How low can Organovo (ONVO -3.74%) go?
After turning in a great performance in 2016, Organovo Holdings stock is down around 20% so far in 2017. Things like slashing revenue outlook and unexpectedly changing CEOs tend to have that kind of effect on stocks. At this point, there's nothing to make investors think the stock is ready to rebound.
It's possible that Organovo's share price could hover around current levels. But there's a realistic chance that the stock could drop even more. Here are three reasons why that could happen.
1. Validation problems
The primary factor behind Organovo's poor year-to-date stock performance is a negative impact to revenue stemming from customers delaying orders of the company's 3D bioprinted tissues. In February, Organovo announced that some customers were requesting additional validation studies before making purchase decisions.
Convincing prospective customers about the benefits of 3D tissues over animal tissues and traditional 2D models is proving to be harder than expected. Organovo has published several studies in scientific journals. Big customers have publicly attested to the potential for 3D bioprinted tissues. However, the efforts so far obviously aren't enough to win over some skeptical prospects.
Organovo is actively working on the additional studies needed to validate its tissues. New CEO Taylor Crouch's experience could help the company in this process. However, if Organovo runs into any problems with these studies, whether it's a delay or bothersome results, the stock is likely to get shellacked.
2. Failure to launch
Before his abrupt departure, former Organovo CEO Keith Murphy announced that the company planned to offer metabolism services. He predicted that the new service could allow Organovo to double its annual revenue. It also plans to develop therapeutic tissues, beginning with 3D bioprinted human liver tissue. Failures on either of these fronts could take a toll on Organovo's share price.
While it's too soon to call the metabolism services a failure, they certainly can't be called a roaring success. In Organovo's fiscal fourth-quarter conference call earlier this month, CFO Craig Kussman said that the company had only a couple of orders so far. There's a long way to go to double revenue.
There's also a long way to go with developing therapeutic tissues. Organovo reported promising preclinical results from implanting 3D bioprinted human liver tissue in mice. However, plenty of hurdles remain before the company can submit an investigational new drug (IND) application.
3. Market correction
Even if Organovo's validation studies, metabolism services, and therapeutic tissue efforts don't run into problems, the stock could still drop further if the overall market undergoes a significant correction. It wouldn't be unrealistic for a small-cap stock like Organovo to feel the full brunt of a big market pullback.
Although the bulls are still out in force on Wall Street and the U.S. economy appears to be doing reasonably well, a market correction isn't out of the question by any means. Looking at history, we're overdue for both a correction and a recession.
Short term vs. long term
How likely are these three scenarios? My hunch is that the company will ultimately prove successful in its validation studies. I also think Organovo's efforts to build metabolism services and develop therapeutic tissues have solid prospects. However, it wouldn't be surprising if any or all of these efforts take longer than expected.
It's inevitable that the market will correct at some point. No one knows, though, whether it will occur this year, next year, or several years from now.
In my view, Organovo isn't a stock to buy with short-term expectations. A long-term outlook is a must for investors who buy this stock. If you believe in the potential for 3D bioprinted tissues and think that Organovo can deliver on that potential, whether or not Organovo stock falls more this year isn't all that important.