Organovo Holdings Inc (OTCQB: ONVO)

A Developmental Biotechnology Company, Organovo Holdings Inc, has gained quite good momentum in the most recent trading days. It was announced that Organovo Holdings Inc will be listed in OCTQX on October 08, 2012. Organovo’s stock price has significantly risen by around 9% consecutively during the last two days of trading, Oct 11 and Oct 12.

Organovo was the product of a reverse merger in February 2012.  It experienced an an extremely high peak of $9.65 per share in June of this year, and then plunged to $1.65 the following month. I am not quite sure regarding what was the catalyst leading to these dramatic events, however, based on my attendance at an investment conference that was presented by the CEO of Organovo, and some of my “on the spot” quick fundamental analysis, I conclude to shun this seemingly “hot” stock.

My basic but essential investigation contains two major questions:

What’s the product of this company, and what is its core competitive advantage?

Who comprises the management team of this firm, and does the leader have the capability to monetize the core competitive advantage (if the first question was justified), and does she/he have the integrity to be responsible to the shareholders?

With regard of the first question, I would like to vet on the self-description cited from Organovo’s press release:  “Organovo designs and creates functional human tissues using a proprietary three dimensional bioprinting technology.  The Company focuses on developing a range of human tissues and disease models for medical research and therapeutic applications.  The Company’s NovoGen™ three-dimensional bioprinting technology employs a specialized automated platform that works across all tissue and cell types. Organovo’s bioprinter was named one of the “Best Inventions of 2010” by TIME Magazine and Organovo has been recognized as one of the most innovative companies of 2012 by MIT’s Technology Review.  Organovo is helping pharmaceutical partners develop never before available human biological disease models in three dimensions that hold the potential to transform the business of therapeutic drug discovery and development. Organovo is also developing direct tissue therapies where precise structure and architecture may deliver the best clinical outcomes.  Organovo leads the way in solving complex medical research problems and building the future of medicine.”

It is terrific at a glance. Think about the tremendous amount of money expensed to test drugs/biological; think about the huge un-met demand of human organs for transplantation… such a bioprinting technology would generate exceptional return for an investor, if, it is true.

I know 2D cell culture is not a problem for biotechnology firms or institutes. But 3D is a big challenge so far because of the complex cell communication mechanism, which can only occur in the delicate in-vivo environment with numerous cell growth factors, signal proteins involved. Isolated from inside the body, cells can grow only in a single layer, not in two or multiple layers; on the other hand, claiming 3D cell culture and creating tissues or organs are entirely distinctive in scientific sense. Because tissues would be composed of different types of cells or one type of cells in different development stages, it’s misguiding for Organovo to describe to investors in such a way that its bioprinting, putting layer of cells together in some bio-scaffold, can be used for organ transplantation.

If we put aside the prosperous expectation on organ transplantation and think about generating revenue from drug testing in the current term, I still doubt its feasibility.

First of all, even if the cells were formed into a shape of blood vessel, it is not a real blood vessel. Cells in different layers won’t communicate to each other as what happens in human bodies, therefore, drug testing in such structure can’t mimic effects in a real body.

Secondly, this company seems not to be able to provide a product, say “a printed blood vessel” at all. As an attendee in the investment conference, I would have rather taken a look at a real product than listening to the CEO churning out a very long and linguistic narrative. Moreover, I found it’s very ridiculous that when I checked its website, the product is “NovoGen MMX Bioprinter™”. As an investor, I don’t care whether you have a printer or a weaver, or even a pot, I don’t care, I just care whether you can show me a piece of 3D tissue, so I know you may be able to produce something you brag about.

I checked Organovo’s two quarterly reports to verify whether I am too negative. The company claimed that it is earning collaboration fees from third parties for drug testing, which can be a solid evidence against my suspicions.

There are two deals that went on as is cited below from the second 10-Q:

“In December 2010, the Company entered into a 12 month research contract agreement with a third

party, whereby the Company was engaged to perform research and development services on a fixed fee basis for approximately $600,000. Based on the proportional performance criteria, the Company

recognized approximately $0 and $0 and $143,000 and $217,400 in revenue related to the contract

during three and six months ended June 30, 2012 and 2011, respectively. Total revenue recognized on

the contract from inception through June 30, 2012 was approximately $450,000.

In October 2011, the Company entered into a research contract agreement with a third party, whereby

the Company will perform research and development services on a fixed-fee basis for $1,365,000. The

agreement included an initial payment to the Company of approximately $239,000, with remaining

payments expected to occur over a 21-month period. During the three and six months ended June 30,

2012, the Company recorded approximately $259,000 and 379,000, respectively, in revenue related to

the research contract in recognition of the proportional performance achieved by the Company. Total

revenue recognized on the contract from inception through June 30, 2012 was approximately

$618,000.”

I am cautious on the first deal as the total amount should be $600,000, while Organovo only realized 75% of the contract term. And apparently, the “third party” didn’t continue the collaboration with Organovo. If the technology is as useful as it claimed, it is more likely they should obtain the renewal of their contract.

Total revenue shown as below is not impressive and there is no sign of growth at all. For one who burns millions of cash each year, generating several hundred thousand of revenue is pathetic. And investors need to be well aware that this is not a company developing  some blockbuster drugs. The revenue we expect should be dependent on its bioprinting technology, which is supposed to generate a decent amount of collaboration fee now.

I also checked the scientist Prof. Gabor Forgacs’s website, there are published articles listed till 2010, I am wondering why there isn’t any work done in 2011, 2012? As an investor who had immersed into molecular/cellular research work, I would like to study his research work before I buy in any business presentations.

In light of the second fundamental question, I had the chance to observe and talk with the CEO and CFO, and listened to their pitch. The CEO presented in a professional/verbose way with fancy power point graphs and tables, but, there was no concrete product demo. When I asked him questions about the technical details and competitor analysis, he circumvented my questions by beating around the bush, which made him looks very professionally skilled at fielding hard questions, but not to the point of may query. I like leaders to be sincere, not necessary to be articulative; I like leaders to be humble, not to be pretentious; I like to listen to the scientist present the product, not the administrative manager in an invest banker’s approach…

Take a further look at their balance sheets and income statement; more than 6 million shares are hold by CEO, comparing the total outstanding of 44 million shares or so. Greater than $1 million was burned on SG&A in the last 6 months, while a minuscule of $0.6 million was expensed on R&D during the same time period. This is not the way to steward a biotechnology developmental company toward a profitable cash cow. I feel the management team is playing a fancy “bioprinting” theme to steal capitals from gullible investors.

In the end, I would point out that I noticed the recent upward tick of this stock movement. Based on my quick investigation, I have not figured out the reason behind this movement yet. It could be pure whimsical market movement, or, I might be totally wrong on the above analysis, but if it’s an odds playing game- which applies to most of developmental biotechnology stocks, I would say, there are much higher chances that I am right.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.