Creative destruction by definition is a process through which novel technology facilitates the demise of innovation from the past by captivating its market share or; expanding a current market by developing niches within the respective industry. When analyzing creative destruction in companies traded on public equity markets, key discrepancies must be used in assessing the correlating stock price which include; assigning future valuations, addressing prospective market potential and the possibility to overcome barriers protecting the penetration of the particular market. Dissimilar to established companies in conventional industries, businesses on the forefront of disruptive technology are victim to escalated amounts of both sell-side (short) scrutiny and overzealous buy-side (LONG) optimism due to the fact that they are organically speculative in nature. While there is substantial inherent risk in trading these types of securities, the analogous potential in upside offers investors an opportunity to capitalize on the birth of a niche market that can exponentially grow at a rate incomparable to any other investment publicly available.
In this article, we will examine two companies that harness disruptive technology, and justify how investors assign valuations on a forward looking premise based on anticipated growth that will justify today's valuation at some point in the future. Using Organovo (ONVO) as an example, we will evaluate why investors have assigned a forward looking multiple to the share price that has bolstered the company's market cap to over $700M. Using cross-analysis, I intend to show how a company like GlasessOff (OTCQB:GLSO), who has the potential for creative destruction, has yet to be valued at a higher premium due to a lack of exposure; the same conditions Organovo was subject to a year ago.
Carving a Niche in 3D-Printing
Organovo is developing a range of human tissues and disease models that can be used for medical research and therapeutic applications. This platform 3D bioprinting technology has the potential to revolutionize the way large pharma's conduct clinical testing. Early data has been revealed proving Organovo's 3D printed cell assay models are superior to the traditional 2D models in replicating functioning human cells. This has presented the company with an opportunity to disrupt the conventional methods of clinical testing and potentially enter a $500 million market opportunity by 2018.
Organovo anticipates that their disruptive business model will lead to collaborations with large pharmaceutical companies who will utilize the bioprinting technology to model human tissues and in turn conduct drug development. In exchange for printing this tissue and organs to test for toxicity, Organovo will collect attractive royalties (up to 10%) on commercialization of future drugs. Theoretically, this will provide the company with lucrative revenue streams when you consider the potential of developing a multi-billion dollar drug. As the 3D printing technology gains widespread adoption, Organovo's platform technology will only grow in popularity and practice. This is how Organovo management envisions leading the next wave of technological breakthrough in healthcare.
Organovo is the lone company in public markets that allows investors to capitalize on the hot 3D printing trend while also being exposed to biotech industry. Such exclusivity warrants a valuation premium on ONVO stock. The ever growing bioprinting craze will undoubtedly attract entrants that may potentially "threaten" Organovo's dominance. However, with over $50 million in their cash balance, the company has access to the most resources and thus better prospects of developing first in class products such as 3D printed liver assays. In the event that smaller competitors were to release a creative solution, Organovo has the means to acquire potential threats. Amid all the scrutiny, Organovo's distinctive technology and market leading status endorse the premium valuation multiple that shorts single out.
Organovo has ongoing collaborations with giants like Roche, United Therapeutics and L'Oreal. In addition, the company also works with leading research institutions around the US like Oregon Health & Science University (OHSU) and Harvard Medical School. Though critics may classify these collaborations as immaterial due to the nominal incoming revenues, investors in a development stage company are looking for exponential growth not immediate top line results. Organovo's partnerships are a cheap way for the company to outsource its R&D expenses. These partnering institutions are essentially developing Organovo's technology at zero cost which could generate much greater value for investors down the road than a couple hundred thousand retained in quarterly revenues. A perfect example of this will be on hand at the upcoming ASCB conference this weekend (Dec 14-18), where ONVO/OHSU breast cancer model data will be released.
The Next Wave of Creative Destruction
Throughout the course of 2013, Organovo's longs have realized a 250% gain peaking at 400%, leaving no doubt that investors have assigned a multiple to the stock price that includes a vast range of future revenues the company prospectively anticipates on realizing. Of particular importance, sanguine investors seeking exposure to companies with disruptive technology could justifiably shy away from those whose stock price already include the aforementioned multiple. At a current price of $9.50/share, those just learning about Organovo's chronicle might veer to companies with creatively destructive potential whose stock price has yet to have that respective multiple assigned, concerned with the possible short-term retraction Organovo's shareholders could be subject too. In my search for the next candidate, I came across GlassesOff , and it appears I'm not the only one who has noticed.
GlassesOff is a neuroscience technology company, utilizing proprietary technology to develop and commercialize consumer-oriented software applications that address the farsighted condition known as presbyopia. The company's flagship application aims to improve near vision sharpness by improving the image processing function in the visual cortex of the brain. Human vision is limited by two main factors: (I) the quality of an image captured by the eyes; and (ii) the image processing capabilities of the brain as it interprets an image captured by the eyes. At some point, natural age-related changes in reading abilities affect virtually every person, who typically attempt to improve their reading abilities through the aid of reading glasses. GlassesOff technology is proven to enhance the image processing capabilities of the brain thus improving a person's reading abilities, effectively eliminating the need for reading glasses.
By spending 12 to 15 minutes a day, three times a week for three months completing a game-like program, a user can improve the image-processing function by teaching the brain to better interpret blurred images, rendering the use for reading glasses obsolete. In a study conducted at The UC Berkley School of Optometry, published in the respected Nature's Scientific Reports, surveyors concluded that users who completed the three month program witnessed a >80% improvement in visual activity, effectively reducing the biological "eye-age" by 8.6 years. All 30 presbyopes, who could not read a standard font size newspaper without reading glasses, were able to effortlessly read the newspaper with their "glasses off" by the end of study.
For the average person, the onset of presbyopia occurs around the age of 40, with practically everyone experiencing it by the age of 51. This creates an immense target market for GlassesOff, which is 100% available to them for those who choose to get rid of their reading glasses. A study conducted by the International Centre for Eyecare Education estimates that over a billion people in the world were presbyopic as of 2005, while the U.S. Census estimates that 122 million Americans had presbyopia in 2010. With the release of the company's product earlier in the week, the app is now currently available as free download to all targeted consumers using Apple's IOS platform. Their business follows a "freemium" model, where users have their eyes examined at no charge which redirects them to an assessment of whether or not the software can help/improve the user's eyes. If applicable, the average cost to use to the customized treatment is $60 (special pricing of $9.99 during the launch). As of May 2013, 91% of Americans own a cell phone, and 56% own a smartphone. Of all the cell phones, a reported 25% are iPhones. Assuming GlassesOff can secure %5 market penetration, the company will be on track for realizing revenues of $91.5 million ((122M*0.25*0.05)*$60). This figure is solely based on iPhone users in United States alone, and with the company disclosing the release of the app on the Android operating system to come in the first quarter of 2014 in conjunction with expansion into international markets, it's easy to see how the revenues could escalate exponentially on a broader base with more adoption giving the company the ability to generate revenues in the hundreds of millions.
Circling back to the case of Organovo, we have witnessed that investors who see creative destruction in companies that harness disruptive technology assign valuations that appear "rich" today, because they are forward looking, meaning investors anticipate growth that will justify today's valuation at some point in the future. Although much of that potential has been realized in the case of Organovo, the opportunity is still present with GlassesOff trading in low $2 range. Increased word of mouth and widespread adoption will facilitate GlassesOff to tap an untapped market, protected by patented technology that can literally change millions of lives.