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By Jason Napodano, CFA

On March 15, 2013, Organovo Holdings (ONVO) reported financial results for 2012 and provided insight into the business plan for 2013. By all measure, 2012 was a banner year for the company, kicking off with the reverse merger late 2011 and financings to fund operations that took place in February and March 2012 and culminating with the highly successful warrant tender started late December 2012 and just recently completed earlier this month. In between, the company continues to operate on its business plan, which includes delivering on, expanding, and signing new business collaborations. Total revenues in 2012 were $1.197 million, consisting of recognition under agreements with United Therapeutics, Pfizer, and the NIH.

…Existing Collaborations…

In December 2010, Organovo entered into a $600,000 collaborative research agreement with Pfizer (PFE) to develop specific three-dimensional tissue based drug discovery assays in two therapeutic areas utilizing the NovoGen MMX Bioprinter technology. Pfizer has paid the company all $600,000 under the agreement, as Organovo delivered the constructs to Pfizer during the fourth quarter 2012. Constructs delivered by Organovo are currently being evaluated in Pfizer's laboratory. No specific timeframe has been given, but we suspect that Pfizer will come back to Organovo in the next six to twelve months. Ideally, Pfizer and Organovo will sign an additional agreement that expands the relationship at that time. We anticipate any new deal signed will provide an upfront payment, as well as the potential to earn development, regulatory, and sales-related milestones, as well as royalties on commercialized products.

In October 2011, Organovo entered into a $1,365,000 research agreement with United Therapeutics (UTHR) to establish and conduct a research program to discover treatments for pulmonary hypertension using the NovoGen MMX Bioprinter technology. The initial term of the collaboration was for 30 months. However, in November 2012, Organovo and United Therapeutics executed an amendment to the agreement adding additional research scope and providing for additional collaborative research funding. This new expansion of the agreement added $150,000 to the contract. To date, Organovo has recognized a total of $1,100,000 in payments from United Therapeutics. Based on the existing contract, $400,000 remains to be recognized in 2013.

…New Collaborations…

In December 2012, Organovo announced it started working together with Autodesk, Inc (ADSK) to create the first 3D design software for bioprinting. The software, which will be used to control the company's NovoGen MMX bioprinter, aims to represent a major step forward in usability and functionality for designing three-dimensional human tissues, and has the potential to open up bioprinting to a broader group of users.

In January 2013, Organovo entered into a collaboration agreement with the Knight Cancer Institute at Oregon Health & Science University (OHSU), a national leader in translational oncology research, to develop more clinically predictive in vitro three dimensional cancer models which are ultimately expected to advance discovery of novel cancer therapeutics. We are very pleased to see Organovo collaborating with OHSU. The OHSU Knight Cancer Institute is one of the nation's top cancer research centers. The center's director is Dr. Brian Druker, who developed Gleevec for chronic myeloid leukemia at Novartis.

The goal of the collaboration is to marry Organovo's 3D bioprinting technology with KCI-OHSU's deep understanding of cancer and metastasis to develop new therapeutic candidates. Discoveries can then be out-licensed to larger pharmaceutical companies for clinical development. We believe Organovo's 3D bioprinting technology has the ability to improve on animal model and cancer cell lines currently being used to test drug candidates by providing a more representative model of human disease. New biological models that more accurately replicate human cancer and malignant disease could be an enormous opportunity for the company.

In February 2013, Organovo signed a partnership agreement with ZenBio Inc., a leading provider of advanced cell-based solutions and services for drug discovery and advanced tissue therapies. Under terms of the collaboration, ZenBio will provide unique and validated cellular inputs for use by Organovo with its NovoGen bioprinter. NovoGen creates living, three-dimensional tissues that reproduce the architectural and functional features of tissues inside the human body. By partnering with ZenBio, Organovo now has access to a validated supply of cells to build cell assay models for commercialization or for surgical therapies. Potential opportunities may be in creating 3D skin structure assays for cancer therapeutic or cosmetic testing.

Organovo's goal is to sign additional licensing and collaboration partnerships over the next several years, either with leading academic centers like KCI-OHSU that provide knowledge and driver knowhow, or with synergistic partners that can advance the potential to create cell assays or commercial products for Organovo.

…Making Progress With Cell Assay Products…

Organovo's NoveGen MMX bioprinter can produce highly specialized three-dimensional human tissues that can be utilized to model a specific tissue physiology or pathophysiology. The company has demonstrated the ability to create human blood vessel constructs, and to create fully human tissue containing capillary structures. This has the potential to broaden the scope and scale of 3D tissues that can be generated, and to facilitate the development of disease models in such areas as cardiovascular disease, oncology, and fibrosis.

But a more near-term opportunity for the company is in the development of cellular assays to facilitate biological research through absorption / distribution / metabolism / excretion (ADME) testing. ADME testing is used to determine which factors enhance or inhibit how a potential drug compound reaches the blood stream. Many companies perform ADME studies utilizing various cell-based assays or automated bioanalytical techniques. Drug metabolism and pharmacokinetics (DMPK) testing is a subset of ADME. Determining the DMPK properties of a drug helps the drug developer to understand its safety and efficacy. Finally, toxicology (TOX) testing is a further requirement to determine the detrimental effects of a particular drug on specific tissues.

The pharmaceutical industry spends over $50 billion per year on R&D, yet only produces some 30 new drugs that are approved by the U.S. FDA. Many drugs fail in preclinical or clinical testing due to a lack of understanding on physiology or pathophysiology or unforeseen toxicity. This is because currently drug therapy research and testing generally involves testing drug candidates and therapies on monolayer two dimensional cell cultures that attempt to mimic damaged or degenerating tissues. Organovo's technology creates three dimensional cellular structures which enhance and facilitate drug discovery.

We believe that the NovoGen MMX Bioprinter is positioned to deliver highly differentiated products for use in traditional cell-based ADME / TOX / DMPK studies. Products in this arena may replace or complement traditional cell-based assays that typically employ primary hepatocytes, intestinal cell lines, renal epithelial cells and cell lines grown in a traditional two-dimensional format. Organovo's technology may be particularly attractive area for testing liver toxicity, which can be difficult to model in cell culture assays because the cells flatten out resulting in altered gene expression / loss of phenotype. The cells essentially stop functioning as liver cells within 24 hours of culture, no longer producing liver enzymes or biomarkers of activity. A 3D living human tissue makes it possible to test the toxicity of an experimental compound in a way that more closely mimics the reaction within a living organism over a longer period of time.

Importantly, the combination of tissue-like three-dimensionality and human cellular components is believed to provide an advantage over non-human animal systems toward predicting in vivo human outcomes. There is an enormous opportunity for Organovo to launch a liver cell assay kit into the drug discovery market for things like ADME / TOX / DMPK studies. Organovo's 3D tissue-culture system is designed to bridge the gap between preclinical animal modeling and human clinical trials. The process provides a more dynamic and true representation of target drugs interactions in a natural biology.

We expect Organovo to present data on its first livery cell assay product in late April at the Experimental Biology conference. The company is planning multiple poster presentations designed to demonstrate liver histology and biomarker activity. If successful, we expect Organovo to be in position to launch its first products here - such as 48 or 96-well liver toxicology kits - in late 2014. We see this as a potential $20 to $30 million opportunity. Other applications include testing new medications for lung fibrosis and cancer (note the Knight Cancer Institute deal in January 2013), equally large or larger opportunities to the company.

…Balance Sheet Improved…

Net loss for 2012 totaled $43.1 million, or $1.01 per share. Loss included $34.2 million in non-cash derivative charges for increase in the outstanding warrant liability. Operating and investing cash burn in 2012 totaled only $10.1 million, driven by $3.4 million in R&D and $7.1 million in SG&A. Organovo exited 2012 with $14.8 million in cash and investments. The company secured an additional $2.3 million in cash during the first quarter from warrant exercises. The company has dramatically cleaned up its balance sheet. We find the current cash balance sufficient to fund operations into 2014.

…Seeking An Uplisting…

Management at Organovo has said in the past they seek to uplist from the OTCQB to a major exchange. The company even reiterated this goal in a press release on March 19, 2013.

Financial and liquidity listing requirements for the NASDAQ Capital Markets require stockholders equity of +$4.0 million, a market value of publicly-held shares of $15.0 million, a market value of listed securities of $50.0 million, 1 million publicly-held shares, and a bid or closing price above $2 per share if net tangible assets exceed $2 million and a three-year operating history.

Below, we look at how Organovo qualifies for listing on the NASDAQ-CM:

(click to enlarge)

Investors can see the company is still shy of the > $4 million Stockholders' Equity requirement by roughly $9.7 million. But this is based on year-end 2012 financials. A company can achieve an increase in Stockholders' Equity by either increasing assets, decreasing liabilities, or a combination of both.

Earlier in the first quarter of 2013, the company announced a warrant tender to redeem an additional 2.9 million warrants at $1.00 per share. This redemption period expired on March 14, 2013, and the company announced it has secured an additional $2.3 million in cash. The company exited 2012 with approximately 11.4 million warrants outstanding. This equated to a non-cash warrant liability of $20.6 million. That's a $20.6 million non-cash hit to Stockholder's Equity.

As of March 1, 2013, the number of outstanding warrants have been reduced to 7.4 million. As of March 14, 2013, the number was reported to be 4.5 million. We estimate the outstanding warrant liability projected at the end of the first quarter 2013 will be less than $10.0 million. We forecast the cash position at the end of the first quarter 2013 will be around $15.0 million. Therefore, we suspect that the company will have a Stockholder's Equity on March 31, 2013 greater than the required $4.0 million to meet the NASDAQ-CM requirement. Clearly, Organovo has made enormous progress towards the goal of up-listing.

Conclusion

We see a significant opportunity for Organovo to create 3D cell assays and start introducing them to the market in 2014. We model the launch of one new major cell biology assay kit coming to market every year starting in 2014. We see each product as a potential $20 to $30 million opportunity for the company, and there are probably a dozen products within cell toxicology alone the company can create.

We expect the company's top-line to be lumpy, but eventually take off in a hockey-stick like ramp starting in 2015 or 2016 based on two revenues sources: firstly, early-stage collaborations should start progressing to where Organovo can earn developmental milestones, and second, the company should launch cell assay tests in 2014 and 2015.

We expect costs to remain low as management looks to partner with larger organizations and academic institutions. All this should make Organovo an attractive investment for long-term shareholders. We can justify a market value of $300 million given our estimating financial model. We wouldn't chase the stock here, but instead recommend investors use pull-backs to opportunistically establish a position.

Source: Checking In On Organovo