OpGen - A Play Against Multiple Antibiotic Resistant Infection Many May Not Have Noticed Before Its 100% Gain

| About: OpGen (OPGN)

Summary

OpGen gained over 100% in share price after a year of steady declines from its IPO.

OpGen recently presented extremely positive results for one of its diagnostic platforms.

Could the recent trading be a signal that OpGen is a likely buyout target?

As a scientist and as a biotech investor with an interest (although not direct professional focus) in Public Health and in disease treatments, I have been monitoring many of the emerging human disease concerns for years now. These interests are illustrated by some of the other companies for which I have previously developed articles (interested readers are invited to check here, and here).

I will not go into these other articles' details in this article. However, like many, I have been following and periodically assessing the spread and growing concern in the Medical community about the prevalence of antibiotic-resistant bacteria.

One company that has attracted my interest during the last year is OpGen (NASDAQ:OPGN). OpGen is a small biotech company that has been in existence for several years as a privately-held company, but that went public with its IPO during May of 2015. Since that IPO opening at $6/unit, share prices have steadily decreased and bottomed out at about $1/share during May of 2016.

During this year, OpGen has raised revenue via two Private Placements of stock in October of 2015, and May of 2016. During July of 2015, OpGen also closed a deal for ~$6 MM in financing from Merck GHI, and acquired AdvanDx, Inc. and its portfolio of FDA-approved rapid diagnostics tests in an all-stock deal.

In short, OpGen has had a very busy and accretive first year as a public company. Despite the steady decline in share prices over that year, it is a company that has taken some very positive steps towards growth and making itself more viable in the long term. Judging by the share price action investors have seen for OpGen during the last few days, with prices breaking at least briefly above $4/share on July 20, 2015, the market may be beginning to recognize the potential of OpGen.

What is it that OpGen does?

OpGen is a company that has focused on developing rapid and specific diagnostics tests and tools for use in medical diagnostics. Prior to going public and before acquiring AdvanDx, the company was focused on developing its unique Argus® System, as a tool for aiding in Genomics assembly projects and as a way of identifying genotypes of medically relevant bacteria.

[Full disclosure: The author participated in a pilot study using this platform a few years prior to the company going public, but has had no association with them since OpGen went public]

The key part of their business going forward in the short term is related to the diagnostic capacity that OpGen obtained when they acquired AdvanDx. AdvanDx was producing a gross revenue of over $40 MM/year with this technology prior to it being acquired by OpGen. These diagnostic tests include the Acuitas MDRO Gene Test, CR Elite Test, and the Resistome Test. Collectively this array of diagnostic tests can allow the rapid identification of the types of antibiotic resistance genes present in bacteria that are causing an infection in high-risk patients.

In a world where the risk to patients to develop a bacterial infection that is resistant to treatment with some, or most antibiotics continues to increase, a company with a platform like OpGen's could have very high value and revenue generating ability.

Why is a company like OpGen a potentially good long investment?

Not quite one year ago, there were several reports from China of the discovery of bacteria in animal "Factory Farms" that displayed resistance to the antibiotic Colicin. Colicins are included in a class of antibiotics (bacteriocins) that bind to outer membrane receptors of bacteria, disrupt normal cell membrane function, and through their activity kill or inhibit growth of those bacteria.

As virtually all of these resistance genes are carried on plasmids (small, self-replicating DNA circles) that can be shared with other bacteria under the right circumstances, colicin resistance is relatively easily moved into other isolates and species of bacteria once it is present.

Prior to development of this transmittable resistance in bacterial communities, Colicin has been viewed as an antibiotic of 'last resort' for treatment of bacterial infections that were resistant to other antibiotic compounds. One of the warnings issued last Fall was that now that a resistance mechanism had been selected that it might easily cause problems in human disease.

During the last few weeks of May 2016, the first case of a person in the USA with Colicin-resistant bacterial infection was reported. While (luckily) this person responded to treatment with other antibiotics and recovered, the arrival of Colicin-resistant bacteria in the USA should serve as a wake-up call for the US medical and pharmaceutical communities about the importance of continuing to develop novel antibiotic treatments, chemistries, and diagnostics tools so that the existing pool of antibiotics can be effectively and rapidly deployed.

Some definitions of Multiple Antibiotic Resistant bacteria terminology:

Beta-lactamases (β-lactamases) are enzymes produced by bacteria that give those bacteria resistance to β-lactam antibiotics such as penicillins, cephamycins, and carbapenems (ertapenem). In recent years, the carbapenem antibiotics were relatively resistant to beta-lactamase genes in medically important bacteria. Beta-lactam antibiotics have been generally effective in treating human disease in a broad spectrum of Gram-positive and Gram-negative bacteria.

One acronym that is regularly used is "CTX-M related ESBLs" - which translates to "extended-spectrum β-lactamases," or new bacterial genes that give those bacteria the ability to detoxify or neutralize antibiotics that they would otherwise have previously been susceptible to, and that would have been medically useful against them.

These bacteria have been known from within the medical community since at least 2000, and have been increasing in prevalence and importance since that time. Because of the increased prevalence and spread of these bacteria, there has been a growing need for novel antibiotic types, treatments, and diagnostics methods to better determine what bacteria were present in an infection, and how best for doctors to plan treatments for those patients.

More recently, a more metabolically versatile version of these β-lactamase antibiotic neutralizers has been developing. Carbapenemases can react with penicillin, cephalosporin, monobactam, and carbapenem class antibiotics and inactivate them before they have the opportunity to kill the infecting bacteria. There are at least 4 classes of these Carbapenemases, and they have spread rapidly while the medical community continues to seek effective treatments against these bacteria.

For those bacteria that possess the Carbapenemase enzymes and more standard extended-spectrum β-lactamase activity, Colicin has been one of the default antibiotics of choice for treating bacterial infections. Now even those antibiotics of last resort cannot be used with certainty in outcome for the patient.

What else - more specifically - has OpGen been up to during 2016?

OpGen reported very positive testing results from their Acuitas Resistome Test at a scientific meeting during June. However this news is now, as of this writing, fully a month old and is probably not the driving force behind their big (>100%) gain during July 20's trading. I view this result as a long-term positive factor, but it is not likely what drove trading on July 20.

During their first quarter financial update in early May, OpGen reported a total revenue of $1.1 MM, up over 100% from the same quarter in 2015. The company attributed this increase to increased sales of their rapid pathogen ID molecular diagnostic products since the company's acquisition of AdvanDx. Gross margin on sales was over 60%, compared to 37% in the same time in 2015.

The company has a short public history, and although it still experiences significant net operating losses, and will still require significant growth in revenue and product sales in order to have a net positive revenue. So it is unlikely that the sharp increase seen in the July 20 trading is due to a more positive revenue situation - at least not yet.

No announcements yet - so why the big move of July 20?

I, like many, have been scanning for news on OpGen since the huge volume and price jump and can find nothing obvious to 'us' on the outside that would drive such a huge and sudden surge. An article describing the relationship between OpGen and Merck (NYSE:MRK) and spelling out how OpGen's technology is starting to have an impact on the medical community was published on July 19.

Merck has acquired a large minority stake (~37.5%) in OpGen, and the coupling of Merck's large profile in the antibiotic market with OpGen's rapid antibiotic resistance technology has obvious positive financial implications for both companies.

One of the initial rounds of financing after the IPO came from the Merck Global Health Innovation Fund (Merck GHI) during July of last year. At that time, the CEO Evan Jones of OpGen was quoted as stating that:

"Merck is a world leader in antibiotics and infectious disease therapeutics and vaccines. With its strong capabilities and global reach, we see opportunities to accelerate the growth of our business and to improve patient care worldwide. The investment by Merck GHI will help us further develop OpGen's molecular information business and rapid diagnostics to guide antibiotic therapy. We welcome David Rubin to the OpGen board and look forward to formalizing our collaboration in a number of areas in the coming months."

Merck GHI obtained a large part of its significant financial interest in OpGen (~1.1 MM shares) at that time, and that insider position could be developing into a very interesting situation for OpGen and its shareholders.

As yet, no new SEC-related information on insider buying has surfaced and no new 8-Ks have been released to give potential investors insight into the July 20 trading. No concrete reason for the big day yesterday can be found. Trading on OpGen was briefly halted due to volatility both on July 20 and again on July 21.

The huge price increase and huge volume increases give us hints as to what might be going on behind the scenes. This sudden shift suggests to me that "the market" thinks that Merck may be positioning itself for a buyout of OpGen in the very near future.

OpGen's IPO during 2015 of ~$6/share only a year ago suggests to me that the bottom value for such a buyout offer. I anticipate that such an offer would be at a premium to that $6 base investment in order to ensure that initial investors and the investment funds that hold large percentages of OpGen stock are on board.

Investors who correctly anticipate such a buyout could still see a significant gain over the (as of this writing) share price of ~$3 in a relatively short period. The potential upside of the company short term (in the event of a buyout offer) is excellent, and the risk of OpGen's technology failing to provide sustained value in the long term for investors is relatively low.

Interested parties should keep a very close watch on OpGen over the next few weeks. It remains an interesting speculative investment despite the gains the share prices experienced on July 20th trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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