Since last writing about the hype surrounding the 3D printing sector (see "Are You Buying The 3D Printing Hype?"), it seems the rally behind two industry leaders, 3D Systems (DDD) and Stratasys (SSYS), has come to a halt. Shares of DDD experienced a three-month rally in which the price shot up over 40%, hitting a new 52-week high. Arguably, investors taking profits off the table either sparked or perpetuated the ensuing price correction. Since then, shares of 3D Systems sold off on above-average volume and have now settled around $33 after a 25% haircut. Although no material news surfaced during this pullback it has (in a bittersweet way) allowed for some of the metrics to get back in line, such as the trailing P/E of 51, after undergoing a period of inflation from surrounding hype regarding 3D printing technology. Moreover, this pullback could signal that the stock is approaching fair value as price is becoming a more reasonable indicator of the core company valuation, rather than containing a built in "hype" premium.
This brings me to something interesting that crossed my desk as I was researching the sector. A cheaper alternative to buying into the 3D printing trend may perhaps be Organovo (ONVO), a 3D "bio-printing" company that specializes in printing functional human tissue. Referencing the Gartner Hype Cycle (see diagram below), which I briefly discussed in my last article on 3D printing, 3D bio-printing is listed on the up-swinging "technology trigger" phase containing unproven ideas with potential for breakthrough technology. Organovo, the lone leader in the up-and-coming technology of 3D bio-printing, has prompted recent publicity by being featured in financial media giants The Economist and The Wall Street Journal.
Click to enlarge images.
Organovo has developed and commercialized the first 3D bio-printer, called NovoGen MMX, which is capable of creating living tissue used to model specific body parts. The company seeks to employee this technology in the drug development process by using 3D generated tissue for in-vitro testing, which could potentially alter pre-human clinical trials. Ultimately, the long-term aspiration is to one day use the 3D printed models as therapeutic implants for the treatment of damaged tissues and organs.
The NovoGen MMX bioprinter constructs 3D living cells into functional tissue; the latter is comprised entirely of cells, a distinctive feature of the printer. The printer produces layers of "bioink," building blocks made up of 10,000-30,000 living cells in the form of miniature spheres. This bioink is then printed onto a paper layer of biocompatible gels. The desired tissue is printed layer by layer on the biopaper and then cell clusters naturally begin to fuse to each other while the biopaper dissolves, forming a living functional tissue. The image below, courtesy of Zacks'report on ONVO, gives a clearer understanding of the printing process.
Organovo has two active collaborations, one with Pfizer (PFE) and the other with United Therapeutics (UTHR), which provide all of the company's revenue -- typical of any firm in the early development stages. ONVO possesses a stable balance sheet as it holds approximately $8.5million in cash and cash equivalents, while only bearing around $900,000 in liabilities. However, it holds a warrant liability in the balance sheet of $80.5 million. This warrant liability caused significant changes in the latest income statement as a $34 million expense, a readjustment updating the warranty value to match the change in the balance sheet liability figure. This is a non-cash bearing adjustment, which means it exaggerated the loss incurred during the quarter. During the first half of 2012, the company used $5.4million to fund operations and forecasts expending another $3 million for the remainder of 2012. On average in 2012, the company has an estimated monthly burn rate of $700,000, meaning that it has sufficient resources to fund operations well into the second quarter of 2013 before needing additional financing.
In addition to its solid financial base and promising technology, ONVO is an intriguing stock because it provides exposure to two of the top-performing industries in the market. Its investors are exposed to the excitement of the 3D printing trend that is buzzing with hype, while also directly benefiting from advances as a biotech company. To date in 2012, two of the top five best-performing industries (as per Dow Jones Indexes) are the computer hardware index, which holds both DDD and SSYS, and the biotechnology index, gaining 45% and 43%, respectively. ONVO can be viewed as more "diversified" due to this dual industry exposure, as the rumors of both industries will influence it. Looked at another way, this exposure theoretically mitigates concentration risk but enhances potential alpha, or return on investment (for instance, with the idea that as a platform there are more "shots on goal").
If the hype surrounding the 3D printing technology being the "third industrial revolution" continues to spread like wildfire, investors of all kinds will want to embark on the action by buying the stocks of the scarce publicly traded 3D companies such as DDD, SSYS, ONVO, and the 3D software modeling Autodesk (ADSK). Organovo currently faces no competition in the bio-printing market niche. The company can use this supply and demand advantage to enforce a premium, while also utilizing protective patents as barriers to entry so that any incoming competitor must penetrate the market through ONVO directly. Being the lone name in this 3D printing technology and bio-printing market niche suggests ONVO will command a premium to the valuation an indirect biotechnology or high-technology competitor receives.
Organovo, a firm in early development stages, comes with a lot of risk, but also immeasurable rewards if it pans out. That is the name of the game with the biotech industry. If the product passes clinical trials and wins FDA approval, the share price blows up, catching the interest of a larger pharmaceutical company that comes along with a buyout opportunity. This M&A activity is common in the biotech industry, as recently seen with Bristol-Myers Squibb's (BMY) acquisition of Amylin Pharmaceuticals after the approval of its diabetic drug Bydureon. ONVO could be the talk of such rumors once it starts launching commercial products, its first one being a 3D liver toxicology cell-based assay, which could be as soon as 2014, according to Zacks' investment report. If the products are released, ONVO will be entering into a global cell-based assay market worth $1.6 billion by 2017. The invention of such 3D cell assays would mimic the human organs better than current models and prove to be superior indicators of how drug interaction would work in human clinical trials. Such a breakthrough would bring Organovo one step closer to introducing testing engineered human tissue in the drug discovery process.
The concept of valuing a company with minimal revenue streams will scare investors who prefer the security of a steady income statement. The stock price, of approximately $2/share, has bottomed out after being optimistically valued five times the current amount just three months ago, showing the compelling potential of the company. This overblown assessment seems to have now stabilized as the stock price has hovered around the $2 floor for the last two months. At current price levels, Organovo could prove to be an efficient use of capital to buy into the hot new trend of 3D printing technology, while offering additional exposure to the benefits of the biotechnology industry. Its bio-printing technology has the potential to completely transform drug development, and maybe even eventually print new organs to replace damaged or malfunctioning ones. A company with the combination of financial steadiness and endless potential that Organovo possesses could well be worth the risk of such a speculative investment.