It's been an exciting year for investors, with the broad-based S&P 500 up 8% year to date. However, that same sentiment isn't being felt at present by shareholders of Organovo Holdings (NASDAQ:ONVO), a tissue engineering company whose shares have dipped by 40% so far in 2014.
Why the marked bifurcation between the overall market and Organovo's performance? I'll answer that question today, as well as look at where Organovo's stock could be headed next.
Why Organovo was clobbered in 2014
Organovo's problems this year certainly haven't been related to a sectorwide slump, as healthcare has more or less been on fire. Instead, I would suggest there are three reasons why its shares have plunged.
First, we have to credit the company's enormous run in 2013 as a reason why shareholders have witnessed a substantial pullback in 2014. Last year, Organovo stock rose 345% based on the potential of the company's tissue engineering technology. Investors have been amped about its potential to speed up clinical testing using human tissues, as well as the long-term possibility of using its technology to make replacement human organs. This year, though, Organovo's shock and awe factor has worn off a bit, leading shares to pull back from their monstrous run in 2013.
Second, the reality of the company's product timeline has set in with investors. Although Organovo remains on track to introduce its 3D liver assay test before the end of the calendar year, it remains unclear if and when the company will become profitable on an annual basis. Because its market value is only roughly $500 million it lacks significant Wall Street coverage, but I'd certainly guess that full-year profitability is a minimum of three to five years off. My reasoning is that the bulk of its Star Trek-like organ-creating technology might be a decade or longer away.
Finally, investors remain focused on Organovo's cash burn rate. Because Organovo is an entirely clinical stage company at the moment, it is expected to burn through its remaining cash on hand. At the end of the second quarter, the company held $44.9 million in cash and cash equivalents, while using up $3.4 million during the quarter. In other words, there might be in the neighborhood of three years of cash viability left here unless Organovo turns to the open market and sells some of its shares, which has the potential to dilute existing investors, or enters into a licensing deal with a larger company.
Organovo shows promise, too
Have no fear, optimists: a case can be made that Organovo is a company worth owning as well.
Perhaps no catalyst is more in the forefront than Organovo's liver assay test, which is expected to hit the market within the next three months. Earlier this year, Organovo shipped its product to a number of key opinion leaders around the globe in order to get feedback. It's worth pointing out that little mention has been made of the 3D liver assay test, with the exception of a key opinion leader reporting favorable results in late June from using Organovo's technology.
Even more striking, Organovo's 3D Liver Tissue System, based on these aforementioned "favorable results," was able to establish the toxicity of a drug known to cause liver damage that previous animal and pre-clinical models could not predict. With technology capable of producing bioengineered human tissues, it's quite possible that Organovo eventually could completely alter the way clinical trials are run and even expedite the process by which experimental drugs are brought to market. In addition, as medicine moves toward increased personalization, Organovo's products could see an increased role in pharmaceutical research.
I also wouldn't rule out the potential for collaborations to drive up Organovo's arguably small cash position. The patent cliff is striking drug companies hard, and Big Pharma has demonstrated in recent years it is willing to reach out early in the development process for new and innovative technologies. If Organovo were to forge some form of licensing or development deal it could see a substantial up-front cash payment that might alleviate intermediate-term cash concerns.
In July, the company and Johnson & Johnson (NYSE:JNJ) announced a partnership that calls for Organovo to bring its bioprinted tissue technology to the table to potentially help J&J with the drug discovery process. As Foolish healthcare contributor Dan Carroll has noted, Organovo has formed similar partnerships in the past with Pfizer and United Therapeutics.
Where Organovo heads next
Probably the toughest question to answer is where Organovo heads next. I personally suspect that the hype last year regarding its potential to generate human replacement organs was a bit overdone. Conversely, I'd also opine that a 40% pullback this year could be a bit excessive considering that the company is about to release its first product which, to date, has received positive reviews from key opinion leaders.
Ultimately, what's really going to move Organovo's stock over the next year is the success or failure of its 3D Liver Tissue System launch, especially considering that it's selling the product without the help of an experienced marketing team. On one hand, I suspect the product has enough allure to sell itself. Organovo recently forecast that, with an average contract of $150,000 and 6,500 potential customers, it could have a roughly $1.3 billion opportunity with its liver toxicology test. On the other hand, I'm curious to see how much of this market Organovo can actually capture.
Still, with more questions than answers, I would classify myself as intrigued and optimistic, but not entirely sold that the idea will be profitable anytime soon. I'll wait a few quarters for the sales data on its 3D liver assay test to stream in before making that call.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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