Shares of Organovo Holdings (ONVO +1.60%), a synthetic tissue engineering company currently geared towards the pharmaceutical and clinical research industries, lost a quarter of their value in June based on data from S&P Capital IQ after the company announced a common stock offering.
It was actually an exceptionally volatile month for Organovo, with shares of the tissue printing company trading up about 16% for the month shortly after the release of its fourth-quarter earnings results. Those gains were short-lived, though, due to its stock offering.
In the fourth quarter, Organovo announced the booking of $1.94 million for its commercial liver test assay, known as exVive3D Human Liver Tissue. It wound up recognizing $290,000 of that as revenue by the end of the quarter. It may not seem like it, but compared to the $139,000 it recorded in exVive3D revenue from the third-quarter, when the product was launched, this was significant improvement.
However, on June 17, Organovo announced the sale of common stock to raise funds for general corporate purposes, including research and development and the commercialization of its products. The following day it specified that it would be selling 9,425,000 shares at $4.25, a price that was 18% lower than where the stock had closed the previous day. While the share offering did raise $40 million before expenses, giving Organovo more breathing room, share offerings tend to do a number on existing shareholders by diluting their shares. The 18% haircut in the offering price implies there was probably little demand for new shares.
Source: Organovo Holdings via Facebook.
What investors need to ask themselves here is whether Organovo's substantial dive in June is just an anomaly, or a genuine reason to keep your distance.
On one hand, Organovo has a first-in-class product with its liver tissue assay. Organovo's product could help laboratories and universities save hours, days, weeks, or even months when it comes to testing the toxicity of experimental compounds before diving into costlier human trials. A kidney assay test is expected soon as well. This first-in-class technology does appear to deserve a premium.
Then again, Organovo still has a lot to prove in terms of justifying its approximately $340 million valuation. While the technology behind its liver assay is borderline Star Trek, it'll certainly take more than an extrapolated $8 million in commercial orders before a $340 million valuation is justified -- especially considering that losses will likely extend throughout the remainder of the decade.
I believe Organovo has the tools to succeed, but it remains to be seen if commercial businesses come around to the product. I don't think there's any shame in sticking to the sidelines for now and waiting for the exVive3D to make its mark on Organovo's top- and bottom-line. There are plenty of ways for investors to benefit for years to come, but don't feel pressured into buying Organovo's stock here just because it's near a new low.
