Today, we will see why Oyster Point Pharma (OYST) is an attractive investment opportunity in 2020.
Company overview
Oyster Point Pharma is a clinical-stage biopharmaceutical company focused on the development and commercialization of innovative treatments targeting ocular surface diseases. The company’s lead asset is OC-01, an investigational drug candidate and highly selective nAChR (nicotinic acetylcholine receptors agonist). The therapy is being developed as a nasal spray to treat the signs and symptoms of DED (dry eye disease). The company also plans to study OC-01 in NK (neurotrophic keratitis) indication, a degenerative disease in which the nerves that supply the cornea do not function properly.
Why is DED a huge underserved market opportunity?
There are around 34 million adults from DED in the U.S., while the global prevalence of the disease is much higher, in excess of 340 million. While 16 million DED patients have been diagnosed across the world, less than 2 million are currently being treated. To date, around 7 million people have opted for available treatment options.
According to Oyster Point Pharma, “Dry eye disease is a multifactorial chronic disease of the ocular surface characterized by a loss of homeostasis of the tear film, resulting in pain, visual impairment, tear film hyperosmolarity and instability, inflammation and corneal wounding.”
The currently available treatment options are only addressing the inflammation aspect of this disease. Besides, the onset of action is slow and they suffer from tolerability and compliance issues. Despite these shortcomings, these drugs have become blockbuster therapies due to high disease prevalence and a high burden of the condition.
How OC-01 works in DED?
Unlike existing treatment options which are only focused on inflammation in DED, OC-01 aims to re-establish tear film homeostasis by activating the trigeminal parasympathetic pathway and stimulating the glands and cells responsible for natural tear film production. Currently, there is no substitute for the natural tear film. The human tear film is a complex mixture of more than 1,500 different proteins, including growth factors and antibodies, as well as numerous classes of lipids and mucins. The human tear film forms a primary refractive surface of the cornea and also protects and moisturizes the cornea.
The trigeminal nerve provides the pathway for parasympathetic stimulation of the LFU (Lacrimal Functional Unit), comprising of lacrimal glands, meibomian glands, and goblet cells. The LFU promotes the formation of natural tears.
OC-01 is a preservative-free nasal spray containing nAChR, varenicline. On administered twice-a-day, the varenicline binds to receptors on the trigeminal nerve and opens the ion channel to depolarize the nerve. The activated trigeminal nerve then stimulates LFU to promote natural tear formation.
OC-01 has demonstrated robust efficacy and safety in clinical settings
OC-01’s novel MOA (mechanism of action) is focused on tear homeostasis and rapid onset of action. The drug has also demonstrated a favourable tolerability profile in clinical settings.
Oyster Point Pharma completed the open-label, single-center, randomized two-way crossover study, ZEN, in healthy volunteers in November 2019. This trial aimed to compare the bioavailability of varenicline administered as a preservative-free nasal spray as compared to varenicline administered orally. Top line results demonstrated that nasal spray resulted in much lower systemic exposure as compared to oral administration.
Oyster Point Pharma also reported positive results from the Phase 2b study, ONSET 1, which evaluated the efficacy of multiple dosages of OC-01 on signs and symptoms of DED. The company demonstrated statistically significant improvement in Schirmer’s Score on Day 28 for all three cohorts treated with OC-01. Besides, all three cohorts also demonstrated statistically significant improvement in the secondary symptom endpoint which involved mean change from baseline in EDS (Eye Dryness Score) on Day 21 in controlled adverse environment and on Day 28 across all three cohorts. Schirmer’s Score highlights the severity of a patients’ DED.
In addition to robust efficacy, OC-01 also demonstrated a robust safety and tolerability profile with no ocular burning/stinging, taste or smell. Almost 82% of the adverse events seen such as sneeze, cough, throat irritation, instillation site irritation, and pharynx dysesthesia after any installation, were mild in severity. The remaining 18% were moderate in severity. All events, however, were transient and were resolved by the next visit.
In January 2020, Oyster Point Pharma announced the positive top-line results from its Phase 2 MYSTIC study evaluating the chronic efficacy of OC-01 nasal spray on signs of DED. Although the trial met its primary endpoint of mean change in Schirmer’s Score at Day 84, statistically significant improvements in Schirmer’s Score as compared to placebo were seen as early as Day 7. The trial also demonstrated sustainable efficacy at 84 days with a BID dosing regimen for both 0.6 mg/ml and 1.2 mg/ml, with the magnitude of tear production consistent with prior studies of OC-01 at 28 Days. Again, OC-01 demonstrated a favourable safety and tolerability profile.
Oyster Point Pharma is currently evaluating OC-01 in pivotal Phase 3 ONSET study, a multicenter, randomized, controlled, double mass clinical trial designed to evaluate the efficacy and safety of the drug on the signs and symptoms of dry eye disease. The design of ONSET-2 is similar to that of ONSET-1.
Enrollment in the trial is expected to complete in the first half of 2020. Top line data including primary endpoint data, multiple secondary endpoint data as well as safety data from ONSET-2 is expected by the end of the second quarter of 2020. In case of positive data from ONSET-2, the company plans to submit an NDA to the Food and Drug Administration for OC-01 nasal spray during the second half of 2020.
A major differentiating factor for OC-01 from competitors such as RESTASIS and XIIDRA will be the eye dryness score as measured in the controlled adverse environment. Positive results here demonstrate the efficacy of OC-01 in adverse situations such as low humidity and high airflow environment. Hence, OC-01 is expected to be superior to the competition in terms of efficacy across various settings, faster onset of action, and better tolerance profile.
The company is planning the launch of OC-01 in the U.S. in the fourth quarter of 2021
Oyster Point Pharma expects the launch of OC-01 in DED indication in the fourth quarter of 2021. To that effect, the company plans to develop a specialty sales force of 150–200 representatives to target high volume ophthalmologists and optometrists. The company also plans to leverage the DTC (direct-to-consumer) promotional channel to further boost the adoption of IC-01. Finally, Oyster Point Pharma is also focusing on ensuring a broad distribution base and payer coverage. OC-01 has a broad patent estate and is protected by various patents in the U.S. until 2035.
Investors should consider these risks
The growth prospects of Oyster Point Pharma depend exclusively on clinical, regulatory, and commercial prospects of OC-01. The company is exposed to a very high degree of business concentration risk and R&D failure risk. Oyster Point Pharma is also a loss-making company and continues to be so for many more years. The company also has to compete with pharma bigwigs such as Allergan (AGN) and Novartis (NVS) in the DED space. The competition has deeper resource pockets for the promotion of their DED drugs.
As of December 31, 2019, the company had cash and cash equivalents worth $139.1 million on its balance sheet. The company expects these cash assets to fund its projected operations at least till the end of February 2021. Subsequently, the company may need to dilute its equity, raise debt, or sell off some rights to raise more capital.
What price is right for the stock?
According to Finviz, the 12-month consensus target price for Oyster Point Pharma is $41.67. On March 6, JPMorgan analyst Anupam Rama reiterated an Overweight rating and increased the target price for the stock from $25 to $50. He pointed out the huge unmet demand in DED indication and high probability of success for ONSET-2, considering that the latter has a design similar to that of ONSET-1. On Positive data from ONSET-2, the analyst expects the company’s share price to jump by 55%-120%. However, on negative results, he expects shares to take a beating of 50%-85% to the company’s cash levels. The analyst has estimated conservative peak sales potential of OC-01 to be $700 million-$800 million.
On February 27, Piper Sandler analyst Tyler Van Buren reiterated an Overweight rating and raised the price target to $60 from $35. On November 25, Cowen analyst Ken Cacciatore initiated coverage of Oyster Point Pharma with an Outperform rating and $40 price target.
In this backdrop, I believe that the target price of $41.61 is a fair estimate of the true growth potential of the company. This is a risky biotech pick, considering its complete dependence on the success of OC-01. I believe that aggressive retail investors with an investment horizon of at least one year should consider this stock ahead of ONSET-2 data, in March 2020.
