Sell Ocugen On Split Stake In Potential U.S. Revenues

Summary

• OCGN has risen to a $2.5 billion market cap on hopes it will be able to market COVAXIN in the United States.
• Bharat Biotech maintains a 55% stake in any U.S. profits versus 45% for OCGN plus all ex-U.S. profits. It should be valued substantially higher than OCGN.
• A 10% stake in Bharat Biotech sold for a $175 million valuation in November, implying very little value given to COVAXIN at the time.
• OCGN is trading at a significant liquidity and speculation premium compared to Bharat; the stock is likely headed down in the long term even upon success in the U.S. market.

Photo by Geber86/E+ via Getty Images

Ocugen, Inc. (NASDAQ:OCGN) has been on a tear over the last several months, fueled by its agreement with Bharat Biotech to commercialize COVAXIN™, a COVID-19 vaccine, in the United States. There has been substantial debate regarding the costs, timeline and potential market for COVAXIN, with bulls and bears both making good arguments. It's still up in the air as to whether Ocugen can receive an EUA for COVAXIN without running clinical trials in the United States. While COVAXIN's efficacy of 78% after the second dose is inferior to the mRNA vaccines, it is superior to the Johnson & Johnson (JNJ) vaccine. COVAXIN can remain stable at 2-8 degrees so there is certain advantages to storage and distribution. It might also appeal to people who are hesitant over the mRNA technology.

One thing that is overlooked by traders and investors in the United States is what exactly is the perception of COVAXIN and valuation of Bharat Biotech in India? Bharat has had an uphill battle to gain credibility as its vaccine was called "safe like water" prior to Phase 3 results. Even as vaccine rollout begins in India, there is significant pushback at the high cost (the equivalent of about US$8 to US$16 per dose), with some people claiming that the intellectual property is actually owned, at least in part, by the government and other entities that aren't Bharat.

Ocugen has disclosed that it will retain 45% of the profits as part of the U.S. commercialization agreement while bearing all the costs, risks and responsibilities of getting it approved in the country. For its part, Bharat only needs to support the technology transfer for manufacturing in the U.S. and supply initial doses in order to earn its 55% profit stake.

Bharat Biotech should be valued much higher than OCGN. It owns a 55% stake in any future U.S. COVAXIN revenues to OCGN's 45% while also owning all ex-U.S. revenues for the vaccine. With 198 million shares outstanding, OCGN has a $2.5 billion market cap. Considering that it was a $0.30 stock in December prior to the letter of intent with Bharat being announced, we can assume that essentially all of its value is based on the speculation around COVAXIN's success in the United States. Perhaps $50 million can be allocated as value towards its gene therapy platform for eye diseases. So OCGN investors should be very interested in knowing how much Bharat is actually worth, because it directly relates to how much OCGN should be worth.

Data by YCharts

How much is Bharat Biotech worth?

Bharat Biotech International Limited is a privately owned vaccine company in India. Despite attempts to go public in the past, it has remained in private hands. Considering the limits of an investor in North America doing research on a company domiciled in India solely relying on information available on the internet, Bharat Biotech appears to be a quality company. ICRA Limited, a credit research firm in India, upgraded Bharat's debt to AA- in October 2020, which is pretty good for a privately owned firm. ICRA provided the key financial indicators on Bharat in its report:

Source: ICRA Revised Credit agency report on BBIL, dated October 16, 2020

A crore is equal to 10 million, so one Rupees crore is equivalent to approximately US$135,000. Revenue (referred to as operating income in the chart above) grew a robust 35% to $146 million while net profit tripled to $40 million. If an investor is bullish on COVAXIN, Bharat is the company they would want to buy if they can.

There is limited data on how much the company is worth, but one important valuation data point did occur about a month before the deal with Ocugen was first announced through the letter of intent. On November 12, The Economic Times reported that Bharat's CEO Dr. Krishna Ella led a group to buy back ICICI Venture's stake in the company:

The promoters of Indian vaccine innovator Bharat Biotech International Ltd (BBIL) have acquired the holding of private equity giant ICICI Venture for around Rs 130 crore, valuing the company at over Rs 1,300 crore.

The BBIL promoters headed by Dr Krishna Ella have bought 47.06% of the company’s optionally convertible preference shares from ICICI Venture through the promoters-controlled vaccines producer Biovet Private Ltd, two persons in the know of developments told ET.

The price tag equated to about $17.5 million, valuing Bharat at over $175 million and at just 1.2x of 2020 revenue. ICICI Venture is a subsidiary of ICICI Bank, the leading private sector bank in India. As in other words, this firm is a large and experienced investor. It sold its stake in Bharat, giving very little value to COVAXIN, despite its being immersed in advanced stage COVID-19 trials at the time and days away from starting Phase 3.

The good news for investors was that the purchaser of this stake was led by Bharat's CEO. One could see that as a move made because Bharat's leadership team knew better than anyone else that the value of this stake was about to rise.

Based on Bharat, Ocugen's valuation appears quite suspect

The 10% stake in Bharat is likely worth much more than the $17.5 million price tag paid for it six months ago given the recent success of COVAXIN Phase 3 Trials. But even a 1,000% increase in valuation over that time would equate to a valuation that is substantially lower than Ocugen right now. Bharat owns a greater profit stake in potential U.S. revenues, and if the U.S. market ends up being a bust, it's still currently selling its vaccine in India and has the opportunity to sell globally ex-U.S. In addition to that, it already has a profitable pre-COVID vaccine business that saw 35% growth last year. I believe Bharat should be worth several times of OCGN, but right now it's the opposite.

A value investor should be selling their stake in Ocugen to buy a stake directly in Bharat. They could make some phone calls to see if they can buy the debt, or find out if there is a direct offering from the company or other third party private equity investors. Those who aren't willing to do the work are tacitly admitting that they aren't truly investing. They are paying a significant liquidity premium on OCGN shares to speculate on the success of COVAXIN. It's easy to buy (or sell) a stake in OCGN and it's hard to buy (and hold) a stake in the company that comes cheaper, has an unambiguously and significantly larger market for COVAXIN and is actually making money now.

If there is moderate success for COVAXIN in the United States of 10 million doses sold and assuming an average of $15 per dose, that leads to $150 million in revenue. OCGN would have to absorb the costs of marketing in the United States, which if a trial is needed, could run into the $10's of millions. Assuming a net profit of $120 million, $66 million of that would go to Bharat, adding a significant chuck to its already profitable operations. $54 million would go to OCGN. This would barely justify a $2.5 billion market cap and would be further eroded by the company's corporate expenses and R&D for its pipeline. OCGN recorded a $21 million operating loss in 2020. Total failure in the United States would result in no revenue for OCGN but a significant cost for trying, while Bharat walks away with minimal time and money spent.

One move OCGN could do is to use part of the $100 million it just raised to buy a stake in Bharat itself. However, it would have to pay significantly above the price tag of the ICICI holding or risk making the optics look bad. If it pays a similar valuation, investors might initially think it's a good deal. But then they might put two and two together and figure that if Bharat is worth, say, less than $200 million, how could OCGN possibly be worth more than $2 billion with an unambiguously inferior stake in COVAXIN?

Buy Bharat and sell Ocugen. But if you can't buy Bharat, just sell Ocugen. The risk-to-reward trade-off on OCGN makes no sense right now. I own a small put option position on Ocugen, reflecting my bearish outlook on the company.

Analyst’s Disclosure: I am/we are short OCGN. 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.