What: Shares of Organovo Holdings (NASDAQ:ONVO), a 3D tissue engineering company focused on developing products that can assist in the drug discovery process and could someday be implanted, fell 40% in March according to data from S&P Capital IQ after the company filed for a large shelf offering in late February.
So what: According to its S-3 filing from Feb. 27, 2015 with the Securities and Exchange Commission, Organovo Holdings wanted to sell up to $190 million worth of securities from time to time. These securities include its common stock, preferred stock, debt securities, warrants, and units. Money raised through a stock or debt issuance would most likely be used to help expand sales for its exVive3D human liver tissue assay test, as well as expand its research and development pipeline.
The fear here is that Organovo could -- based on last Thursday's closing price -- increase its shares outstanding by roughly 65% and dilute shareholder value considerably. For its part, management released a market update in mid-March stating that the company is "financially strong" and that it's excited about the future of exVive3D. Organovo's management still believes the product has $100 million-plus potential.
Now what: What investors need to weigh here is whether or not Organovo's S-3 filing is really a big enough cause for concern to warrant shares dropping 40% in a month.
The obvious concern here is that Organovo can now simply dilute shareholders without warning. Even though the company looks to have ample liquidity into what I would estimate is 2017, its cash needs over the next decade will likely be substantial, with no profitability in sight for many, many years.
The other side to this argument is that it does have its very first product (exVive3D) on the market, and its technology could revolutionize both the safety and speed of the drug development process. The long term picture for Organovo looks great, as it has human bioprinting technology in place that practically no other companies currently have.
As for me, I do believe that its first-in-class status should give Organovo a higher premium than a majority of its peers. However, I also believe investors should be prepared for many more years of losses and possible dilution. I believe the stock right now is only suited for the riskiest of investors, but would certainly suggest adding it to your watchlist and reassessing when its product portfolio has matured a bit.
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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