Organovo's (NYSEMKT:ONVO) cutting-edge futuristic 3-D bioprinting technology is exciting. It may prove to be a massively disruptive technology, that may transform our lives, especially in the way we get healthcare, and fundamentally alter our vulnerability and fragility as a species in fighting disease and death. It may prove to be a leader in the next multi-billion dollar new industry, and become the proverbial next Amgen, Microsoft, or Cisco that investors look for. Potential applications of its technology are nothing short of sci-fi, with the most exciting ones being artificial organ development to replace diseased organs, re-growing hair and bones, growing animal meat and leather in an industrial laboratory environment, and probably many more that we cannot yet even conceive of.
Besides saving lives, these applications also have significant ecological, ethical and quality of life impacts. Just taking one of them, for example, the growing of animal meat in the lab vs. the current practice of rearing and then killing animals for meat has positive ethical impacts in the eyes of many. Since it takes about 15 pounds of feed to make 1 pound of beef, with corresponding numbers for chicken and pork being 5 pounds and 6 pounds, it would be more cost-effective to make meat in the laboratory, once the technology has been scaled. Cattle-rearing also generates more global warming greenhouse gases, as measured in CO2 equivalent, than transportation, so it would also be hugely beneficial ecologically as well. Lastly, it is conceivable that you could mix and match different meats, spices, and other ingredients during the meat growing process, which can be more flavorful to the palette and improve quality of life.
However, many of these sci-fi like applications have years of development, testing and regulatory approval processes ahead of them. Growing artificial human organs, for example, may take 15-20 years before it can become a commercial success. While one can be reasonably confident that the industry will grow in the long-term, given its potential to fundamentally improve human life, it is much more difficult to pick winners and losers at this early stage. And it is even more difficult, if not impossible, to build an investment case based on that.
It is probably better then to focus on more mundane applications, by comparison at least. These are centered mostly around bringing efficiency and cost-savings to the pharmaceutical industry, that has seen drug development costs rise steeply in recent years (see Figure). While the FDA has approved fewer new molecules and biologics, the total R&D cost has risen up about three-fold in the last 15 years. Effectively, drug development costs per FDA approved drug has gone up from about $400 mill. in the mid-90's to about $2.4 bill. in 2010, a six-fold rise in the last 15 years. Other estimates are much higher, with average cost for each drug developed by a major pharmaceutical company ranging from $3.7 bill. per approved drug for Amgen (NASDAQ:AMGN) to $11.8 bill. per approved drug for AstraZeneca (NYSE:AZN).
Organovo plans to help reduce that in at least two ways. In the short-term, that is in the next two to three years, the company is planning to launch human liver tissue toxicology assays, and in the long-term, that is in the next five to seven years, the company is planning to develop 3-D cancer tumor models.
The human liver toxicology assays will address one of the most vexing problems in clinical drug development. Current methods rely on animals and two-dimensional cell culture assays to testing a drug in pre-clinical trials before they can be advanced to human trials. However, animals and two-dimensional cell culture assays are a poor predictor of toxicity in human cells, particular liver toxicity, and an estimated 25% of all drugs are shelved due to liver toxicity. Organovo's human liver tissue toxicology assays would help pharmaceutical companies eliminate billions of dollars of costs by testing for liver toxicity in the pre-clinical trials using the assays, thereby eliminating the ones that result in liver toxicity in the pre-clinical trials when costs are low vs. abandoning them much later after spending hundreds of millions of dollars testing it on human subjects. Also, it would avoid the ethical challenge of using trial patients as guinea pigs when the drug has not yet been demonstrated to not be toxic or otherwise harmful to human patients.
Organovo has already made progress on this, as in October, it announced data demonstrating retention of key liver functions in bioprinted tissues for up to 40 days, and dose-dependent response to acetaminophen, a know liver toxicant. Also, the data indicated that the toxic effects can be assessed using both standard screening assays and histopathological assessment of the treated tissue, and that Organovo's 3D liver tissue can potentially have value in assessing the toxicology problems in the human liver over a long period, including sub-acute and multiple dose effects.
The 3-D cancer tumor models would enable oncology companies to print hundreds of these in the lab, running large numbers of tests on them using different clinical compounds, so as to expedite the drug development process, and thereby also reduce costs. Also, the tumor models, based on each individual patient type, could be used to test multiple drugs, and come up with a personalized regimen for each individual patient. Organovo is already collaborating with Oregon Health Sciences University (OHSU) to develop this technology, and ultimately take it to commercialization.
Much as we like the 3-D bioprinting space, and the technology potential of ONVO, it is difficult to make an investment case, given the current run-up in its shares (see Figure), and the lofty market-cap of over $900 mill. In the latest Sept. 2013 quarter, the company reported a 14c per share loss on revenues of only $23,000. There is no Wall St. coverage on the stock, so there are no fwd. analyst revenue or earnings estimates either. The company plans to launch and deliver human liver toxicology assays to its pharmaceutical customers beginning in December 2014, so the revenue stream should start trending up starting in the March 2015 quarter. However, there is no further information from the company that can help us quantify how big that stream would be, and its growth trajectory.
In the absence of such information, we have to look for how similar companies that had paradigm-shifting, rule-breaking technologies traded at comparable points in their development. The two most obvious names that come to mind are two 3D printer manufacturers, Three D Systems (NYSE:DDD) and Stratasys Ltd. (NASDAQ:SSYS), that manufacture printing, prototyping and manufacturing systems to manufacture 3-D objects from computer data. They have the potential to have game-changing impacts on manufacturing, in ways that ONVO may impact healthcare. In fact, some may argue that their impact may be even more significant, given their potential applications aerospace, defense, automotive, medical device and architecture industries.
Digging through SEC filings, we find that DDD first reached a market-cap approaching $1 bill. in 2011, when its revenues were already in the $200 mill. range. SSYS's market-cap also approached $1 bill. in 2011, when its revenues were already in the $100 mill. range. Compare this to ONVO, where its market-cap at Thursday's close is already over $900 mill., with its latest quarter revenue at just $23,000. Looking further out, the first commercial revenue is expected in late FY 2014 or FY 2015, that is more than a year out. ExOne (NASDAQ:XONE) and Voxeljet AG (NYSE:VJET) are two other player in the 3D printing space. While both trade in the $800 mill. to $900 mill. market-cap range, XONE generated $11.6 mill. in revenue in the latest quarter, with FY 2014 projections of $73.4 mill., and analysts project VJET revenues to reach $23.8 mill. in FY 2014.
We don't how long it will take ONVO to reach $100 mill. to $200 mill. revenue, that might better support current prices, as there is not enough guidance from the company to make those projections. But a reasonable guess of going from $0 to $100 or $200 would be at least three years, which would put is in the FY 2017-18 timeframe as being the earliest when we would expect annual revenues to reach that level. The market is pricing perfection here, and pricing it way ahead of time. There is the potential for too many disappointments as the company works to realize its long-term vision, in terms of glitches with product development, testing and regulatory approvals. So when the company reports, what by any objective measure would be considered stellar results, early investors may be disappointed and dump the stock.
A couple of other things to keep in mind. The stock is in the $11 range, where it reversed from steeply in 2012 (see Figure), before falling to $2 lows. It also has had an unconventional reverse-merger entry into the public markets in 2012, and probably related to that, it also has no institutional coverage. As a result, there are no estimates, no research coverage, or price targets on the stock.
ONVO Is Being Accumulated By Top Funds (Based on Filings To-Date)
As of the latest available 2Q/2013 filings, institutions held a grand total of 22,650 shares. Although all filings are not yet in for 3Q/2013, based on the ones filed so far, ownership among our over 300 hand-picked top Wall St. fund managers is up from zero shares at the end of 2Q/2013 to 2.02 mill. shares, and is bound to go up significantly as more filings are catalogued (see Table). Based on the historical testing of our system, we have seen a strong correlation between strong levels of accumulation by top funds and the stock's performance over the following quarters.
What is notable here, though, is that the ownership is mostly only among the world's largest or mega funds, many of which own small positions in almost every security traded on the exchanges. So, when they own 1.77 mill. or less than 3% of the float, it is not as telling, as say when they go from say 10% to 15% or 20% of holdings. There is no ownership at all that we have recorded so far among our 79 hand-picked guru fund managers, that have outstanding long-term market returns. We considered these 79 funds to be the anchor of our system, given their strong track record, and would be more excited about the stock if we see it in the remaining filings. Also, the shares bought were most likely in the $5-$6 range, so buyers now are getting a very different deal than what these top funds thought was a good deal.
Investing, or rather trading, in volatile opportunities, such as ONVO, is very often just a play of emotion, in terms of fear and greed. Right now, the dominant thinking seems to be the fear of missing the opportunity on the next new big thing. While that is certainly conceivable, based on the company's market focus, the investing world is littered with many such stories of 'the next Amgen', 'the next Microsoft' or the 'the next Apple.'
If you are a trend trader, that watches the market like a hawk, there may be opportunity here to make some quick money, but for many long-term investors that don't have the time or inclination to watch stocks all day like a hawk, or don't have the emotional wherewithal to pull the trigger when the reversal happens, the stock looks too dangerous given the huge recent run-up and the lack of any clear timing and volume on near-term revenue opportunities. For the patient long-term investor, if you really believe the story, the time to buy may be on a serious technical pull-back in the 20%-25% range, as long as the fundamental story is still intact.