How Big Is Organovo's Market Opportunity?

Organovo (NYSEMKT: ONVO  ) is a little company that people think could do big things. Foremost among those "things" is the 3-D printing of human organs for transplants.

But the problem with such grandiose potential is that it can often distract investors from the more tangible opportunities lying in plain sight. As you'll see, Organovo could have much more practical streams of revenue sooner than printed organs ever come along.

A market in dire need of new efficiencies
In 2010, the pharmaceutical industry spent $50 billion on research and development of new treatments. At the same time, the FDA approved only 20 new drugs.

Sources: Organovo, FDA, Pharmaceutical Research Manufacturers of America.

Though much of the money invested is for the drugs of the future (well beyond 2010), these numbers represent just how expensive it is to bring a drug to market.

More representative figures do exist to put the spending in perspective: A new drug, on average, takes 12 years and $1.2 billion to bring to market. And that doesn't even take into consideration all of the drugs that never see the inside of a pharmacy.

Sometimes, drug companies believe they have a big hit on their hands because of successful tests in the lab with two-dimensional cells, or on animal subjects. It isn't until human trials begin -- and after hundreds of millions of dollars have been spent -- that unexpected toxicities arise.

These toxicities either set the drug back significantly or force companies to scrap their plans altogether. BioWorld Today estimates that "[f]orty percent of drug development costs go toward molecules that ultimately fail," often because of "unforeseen toxicities." With the industry spending $50 billion per year, that means $20 billion down the drain.

Primary application = killing drugs faster
Clearly, any company that can add reliable and cost-cutting efficiencies to the process could be richly rewarded. And it is here where Organovo's most practical revenue stream could materialize.

Organovo enters the scene by offering pharmaceutical companies three-dimensional tissues that mimic native human biology -- and aim to have a much higher predictive value for the success of drugs than prior methods.

Already, the company has partnered with both Pfizer (NYSE: PFE  ) and United Therapeutics (NASDAQ: UTHR  ) to research and test out the 3-D tissues. The collaboration with Pfizer ended last year, and Organovo is waiting to hear back to see if Pfizer wants to continue collaborating. The United Therapeutics deal is still ongoing and was expanded upon in 2012.

More long term, market research firm Scientia Advisors sees a specific market opportunity of more than $500 million for Organovo by 2018. Currently, the company has functional liver tissues developed, but it hopes to expand to kidney and heart cells.

Organovo would earn its keep by manufacturing the cells and providing them to the drug companies. Along the way, it hopes to continue partnering with drug companies and academic institutions to expand the number of organ cells it offers. Specifically, Organovo is looking for collaboration deals worth between $10 million and $30 million, where the company could have a 3% to 7% royalty.

At the same time, the company sees the possibility of developing tissues for therapy. When that time comes, Organovo will expand its scope to include lung, bone, and blood vessels.

Overall, the revenue and development stream looks something like this.

Source: Organovo. 

Don't do too much math
If we make an assumption of $300 million in revenue by 2018, with a conservative estimate of 10% profit margins, earnings would come in at $30 million. Assuming the number of shares outstanding stays the same (which it probably won't), and a P/E ratio of 30, the company could be worth $900 million by 2018. That gives investors a nice 20% rate of return from today's market cap of about $370 million.

But the reality is that these assumptions should be taken with a grain of salt. History has proved time and again that we humans stink at predicting the future. That's why investors in Organovo -- myself included -- need to be well aware of the risks associated with investing in the company.

At the end of the day, there are literally hundreds of "multiple futures" -- as Foolish co-founder David Gardner likes to call them -- that Organovo could take. Some of those possibilities include bankruptcy, and some include amazing profitability.

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Read/Post Comments (11) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2013, at 7:11 PM, 007mercucio wrote:

    Organovo's primary competitor is tissue from cadaver/corpse. It is basically free. I'm not saying there's no market for what they make, but until it is uniquely useful in a marketable way, with no cheaper alternatives, it's not going to be easy for them to make money. Even so, you never know what nich markets might exist. I'm just saying the case for ONVO is not selling clonal lab tissue they could just as soon cut from a fresh corpse for the same purpose... except to say they can reproduce the clonal tissue repeatedly over the course of years, rather than corpse tissue having a limited lifespan... there is something to say for that. But the point remains valid: they are competed with by something completely free... tissue from dead humans. Until they can show a compelling case to buy 3D printed tissue, they are primarily an R&D company with negative earnings and a tremendous long-term potential... and...meanwhile, the main question people should be asking, imo, is what advantage the 3D printing confers over conventionally generated clonal tissue. Organovo does not have a patent on clonal regenerative medicine. It has a patent on using a 3D printer in conjunction with that. So ask what good the printer does, that couldn't be done with the already-known methods... how does it make ONVO better suited to make tissue? Very keenly: There -are- biotech engineers who have made tissue -without- a 3D printer. I'm not saying the 3D printer adds no value at all... but I suspect it might be a gimmick to lure investors to their company, which may very well succeed in making organs, one day, but would not stand out were it not for the 3D printing thing...which, again, is of questionable relevance to what they are trying to achieve.

  • Report this Comment On August 25, 2013, at 12:50 AM, 007mercucio wrote:

    I have to contribute one more addendum to that comment: They make a 3D Bioprinter. That is a viable product for R&D & Education. It is very expensive...and they have a competitor in Germany which makes a less expensive Bioprinter... I believe Organovo could make earnings selling its printers, but profitability is a different thing. The amout of money drug companies spend on research is not their 3D printer budget... it's their R&D budget...

  • Report this Comment On August 25, 2013, at 12:53 AM, BJonRob wrote:

    Thanks Brian for simplifying the ONVO concept and helping to clear up some of the confusion about what it is and when it might happen. Still a bit mystifying, but nice to have a little better idea of their potential!

  • Report this Comment On August 25, 2013, at 1:07 AM, BJonRob wrote:

    007- If I'm not mistaken, Autodesk (which just had a good gain this past week) is the company working w/ ONVO on the printing aspect. I think the idea is that the experimental trials they are working on could stay alive and viable much longer than tissue "borrowed" from dead human tissue.

  • Report this Comment On August 26, 2013, at 11:31 AM, genepicker wrote:

    007

    I think there is some confusion over the concept of 'human cadavers' / free tissue. E.g. if you want to test a drug, the liver processes 99% of all drugs 1st Pass in glucoronidation and the kidney's the remaining 1%. Hence ONVO is hitting the sweet spot with simulating liver (and soon kidney cells).

    Any Fool that wants to invest in ONVO needs to understand that the value in ONVO is in rapid drug screening. The intellectual property over using a 3D printer is solid and will have to expand to pluripotent stem cells which is tricky because they can morph into anything including cancer but usually do not which is another hurdle the FDA does not like.

    This is where ONVO will make ALL it's money is screening small molecules for toxicity for the next 5-10 years. The myth of creating an organ is just that, a myth decades away. ONVO will start transplanting tissue in disease ridden organs within a decade but that is after some major collaborations not yet on the market.

    If you want to harvest a 'cornea' or some other organ from a cadaver that is great but it's not 'free'. Just to harvest an organ and fly someone in e.g. a liver, heart, lung transplant cost's $50k alone just for the helicopter, on call staff, organ procurement, etc. Organ rejection is another reason why grafting tissue from your own cells via 3D is so appealing.

    007 don't get distracted by creating organs, that's not the value here.

  • Report this Comment On August 26, 2013, at 12:54 PM, genepicker wrote:

    Addendum:

    One last thing, regenerative medicine at Wake Forest, Univ. of Pittsburgh etc can indeed clone tissue e.g. artificial trachea, ear etc but notice most of this tissue is for cartilaginous areas that already have structure.

    Autodesk is trying to use their 3D software to help create structure for the growth of blood vessels which is the first step in creating viable tissue that lasts more than 96 hours. A very sound and creative approach for ONVO.

    Their only mis-step which I witnessed was their amateurish approach of offering 10.4 million shares at $4.50 which was about $1-$1.50 below market share, hence they left $10-$15M on the table for no good reason. Troubling yes...but a 'float' mistake that the underwriters should have given waaay better guidance.

  • Report this Comment On August 27, 2013, at 1:12 AM, jpokergman wrote:

    Dude...the key word and tricky phrase that most people are going to fail to grasp is.....Opportunity.

    This as they say at LSU, is a very big word. Many of these come by every single day, and people have their proverbial heads planted firmly up their foolish orifice's and therefor fail to grasp them, as they sail by into the sun set.

    Is Organovo going to be the next great thing? Who knows! Is 3-D printing? eh...One can only shrug.

    I will say this though......ONVO....Has had Heavy Volume for the last 6 months.

    The JUNE Institutions have Printed their Ownerships. Why is it, That ONVO, shows 0% Mutual funds, and 0% Institutional Ownership? As of Jun 30 2013?

    Are The Big-shots embarrassed to show on paper that they stepped up and took a shot at this?

    If 1.58 Million shares of this are Short, doesn't that mean that some Foolish Institution has Lent somebody the shares?

    Doesn't somebody have to claim ownership somewhere?

    Like I said......Opportunity......!

    If it is important enough to lie about, There is Gold somewhere in them thar' hills.....IMO.

  • Report this Comment On August 28, 2013, at 7:24 PM, JSB1685 wrote:

    Sorry but I don't get it.

    "That's why investors in Organovo -- myself included -- need to be well aware of the risks associated with investing in the company."

    vs.

    "Fool contributor Brian Stoffel and The Motley Fool have no position in any of the stocks mentioned".

    I very much respect Brian Stoffel and his articles, but... can somebody explain please?

    Fool on,

    JSB1685

  • Report this Comment On August 29, 2013, at 10:50 AM, TMFCheesehead wrote:

    JSB1685-

    I'm not sure why it appeared that way. I DO own shares of ONVO, but for some reason our automatic disclosure function didn't kick in. I'll be sure to keep my eye open for that in all future articles.

    Brian Stoffel

  • Report this Comment On September 09, 2013, at 11:22 AM, Takeiteasy wrote:

    jpokerkergman,

    I'm not following. Thanks for any clarification you care to provide :)

    TIE

  • Report this Comment On September 19, 2013, at 9:04 AM, jpokergman wrote:

    TIE,

    Expect a Huge move up right before option expiration. If there is such a large short has been generated, logic dictates that those shares were "Borrowed".

    The question then becomes. Who bought them, and who lent them. Since No Institution or Manager wishes to Claim Ownership. I can only assume a great deal of "Volatility" in the 2 days before option expiration.

    These guys will treat ONVO like a hot potato. If all goes well, then the managers will step in and claim ownership. If things go south. They can deny they ever had it.

    Welcome to the NFL.

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