OpGen Inc. (OPGN, Financial) just announced it has been awarded a contract from the U.S. Centers for Disease Control and Prevention (CDC) to develop smartphone-based clinical decision support solutions for antimicrobial stewardship (AMS) and infection control in low- and middle-income countries.
This is a neat little development for a company of OpGen's size, and it is one that validates the company to a certain degree in that it has picked up a government contract related to its area of operational focus. But there is far more than this CDC development going on behind the scenes, and it is this activity that really harbors the value of this company as a potential long-term play.
Before I get into why, it is worth highlighting the fact this is a very small biotech play that has had a pretty rough year from a share price perspective. OpGen currently goes for a close to 75% discount to its January 2017 open.
With that said, I believe this decline is far from representative of the company's inherent value and that there is some real potential for recovery and advance above and beyond the year's opening price.
For those unfamiliar with OpGen, it is a biotechnology company that is trying to tackle a problem in health care associated with what are called multi-drug resistant organisms (MDRO). This issue has arisen from decades of antibiotic overuse, which has created so-called superbugs that are resistant to the conventional antibiotics that have, in the past, been incredibly effective.
When antibiotics do not work, people die. It is that simple. There are more than 2 million MDRO-related illnesses in the U.S. each year and, of these, around 25,000 result in the death of the infected individual. By 2050, scientists expect 10 million individuals will die each year from antimicrobial-resistant infections – more than cancer (around 8 million).
Governments across the globe are pushing to try and tackle this trend, and the CDC contract mentioned in the introduction is just one small example of many initiatives of its type in the U.S. and internationally.
But it is not all about patients surviving these infections. There are some considerable direct costs attributable to MDRO infectious diseases, with estimates suggesting upwards of $20 billion is spent in the U.S. alone every year on increased length of hospital stay, higher drug usage and Centers for Medicare & Medicaid Services (CMS) financial penalties, all rooted in MRDO issues.
So where does OpGen fit into the picture?
The company has developed two primary technologies, both of which combine to help overcome some of the major issues associated with MRDO infection. The first is what is called the Acuitas Rapid DNA Test, while the second is called Lighthouse Informatics.
The DNA test can identify the type of pathogen with which an individual is infected in around 2.5 hours. This compares to the more than 24 hours associated with the current testing systems. To add a bit of perspective here, when a patient goes into a health care facility with a suspected infectious disease, a physician performs a test and then sends it off to the lab for analysis. The point of this test is to identify the pathogen in question and then use this identification to try and treat the infection with the antibiotic that is most likely to be effective.
While they are waiting for the results of the test, the patient is treated with a cocktail of antibiotics in the hopes one will resolve the issue. This is in itself adding to the prevalence of MDROs and – in many cases – it just does not work; the patient gets worse and the infection becomes increasingly severe.
So the ability to reduce the analysis time to 2.5 hours is a game changer in and of itself – it means a pathogen can be identified quickly and a patient treated with the drug most likely to do the job, removing the necessity for a bunch of different antibiotics to be administered all in one go, knowing 90% of them are not going to be effective in that patient.
The second technology OpGen has created, the Lighthouse Informatics system, is a database of pathogens and antibiotic treatments that can be used to identify the likelihood of a patient's strain of infection being resistant to an antibiotic. Two versions of the same pathogen can be different in terms of response to an antibiotic – one will respond to it, one will not. This difference can be identified by the identification of certain genes that indicate resistance.
The Acuitas test can identify these genes and the results are then fed into Lighthouse. The latter then produces a report, tailored specifically to the patient under investigation, suggesting which antibiotic is going to be the most effective based on predicted antibiotic resistance. This whole process in completed in about three hours.
Further, Lighthouse is a self-feeding system. As more and more tests are carried out, more data will be fed into the database, increasing its knowledgebase and accuracy over time. As a starting point, OpGen teamed up with Merck & Co. Inc. (MRK, Financial) to create its initial data set, with the latter providing the former with access to its archive of over 200,000 bacterial pathogens gathered over the last 15 years through Merck’s Study for Monitoring Antimicrobial Resistance Trends (SMART).
As a side note, Merck owns a nearly 37% stake in OpGen through its Merck Global Health Innovation Fund LLC.
So what is next and what is going to drive value here?
OpGen is now in the position to start ramping up its efforts to roll out this system in the U.S. The company is in the process of collecting data on its Rapid test as well as working on getting test batches of the product in the hands of its end users, with initial commercialization slated for the first quarter of next year. That is a major milestone. Food and Drug Administration clearance for the entire system is slated for 2019.
By way of a quick look at the financials, revenues for the first half of 2017 came in at $1.5 million versus revenues of $4.0 million for full-year 2016. The vast majority of these revenues derive from an already established testing technology called FISH, which is likely going to decrease in proportionate value representation over the coming 12 months as the Rapid test and Lighthouse become more prevalent. Cash on hand as of June 30 came in at $8.9 million, the majority of which derived from a July offering for net proceeds of $8.7 million and there is an at-the-market program in place for a total of $11.5 million, of which there is $3.1 million left in the remaining capacity.
So what are the risks?
This is development-stage biotechnology and a microcap company. The major risk factors that are relevant to pretty much any stock in this market (and of this size) all apply to OpGen. Primarily, the company is going to need to rely on shareholders for capital inflow, which means we are probably going to see some dilution over the next 12 months. Right now, there is also a listing risk, with the company trading below minimum bid for Nasdaq listing. This means we might see a reverse split at some point in early 2018 if the company cannot get its share price above $1.
From an operational standpoint, the risk is rooted in the company successfully getting its systems past the FDA. These are potentially game-changing technologies but, and this especially relates to the Rapid test, if the data that comes out on the back of the ongoing clinical validation studies is not great, it is going to hamper the asset's chances of picking up a regulatory greenlight. There is still value in the Lighthouse database if this turns out to be the case, but the real value in OpGen is rooted in the two systems working in tandem.
Disclosure: The author has no positions in any of the stocks mentioned in this piece.
