Ocugen: Peripheral Scandals Taint This Expired COVID-19 'Me-Too' Longshot
Jul. 08, 2021
Summary
Ocugen's CEO is connected to a "failed COVID-19 antibody testing program" which raises inconvenient questions.
Their vaccine partner, Bharat Biotech, is now mired in its own international bribery scandal which has already severely tarnished the image of the firm.
After failing to receive Emergency Use Authorization from the FDA, upside catalysts for Ocugen have disintegrated.
Investors now hope for a shot at approval for use in Canada, but Health Canada's public vaccine listings do not even show Ocugen to have submitted an application yet.
Like the unused vaccines that are rotting away on shelves, I believe Ocugen's ambitions have exceeded their shelf-life. I expect the stock to bleed back to penny stock territory.
A brief company history
Ocugen (OCGN) has been one of the more polarizing story stocks of 2021. The company is led by CEO and Co-founder, Shankar Musunuri, and entered into the public equity market in 2019 via a reverse merger with floundering biotech shell Histogenics. Ocugen had been in operation since 2013 with the goal of "develop[ing] innovative therapies to treat rare and underserved eye diseases". The company had raised $19 million in debt and equity through the life of the company and has de minimis existing revenues today.
As the below chart shows, markets had little interest in this penny stock between the closing of the reverse merger in late 2019 through late 2020.
Another new COVID-19 stock!
That suddenly changed on December 22, 2020 when Ocugen announced that they had a new agreement with India's Bharat Biotech to commercialize Bharat's COVAXIN within the United States. Since then, the stock has surged more than 2,000%, from less than $0.30 to more than $7.00 today, and currently sports a market cap of more than $1.5 billion.
Few investors seem to have asked the obvious question of just how this unknown ophthalmology company became involved in international vaccination efforts. But as it turns out, COVAXIN was not Ocugen's first dabble into the COVID-19 healthcare market.
Advaite's COVID-19 test flop
Advaite is a biotech firm that was founded by Ocugen's CEO's son, Karthik Musunuri, while he was completing his undergraduate degree in pharmaceutical marketing at Saint Joseph's University. Advaite also hired Shankar's other son, Vinny, in 2020 to be the company's manager of corporate strategy, despite the fact that he was a Sophomore undergrad at USC at the time. Vinny's LinkedIn notes that he was also previously an intern for Ocugen and for Pennsylvania State Senator, Andrew Dinniman.
According to Advaite's website, the firm is focused on developing therapeutics and diagnostics in the oncology space. But when COVID-19 struck, Advaite branched out into COVID-19 testing kits. In April 2020, Ocugen entered into a Collaboration Agreement (source: page F-15) with Advaite with respect to the development of Advaite’s RapCov COVID-19 Testing Kit. Ocugen agreed to provide:
certain production, research and development, technical, regulatory, and quality support services to Advaite in connection with the development and commercialization of the COVID-19 Test wherein Ocugen would provide services to Advaite and share in future COVID-19 testing royalties.
Ocugen's CEO seems to have been deeply ingrained in Advaite's operations. According to Senator Dinniman, "Anything Advaite was doing, he [Shankar Musunuri] was involved.” (source)
But just a few months later, things fell apart for Advaite and Ocugen.
This article from the Philadelphia Inquirer outlines Advaite's botched entry into the COVID-19 testing market.
The program began May 7, then was quietly shelved about a month later — despite Chester County’s having spent more than $13 million in federal pandemic aid for the tests.
What went wrong? The Inquirer found that:
Internal emails and interviews with people involved in the program show that the newly developed, unapproved antibody tests, sold to the county by a politically connected, neophyte biotech firm called Advaite, may have been generating wildly inaccurate results.
The initiative was later described as a "failed COVID-19 antibody testing program" as the county sued Advaite for the return of the majority of their funds. Ocugen's role with Advaite and their acceptance of testing royalties make them directly involved in Chester County's failed testing program. This is a particularly troubling outcome when we focus in on one specific risk factor mentioned in Ocugen's 10-k.
As an organization, we have no experience in the development, manufacturing, distribution or commercialization of a vaccine candidate.
A failed roll-out of testing kits for one county does not bode well for ambitions to potentially roll out millions of vaccines for an entire country.
Bharat Biotech's turn to descend into scandal
Likewise, at Bharat, their COVAXIN vaccine has been mired in controversy practically from day one. India's drug regulator was highly criticized when they approved use of COVAXIN while the phase III clinical trials were still ongoing.
Earlier this year, Brazil rejected the importation of COVAXIN from Bharat due to failure "to comply with manufacturing standards, including not adhering to demands for documentation and maintaining the integrity of containers and methods of analysis". Eventually, the mood in Brazil abruptly changed and the country agreed to a large contract with Bharat despite the vaccine being unapproved by the WHO and more expensive than Pfizer's vaccine.
#CovaxinGate
But just days ago during the last week of June, the Brazilian contract has turned into a full-blown international scandal that has already resulted in the firing of one Brazilian health official and has led to increasingly loud calls for the impeachment of Brazil's president.
The $15 a dose contract signed by the Bolsonaro government, which had earlier shown little interest in getting vaccines for the country, has become a full-blown scandal with 24×7 media coverage being followed by millions. With explosive leaks coming out almost in real time, a top television commentator called the investigation “CovaxinGate” on Thursday; soon stories about the vaccine were being shared with #CovaxinGate on social media. Some senators have even called it ‘Caminho das Indias’, or “Passages to India”.
There are serious questions to be answered surrounding suspicions of bribery as well as questions of why the payment for Brazil's contract was being routed to a previously unknown Singapore-based firm, Madison Biotech. A firm that is listed with three directors, one of which is Bharat's President and founder.
In the past week, the senators leading the probe have appeared confident that Madison Biotech’s invoice is the piece of evidence that will lead to a trail of tax evasion, money-laundering and bribery in the deal between Brazilian government and the Indian firm.
Source
These problems for Bharat are rapidly escalating by the day. As of July 1st, two separate criminal investigations have been launched and Brazil's organized crime unit has become involved.
Questionable claims over EUA approval
This article details how Bharat "claimed that it has received the emergency use authorization", but:
From ANVISA’s [Brazil's Health Regulatory Agency] June 4 statement, which sought complete analysis of phase-3 trials in Brazil before Covaxin is used, it is clear that the Indian company has not been given the EUA certificate by Brazil.
ANVISA then effectively suspended COVAXIN's EUA request after it found:
“mandatory and essential documents for the evaluation of the efficacy and safety” of the vaccine were “not complete or missing” from the application.
Madison Biotech
Bharat's attempted explanation of the Madison Biotech relationship is also not sitting well. Bharat has not stated why their invoices were submitted via Madison, but have only stated that:
Since 1996, the company owner Dr Krishna M. Ella “has also founded or acquired 13 other organisations. This includes Madison Biotech, which he founded in 2020 for the purpose of external R&D and sales and marketing of vaccines”.
According to the same article:
The statements by Lorenzoni and the Indian firm don’t establish that Madison is a subsidiary of Bharat Biotech or owned by the company. The business details of Madison Biotech, as already revealed by The Wire, show it to be a private limited company founded by Dr Krishna Ella on February 14, 2020. [...] The Sao Paulo lawyer finds the whole arrangement dubious. “One may own many companies but you can’t sign the contract in the name of one company and raise the invoice from another. It is illegal,” says the lawyer.
While Bharat has denied any wrongdoing, this has obviously become a major international event which is rapidly continuing to develop. One should ask themselves if it would be politically viable for a government to spend taxpayer dollars on vaccines from a company which would, in turn, be passing royalties to a firm that is caught up in a criminal investigation by a sovereign nation concerning bribery, money laundering, and tax evasion. As has been stated:
With its image in tatters, the Indian firm may face more scrutiny here as the ongoing probes look for criminality in the contract.
COVID-19 today - What hope does Ocugen have?
The NPR estimates that nearly 50% of the U.S. population has been fully vaccinated. While this is short of hoped-for levels by this time, it's becoming clear that adults who are inclined to be vaccinated against COVID-19 have largely already done so. The below chart from the NPR definitively shows that the wave of mass U.S. vaccinations has come and gone.
The Wall Street Journal also recently detailed how pharmacies have been scaling back spaces for shots as demand has waned while mass-vaccination sites are also shutting down.
COVID-19 vaccines are no longer a scarce commodity in the U.S. as supply now outstrips waning demand, and getting a shot is becoming akin to getting a flu shot, easy and generally uneventful.
Meanwhile, the catalysts looked to by Ocugen investors have also come and gone.
Catalyst 1: Ocugen was hoping to submit COVAXIN for EUA within the U.S.
Outcome: Ocugen announced on June 10th that the FDA had advised them to pursue a Biologics License Application (BLA) and abandon their EUA efforts. Not only will a new U.S. clinical trial be needed, but the approval process for a BLA is much more stringent and longer than an EUA. It requires a longer timeline of safety data, inspections, manufacturing runs, and can take 10-12 months for review even after submitting all these detailed documents. This response from the FDA makes perfect sense. When a 15-employee ophthalmology firm wants to do a mass vaccination roll-out, regulators need to ensure they can safely do so, but it is a virtual death blow for any hopes of having a competitive U.S. vaccine within the next year and could easily extend Ocugen's prospective timeline to at least 2023.
Yet, Ocugen's less sophisticated investors seem to be under the impression that ongoing press releases from Ocugen/Bharat concerning their existing India-based trial give the company a shot at some kind of approval for use in the U.S. This is objectively false. The ship has sailed, or rather, it has sunk.
Source: [1], [2], [3], [4]
Catalyst 2: Bharat's/Ocugen's COVAXIN would be uniquely effective against the Delta variant that was first identified in India.
Outcome: As more data has come in, existing U.S.-approved vaccines have proven to be highly effective against the Delta variant: "Pfizer says COVID vaccine is highly effective against Delta variant" (6/24/21). "J&J Covid Shot Neutralizes Delta Variant" (7/1/21). Efficacy results for Pfizer (NYSE:PFE) and J&J (NYSE:JNJ) are also coming from real-world infection data at this point. COVAXIN's claim of 65.2% efficacy is in line with J&J's efficacy, but is based on "lab experiments", which are not given the same weight by government agencies and medical professionals.
Catalyst 3: With hopes for an imminent U.S. market dashed, Ocugen announced on June 10th that they would seek regulatory approval for use in Canada.
Outcome: Canadian citizens are even more vigilant than their U.S. neighbors when it comes to COVID-19 vaccinations. According to ourworldindata.org, a whopping 68% of Canadians have received at least one COVID-19 dose as of this writing. Similar to the U.S., discussions of sharing excess vaccines have already begun in Canada as well. Canada has little need of approving/purchasing additional vaccines from scandal-plagued Bharat/Ocugen, so why would they diverge from the FDA's response to rush out a vaccine from an unproven ophthalmology firm.
And despite Ocugen's telling us on June 10th that they were "engaging" with Health Canada, HC does not show a record of having received an application from Ocugen/Bharat as of their latest application log dated June 18th. It's unclear if Ocugen has even submitted an application to HC at this point or if they are still "engaging", yet Ocugen's retail investors seem to think HC approval headlines could hit at any moment. Investors should also take note of Novavax's (NASDAQ:NVAX) application which was submitted all the way back in January but which is still under review six months later.
I emailed Ocugen's investor relations on July 6th asking if they had submitted COVAXIN to Health Canada for Interim Order use. I have not yet heard back from the company, but will update this article in the event I do.
Catalyst 4: There are hopes that COVAXIN may receive Emergency Use Listing from the World Health Organization.
Outcome TBD: The WHO has suggested that they will have a decision on EUL for COVAXIN by the second week of August. Receiving EUL from the WHO would give COVAXIN a stamp of credibility from an internationally recognized authority, and this is important to COVAXIN recipients as thoughts evolve on an international standard for officially recognizing someone as being vaccinated for travel purposes. It's less clear how important this outcome would be for Ocugen investors. EUL from the WHO will obviously have no impact on COVAXIN's coming to the U.S. given the EUA door has already been closed. It's also unclear what impact EUL would have on COVAXIN's prospects in Canada, if any.
What's left?
So what exactly does this leave for an Ocugen investment thesis that could possibly justify a $1.5B market cap? There is the possibility that booster shots may be needed to prolong immunity while targeting new emergent variants, and also the possibility that regulators will approve/recommend vaccinations for children younger than 12.
But what reason do we have to think that federal agencies or healthcare providers in the U.S. and Canada would in the future choose an unapplied Bharat/Ocugen vaccine over the three heavyweights that the public has already instilled their trust and confidence in? In my opinion, the obvious answer is that we have no reason to envision such an outcome.
I don't think Ocugen investors fully grasp just how hollow this company's vaccination prospects actually are. The entire bullish investment thesis now merely hangs on Ocugen's possibly receiving approval from Health Canada while we don't even have evidence that an application has been submitted to HC at this point. Even if we assume HC approval does come through, how many doses would Canada order given a population of less than 40 million and a vaccination rate that is approaching 70%? If Ocugen hypothetically received a contract for 10 million doses, they would be lucky to generate $20M in gross profits after accounting for cost of materials and Bharat's share of profits. It seems to me that investors are paying $1.5B in market cap for an incredibly stretched longshot at something like $20M in gross profit. Efficient markets indeed.
An illustration of what could come next
Ocugen shares many similarities with another COVID-19 oriented stock that I have covered, Sona Nanotech (OTCQB:SNANF). Like Ocugen, Sona was an insignificant and unheard of penny stock before jumping onto the COVID-19 bandwagon, but while Ocugen primarily has become involved in vaccines, Sona aimed to create a COVID-19 test.
And like Ocugen, Sona failed to obtain EUA from the FDA and immediately pivoted to hopes for approval in Canada.
Sona Nanotech Inc., a developer of rapid, point-of-care diagnostic tests, received notice from the FDA that the Company's request for an emergency use authorization ("EUA") for the marketing of its rapid COVID-19 antigen test in the United States "is not a priority" and consequently such authorization will not be issued at this time. [...] Health Canada continues its evaluation of the Company's application for an Interim Order ("IO") authorization.
Source
Unfortunately for Sona investors, Health Canada also gave their inferior COVID-19 test a pass and their stock is down ~98% since I wrote about the company less than a year ago.
I would urge Ocugen investors to soberly consider Sona's rapid rise on COVID-19 hype and equally rapid demise once it was clear that no government contracts would materialize. The parallel similarities and risks at Ocugen should be alarmingly clear.
For the reasons outlined in this article, I am confident that Ocugen's upside catalysts are now exhausted and that the stock will inevitably bleed lower over a relatively short period of time.
