Ocular Therapeutix (OCUL)

Ophthalmology biopharmaceutical company Ocular Therapeutix (NASDAQ:OCUL) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 5.7% year on year to $14.54 million. Its non-GAAP loss of $0.38 per share was 9.6% below analysts’ consensus estimates.

Company Overview

Pioneering a drug delivery platform that can eliminate the need for monthly eye injections, Ocular Therapeutix (NASDAQ:OCUL) develops sustained-release treatments for eye diseases using its proprietary ELUTYX bioresorbable hydrogel technology that gradually releases medication.

The specialty pharmaceutical industry relies on a high-cost, high-reward business model, driven by substantial investments in research and development to create innovative, patent-protected drugs for niche diseases. Successful products can generate significant revenue streams over their patent life, and the larger a roster of niche drugs, the stronger a moat a company enjoys. However, the business model is inherently risky, with high failure rates during clinical trials, lengthy regulatory approval processes, and competition from generic and biosimilar manufacturers once patents expire. These challenges, combined with scrutiny over drug pricing, create a complex operating environment. Looking ahead, the industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Ocular Therapeutix competes with large ophthalmology companies like Regeneron (NASDAQ:REGN) and Roche (OTCQX:RHHBY), whose Eylea and Lucentis dominate the wet AMD market. In the glaucoma space, it faces competition from Allergan (now part of AbbVie, NYSE:ABBV) with Durysta, while its DEXTENZA product competes with corticosteroid eye drops from various pharmaceutical manufacturers.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $55.78 million in revenue over the past 12 months, Ocular Therapeutix is a tiny company in an industry where scale matters. This makes it difficult to succeed because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Ocular Therapeutix’s 39.5% annualized revenue growth over the last five years was incredible. Its growth beat the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Ocular Therapeutix’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.7% over the last two years.

This quarter, Ocular Therapeutix’s revenue fell by 5.7% year on year to $14.54 million but beat Wall Street’s estimates by 3.8%.

Looking ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and indicates its newer products and services will catalyze better top-line performance.

Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.

Ocular Therapeutix’s high expenses have contributed to an average adjusted operating margin of negative 231% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Ocular Therapeutix’s adjusted operating margin decreased significantly over the last five years. This performance was caused by more recent speed bumps as the company’s margin fell by 331.9 percentage points on a two-year basis. We’re disappointed in these results because it shows its expenses were rising and it couldn’t pass those costs onto its customers.

In Q3, Ocular Therapeutix generated a negative 472% adjusted operating margin.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although Ocular Therapeutix’s full-year earnings are still negative, it reduced its losses and improved its EPS by 4.1% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q3, Ocular Therapeutix reported adjusted EPS of negative $0.38, down from negative $0.22 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Ocular Therapeutix to improve its earnings losses. Analysts forecast its full-year EPS of negative $1.44 will advance to negative $1.39.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Ocular Therapeutix’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 194%, meaning it lit $193.56 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Ocular Therapeutix’s margin dropped meaningfully during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Ocular Therapeutix burned through $56.72 million of cash in Q3, equivalent to a negative 390% margin. The company’s cash burn increased from $36.65 million of lost cash in the same quarter last year.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Ocular Therapeutix burned through $199.4 million of cash over the last year. With $344.8 million of cash on its balance sheet, the company has around 21 months of runway left (assuming its $77.01 million of debt isn’t due right away).

Unless the Ocular Therapeutix’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Ocular Therapeutix until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We enjoyed seeing Ocular Therapeutix beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed. Overall, this was a weaker quarter. The stock remained flat at $11.83 immediately after reporting.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Ocular Therapeutix.

Ocular Therapeutix doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its declining adjusted operating margin shows the business has become less efficient. On top of that, the company’s cash profitability fell over the last five years.

Ocular Therapeutix’s forward price-to-sales ratio is 36.7x. The market typically values companies like Ocular Therapeutix based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy.

Wall Street analysts have a consensus one-year price target of $24.17 on the company (compared to the current share price of $11.83).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.