% following the IPO, to $70 million. This would add $35 million to Oculus's valuation, and $3.68 to the Oculus shareprice, bringing it to $8.04. Oculus shareprice increase: 84%.
Scenario 3: Ruthigen's valuation rises 200% following the IPO, to $105 million. This would add $52.5 million to Oculus's valuation and $5.52 to the Oculus shareprice, bringing it to $9.88. Oculus shareprice increase: 126%.
As the preceding numbers demonstrate, following the Ruthigen IPO, Oculus shares should appreciate significantly. Given the high probability of a successful IPO, and a low pricing of Ruthigen, investors in Oculus and Ruthigen should realize substantial gains.
What if the IPO does not take place?
In a worst-case scenario, the IPO would not occur. However, given the probable high demand for Ruthigen IPO shares, that appears unlikely. But if that were the case, Oculus shareholders would not realize the immediate gains that I have projected.
On the positive side, if the IPO did not occur, Oculus would still own the licenses, the IP, and the technology. Oculus could partner Ruthigen's lead product, keep it in-house, or go after orphan drug status. Even if Ruthigen were not to go public, Oculus would still be in a strong position.
The other worst-case scenario would be for the IPO to occur, but for Ruthigen's shareprice to remain at the pricing level, as opposed to appreciating. This would still add $2 or 46% to Oculus's shareprice, which would certainly be a good return for such a short time frame. Ruthigen shareholders on the other hand would not profit at all, at least short-term, but they would still be holding the warrants, which could be of considerable value down the road.
After the IPO, everybody wins
Oculus currently owns all of Ruthigen's 2 million common shares. Ruthigen is issuing another 2.2 million shares for the IPO, which should ultimately bring in $48 million, when you include the exercised warrants. This should be sufficient to fund most of the clinical trials. Following the IPO, Oculus will own 48% of Ruthigen in the form of common stock. A successful IPO will benefit all participants for the following reasons:
- Oculus benefits because its valuation is increased.
- Ruthigen benefits because it is now fully funded to proceed through most of the clinical trials.
- Oculus shareholders benefit because of the increased valuation of Oculus.
- Ruthigen shareholders benefit when the share price increases beyond the IPO pricing.
I appreciate investment opportunities where everyone benefits, and that appears to be the case with the Ruthigen IPO.
Oculus is undervalued today
Oculus currently has a market capitalization of $40 million. Even without the value of the Ruthigen IPO, this is a ridiculously low valuation for a biotech company at such an advanced stage of development.
Oculus is currently selling over 100 products in over 30 countries. You can buy Oculus's products in Walgreens. The company has 8 FDA approvals and a strong patent portfolio. This is not some clinical stage biotech with a product that may not even work. Oculus is selling effective products in multiple markets, including dermatology, acne, wound care, and animal healthcare.
One good metric for determining Oculus's valuation is comparisons to other biotechs. But the problem is, Microcyn technology is in a class by itself, so making comparisons is challenging.
But this situation is precisely what makes Oculus and Ruthigen such good investments, because there are no real competitors, other than companies in the antibiotic industry, and we know that antibiotics offer an imperfect solution, given the problem of antibiotic resistance.
But we can still make comparisons, just to get an idea of how Oculus is valued compared to other biotech companies in general. These comparisons will not be proof of Oculus's undervaluation, but they will provide reasonable indicators.
Cytori Therapeutics (NASDAQ:CYTX) is a good comparison because it is actually selling products and has revenue within the range of Oculus's. Like Oculus, Cytori is not yet profitable. Cytori is generating $16 million in revenue, and has a market capitalization of $217 million. Compare that to Oculus, which is generating $14 million in revenue, and has a market capitalization of $35 million. On a pure revenue to market capitalization basis, Oculus appears undervalued when compared to Cytori.
Another example is Dipexium Pharma, a company that has filed for an IPO on NASDAQ that would value the company at $100 million solely based on a topical cream called Locilex intended to treat mild to moderate diabetic foot ulcers. The company plans to start Phase 3 trials in Q2, so it is not selling products yet.
Oculus already has a very effective product for treating diabetic foot ulcers, but that is only one of dozens of indications that Oculus's products are addressing. If Dipexium can be given a $100 million valuation for one product, I would think that Oculus should be given a valuation significantly higher, given the large number of products that Oculus is currently selling.
When looked at from any perspective, Oculus appears to be very undervalued right now. When you add the upcoming value of the Ruthigen catalyst, the undervaluation becomes even more extreme.
Oculus fundamentals get even better after the Ruthigen IPO
Oculus fundamentals will improve even more after the Ruthigen IPO for the following reasons:
1. Ruthigen will be licensing product technology from Oculus, which will result in an upfront payment, milestone payments, and licensing fees for Oculus. These payments will go directly to Oculus's bottom line.
2. Oculus's Ruthigen related expenses will be eliminated. Up to now Oculus has been funding Ruthigen, but following the IPO, this funding will end. This will significantly reduce Oculus's operational expenses.
When you combine all elements of the IPO and the effect on Oculus, it becomes apparent why the Oculus shareprice should rise in anticipation of, and following the Ruthigen IPO.
How large is Oculus's scar reduction market?
Oculus just received FDA approval for its scar reduction product, and it was no surprise that the stock price more than doubled within 24 hours of the announcement. Oculus will begin generating revenue from this product this year.
Fortunately for new investors, the shareprice has since retreated, providing a good buying opportunity, one which I have been taking advantage of. This one product will add considerable value to Oculus based on the very large total addressable market.
According to a report by Frost & Sullivan, it is estimated that 62 million scars are formed each year in the United States. Assuming $100 per treatment, this gives Oculus a $6.2 billion total addressable market. Since Oculus's product is addressing an unmet medical need, Oculus could ultimately capture a large percentage of this huge market. But even at 5% penetration, total product sales would be $310 million annually.
Would patients pay $100 to eliminate or prevent a scar? Of course they would, most would probably pay twice that much.
In my opinion Oculus will capture significantly more than 5% of the market because all of the anecdotal evidence I've heard indicate that the Oculus scar reduction product is superior to anything on the market. (You have to keep in mind that the FDA required clinical data before the product was approved. Given that the data was cleared by the FDA, we can assume that the data was good.) The FDA approval makes the anecdotal evidence even more compelling. In other words, the FDA would not have approved this product unless safety and efficacy were clearly demonstrated.
Why is Oculus so undervalued?
The primary reason Oculus is undervalued is because most investors are not aware of how well the Microcyn technology works. Very few investors have spoken to physicians and patients, as I have, and heard the many case studies that demonstrate how effective the Microcyn technology really is.
Oculus has not yet reached the tipping point, where Microcyn products have achieved explosive growth. Oculus has gotten Microcyn products into Walgreens, which is a good start, but I cannot predict what combination of events will catapult Oculus to the level where the company's products become household names.
Why haven't investors already bid up the Oculus share price in anticipation of the Ruthigen IPO?
Wall Street is not yet aware of this trade. Last Friday Jim Cramer's TheStreet.com released a bullish analysis on Oculus, and didn't even mention this aspect of the trade.
Most investors don't realize that Oculus will own 48% of Ruthigen's common stock following the IPO and that Oculus's valuation will be immediately increased by at least 46%. One would have to wade through 200 pages of Ruthigen's S1 to discover that fact.
Neither Oculus nor Ruthigen have spelled out how the IPO will benefit Oculus shareholders, probably because of SEC regulations. I have spent the last 2 months, and approximately 200 hours investigating all aspects of Ruthigen, Oculus, and the most recent Oculus funding. I am confident in my analysis. This is an excellent opportunity precisely because investors do not understand how Oculus will benefit as a result of the Ruthigen IPO.
Oculus's and Ruthigen's financial positions
Oculus just reported the company had $3.4 million in cash and basically no debt. After the IPO, Ruthigen will have approximately $18 million in cash and no debt. $1.5 million will immediately go to Oculus, bringing the Oculus cash balance up to $4.9 million and the Ruthigen cash balance down to $16.5 million.
After the IPO, Oculus's cash burn will be about $400,000 per quarter. Ruthigen's cash burn is unknown at this point, but once the company becomes public, that number will become clear.
Four trades that could provide 46% to 100% returns
What I like about this opportunity is that there are multiple ways to profit:
Trade number 1: Buy Oculus and profit as Oculus's undervaluation is recognized and the shareprice is bid higher.
Trade number 2: Buy Oculus and profit in anticipation of and following the Ruthigen IPO.
Trade number 3: Buy Ruthigen through a broker before the IPO and profit as Ruthigen goes higher once shares begin trading publicly.
Trade number 4: Buy Ruthigen on the open market and profit as shares go higher based on pent-up demand from investors who could not buy IPO shares.
In my opinion, all of these options present good trading opportunities, and if trades could be made serially, profits could multiply profits.
What's the risk?
Since most of these trades are based on the Ruthigen IPO, if the IPO were not to take place, the short-term shareprice appreciation I have projected would not occur.
The Ruthigen trade presents little risk for participants in the IPO because in the short-term, the shareprice should not fall below pricing. However, if Ruthigen doubles within the first couple of days, there could be substantial volatility at the higher prices.
For Ruthigen, there is long-term risk regarding clinical trial data and FDA approvals. Even though Microcyn has generated excellent clinical data, there is no guarantee that the Ruthigen product will follow suit. Ruthigen expects to report Phase 1/2 clinical data in about 12 months, so that will be an important inflection point. Positive data will be very good for shareholders, but negative data could drop the share price significantly.
The long-term risk for both companies revolves around execution. Even with great products, there is no guarantee that management will be able to successfully build profitable companies.
Oculus has developed a line of products that has one of the highest levels of efficacy and best safety profiles that I have seen. Microcyn technology needs to be in every physician's office, operating room, and medicine cabinet in the world.
I've spoken with physicians who are using Microcyn in their daily practice as well as in the surgical suite (surgeons have a high regard for this product). From all accounts, Microcyn appears to be the safest and most effective antimicrobial on the market, and some believe it could become the new standard of care for the prevention and treatment of infections.
I expect each trade to generate a short-term return of 46% to 100%. Downside risk is limited for both companies given the undervaluation, strong cash positions, exceptional clinical data, solid patent portfolios, and 8 FDA approvals. Both Ruthigen and Oculus present investors with ideal asymmetrical trades.
Disclaimer and disclosure: It is probable that the author and his associates have a position in the subject securities consistent with the opinion expressed in this article and they reserve the right to buy and/or sell the securities mentioned in this article, at any time without further notice. For complete disclosure and disclaimer information please click here.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.