Organovo: Slow And Steady Wins The Race

| About: Organovo Holdings, (ONVO)

Summary

Organovo is progressing on solid exVive3D liver tissue results and has multiple contracts.

Kidney assay, expected to launch in second half of 2016, is expected to bring in greater revenues.

Organovo is poised for success with multiple opportunities over the years, appealing mostly to the long term investor.

Organovo Holdings (NYSEMKT:ONVO) had the worst year ever in 2015, the stock lost most of its value and is trading below the $3 mark. Despite the fact that the company finally released its first product, presented impressive results, tied in projects with clients, and even reported revenue during the year. All this did not help Organovo's case, why because firstly, the investors had substantially high hopes for the stock, second, the company took one stock offering after another during the year to accumulate cash, and thirdly, the short interest in the company was and still is substantial. However, the short interest has been on a decreasing trend, with almost 2% decrease recently and bringing the interest to 15.27% of the float.

The question that arises here is whether 2016 will be any better or Organovo will continue with the dismal stock performance. The year-to-date performance of the stock shows continued volatility of the stock, which can also be attributed to the general volatility in the market. However, this does not entail that the stock will perform poor this year too. The reason, which is now clearer after the release of 3-D Liver Assay, is that the company is performing on its goals, producing revenues and demonstrating results. I believe, Organovo over time will reward the patient long term investor, and these sporadic performances of the stock do not matter for the long term investors.

Liver Assay Presentations

Organovo recently presented impressive data on their exVive3D bioprinted Liver Assays, at the Society of Toxicology's (SOT) 55th Annual Meeting. The poster presentations dealt mainly with the viability and superiority of their Liver Assays over the existing animal models being used to test drug toxicity on liver. Liver toxicity has long been a costly phenomenon for drug developers, where the drug may seem safe in animal models, but turn out to be damaging during clinical trials. There are various demerits of using animal models to predict human liver response, which include the high doses of compounds administered to the animal models, which complicate the effects and results in varying levels of inaccuracies. Second, human beings are heterogeneous, thus, a single animal model cannot produce results that may be generalized to the entire human population. Lastly, animal models are exposed to the single compound being studied, whereas human beings are exposed to multiple compounds daily, which render the animal models inaccurate for prediction. Organovo, with the release of its Liver Assays, aimed to produce assays which replicate the function of human liver, and thus, can help assess the toxicity of a drug during development. The poster presentations at the SOT dealt with the response of the Liver Assays to various compounds.

A major drug induced liver injury (DILI), liver fibrosis, is a phenomena that has historically been assessed using animal models. However, due to the limitation of the animal models, this phenomena is not well understood and further cannot be generalized to the human population; and Organovo aims to fill this void. The poster presentation titled "Modeling Drug Induced Hepatic Fibrosis In Vitro Using Three-Dimensional Liver Tissue Constructs" showed how liver damage was induced through the exposure of fibrogenic drug methotrexate and agent thioacetamide for 7 or 14 days. This entails that the researches can better understand what causes the disease and how it progresses over further exposure. This is a major breakthrough as the risk assessment of the drugs can be made on point, instead of a close approximation when animal models are used. Thus, the data provides strong proof-of-concept that the 3D liver assays can recapitulate compound induced fibrogenesis.

Compound induced steatosis was the topic of the presentation titled "Utilization of exVive3D Human Liver Tissues for the Evaluation of Valproic Acid Induced Liver Injury."

Steatosis is the imbalance of fatty acid metabolism, which results in abnormal retention of fat in the liver. The energy for the cellular metabolic activities is provided by the molecule adenosine triphosphate (ATP), without which these activities cannot take place. The presentation demonstrated that the exposure of the liver assay to steatosis-inducing Valproic Acid resulted in a decrease of 70% and 45% of the ATP levels, at 1mM and 5mM VPA respectively. This means that the decrease in the ATP levels will results in lower energy for metabolism and thus, induce steatosis. Along with other findings, it has been concluded that the Liver Assay can be employed to explore the workings of the drug-induced-liver-injuries.

Other two presentations also highlighted the superiority of the liver assay over the 2-D models, and provided proof that the assays can be used to investigate and understand drug induced liver injury. The presentation by Bristol-Myers Squib (NYSE:BMY) titled "Monocrotaline Toxicity in 3D Bioprinted Human Liver Tissue" demonstrated how the 3D model was able to capture various complex multi-cellular events on exposure of monocrotaline. And finally, Kuppffer cells, which are used alongside hepatocytes to study the possibility of inflammation when exposed to a stimuli, were addressed in the presentation titled "Inflammatory Response of Kuppffer Cells in 3D Bioprinted Human Liver Tissues." A common stimuli used in models is lipopolysaccharide (LPS), however, it doesn't demonstrate the activities and interaction present in the human liver and is thus, a shortcoming. However, the 3-D model employed not only replicated the native human liver function, but also measured the differences in response to stimuli of donor-specific Kuppffer Cells.

Betting on the Kidney Assays?

Disruptive technology takes time to make a strong foothold, which I believe is the case with Organovo. The company has successfully launched its 3-D bio printed Liver Assay and is on track to launch the second bio-printed product - 3D Kidney Tissue - in the second half of 2016. Despite these successes, the company trades way below its potential.

The kidney is a vital organ of the body, and like liver is subjected to toxicity arising from drugs. The significant portion of the kidney is made up of the proximal tubules, which carry out the regulatory and endocrine function. These tubules are of great interest to the researchers, as it carries out various functions that are related to renal toxicity and kidney disease development. However, the kidney and the renal function vary from specie to specie, thus, the study of kidney cells from animal models cannot be generalized to native human kidney. Thus, it's not guaranteed that a drug void of renal toxicity in animal models will also be safe in clinical trials. This limits the experimentation and analysis that can be done regarding renal toxicity.

Organovo aims to fill this gap by releasing its 3-D bioprinted kidney assay by the third calendar quarter of 2016. According to CEO Keith Murphy, the kidney tissue has shown strong results and over time the compelling data will be presented. The kidney assay has replicated native kidney proximal tubule, using a number of cell types, viz. epithelial cells, interstitial layer from renal fibroblasts and endothelial cells. The tissue has also showed increasing function over a two week period following bioprinting.

Source: Poster Presentation

Organovo has time and again made it clear that the 3-D bioprinted Kidney Assays will be priced superior to the Liver Assays, as there are no existing options. The average contract is expected to be priced at $250K, and also needs project run every 9 months. Thus, the contract updates will again be slow, similar to the Liver Assay. However, the market opportunity for kidney toxicology is substantial at $2.1 billion.

Opportunities to Cash On

Organovo has developed an impressive portfolio and is working tirelessly to achieve the goals it has set out. The liver assays and skin contract is already doing well, and same is expected of the Kidney Assays due to release in the third calendar quarter of this year. However, within these categories there exist multiple opportunities which the company will exploit. And these opportunities will not only better the healthcare scenario but also improve the company's image and financial condition.

There are multiple opportunities arising from the exVive3D bioprinted Liver Assay, such as use of the assay in developing treatment for Non-alcoholic steatohepatitis (NASH), which ultimately leads to cirrhosis. NASH is an extreme form of non-alcoholic fatty liver disease (NAFLD), which as the name suggests is due to causes other than excessive alcohol use. To date there is no specific therapy for NASH, and the drugs in clinical trials (elafibranor and obeticholic acid) have not demonstrated safety in humans. In addition, the market for NASH is also expected to grow at 25.6% from 2014-2020, reaching $1.6 billion by 2020. This presents a major opportunity for Organovo's Liver Assays; the liver function and disease progression can be better understood and treated using these assays. This will not only bring in additional contracts, but in case of a successful drug development, it should also bring in cash in the form of royalties.

Other opportunities that will prove to be cash-cows for the company, upon success, include the tissue-on-demand or patches that will be used to replace damaged tissues. This is an unmet need, where a treatment can be fulfilled using a tissue replacement. The company has evaluated multiple tissues, and have found encouraging results in the animal models. Furthermore, the company aims to file an IND in the next 3-5 years, for at least one tissue. In addition, the company also has bioprinted cancer models under its belt, which could lead to large amounts of revenues, contracts and royalties. These opportunities present the long-term outlook of the company and may take over 5 years to materialize.

Risks

A major risk faced by the company is the inability of the tissues to show effectiveness or replication of the native human tissues. The liver tissue has demonstrated positive results, however, a minor glitch down the road will wreak havoc on the stock price. This will also result in negative investor sentiment, which will take a long time to recover. This scenario, in my opinion, is highly unlikely since the company is already meeting goals and producing quality products.

Organovo is known for its stock offerings to raise cash, which has negatively impacted the stock price of the company. The current cash pile, as reported in the last quarter, was $70 million, which will be sufficient for next two years. However, in case of increased activities and resultant cash burn, if the company undertakes a stock offering, it will negatively impact the stock price.

Conclusion

I still believe that the company is a good long term investment, for those who are ready to tie up their money for a long period - somewhere around 4-5 years. Organovo is bound to experience volatility over the years, owing to the substantial short interest, a weaker PR strategy by the management, and an overall slow progress. However, if the company does not experience a setback in the form of failure of the assays, it is bound to prosper by leaps and bounds. Additionally, if big pharmaceutical companies sign up with Organovo in the coming years, it will not only help solidify the company's position, but will also lead to a larger acceptance of the technology. We have seen number of big names such as Merck (NYSE:MRK), L'Oréal (OTCPK:LRLCY), Bristol-Myers Squibb, Astellas Pharma (OTCPK:ALPMY), among others, and in time others will also sign up. All in all, I still believe that the company is good long term investment, with solid disruptive technology that will change the face of healthcare as we know it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.