Organovo Holdings (NASDAQ:ONVO) is a small biotech company that aims to create functional human tissue using its proprietary three-dimensional bioprinting technology. The company's long-term goal is to build living human tissue that functions like real tissue and can even be used for transplant.
Needless to say that if the company succeeds, it will be a game-changer for the development of ground-breaking therapies worldwide. However, like many biotech companies, it is still in the early stage of development.
Two reasons why I love stocks like Organovo Holdings
For starters, if it succeeds, it might mean a lot of money for shareholders. This is because it is starting from a very low valuation (about $160M). So, the slightest positive development might mean a substantial rise for its stock from today's levels.
The second reason I like ONVO is because everybody who has ever invested in its stock has lost money over the years. And the reason why I like such stocks is because, after many years of losses, investors give up, and such stocks usually become extremely undervalued. This is why sometimes long forgotten stocks become great opportunities.
ONVO data by YCharts
ONVO's recent quarterly results missed slightly on revenue, and that's the headline reason why shares corrected 26% last Friday and another 6% on Monday.
But the reality is that, after so many years of holding on, investors at some point give up. And, investors in ONVO have given up (my opinion). There was really no reason for the stock to fall that much, outside of the fact that it rallied towards earnings, and profit-taking came into play.
So, what might be a catalyst for higher prices?
A while ago, the FDA granted orphan drug designation for the company's treatment of alpha-1 antitrypsin deficiency ("A1AT") with its 3D bioprinted liver therapeutic tissue.
The FDA orphan drug program offers incentives to develop new drugs and biologic therapies for rare diseases, affecting fewer than 200,000 people in the US. The designation also means ONVO will be able to seek FDA assistance and tax credits for clinical research costs.
Please note this is a very important milestone for the company, because the company is targeting to file for an Investigational New Drug application with the FDA in calendar year 2020.
Also, note the company's 3D-printed liver and kidney tissues are already being used for drug profiling and compound screening tests of disease models as well as toxicological studies.
Speculating the odds
Make no mistake, ONVO is a speculative play. However, I think the odds are in our favor at current valuations.
ONVO estimates that a therapeutic alternative to organ transplants has the potential to create a $4 billion worldwide sales opportunity. The company's first target indication of A1AT alone has the potential to approach $1 billion in peak sales, according to the company.
This means that any piece of positive news about the company's products could potentially increase the value of ONVO shares several times over from today's levels. This is because the current market cap is only around $160M.
And, this might happen over the next 12 months or so, for the company will seek a second IND-track program in orphan liver disease expected to be nominated in fiscal 2019.
When buying biotech stocks, I prefer stocks that have enough cash to fund operations for at least two years, before any additional funding is needed. The company currently has about $44M in cash and equivalents on the balance sheet. Sure, $44M is not a lot of money. However, CFO Craig Kussman forecasts a net cash utilization rate of between $22M and $24M for fiscal year 2019 and believes the company has sufficient funds to meet its operating and capital requirements well into fiscal 2020.
This means we have a full 2 years before the company might need additional capital. Until then, anything can happen, and the slightest positive development in its 3D printed liver and kidney tissues will be a huge catalyst for the stock.
Bottom line
ONVO is a small biotech company developing 3D bioprinted tissues for therapeutic use. While all biotech companies come with very high risk, in the case of ONVO, I think the odds are with investors at current valuations.
Not only does the company have enough capital for the next 2 years or so, but the stock is trading very close to its all-time lows.
Currently, I am long with a small position and will build on this position when I get bullish confirmation from the charts on a weekly scale.
