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Why This "Busted IPO" Could Rally Further

|Includes: Ocular Therapeutix (OCUL)

"Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful." Samuel Johnson

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For today's instablog post, I am going to post some previously exclusive content from The Insider Forum around a small ocular concern that may be in the early innings of big run after being a "busted IPO" for quite some. This small-cap stock rose more than 15% on Friday for reasons I highlighted in the Biotech Forum Daily Digest yesterday. However, it is still far below previously attained levels and analyst price targets. With a possible FDA approval on the horizon, it may have considerable upside ahead. I offer it up for consideration for investors within a well-managed and diversified biotech portfolio

December 29th article:

Company Overview:

Ocular Therapeutix (NASDAQ:OCUL) develops sustained ophthalmic (eye) therapies with proprietary tailored hydro-gels to improve patient experience and outcomes by providing more consistent dosage therapy. The company came public in the second half of 2014 at just under $15.00 a share and soon soared to over $40.00 a share in the first half of 2015. Unfortunately, like most IPOs, the hype soon faded and the stock dropped back below $10.00 a share. The shares have spent most of 2016 marking time in a fairly narrow trading range and goes into the Insiders Forum portfolio at Wednesday's closing price of $8.18 a share. Ocular has a market capitalization of just a tad over $200 million at the moment.

Product Portfolio & Pipeline:

The company has four potential revenue generators:

1. ReSure, which is an ocular sealant that patches up a cataract incision. Once this hydro-gel is applied, it does not have to be removed. Think of ReSure as dissolving stitches for the eye. It is an alternative to nylon sutures which leaked 34.1% (versus only 4.1% for ReSure) in a recent trial. Although effective, this does not have the potential to be a huge money maker, although sales ($477,000 in 3Q 2016) should increase with the deployment of a sales force in 2017.

2. DEXTENZA, which is a compound for post-surgical ocular pain and inflammation. It is also in trials for the treatment of allergic conjunctivitis and inflammatory dry eye. A resubmission of an NDA for DEXTENZA is expected by the end of the year. More on this dynamic shortly as this will be the key value driver for the company over the near and medium term. When approved, DEXTENZA will be the first and only FDA approved drug to provide the complete course of therapy for this indication with drug elusion up to 30 days with a single placement.

3. OTX-TP, which is for the treatment of glaucoma and ocular hypertension. The company commenced patient enrollment for a Phase III study in October 2016. Data is not expected until the first half of 2018. Per IMS health data, there were 34 million prescriptions and sales of approximately $2.7 billion of drugs administered by eye drops for treatment of glaucoma in the United States in 2015

4. The company has also entered into a strategic collaboration, option and license agreement with Regeneron Pharmaceuticals (NASDAQ:REGN) for the development of a sustained released version of aflibercept, which is the vascular endothelial growth factor {VEGF} trap for the treatment of wet age-related macular degeneration (wet AMD) and other serious retinal diseases employing its hydro-gel technology. This could result in the total of $305 million in milestone payments. This includes up to $155 million in development and regulatory milestone payments, which includes a $10 million option payment, $100 million for first commercial sale and up to $50 million in commercial milestone payments. In addition, Ocular will be eligible to receive tiered high single digit to low to mid-digit royalties on potential future net sales.

Attractive Entry Point:

On July 25, 2016, Ocular received a Complete Response Letter {CRL} due to manufacturing deficiencies - specifically an inert gas component used in the making of DEXTENZA - from the FDA. The takeaway is that the CRL did not identify any deficiencies related to efficacy or safety concerns. In other words, as Amar Sawhney, PhD, President, Chief Executive Officer and Chairman of Oculus said, it's a question of when, not if for DEXTENZA. It is expected that an NDA will be resubmitted in the first quarter of 2017. Pricing for the treatment is not set, but is expected to be approximately $400 per cataract surgery. With just over 3.5 million cataract surgeries were performed in 2015, this compound has strong potential to trigger capital appreciation given the company's only $200 million market capitalization. This market is growing nicely as well. Per US census data by year 2020 it is estimated that number of Americans diagnosed with cataracts is expected to rise approximately 30 million, representing a 31.9% increase over current prevalence estimates. Per management, approximately 80% of ophthalmologists stated in a recent market survey conducted by a third-party and commissioned by us that DEXTENZA would become the new standard of care for post-surgical use

In the meantime, Ocular announced on November 29th that is raising $40 million through a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald. At current prices, this amounts to a little more than 4 million shares or about one-sixth of the outstanding stock. As a result, the stock price, after running from an intraday low of $4.82 (on Nov 3rd) to a recent intraday high of $11.91 (Nov 25th) has dropped to just over $8.00 a share.

Balance Sheet & Analyst Commentary:

The company ended the third quarter with $75.7 million in cash, cash equivalents and marketable securities against just over $15.5 million in debt. The $40 million secondary capital raise will be used to pay off some or all of that debt, fund trial development and pay for a sales force to market DEXTENZA.

Analyst commentary on Ocular is quite positive with a median analyst price target on the stock of $18.00 a share currently, more than twice the current price of OCUL. The biggest bull on the stock currently is RBC Capital with a $38 price target on the shares. Most analyst price targets on Ocular are currently in the mid to high teens. In addition, and perhaps more importantly, the CEO just bought some $355,000 worth of shares on December 15th at $7.85. It was the first insider activity since June when the same insider added $67,000 to his core holdings. There has not been any insider selling in this concern in well over a year.

Outlook:

Ocular Therapeutix is the classic "busted IPO" I have found much success investing in during the past two decades. The stock is selling for 20 cents on the dollar compared to its most enthusiastic trading as a public company even as its pipeline has advanced. Ocular is also well funded, has solid analyst support, several "shots on goal", recent insider buying and upcoming catalysts.

End of Article:

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Note: The Insiders Forum portfolio continues to CRUSH the return of our benchmark since its launch some seven months ago now. As of the market close on Friday, the Insiders Forum portfolio is up 41.56%, compared with the return of 14.43% from the Russell 2000. Since the end of June when we launched this Marketplace service we have taken an initial 15-stock $150,000 model portfolio and transformed it into a 19-stock $210,000+ model portfolio. This is the only service of its kind out of the 70 offerings available via SeekingAlpha's Marketplace.

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Thank You and Happy Hunting

Bret Jensen

Founder, Biotech Forum & Insiders Forum

Disclosure: I am/we are long OCUL.