Organovo Holdings: So Much Potential

| About: Organovo Holdings, (ONVO)

3D printing has been heralded by some as the future of manufacturing and the breakthrough that will take us into a new productivity boom. The idea of using computers and robotics to assemble items from scratch is a growing trend and one company has decided to embrace the concept with an organic twist.

Organovo Holdings (ONVO) is a revolutionary company that uses 3D printing technology to build organic tissues one cell at a time. The potential applications for this technology are simply astounding with the possibility of replacement organ and tissue manufacturing that would revolutionize medicine and the healthcare industry. With an innovative management team and a potentially lucrative patent portfolio, it would seem that the sky is the limit for ONVO.

Trees Growing to the Sky

That would be the mindset that drove ONVO from an opening IPO price of 1.65 to a nosebleed peak of 10.90 in just 4 short months.

ONVO 6 Month PerformanceClick to enlarge
(Click to enlarge)

The story of the stock was enough to generate massive gains for those willing to try and "get in on the ground floor". Sadly anyone that did not get out in June is now back to the drawing board with ONVO close to making new 52 week lows.

The company is small and the technology new and largely experimental. At 10.90 the company was valued at over 400 million dollars and had yet to make anything but losses. While this is seen often in the biotech markets, ONVO is not a drug company with products in the pipeline, there is no immediate calendar based event that justified the run up and the bears did what they do best and took ONVO back down to a more reasonable size.

Just a quick look under the hood shows that the ONVO bulls were getting way ahead of themselves:

TTM Rev: $887K (You read that right, in the Thousands)

  • TTM Earnings: -$8.97M
  • Total Cash: $10.35M
  • Total Debt: $37.35M
  • TTM Cash Flow: -$5.16M

Source: Yahoo Finance

The company is loaded up with debt, bleeding cash and generates little to no revenue. While the technology is amazing and the potential is huge, right now the company is generous in its filings when it says it will be able to pay the bills for the next 12 months.

It's Not All Bad, Well It Kinda Is

So, the nuts and bolts are a bit loose under the hood but the body is just so appealing. This appeal has been generated by a ton of press exposure, usually related to 3D Systems (DDD) and other 3D Printing technology. All of these positive forward looking headlines tends to attract true believers due to the potential applications.

I'm a true believer as well, in the technology at least, the stock I'm much more hesitant on.

Anyone considering establishing a position in ONVO needs to understand some basic things.

1) The company doesn't make money

Since the company doesn't make money, this is currently a purely speculative play. There are no earnings to compare, the revenues are almost non-existent, the debt and cash burn are well above current assets and income. The future may be bright, but that doesn't mean that this company will succeed to realize it. Many an innovative company has gone bankrupt and their bright shiny ideas picked up in bankruptcy by the larger players.

2) There will likely be a significantly dilutive Secondary within the next 12 months

With the cash burn set to eat the company alive in less than 2 years (at current rates) the company will need to generate capital to remain solvent. One option that should be available to them is the initiation of dilutive secondary offerings now that they are a publicly traded company.

I am 100% certain that the founders of the company understand the potential of their technology and will make every effort to remain a going concern to fully reap the rewards. While dilutive Secondaries are no fun for holders of ONVO stock, the alternative of potential insolvency should provide a stark enough contrast to get approval by the board for any such moves.

A 10% dilution (at a 10% lower price) would generate enough cash to run another 12 months. I would expect continued secondaries as long as the market is willing to bear it. The company is already loaded with debt and will be hard pressed to generate sufficient revenue until the technology matures.

3) This could take a while

Many of the bulls and positive stories are talking about replacement organs as if they were coming to a hospital near you soon. Even the CEO of the company has tried to tamper the expectations by talking about how they may be able to do such things ... in 10+ years.

Currently the company does limited runs of specific tissue samples for pharmaceutical companies and has a very limited market I understand that the future could be brilliant for the company but that could be quite some time from now and involve fundamental changes in the company. The fact that they currently have negligible revenue and no announced prospects does not fill me with warm and fuzzies for recommending significant positions in ONVO.

Where The Wild Things Are

ONVO is a speculative bet that the current management will be able to continue to fund the innovation that is generating so much buzz. The stock trades on the pink sheets and justifiably so. The company is small, the cash burn and debts are large and the technology has not really demonstrated enough progress to merit takeover considerations (at this time).

Anyone looking to get into ONVO has another opportunity to get in near the IPO price. With the cliff face so close in the rear view mirror I do not see another huge run as investors are now "once bitten" and will remain shy for a while. Luckily I would expect more and more positive headlines for the company in the near future and those should provide tradeable bumps in the stock price as people join the hype.

Such spikes will remain short lived like this last one due to the unproven nature of the company. If the cash burn is put out and some revenue generation is seen, there could be some sustainability in the shares. Until then it will remain a play toy for hedge fund traders who will whipsaw those that are not prepared.

I wish anyone brave enough to get long ONVO at this point in its development the best of luck but will be remaining on the sidelines until I see some positive developments on the quarterly reports.

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