Shares of tissue engineering company Organovo Holdings (ONVO -2.14%) have exploded higher in the past month on heavy volume, only to suffer a swift 25% pullback on an astounding 30 million shares traded. The company only has 78 million shares outstanding. Even with the pullback, shares are up more than 50% in the past month alone.
Why did Organovo Holdings experience such a dramatic pullback? Other than the obvious fact that the company was drastically overvalued at $1 billion given limited near-term revenue possibilities, there was a post on Tuesday morning from Richard Pearson at Seeking Alpha. It's also very obvious that commercial tissue engineering technologies are still in their infancy. Any arguments pointing to the disconnection between the company's balance sheet and valuation can be summed up by looking at the following.
Any way you slice it
Take any metric you want from Organovo's income statement or balance sheet, and it quickly becomes clear that a $1 billion market cap (or even a $500 million market cap) is not based on current realities.
|
Financial Metric |
Value as of Sept. 30, 2013 |
|---|---|
|
Cash and cash equivalents |
$53.4 million |
|
Shareholders' equity |
$51.9 million |
|
Total revenue since inception |
$3.19 million |
|
Net loss since inception |
$80.5 million |
Source: SEC filings.
What investors are factoring into the company's valuation is potential -- and a lot of it. Unfortunately, even when the company launches its first product, 3-D liver assays for toxicology at the end of 2014 (assuming all goes as planned), there won't be very much revenue to report. It will be a major milestone for Organovo and investors, but hardly the end of the road or one with any major financial impact. I don't think you need to invest today for fear of missing out on a greater opportunity tomorrow. Simply put, reality isn't done having its way with shares.
Getting to the facts
Pearson called out "hyper bullish articles on The Motley Fool" as one reason for the ascension of shares, but I don't think any articles published here made questionable statements or forgot to mention how distant the opportunity is for tissue engineering platforms. It's clear that the technology is overhyped and widely misunderstood. For instance, there were 7,380 words in Pearson's article, but he failed to mention "tissue engineering" -- the correct term for the technology -- even once. That's an important phrase to include in an article describing the company. Essentially, any attention given to a company that was recently added to a major exchange is bound to create a push or pull on shares.
He correctly noted that there are other, more established 3-D cell culture liver assays on the market for determining toxicology for pharmaceutical and cosmetic products. That means competition for Organovo's developmental platform, which may be news to many investors. However, several of the bioprinters Pearson mentioned require inorganic scaffolds to support tissues -- something that Organovo's NovoGen doesn't need and is one of its main advantages.
In addition, being publicly traded affords the company the opportunity to raise the large amounts of capital necessary to develop its platform. That doesn't mean the company will be wildly, mildly, or marginally successful, but it represents an advantage over less-capitalized academic research labs nonetheless.
Foolish bottom line
I think Organovo is an intriguing story, but I can't rationalize a $1 billion valuation for the company. Heck, even $500 million looks absurd to me. I am in no way supporting an investment or completely refuting Pearson's claims -- just simply pulling the conversation back to the facts. The takeaway for investors is that Organovo is overhyped and misunderstood, which has led to its severe overvaluation given current financials and near-term revenue opportunities. I will continue to encourage investors to sit on the sidelines until more certainty comes to Organovo the business, rather than gambling on its potential.
