Orgenesis, Inc. - Overlooked Stock In The Gene Therapy Contract Development With R&D Pipeline

|
Includes: CLLS, CRSP, EDIT, IBB, LZAGY, NTLA, ORGS, PTH, WXXWY
by: Trowbridge Capital Partners LLC

Summary

Overlooked specialty contract development and manufacturing stock in the exciting field of advanced cell therapy with a potential for an exponential upside.

Derivative advanced cell therapy investment opportunity less correlated to the idiosyncratic risk of an FDA approval process and/or patent infighting permeating the advanced cell therapy CRISPR field.

Exciting R&D pipeline developing technology converting liver cells into beta cell-like insulin producing cells for Type 1 Diabetes patients.

Science backing the R&D pipeline validated by 10 years of research and by institutional funding, including government grants.

Business Summary

Orgenesis, Inc. (NASDAQ:ORGS) has two sides to its business:

1) Its Belgium based subsidiary MaSTherCell provides contract development and manufacturing (NASDAQ:CDMO) services to pharma and biotech companies developing or selling cell-based therapies. It has entered into long-term CDMO contract with CRSPR technology leaders such as Crisper Therapeutics AG (CRSP), Servier S.A., a French biopharmaceutical which acquired the exclusive rights to UCART19 from Cellectis S.A. (CLLS), Zelluna Immunotherapy AS, a privately held Norwegian company.

2) The company's R&D program is focused on a cell-based therapy using Autologous Insulin Producing (AIP) cells into a functional insulin-producing cells to provide long-term insulin independence for diabetics (the "CT business").

Earlier this year, ORGS has jumped from an OTC Venture Market exchange to Nasdaq. Since jumping onto Nasdaq, a number of institutional investors acquired shares, including Morgan Stanley (MS), Citigroup (NYSE:C), Bank of America (NYSE:BAC), Royal Bank of Canada (RBC), and Panagora Asset Management. Nonetheless, ORGS is still overlooked as it receives no sell side coverage at this time. ORGS market cap is approximately $95 million.

CDMO Business

ORGS conducts its CDMO business through its subsidiary MaSTherCell SA, Cell Therapy Holding SA, a Belgium company (MaStherCell). ORGS acquired MaStherCell in 2015 in a stock for stock exchange for approximately $24.5 million from the Universite Libre De Bruxelles, which now owns approximately 9.95% of ORGS issued and outstanding stock. MaStherCell operates its CDMO services in a state-of-the-art facility located in the Walloon province in Belgium. Additionally, through joint ventures, MaStherCell operates GMP facilities in South Korea and Isreal and is the developmental stages of opening a GMP facility in Singapore.

A contract development and manufacturing organization (CDMO), is an entity that serves other companies in the pharmaceutical industry on a contract basis to provide comprehensive services from cell therapy development through cell therapy manufacturing for and end-to-end solution. Due to the complexity, global outreach needs, redundancy, and operational costs of manufacturing biologics and cell therapies, most advanced cell therapy candidates opt to outsource the manufacturing and the commercialization of drug candidates.

Unlike most other CDMO companies (CDMOs), ORGS is specializing in CDMO for cell therapy companies. Typically, advanced therapies present a challenge for CDMOs because their business model and technology often do not fit the traditional CDMO model. Most CDMOs technology are based on the production of multiple units of a single product. In case of advanced therapies, units are typically autologous and involve the development of a sophisticated technology taking cells from a patient, processing them with the sponsor’s technology, and re-injecting them into the patient.


Source: ORGS web site.

In June of 2017, MaSTherCell signed an agreement with CRISPR Therapeutics (NASDAQ:CRSP) to develop and manufacture allogeneic CAR-T therapies. MaSTherCell will be responsible for the development and cGMP manufacturing of CTX101 for use in clinical studies. Earlier in 2017, MaSTherCell signed an agreement with Servier for the development of a CAR-T cell therapy manufacturing platform enabling industrial and commercial manufacturing of Servier's cell therapy products, a critical step in the development of these products for later stage clinical trials.

CDMO business is a revenue-generating business for Orgenesis, and it's growing at a rate corresponding to the cell therapies market growth rate. Reenue for the fiscal year ending November 30, 2016 increased 115% to $6.4 million, from $3.0 million in fiscal 2015. For the fiscal year ending November 30, 2017, ORGS generated $10.089 million in revenue, a 58% year-over-year increase. For the first quarter of 2018, ORGS CDMO Business revenues increased by 42% on a year-over-year basis to $2.6 million versus $1.9 million last year, generating 38% gross margins.

Global overall CDMO drug market was estimated at $71.5 billion in 2015, growing to $105 billion in 2021, of which 92% is currently dedicated to the small molecules commercial manufacturing supply. More than 854 companies compete in the field of the regenerative medicine worldwide (versus 580 in 2015). There wee 934 clinical trials underway by the end of the third quarter of 2017 (versus 486 in the first quarter of 2015). Global CDMO cell therapy market is estimated to be approximately $460 million presently and is expected to grow at the rate of between 15% and 20% annually (triple the expected growth rate of the overall CDMO drug market) to over $800 million in 2021. In 2012, there were 63 advanced cell therapy clinical trials, and in 2016, the number of advanced cell therapy clinical trials doubled to 125.

There are approximately two dozen CDMOs competing in the cell therapy space, including larger CDMOs such as WuXi Pharma Tec (OTCPK:WXXWY), Lonza Group AG (OTCPK:LZAGY), and Hitachi Chemical Advanced Therapeutics Solutions (HCATS) comprising approximately 50% of the CDMO advanced cell therapy market; middle-market CDMOs such as MEDINET Co Ltd, Brammer Bio, Miltenyi Bioprocess, PharmaCell, Roslin Cell Therapies, and ORGS collectively comprise 25% of the CDMO market for advanced cell therapies. Smaller CDMOs as well as academic and medical institutions comprise the remaining 25% of the CDMO market for advanced cell therapies.

ORGS is well positioned to maintain its market position as a specialty CDMO leader in the advanced cell therapy field. Unlike its largest competitors, WuXi, Lonza, and HCATS, who are primarily capacity consolidators and are expanding into adjacent service segments, ORGS is a pure CDMO play in the area of advanced cell therapy. Vis-a-vis its smaller competition, its GMP facilities in South Korea, Israel, and Belgium, provide a competitive advantage allowing its clients - advanced cell therapy candidates - a roll out across different geographies.

CT Business

The company's R&D program is based on Autologous Insulin Producing (AIP) cells technology designed to transform patient's own liver cell into a functional insulin-producing cell (like is normally found in the pancreas) designed to provide long-term insulin independence for diabetics (the "Transdifferentiation"). This technology is early, but is backed by ten years of science and the government funding.

Professor Sarah Ferber, ORGS Chief Science Officer (who developed under the tutelage of Professors Avram Hershko and Professor Aharon Ciechanover, winners of the Nobel Prize in Chemistry in 2004) was the first scientist to demonstrate the capacity to induce a shift of adult liver tissue into insulin producing cells.

ORGS is the recipient of a $12.8 million grant from the local government of Walloon in Belgium for the production of AIP cells for two clinical trials that will be performed in Germany and Belgium. Additional grant funding include a grant from the Israel-U.S Binational Industrial Research and Development Foundation (BIRD), and the Korea-Israel Industrial Research and Development Foundation (KORIL), both for a joint research and development project for the use of Autologous Insulin Producing (AIP) Cells for the Treatment of Diabetes

Diabetes, the primary market for the Transdifferentiation technology, is one of the dominant diseases of the 21st-century, affecting over 25 million in the United States, 350 million globally, and nearly 70,000 children are diagnosed with Type-1 diabetes every year, requiring fifteen hundred insulin injections annually. Researches predict that by 2030, over half a billion people globally will be affected by diabetes. Additional applications for the Transdifferentiation technology include regenerative medicine and immuno-oncology.

At the root of the problem with diabetes is the failure of certain pancreatic cells, ß cells, which degenerate to no longer manage proper levels of insulin in the body. Attempts to treat ß cells have thus far lead to transplant rejections. Autologous cell replacement technology show promise to overcome transplant rejections. If successful, a day clinic visit could potentially be all that’s required to control and cure the disease.

At a day clinic, patients would be subjected to a routine liver biopsy procedure to provide a liver cell sample. The technology provides to then in vitro propagate liver cells and manipulate using therapeutic agent, such as Pancreatic and Duodenal Homeobox 1 gene (PDX-1) or other transcription factors to convert patient’s own cells into healthy glucose sensitive insulin producing ß cells free from autoimmune rejection.

Utilizing cellular Transdifferentiation to transform a patient's own adult liver cell into a fully functional and physiologically glucose-responsive pancreatic-like insulin producing cell, the technology is expected to provide Diabetes patients with long-term insulin independence through a one-time treatment.

Historically, R&D efforts for have been focused on prevention and lifestyle management rather than toward development of a cure. One area of R&D with inconsistent outcomes has been pancreatic islet transplants (typically used from a deceased donor). Pancreatic islets are cells in the pancreas that produce insulin. Scientists use enzymes to isolate the islets from the pancreas of a deceased donor. Because the islets are fragile, transplantation must occur soon after they are removed. Typically, a patient receives at least 10,000 islet equivalents per kilogram of body weight, extracted from pancreases obtained from different donors. Patients often require two separate transplants to achieve insulin independence.

Transplants are often performed by an interventional radiologist, who uses x-rays and ultrasound to guide placement of a catheter - a small plastic tube - through the upper abdomen and into the portal vein of the liver. The islets are then infused slowly through the catheter into the liver. The patient receives a local anesthetic and a sedative. In some cases, a surgeon may perform the transplant through a small incision, using general anesthesia. Because the islets are obtained from cadavers that are unrelated to the patient, the patient needs to be treated with drugs that inhibit the immune response so that the patient does not reject the transplant. In the early days of islet transplantation, the drugs were so powerful that they actually were toxic to the islets. Pancreatic islet transplantation (cadaver donors) is an allogeneic transplant, and, as in all allogeneic transplantations, there is a risk for graft rejection and patients must receive lifelong immune suppressants. Though this technology has shown good results clinically, there are several setbacks, such as patients being sensitive to recurrent T1D autoimmune attacks and a shortage in tissues available for islet cells transplantation.

Transdifferentiation offers a more promising, less invasive, lasting, and possibly curative approach to treating diabetes. First, Transdifferentiation treatment can be performed in an out-patient clinic setting in a standard liver biopsy procedure completing the procedure in one day. After, the cells are extracted in a biopsy procedure, the Transdifferentiation and the cell multiplication process is envisioned to take four to five weeks, and the AIP cell solution would then be delivered back to the clinic for an out-patient transplant procedure, with patient being sent home the same day. AIP cells effect kicks in within a few days. Second, autologous cells were found to be resistant to autoimmune attack and to produce insulin in a glucose-sensitive manner in relevant animal models which significantly broadens the potential of the technology for other therapeutics areas.

Source: ORGS web site.

ORGS intends to file with the FDA of an IND for Autologous Insulin Cell Production (AIP) technology this year. It will need to conduct additional pre-clinical safety and efficacy studies with respect to diabetes and other potential indications prior to initiating clinical trials. Thus far, the only FDA approved autologous cell therapy technology in the United States is autologous chondrocyte implantation (NYSE:ACI), developed by Genzyme Corporation under the trade name Carticel.

ORGS intends to pursue an Orphan Drug Designation its AIP technology for diabetic patients whose diabetes was induced by total pancreatectomy. If approved the Orphan Drug Designation program status would qualify the drug for tax credits for qualified clinical testing, exclusivity (enhanced patent protection and marketing rights), and subsidies for research.

ORGS has protected its AIP technology intellectual property rights via four United States patents, one of which is directed to a composition comprising a vector comprising a promoter linked to PDX-1 through 2021. Another three patents expire in 2023 and are directed to methods of inducing endogenous PDX-1 expression in a human differentiated primary non-pancreatic cell, inducing or enhancing a pancreatic islet cell phenotype in non-pancreatic cells, and increasing PDX-1 induction in non-pancreatic primary cells.

In Europe, ORGS has been issued four patents, validated in Germany, France, Italy, and Great Britain, through 2020; two in Australia through 2020 and 2024; and one in Canada through 2020. ORGS has five pending patent applications related to its Transdifferentiation technology and its use in the treatment of degenerative pancreatic disorders including diabetes, pancreatic cancer, and pancreatitis in the United States, which if granted would have a term through 2034-2035; and twenty three (23) pending applications in foreign jurisdictions: Europe, Australia, Brazil, Canada, China, Columbia, Eurasia, Israel, Japan, South Korea, Mexico, and Singapore which if they were to grant would have a term of 2034-2035.

The duration of the patent protection is critical for valuation purposes, since a typical drug makes a $1 million per day profit during the period of sales under patent protection.

Sum-of-the-parts Valuation

Based on our bottom-up sum-of-the-parts valuation, ORGS is deeply undervalued. Based on our discounted cash flow model, its CDMO business alone, is worth 1.3x to 2x the current market cap. Also looking at the closest listed company comparables, those competing directly with ORGS in the CDMO cell therapy field, WuXi Biologics (OTCPK:WXXWY), and Lonza Group A.G. (OTCPK:LZAGY), the CDMO business alone appears to be worth approximately $46.5 million. Based on the multiples reported for the completed M&A middle market transactions in the biotech sector in the last five years, the CDMO business alone is worth between $36 million and $60 million. Additionally, taking into account very conservative valuation approach vis-a-vis the CT business allowing for not more than the average historic probability for a successful commercialization of a drug of 10%, as well as certain other conservative assumptions (including anticipated dilutive effect of capital investment to fund the expected cost of clinical trials) outlined more fully below, we value ORGS at between $118 million (at the very low end, ORGS could be worth as much 125% from the current market up) and $315 million (a 233% upside from the current valuation).

CDMO Business alone is worth 1.3 - 2x the current stock valuation

We made the following assumptions in our discounted cash flow model:

1. We estimated ORGS revenue growth rates based on the estimates of growth for the CDMO cell therapy industry at the rate of between 15% and 20% annually (triple the expected growth rate of the overall CDMO drug market). Our optimistic scenario is based on the expected growth rates for ORGS's flagship client - Crisper Therapeutics AG (CRSP) and other CRSPR technology cell therapy candidates.

2. We have assumed that ORGS will be able to maintain its gross margins at 38% and slightly improve pre-tax operating margins to 30%. We expect that ORGS will be able to reduce high interest cost it is paying currently, by tapping into capital markets.

3. We expect that ORGS will pay an effective tax of 21% on average across multiple jurisdictions.

4. In line of the historic averages for the biotech sector, we expect that ORGS reinvestment rate will be 9.83%.

5. We assumed the cost of capital to be 10%.

6. We have calculated the value of outstanding options based on the average strike price, the average expiration, the number of outstanding options, and the stock volatility to be approximately $11 million.

CDMO Business

Income Based Valuation DCF Valuation
Conservative Base Optimistic
Revenue Growth Rate -2028 15% 20% 25%
Operating Margin 30% 30% 30%
Effective Tax Rate 21% 21% 21%
Reinvestment Rate 9.83% 9.83% 9.83%
Cost of Capital 10% 10% 10%
PV of Cash Flows over 10 yrs. $15.754m $20.252m $26.275m
PV of Terminal Value $79.182m $117.785m $173.479m
Net Debt $3.835m $3.835m $3.835m
Value of Options $10.994m $10.994m $10.994m
Value of CDMO Business $80.108m $127.043m $188.76m
Market cap up(down) side (17%) 1.3x 2x

CDMO Business

Market Based Valuation

Comparables

Listed Companies
Price/Book EV/Revenue EV/Net Income EV/EBITDA EV/FCF
WuXi Biologics (OTCPK:WXXWY) 18.40x 27.54x 83.61x 83.61x 140.95x
Lonza Group AG (LOZAGY) 3.15x 4.61x 25.51x 19.88x 22.29x
Medinet Co. Ltd (TOK:2370) 50.59x -13.95x
Average ex outliers 18.4x 4.6x 25.5x 20x 22x
Value of CDMO Business $46.5m

Source: Trowbridge Capital Partners, LLC

The table below provides comparative transaction M&A multiples in the biotech sector middle market (i.e., those between $50 million and $1 billion) for the last five years. Based on the comparative M&A middle market transaction multiples averages, a 0.9x of assets and 5.3x of revenue, the stand alone value of the CDMO business is between $36 million and $60 million.

CDMO Business

Market Based Valuation

M & A Comparables

Date Target Acquirer

Amount/Earnout

EV/Assets

EV/

Revenue

Jul '17 Protein Sciences Sanofi $650 million ($100 million) 23.0x
Jun '17 Albany Molecular Carlyle Group/GTCR $ 922 million 0.8x 1.6x
Mar '17 Neurovance (Novartis Sub) Otsuka Holdings $100 million ($150 million)
Jun '16 Afferent Pharmaceuticals Merck $500 million ($750 million)
Sep '15 Deima Pharma BV Amgen $300 million ($1.3 billion)
Apr '15 Quanticel Pharmaceuticals Celgene $485 million
Mar '15 IRIX Pharmaceuticals DPx Holdings (Patheon BV) $161 million
Jul '14 Frontage Laboratories Hengzhou Tigermed $50 million 1.2x
Jul '14 Novus Biologicals Techne Corporation

$60 million

2.8x
Jun '14 DAVA Pharmaceuticals Endo Pharmaceuticals

$575 million ($25 million)

4.6x
Mar '14
Aptiv Solutions ICON PLC

$144 million

1.0x
Feb '14 Medpace Holdings Cinven Ltd.

$915 million

1.0x 4.2x
Jan '14
Aqua Pharmaceuticals Almirall S.A (Spain)

$403 million

3.5x
Mar '13
Complete Genomics Inc. BGI Shenzhen

$118 million

0.8x 5.4x

Averages for middle market transactions 0.9x 5.3x

CDMO business value

based on M&A comparables

$36 million

$60 million

Source: PrivCo | Private Company Financial Intelligence and Trowbridge Capital Partners, LLC.

CT Business Valuation

For the income based valuation for the CT business we applied a discounted cash flow model of the expected stream of revenue from the AIP therapy based on the following assumptions:

1. Based on the CDC data, the primary market for the AIP therapy - Type 1 diabetes is approximately 1.15 million or approximately 5% of 23 million of diabetics in the United States. In our base case scenario, because ORGS already received $12.8 in grant money for clinical trials in Europe, we assumed that ORGS will also compete on the European market. According to the World Health Organization, there are more than 33 million of diabetics in the European Union, of which, we also assumed, approximately 5% or 2.8 million are of Type 1, with the combined United States and Europe potential market reaching 4.15 million. In our optimistic scenario, we assumed that, once shown successful, AIP therapies will be applied equally to Type 2 diabetic patients, tapping into the market the size of 56 million in the United States and Europe only.

2. We have conservatively assumed, for each of our three market size scenarios, a market penetration rate of 0.1% annually, i.e., 1,500 patients annually in our conservative case and 2,800 in our base case scenario on average during throughout the patent protection, i.e., through 2034. Because the AIP therapy is envisioned to be performed in an out-patient setting and a patient is expected to be sent home the same day for both the biopsy and the transplant procedure, the estimated average number of patients through the patent protection period in our base case scenario seems quite reasonable.

3. We have conservatively assumed, for each of our three market size scenarios, that the approved price for the AIP therapy will be at the lower end of the price range for cell based therapies, now ranging between $200,000 and $1.0 million, i.e., $250,000. For example, Kymriah, the first CAR-T cell therapy to be FDA approved in the United States, priced at $475,00 per treatment. Yescarta was the second CAR-T cell therapy to be FDA approved in the United States with a list price of $373,000. Strimvelis is an ex-vivo stem cell gene therapy to treat patients with a very rare disease called ADA-SCID has been priced at $665,000.1 Autologous cell therapies (such AIP) are likely to be priced at the higher end of the range. After the anticipated patent protection period expiry, we are modeling for a price drop of 50% to $125,000 in 2035, based on the historical averages of specialty drug price drop after patent expiry of between 38% and 48%, per data published by the National Bureau of Economic Research study.

1. Source: Bioinformant, 2017 Market Pricing Guide for Approved Cell Therapies Worldwide.

4. To properly account for the idiosyncratic risk for each stage of the FDA approval process, we relied on the historic averages for each stage of clinical trials as presented in the Table below. Consequently, the overall success throughout the process on average is approximately 10%.2 As a result, we have discounted the projected revenue stream from AIP therapies by approximately 90% precent to account for the idiosyncratic risk of an FDA and EMA approval. Also, we applied a 10% cost of capital discount rate.

2. Source: Biotechnology Innovation Organization, Clinical Development Success Rates 2006 -2015 (data presented is for all indications on average, success rates data for Autoimmune and Endocrine indications is slightly higher).

5. To estimate future R&D expenses and the duration for each phase of clinical trials, we have relied on the data provided by the U.S. Department of Health & Human Services study titled "Examination of Clinical Trial Costs and Barriers for Drug Development" from 2014. We have assumed that the cost of clinical trials in Europe will be roughly the same.

6. To properly account for the time value of the duration of clinical trials, we are assuming that the FDA approval process will not have been completed before late 2021, so the revenue stream from the AIP therapy is not projected to commence before then.

7. We have assumed that expenses to produce AIP therapy would be approximately $4,800 per dose, less a 30%-margin typically charged by a CDMO, because of the vertical integration of the CT and CDMO businesses.

8. We have taken into account a stream of milestone and royalty payments ORGS will have to pay upon success commercialization to Tel Hashomer - Medical Research, Infrastructure and Services Ltd. (NYSEMKT:THM), an Israeli company holding the patent related to the development of AIP (Autologous Insulin Producing) cells.

Based on the above assumptions, including the anticipated dilutive effect of a capital investment to finance the expected clinical trials, the projected value of ORGS business is between $118 million (at the very low end), a 125% of the current valuation, and $315 million, a 233% upside from the current valuation. Under our optimistic scenario, if the AIP therapies prove successful in treating Type 1 diabetes, and find their application in the treatment of Type 2 diabetes, the CT Business could be worth as much as $6.5 billion or more. Even the most optimistic scenario could be exceeded, as we have not projected for any revenue stream from the potential use of the AIP therapy in regenerative medicine and immuno-oncology, or in any geographies other than the United States and Europe.

CT Business

Income Based DCF Valuation
Conservative Base Optimistic
Market Size - Type 1 Diabetes 1.15 million 2.8 million 56 million
Annual market penetration rate 0.1% 0.1% 0.1%
Number of patients annually from 4Q21 on 1,150 2,800 56,000
AIP Therapy Price $250,000 $250,000 $250,000

Expected Annual Revenue from 4Q21 on @10% probability rate

$28.75 million $67.4 million $1.3 billion

Estimated Operating Expenses @ $3,360 per dose

$3.86 million $9.4 million $188 million

less 3.5% Royalty & certain milestone payments (on commencement of each stage of clinical trials and on cumulative $150 of revenue)

$834 thousand +$2.0 million milestone in 2027 $2.03 million +$2.0 million milestone in 2023 $40 million +$2.0 million milestone in 2021

Annual Free Cash Flow

(from 1Q24 on expected positive normalized free cash flow after completion of Phase 4 of post-approval studies estimated to last through the end of 2023)

$23

million

$56

million

$1.1

billion

Estimate of R&D Typical Trial Costs

Endocrine Immunomodulation Mean
Phase 1 $1.4 million $6.6 million $4.4 million
historic success rate 63% Average duration 15 months
Phase 2 $12.1 million $16 million $14 million
historic success rate 31% Average duration 16 months
Phase 3 $17 million $11.9 million $14.45 million
historic success rate 58% Average duration 17 months
NDA Review $2 million $2 million $2 million
historic success rate 85%
Phase 4 $26.2 million $19 million $22.6 million

Total Estimate of R&D in EU and US

$114.2 million
less earmarked government grants
$12.8 million
Total Net R&D in EU and US

$108.5 million

$108.5 million $108.5 million

Conservative Base Optimistic
less Free Cash Flow from CDMO business through the of 2022

$8.1 million

$9 million $10.1 million
Total Cash Flow Deficiency = necessary investment amount

$100 million

$99 million $98 million
Cost of Capital 10%

PV of Cash Flows net of R&D and operating expenses already discounted for low probability of success and 10% cost of capital through 2035. Cash inflow projected from 4Q21 to account for the expected length of clinical trials.

$31 million $196 million $5.53 billion
PV of Terminal Value (Terminal Cash flow net of expenses) @ Terminal Cost of Capital (which is equal to 10% cost of capital less risk free rate @ 3%) $138 million $335 million $6.7 billion
Intrinsic Value of CT Business $167 million $531 million $12 billion

Intrinsic Value of combined CT and CDMO Businesses

$248 million $658 million $12.4 billion

Cash Flow Deficiency

Capital Investment Dilutive Effect





Conservative Base Optimistic
Current pre-money market cap $94.69 million $94.69 million $94.69 million
Expected Investment Amount $100 million $99 million $98million
Current convertible note holders
$3.6 million $3.6 million $3.6 million
Post-money valuation $199 million $198 million $197million
Dilution of Current Investors 52.34% 52.11% 51.86%
Intrinsic Value of ORGS stock after expected dilution $118 million $315 milion $5.97 billion
Current market capitalization difference 1.25x 2.3x 64.1x

Risks to Our Long Thesis

The stock provides an asymmetrical risk reward opportunity. Based on our model, a rock bottom valuation would be only a 15% - 20% downside from the current levels.

Inherent risks in ORGS business model with respect to its CDMO business include:

  • Its clients may not succeed with its product candidates in preclinical or clinical testing, as most recently evidenced by the FDA placing a clinical hold on CRISPR Therapeutics (CRSP) IND for sickle cell disease gene therapy candidate CTX001.
  • On further study, product candidates may be shown to have harmful side effects or other characteristics, indicating low likelihood of regulatory approval.
  • As is in the case of CRSPR technology, product candidates may be subject to intellectual property disputes or another product candidate may come up with a superior new candidate.
  • A product candidate incurs an inherent price determination risk in a third-party payor system, which may effectively preclued commercialization.
  • Despite its early success and reputation, due to the inherent difficulties and complexities of the commercialization of the gene therapy processes, ORGS may be unable to successfully control the development and manufacturing cost of product candidates to levels allowing commercialization.

  • While it is facing competition from larger competitors, WuXi Biologics (OTCPK:WXXWY), and Lonza Group A.G. (OTCPK:LZAGY), primarily capacity consolidators, who are expanding into adjacent service segments, we believe that it's business model is superior as it is a niche player focusing on the advanced cell therapy market, which has as of late shown superior growth rates to the overall drug market.

With respect to its CT business, ORGS is subject to the following risks:

  • Idiosyncratic risk of regulatory approvals in the United States and multiple other jurisdictions, including the European Union, South Korea, Israel, etc.. Our model takes into account the regulatory approval risk. We discounted by 90% the expected cash flow stream of the AIP product candidate based on the historical average success rate of the successful commercialization of a product candidate.
  • Significant competition from industry giants in the insulin therapy market (Novo Nordisk A/S, Eli Lilly and Company, Sanofi-Aventis, Takeda Pharmaceutical Company Limited, Pfizer Inc., Merck KgaA, and Bayer AG), which may be the first to market, may affect the price or demand for the AIP product candidate. Additionally, industry giants have continuously demonstrated ability to successfully commercialize, market, and distribute at competitive prices new product candidates. ORGS has no prior history of successful commercialization of own new candidate pipeline.

  • Like most companies developing new drug candidates, ORGS is facing liquidity risks to muddle through the commercialization process, though markedly less so. Currently, ORGS has sufficient cash for preclinical safety trials and the commencement with FDA of an IND through 2018. As of the end of 2017, cash on its closing balance sheet was $3.5 million. In addition, its CDMO business should be able to generate sufficient revenue to cover a substantial portion of the expected R&D costs. Together with $12.8 million in grants approved for the clinical trials in Europe, our model estimates (based on very conservative assumptions) an overall cash flow deficiency of approximately $100 million through 2023. ORGS will have to fund the expected free cash flow deficiency either through a higher than modeled for growth in their CDMO business or will have to raise additional capital through the issuance of convertible bonds or equity. In our model, we valued ORGS on a post-money valuation basis fully taking into account the dilution stemming from the expected cash flow deficiency to fund the clinical trials process. Even though the risk of a "fall quickly, fall cheaply" scenario appears less likely in case of ORGS, there is always the risk that the cost of clinical trials (and accordingly, the liquidity gap) may exceed even our conservative estimates.
  • In a third-party payor system, any new candidate incurs a price approval risk at levels allowing commercialization. Our model assumes that the approval at the lower end of the price range for cell based therapies, now ranging between $200,000 and $1.0 million.

Potential Catalysts

Sell side analysts' initiating coverage on ORGS could lift the stock by as much as 30%. A biotech ETF incorporating in its portfolio ORGS stock could provide an additional boost to the price. Earlier this year, after the jump on Nasdaq, the stock briefly doubled in price to $16.

A filing with the FDA or EMA of an IND, expected later this year, as well as the commencement of clinical trials in Europe, should propel ORGS into the $20-range.

Upon completion of Phase 1 of clinical trials in the United States, based on our model, ORGS price should be in the $27-$30 range.

Any positive news associated with CRSPR technology developments, specifically its clients: Crisper Therapeutics AG (CRSP), Servier S.A., or Zelluna Immunotherapy AS, would be a catalyst with respect to the CDMO business. ORGS entering into a development and manufacturing agreement with a new candidate in the autologous cell therapy field would be another catalysts for the CDMO business.

Conclusion

Based on our bottom-up research, ORGS is a promising below-radar business providing an asymmetrical risk reward opportunity. Its contract development and manufacturing (CDMO) business alone is grossly undervalued with a potential upside of 1.3x - 2x from current levels. Its promising R&D pipeline includes developing technology to convert liver cells into beta cell-like insulin producing cells for Type 1 Diabetes patients. If successful in commercializing its technology, ORGS could be the next runaway investment opportunity.

Disclosure: I am/we are long ORGS.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.