Organovo (NASDAQ:ONVO) has seen a large increase in price volatility over the past few weeks. Organovo is an early development stage company utilizing 3D bioprinting technology to design functional human tissues. The company is exploring a novel technology of using layered bio-inks in order to create tissue test products. The first of these products is expected to be a liver tissue assay ready for commercial markets in late 2014. Ultimately, the company hopes to one day scale its technology to design artificial human organs capable of solving the supply bottlenecks in human organ procurement.
One factor playing a role in the current volatility is the ongoing threat of dilution to shareholders. According to the Form 8-K filed on Nov. 27, Organovo recently entered into an agreement with JMP Securities. The agreement entitles Organovo with the ability to sell up to 4,000,000 shares of common stock from time to time through "at the market" offerings. As of Sept. 30, Organovo had 76,818,625 shares of common stock outstanding. As a result of this announcement, a meager amount of dilution is expected in the coming future.
Why investors shouldn't fear dilution
Despite the negative connotations of ongoing dilution, the fact remains that Organovo will continue to heavily rely on its cash reserves for the years to come. Dilution has the power of deteriorating future returns for early investors. However, for companies with disruptive technologies and extended phases of development on the path to commercialization, such a process is often a necessary component of staying solvent. In the same sense, the impact on the company's future earnings remains far from discernible. As of Sept. 30, Organovo held total assets of $54.9 million. Of this figure, $53.3 million was categorized as cash and cash equivalents. Yet of this amount, $46.6 million was recently raised through a public offering on August 7. Despite its limited amount of current assets, Organovo currently trades with a market capitalization of around $890 million.
With no present products on the market, Organovo only generates collaboration revenue in its current situation. In the last quarter, this amounted to a mere $23,000. The total loss from operations grew to $5.6 million, a 54.8% increase over the prior year. As this figure is likely to grow as the company expands, Organovo will continue to need additional capital in light of its long-term objectives of one day developing artificial human organ transplants. While the near-term capability of introducing a liver tissue assay product is sure to help improve the company's cash flow, it remains both questionable and seemingly doubtful whether the company will be able to be profitable in this market alone.
As a result of this situation, the company's ongoing efforts to raise capital should not be feared by long-term investors. After all, cash remains king in the world of early stage product development. The ability of Organovo to raise capital in light of its rapidly rising stock price only helps to fortify its balance sheet in the absence of meaningful revenue found elsewhere.
Focus on the long-term association
As the sole public market option when it comes to investing in biomedical applications of 3-D bioprinting technology, Organovo continues to stand as an increasingly popular investment choice. As shown below, the rising price and increasing volume of market trades demonstrate that Organovo has adopted the status of a momentum stock.
Investors clearly remain focused on the long-term potential of this company's technology. More so, these metrics demonstrate the growing appreciation of a potential technology breakthrough. Above all, Organovo has benefited from the public success found in the 3-D printing technology. Shown below, Organovo has begun to trade in parallel movements with 3-D printing leaders such as 3D Systems and Stratasys despite being in a radically different market altogether. The distinct trend is further seen when compared against the market itself as represented by the SPDR S&P 500.
While operating behind a similar 3-D printing technology, 3D Systems and Stratasys fundamentally function in a distinct market away from Organovo. Both of these companies market printers, materials, and custom parts for consumers. As system inputs, they use materials varying from plastics, to metals, to ceramics, and even edibles. However, Organovo utilizes bio-inks that are vertically layered and ultimately sustained until they assimilate into a functional tissue. Regulations aside, the process is far more complex as it requires the creation of a living product that can be sustained.
Nevertheless, investors continue to associate Organovo with 3D Systems and Stratasys due to the use of 3-D printing technology. As a result of this association, investors should continue to understand that Organovo will likely trend alongside news outside of its pharmaceutical realm. In the present, 3-D printing technology carries a positive momentum that has propelled stock values higher. The ability of Organovo to exploit this trend by raising capital now will only help to fortify its balance sheet with minimal dilution. It allows the company to buy more development time with minimal impact to shareholder value in the future should the industry cool down.
While the latest trading action reflects the natural investor aversion to dilution, the long-term benefit of raising capital in a rising price environment is particularly beneficial for Organovo. The company remains heavily dependent upon its balance sheet for its survival. Likewise, it remains particularly associated with a popular acceptance of 3-D printing. Yet the fact remains that Organovo trades in a radically distinct industry that requires an extended period of market development and regulatory approval. It will take many years before an actual organ product can ever be made commercially viable.
If Organovo is to meet its long-term objective of designing an artifical human organ transplant, it will require an effective tapping of the capital markets in order to effectively raise the funds needed to accomplish it. For long-term investors, the fact that Organovo continues to raise capital remains a wise choice on the part of management to strike while the iron is hot. Nevertheless, investors should remember that Organovo is a highly speculative investment. There is no guarantee of future success in the absence of a marketable product. One can only evaluate the company on the basis of its ongoing technological development and use of raised capital.
Kevin Quon has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short January 2014 $20 puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.