Organovo's (ONVO) uplist to the NYSE MKT earlier in July brought the company a great deal of publicity which rallied the price as high as $8.50. Initially, the market overreacted to this news, inflating the price to levels that moved value ahead of fundamentals. Since, the company has raised dilutive capital and has been quietly operating their business behind the scenes without any significant news releases. This has been interpreted cynically by investors who have sold off ONVO positions. With its moves, I believe Organovo has positioned itself perfectly to progress forward on several fronts
Agreement with The Michael J. Fox Foundation
Earlier in September, Organovo released a form 8-K informing investors it had entered into an agreement with one of the global leaders in Parkinson's research. Minimal information was unveiled on the terms of agreement, which left many investors speculating. The overly optimistic investors suggested that Organovo was developing brain tissue for the neurological disorder since MJFF focuses on Parkinson's research. Though this would be a breakthrough development for the company, it is highly unlikely at this stage.
A more realistic hypothesis could be that MJFF is utilizing ONVO's liver tissue cells to test any developing Parkinson's disease drug for toxicity. Similar to what pharmaceutical companies could have in mind with using liver assays to test toxicity in preclinical studies, MJFF may be doing the same with their early treatments. Another realistic application that may be included in the agreement between the two parties may be the development of bioprinted peripheral nerve conduits. Though Organovo is still in the initial stages of developing such nerve cells, MJFF may believe that this channel of nerve generation may be a viable treatment to nerve injuries in the future. These are both educated guesses on my behalf. Either way, an agreement with such a reputable global foundation is beneficial for Organovo as it may lead to possible grant revenues. If no grants will be awarded, greater exposure and a chance to further develop the functionality of the NovoGen MMX Bioprinter are added bonuses. It would be interesting to see if CEO Keith Murphy sheds any light on this contract during his webcast presentation on RetailInvestorConferences.com.
Public Offering: A Long Term Move
When news of the dilutive capital raise broke, Organovo shares slid to the offering price of $4.50. The company's net proceeds from the raise were approximately $43.3 million. With such a move, Organovo forfeited short term gains for a long term vision that positioned the company in a healthier situation moving forward. Afterwards, Organovo would have a cash balance of around $50 million, enough to fund operations for at least the next three years.
Historical Measure of Value Returned
Historically, Organovo has rewarded its investors by returning a good multiple on every dollar that has been invested in them. Since inception (April 19, 2007), Organovo has raised approximately $33 million from the proceeds of convertible notes and issuance of stocks/warrants. This figure does not include the latest $43.3 million financing round. In total, the company has raised approximately $76 million.
To analyze generated value returned to investors, I am calculating return on raised proceeds as Market Cap/Amount Raised. According to this calculation, prior to its latest offering and before its uplisting, Organovo was returning investors approximately 7.6x ($250 mill/ $33mill) value for each dollar invested. After its uplisting, and the latest round of financing, this figure would equate to 4.6x ($350 mill/ $76 mill).
Going by this simple calculation, investors can expect at least $200 million (4.6 x 43.3) worth of value to be created due to the latest capital raise. The next logical question would be: How Organovo can go about creating value with the $43 million?
- Leverage cash by beefing up patent portfolio
- Ramp up company operations by increasing head count and R&D
- Engage in partnership agreement
Above are three of the many options Organovo has in creating value. Since the burn rate is approximately $3 million a quarter, having cash balance of ~$50 million will allow Organovo plenty of room to operate without the pressures of another dilutive raising.
By expanding patent portfolio, Organovo increases the functionality of its bioprinter and develops additional methods in which it can apply its technology. For example, in March of 2010, the company obtained a world-wide exclusive license to additional intellectual property from the University of Missouri, including a patent application covering the composition and method of manufacture of a nerve conduit. This patent may be what triggered the partnership between Organovo and MJFF (assuming that my speculation is correct). Additional value may come in such forms if the company spreads its patent portfolio even further.
With the available funding and development of the liver cell kits, it is almost a given that Organovo will elevate operations by increasing their head count to more than the 35 full time employees. This, along with increased R&D costs, will drive development efforts in preparation for research-derived revenues. Launch of the first commercial product is expected in 2014; therefore funds will be primarily allocated towards the liver cell assays. With a projected market opportunity of $500 million by 2018, a commercialized 3D cell assay has the potential to add incomparable value to Organovo through a recurring revenue stream.
Organovo is an attractive buyout candidate due to their exclusive situation of being exposed to two of the top-performing industries in the market; 3D printing and biotechnology. However, having the funds to operate for several years will cause Organovo to focus on expanding own valuation, therefore I do not see the company being up for sale. If anything, Organovo is more suited for collaboration. This way, Organovo can receive milestones to further develop their bioprinting technology and its partner, presumable a large pharma, can test bioprinted tissue in preclinical drug development. To add, the recent actions taken to uplist to a national exchange and being in a financially stable condition give the company more negotiation power during partnership talks for better term structure.
Organovo's tissue-based drug discovery assays, as of the 2010 agreement with Pfizer, are currently under valuation by the giant pharma. The company anticipates, but gives no assurance, that a future agreement will be reached with Pfizer. Obviously, striking a second deal would mean that Pfizer is pleased with what Organovo achieved, resulting in upfront licensing fees and further funding for additional growth. This would be the ideal catalyst that Organovo shareholders hope for.
Though the above value creating methods are not guaranteed to increase Organovo's valuation, the probability of success is enhanced with the realization of each given option. Being the lone company in a unique field, Organovo may be priced ahead of fundamentals. However, this premium is warranted due to its connection to two high growth industries and lack of competition. Organovo has stayed out of headlines recently. Thus, the market may get caught off guard when an unexpected catalyst, such as collaboration, is announced. Sharp investors should pay close attention to what Organovo may be orchestrating behind the scenes.