Much has been written on Organovo (NASDAQ:ONVO) in Seeking Alpha and the Motley Fool. Some articles are full of great content, others not so much. After talking with many experts and reading articles, I have come to the conclusion that Organovo is vastly overvalued.
One article I have learned a lot from is this one written by Seeking Alpha writer Douglas House a few days ago. He is a knowledgeable enthusiast of regenerative medicine. He hasn't taken a short position on ONVO because of overwhelming bullish investor sentiment, but he does state that it's at least 40% overvalued.
One thing that Mr. House said in his article that I agree with is:
ONVO is doing its absolute best to convince the market of the uniqueness and value of bioprinting with the NovoGen, but its true value lies with printing human tissues suitable for implantation, not 3D microtissue cultures.
The reason why this is true is because there is already a competitive market for micro tissue cultures, but human tissues suitable for implantation is a market that is in its infancy, and has billions of dollars in potential.
Organovo outlined its opportunities on page 12 of a presentation done in August 2013, and called it its "Opportunity Matrix". On that page, all of the Toxicology Assays and the Disease Models are micro-tissue cultures. The listed Simple Tissues for therapy refer to the implantable tissues.
My research has shown that there is no need for a 3D bio-printer for micro tissue cultures. Companies like Insphero use what's called a hanging drop method to make the tissue models. They can be created manually because the cells self-assemble. It doesn't have to be a specific construct that requires a machine. You can even do it by hand. It's the mix of nutrients and growth factors that are important. Mr. House's article explains the liver assay market and Insphero very well.
For Organovo to break into the tissue model market it's going to need a strong sales team to convince pharma companies to stop going with their current supplier. Organovo management claims that they make superior tissue models with the 3D bio-printer. However, even if that's so, it isn't very important as they don't have to be perfect. They are just for the researching, pre-clinical stage where the researcher is testing how the assays or disease cells react to a drug to get a proof of concept. It's generally a matter of quantity, not quality. Now Organovo could make the argument that the pharmas could use Organovo's tissue models as a "step up" in quality after the proof of concept is successful with the usual ones the company uses. But that could be a stretch because it's debatable whether Organovo's tissue models are actually better.
Mr. House doesn't believe that they are. He said in his article:
The risk in ONVO's strategy, as I see it, is convincing collaboration partners of the uniqueness of bioprinting with the NovoGen. As far as tissue models are concerned, I have been unable to corroborate ONVO's claim that its bioprinting process produces architecturally superior (and thus superior data quality) tissue models. In my research for this article, I interviewed three PhDs about the subject and they all said that the physical placement of cells in rows and layers by a bioprinter would not, by itself, produce a superior liver model.
Organovo's Value Comes From Implantable Tissues
Organovo's main allure and hype is from the possibility to someday make implantable tissues. The Focused Stock Trader quotes Organovo's executive VP, Michael Renard, as saying:
"How far away is the creation of tissue that can be used in a medical procedure? In the next 10 years it is possible that supplemental tissues, ones that aid in regeneration, will progress through design, clinical and regulatory testing, making it to the clinic as therapies."
"Examples may include nerve grafts, patches to assist a heart condition, blood vessel segments, or cartilage for a degenerating joint. But more advanced replacement tissues will most likely be in 20 years or more," Mr. Renard went on to state.
Implantable tissues are what Organovo is shooting to eventually make, and where the real billions are in revenues. 3D bio-printers are a good technology to create implantable tissues because it is a construct. The hospital takes a CAD (computer aided design) image of the needed tissue, and sends it to the 3D bio-printer. The bio-printer prints it and then puts the cells on it. Bio-printing is necessary for producing veins, arteries, patches, etc. because the size and formation of the structures, and the initial organization and precise placement of the cells are important.
Unfortunately, it is unlikely that Organovo's technology will ever get to this point. To go from phase I to phase III for an implantable tissue like a heart patch or a blood vessel segment for FDA approval takes a minimum of ten years. And that's if there aren't any problems. Anything that's novel and potentially dangerous, the FDA moves at a snail's pace. There are all kind of checkups and confirmations that need to be done throughout the trials. Then if there is anything that goes wrong, that could tack on another three years as the trial needs to be re-evaluated and redone, even if the procedure will eventually be successful. Hundreds of millions of dollars need to be spent.
And Organovo is still in just the pre-clinical, research stage. It won't even be ready to start any phase I trials for at least another two years.
Take a look at Neuralstem (NYSEMKT:CUR) as an example of a regenerative medicine clinical trial. It had phenomenal results with its phase I stem cell trial for ALS (amyotrophic lateral sclerosis (Lou Gehrig's disease)) that started in January 2010. Even though there were no problems, it still took 3.5 years to complete. Neuralstem started its phase II trial in September 2013.
There is a ton of potential for Neuralstem because there are currently no therapies whatsoever for Lou Gehrig's disease. There is only one drug and that only prolongs the time before a patient goes on a ventilator. Neuralstem's transplanted cell procedure had such a great effect that one patient even was able to walk again. He relapsed a year later, but the results were still phenomenal. And now CUR is only trading for about $300 million, way less than ONVO. It doesn't seem to make sense that CUR is so cheap, but that shows how institutions are reluctant to get involved unless they are very confident that the drug or procedure works.
If Organovo's Technology Is So Great, Why Didn't Big Pharma Snatch It Up?
In 2012, Organovo was trading for under $2 per share, or about a $100 million market cap. Why weren't big pharma companies or institutions and those in the know snapping up shares at that point for such a "revolutionary" technology? Organovo's bio-printing technology was developed by Dr. Gabor Forgacs in 2003, who is also one of the founders of Organovo and chief scientist of the company. I'm sure he pitched it to plenty of pharma companies, why wasn't he able to sell it?
Many big pharma companies have had a collaborative agreement with Organovo. This is bio-talk for a "looksie", just to check out what they have. If the big pharma has interest, it will follow up with a research agreement, or sometimes even buying the company outright. Pfizer, United Therapeutics, and Knight Cancer Institute had "looksies" but didn't show any more interest. Pfizer's was especially telling, as it has only paid $600K to Organovo since December 2010 (found on page F-15 of Organovo's 2013 annual report). United Therapeutics only paid $1.5 million in 2011. That's a typical "looksie" payment and isn't enough to show meaningful interest. Knight's agreement happened in 2013, and Organovo hasn't disclosed what it had been paid.
How To Make $800 Million Overnight
Buy Tengion (TNGN) and infuse it with $50 million to spruce things up with equipment and personnel and pay off the debt, and you have the same potential and value as Organovo (ONVO). Tengion has the exact same technology as Organovo - 3D bioprinting for tissue engineering for implantable tissues. TNGN is trading on the OTC markets with under $1 million market cap. A big pharma company could snatch it up with petty cash if it wanted to.
Also described in Mr. House's article, Dr. Anthony Atala's, the scientist and founder of Tengion, team showed promise at first with, as Dr. House puts it, "the most talented regenerative medicine team in the world", but the company crashed and burned after spending over $300 million on the phase I trials.
As described in this article, Tengion has most of the patents and legal rights to exploit the 3D bio-printer technology. Since TNGN only has a $1 million market cap, one can assume the patents aren't worth much more than that.
Organovo has picked up some of the former employees of Tengion. Sharon Presnell, the CTO of Organovo used to be the VP of Regenerative Medicine research there.
In conclusion, because of all the uncertainty, it is very hard to determine the actual worth of Organovo. The company doesn't have anything that says what possible implantable tissues they can print and create. Organovo is far from ready to enter trials, and even when it does, it could easily crash and burn like Tengion. However, because of the multi-billion dollar potential of regenerative medicine, I'd put ONVO's value at about $200 million, or around $2 per share.
Disclosure: I am short ONVO, . 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.