Organovo's New Partnership Offers Large Upside With Limited Risk

| About: Organovo Holdings, (ONVO)

Organovo (NYSEMKT:ONVO) and Knight Cancer Institute at Oregon Health & Science University (OHSU) have formed a collaboration to develop more clinically predictive in vitro three dimensional cancer models. Knight Cancer Institute, a national leader in translational oncology research, is famous for the breakthrough in cancer treatment with the development of Gleevec. Approved by the FDA in 2001, this personalized medicine only attacks the abnormal cancer cells by limiting growth without harming healthy cells. These developments at the Knight Cancer Institute influenced a revolution of modern cancer therapies.

Knight Cancer Institute will be employing Organovo's NovoGen MMX bioprinter to stem biological models that accurately replicate human cancer to enhance understanding of the disease. These new models that imitate human cell structures are better representations than the current animal based models used to identify potential drug candidates. In turn, it is hoped that this will deliver better oncology therapies for patients by extracting more accurate information in the preclinical drug discovery & development process.

This partnership further validates the recent buzz circulating Organovo as this move demonstrates the company is committed to ensuing rewarding alliances which present minimal downside risk. Instead of selling bioprinters to just anyone, ONVO is strategically associating with educational institutions, like Knight Cancer Institute, or drug developers, such as the collaboration with United Therapeutics (NASDAQ:UTHR), that will utilize the NovoGen MMX in a potential drug discovery process. In case of a breakthrough or a successful product that is commercialized, ONVO would receive sales-based royalties due to their contribution with NovoGen MMX. If applicable, this could add, yet again, additional revenue streams for ONVO on top of the payments originally negotiated. To boot, academic affiliations are a cheap method of advancing the technology as funding is provided from government bursaries or research firms (instead of Organovo). As more renowned researchers and academia realize the potential of the bioprinting technology, exposure will continue to spread, opening countless more doors for Organovo.

Organovo's strategy to include royalty clauses in their collaborations has the potential for great success by letting others use the bioprinting platform while limiting the downside risk. Regardless of the study's outcome, ONVO will receive the negotiated payments. If successful, however, vast royalty payments from commercialized products (potential new cancer treatment in this case) will propel the company to new heights. With such a tactic, Organovo takes the position of a broker, with limited risk standpoint yet infinite profit potentials.

A similar approach can be examined with the business model of credit card companies like Visa (NYSE:V) and Mastercard (NYSE:MA). Contrary to popular belief, neither Visa nor MasterCard actually issue credit cards themselves, nor do they extend credit to consumers. Neither company deals with consumers or merchants directly. Instead, financial institutions use credit card payment product platforms to develop credit card programs for consumers. These credit card companies make money by charging a fee to merchants for using their network to manage the exchange of information during a transaction. They create value for all stakeholders during the process. Cardholders' benefit because of convenience, security, and rewards associated with card payments. Merchants benefit from improved sales by offering payment method options to the customers. Banks get new revenue streams through card fees, and late payment interests. In other words, as the volume of credit card transactions increase, as do the profits of these companies. Their risk standpoint is minimal as the financial institution incurs the loss if a consumer defaults on debt, instead of the credit card companies which do not deal with debtors directly.

Organovo continues to add value to its shareholders with its recent collaborations that not only validate the bioprinting technology but also divulge favourable risk to reward compensation. Agreements with academia bodies or R&D labs to utilize their 3D bioprinting technology offer Organovo a limitless opportunity of potential with a controlled risk standpoint. Further, similar partnerships will reposition Organovo as a promising public 3D company to be listed in the same domain as current market leaders 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS).

As the stock price continues to trade over $2.50, investors should keep an eye out for the announcement of remaining outstanding warrants (effects of exercised warrants explained here). Assuming the stock does not see a rapid decline, management should be able to file the warrant call by early February, falling within the next week. Such a scenario would allow management to inquire about up-listing without any evident issues and reward investors with a possible appearance on the NASDAQ CM exchange by Q3 2013.

Disclosure: I am long ONVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.