Sell Organovo, Buy Novavax

Dec.11.13 | About: Novavax, Inc. (NVAX)

(Correction Notice: This article has been corrected to note that the company released an 8-K on Oct. 7, not a vague press release.)

Organovo (NYSEMKT:ONVO) and Novavax (NASDAQ:NVAX) are two junior biotech companies that have performed very well in 2013, besting the S&P 500's gains by a wide margin. However, these company's fundamentals and the story behind them are quite disparate. Going forward, Novavax has meaningful foreseeable catalysts and good fundamental reasons to stretch its gains further in 2014 while the opposite is true for Organovo.

Organovo: One of 2013's Story Stocks

The rise of Organovo's stock has more to do with its ties to 3D printing than any other factor. This association was inked in 2012, when it first started trading on the OTC exchange as a result of a reverse merger. 3D printing industry stalwart 3D Systems (NYSE:DDD) was one of the market's hottest momentum stocks and Organovo, with its research in 3D bio-printing using living cells, quickly joined the party. While 3D Systems and similar companies may see significant growth as 3D printers become affordable for the everyday consumer, Organovo will not capitalize on this trend. While Organovo is a 3D printer company in the sense that it uses ink-jet technology to "print" tissue-like three-dimensional arrays of cells, it doesn't indicate any plans to sell its printer to consumers. There has been some speculation that Organovo's most advanced product, a liver tissue assay, will be a revenue driver in 2014. But there is no evidence yet that the product will even be adopted by the market at all. And furthermore, as SA contributor Richard Pearson details in a recent article, it will not provide meaningful revenue even if it is successful in penetrating the market.

Novavax: Ex-Story Stock, Waking Up From a Long Slumber

Vaccine developer Novavax became one of 2009's story stocks when the H1N1 "swine flu" influenza spurred global fears and led the World Health Organization to declare the outbreak a pandemic. But by 2010, the number of human cases of disease was in steep decline and, without a major revenue driver for the foreseeable future, Novavax's stock price was following suit. Although Novavax did rapidly respond to the outbreak with an H1N1 vaccine candidate (using its "new school" VLP - virus-like particle - vaccine technology) that in a trial of 4000 subjects in Mexico displayed immunogenicity in subjects after one dose, the need for the vaccine diminished once the virus stopped spreading. And while Novavax's VLP pipeline at the time extended beyond H1N1 to include other important vaccine candidates, bear market forces kept a ceiling over its stock price and it traded in a range between $1 to $3 until just recently.

Partnerships: Committed Financial Backers vs. Vague "Agreements"

In March 2011, Novavax announced that it had been awarded a contract by the Office of Biomedical Advanced Research and Development Authority (BARDA) at the U.S. Department of Health and Human Services for clinical and manufacturing development of recombinant vaccines for the prevention of seasonal and pandemic influenza. The contract is still ongoing.

In July 2012, Novavax entered into a collaboration with PATH for development of its RSV vaccine to protect infants via maternal immunization in low-resource countries and was awarded about $2 million by PATH for initial funding. Globally, RSV is the most common cause of childhood respiratory infection with 64 million cases and approximately 160,000 deaths occurring annually. The collaboration is still in effect. Currently, there is no prophylactic RSV vaccine on the market. PATH is an international nonprofit organization.

On its website, Novavax also lists Cadila Pharmaceuticals, GE Healthcare and LG Life Sciences as partners in various aspects of its mission to develop and commercialize its VLP vaccines.

On October 7, 2013, Organovo released an 8-k stating that the company "has entered into an agreement with L'Oreal exploring the use of 3D skin for testing skin care products."

Since any materially definitive terms would have been necessarily reported in the 8-K filing, the most we can assume to be true of this deal is that L'oreal was willing to test out Organovo's product. Any further assumptions are mere speculation. If L'oreal offered you a free shampoo sample, you'd be inclined to give it a try, right?

In a similarly vague, two sentence 8-K filing, the company stated it had entered into an agreement with Roche "exploring the use of 3D liver tissue in toxicology."

Sometimes "fluff" news can have a major impact on a company's stock price.

Insider transactions: Accumulation vs. Distribution

In the last 2 years, Novavax insider stock purchases have exceeded sales by hundreds of thousands of dollars while Organovo insider stock sales have exceeded buys by millions of dollars. In the last three months in particular, Organovo CEO Keith Murphy has been aggressively selling stock, 100,000 shares at a time. The picture here is pretty clear: Novavax insiders have been net accumulating while Organovo insiders have been net distributing.

Catalysts

In late September 2013, Novavax announced that it had reached an agreement with BARDA to initiate new seasonal and pandemic influenza clinical trials. The clinical trial plans include a quadravalent seasonal influenza trial in the first quarter of 2014 and a new pandemic influenza trial (H7N9) in the first half of 2014. Also in the first half of 2014, investors should expect results from a phase 2 trial of the company's RSV vaccine candidate in women of childbearing age.

Organovo does not have any drug candidates in its pipeline, so it has no clinical trial catalysts. Updates on the commercialization progress of its liver tissue assay is a catalyst, but again, these facts are irrelevant given the minimal expected revenues to be derived from this product. See Pearson's article for a thorough account of the matter.

Key Statistics

Novavax and Organovo are in the same ballpark in terms of market cap, $888M vs. $780M. Novavax trades at 46x its recent quarter sales and 42x its trailing-twelve-month sales, which are reasonable ratios vs. the biotechnology industry average of 83x and 39x respectively. It also trades at 6x book value vs. the industry average of 9x. Organovo trades at an incredible 8,433x recent quarter sales and 966x ttm sales, making it one of the most overvalued companies in the entire stock market. And it trades at 43x book. The reason for its valuation being so far out of the ballpark has little to do with the company's pipeline or its near-term earnings potential, but is a result of the stock originating on the OTC market, where retail investors care less about key statistics and stocks often trade at ridiculous valuations due to hype. Despite the initial excitement and rise of the stock upon moving to the NYSE, this could and should change now that it trades on the big boards where investors tend to do more due diligence, and short sellers tend to be more pervasive and influential.

Disclosure: I am long NVAX. 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.

Additional disclosure: The author is long NVAX but has no plans to short ONVO in a bull market.