Bet on the Underdog: Oyster Point (OYST) Preparing to File NDA for ~$5 B Dry Eye Disease Market

Summary: Oyster Point Pharma (NASDAQ: OYST) is developing OC-01, an intranasal formulation of varenicline, for Dry Eye Disease (DED). DED represents an estimated $5B global market dominated by two prescription eye drop products: Restasis (Allergan) and Xiidra (Novartis). Restasis, approved in 2003 and anticipated to go generic this year, achieved net sales of $1.1B in 2019. Xiidra, approved in 2016, is forecast to reach ~$1.2B in net sales in 2025. OC-01 offers a similar or moderately superior magnitude of efficacy based on pivotal P3 data (ONSET-1 & ONSET-2). OC-01 has a competitive edge given its ROA and rapid time to impact (on the order of weeks), as current agents are associated with eye stinging / discomfort and may take up to several months to achieve effect. We project >250% upside over the current market cap of ~$730M based on estimated peak sales >$1B and potential M&A takeout value.

Key Takeaways

  • We project peak sales >$1B for OC-01 based on a differentiated product profile, supporting a target valuation of ~$2.6B (>250% upside over current market cap).

  • The OC-01 program is de-risked from a regulatory standpoint given positive pivotal trials: we estimate a ~90% probability of approval (NDA filing in 4Q20).

  • As a small biotech, OYST faces significant execution risks for commercialization given the competitive landscape (Allergan, Novartis) and the consumer-driven market, which will necessitate substantial investment in direct-to-consumer commercial efforts.

  • We believe OYST can best maximize shareholder value via an acquisition. While OYST has indicated that it is planning to launch OC-01 on its own, its relatively small market cap (~$730M) in relation to its regulatory-ready asset make OYST an attractive takeover target. Comparable deals the OYST team could point to include Novartis’ 2019 acquisition of Xiidra from Shire, which closed for $3.4B upfront and $1.9B in milestone payments. Potential partners would bring an existing commercial infrastructure in ophthalmology, such as but not limited to incumbents Allergan/AbbVie or Bausch + Lomb.

  • However, even if no acquisition occurs, OYST still has plans to commercialize OC-01 independently in the U.S., outlining a 150-200 rep sales force and direct-to-consumer campaigns.

Key Stock Drivers:

  • Substantial unmet need for a therapy with rapid onset of effect and an alternative ROA: Patients today are limited to over-the-counter artificial tears, which provide only transient relief, or prescription eye drop therapies which can take months to take effect and can cause significant eye irritation, impacting patient quality of life and compliance.

  • Large patient population offers substantial market growth potential: ~16M adults in the U.S. are diagnosed with DED, though only ~10% are receiving prescription therapy (<2 M). OYST cites that ~7 M diagnosed patients have tried and failed current options, suggesting significant pent-up demand for an efficacious prescription therapy with superior tolerability to current SOC. Even just a fraction of these patients represents a significant commercial opportunity.

  • NDA filing for OC-01 expected 2H20: After announcing data from a second positive pivotal trial (ONSET-2) earlier this month, OYST plans to file their NDA with the FDA during 2H20. OYST expects commercial launch in 4Q21, and announced plans to hire 150-200 dedicated sales reps, which they expect will be able to target >80% of DED prescribers (both ophthalmologists and optometrists).

  • Peak sales estimate >$1B: Analyst consensus and our own projections suggest OC-01 could achieve peak sales of $1-1.3B given the large population, high unmet need, and differentiated product profile. Assuming price parity to Restasis and Xiidra, capturing just ~5% of the ~5M patients who have tried and failed current options could translate into >$1B in sales, even before including sales from new patient starts and patients switching from other medications.

  • Probability-adjusted valuation of $2.3-3B: We forecast a ~90% chance of approval given positive P3 data, giving us a probability-adjusted peak sales estimate of $0.9-1.2B. A peak sales multiple of ~2.5x supports a valuation of ~$2.6B, representing >250% upside over current market cap (~$730M).

  • We believe there is a high likelihood that OYST will receive acquisition offers: We anticipate M&A interest in OYST given its attractive market cap relative to its stage of development and the high barrier to commercial entry in this indication. OYST leadership has also previously explicitly not precluded the idea of an acquisition. We expect large players in this space to at least kick the tires on a deal and for OYST to listen hard, as a deal would be to mutual benefit.

  • Additional stock offering closed on 5/19, creating a window to capture value: OYST closed an additional public offering on 5/19 at $28, raising ~$120M in preparation for OC-01 commercialization and further development. This dilutive capital drove OYST’s per share value back down to pre-ONSET-2 readout levels, creating a window to invest at a diluted price point.

Key Stock Risks:

  • Independent commercialization would be challenging and expensive: There is substantial execution risk for OC-01 launch as OYST would be competing with much larger players in Allergan and Novartis. In a highly consumer-driven market like DED, direct-to-consumer strategies will be incredibly important. For context, Allergan spent nearly $650M on Restasis advertising in 2016 - 2017 (when competitor Xiidra launched). OYST, meanwhile, reported ~$130M in cash and cash equivalents in their Q120 filing (though just raised an additional ~$120M via public offering). OYST leadership has outlined a 3-part strategy encompassing investments in speciality sales reps, DTC marketing, and payer engagement. Driving prescriber and patient awareness of OC-01 will require a heavy commercial lift.

  • No pipeline to fuel long-term growth: OYST’s R&D strategy is primarily focused on indication expansion for OC-01. While OYST also holds the rights to OC-02, which had previously reached P2 in DED, the program appears to be deprioritized for the time being. OYST will live or die by its ability to get OC-01 to approval and punch above its weight in the market.

  • DED market is becoming increasingly competitive: Other novel products and the anticipated launch of Restasis generics could disrupt the DED landscape. For example, Sun Pharma recently launched Cequa, a higher concentration of the same active molecule as Restasis, while Kala Pharmaceutial’s Eysuvius recently read out a third P3 trial (required after an FDA rejection last year). However, for the most part these therapies are not expected to meaningfully detract from OC-01’s unique value proposition as an intranasal formulation.

  • OYST requires substantial additional capital: OYST will likely need to identify additional sources of cash (e.g., out-licensing ex-U.S. commercial rights to OC-01) to fund OC-01 commercialization if it does not receive any acquisition offers.


We own shares of Oyster Point Pharma. This article expresses our own opinions, not Oyster Point Pharma’s or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.

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