Published January 24, 2013

Organovo: A Good Company or a Lesson in Hype?

Let's face it, we're getting older. Not just each of us individually, of course, but society as a whole. According to the Census Bureau, the median age in the US today is over 37 years, compared to about 29 years back in 1960. Thanks to advancements in medicine and a higher overall standard of living, the average person born in the US today can expect to live to about 79, according to the CDC, compared to 70 in 1960 and just 60 in 1930. The percentage of the US population aged 62 years and over is now 16.2%; it was less than 12% in 1980. Today, there are 40 million people in the US aged 65 and older, and this number is projected to more than double to 89 million by 2050. This is not just the case in the US. It's a firmly established trend taking place throughout the world. In 1970, the world's median age was 22.1. That figure has climbed nearly 30% in the past four decades to 28.4.

For those of us who enjoy life, this is, of course, good news. But it's not all roses, unfortunately. Modern medicine is doing a better job of keeping us alive. But as we age our organs tend to fail more.

Organ transplants have been around for more than half a century, and some have become quite routine. But the central problem with them has been the same for fifty years: the number of worthy recipients at any given time always far outstrips the number of willing donors. That is not likely to ever change. With our aging population, in fact, it's going to get worse. Over the last decade alone, the number of patients waiting for a transplant has more than doubled, while the actual number of transplants has remained relatively flat.

If donors and recipients were the only two parts of the equation, then nothing could be done. But technology doesn't sit on an imperfect solution. It moves on, in this case to regenerative medicine. [Ed. note: Summarizing the state of regenerative medicine is beyond the scope of this article, but a good source on the subject is this clip from Dr. Anthony Atala of Wake Forest University, presented at a TEDMED conference a few years ago.]

But regenerating organs is a difficult and complex process and requires a great deal of time for tissue to naturally grow. Is there an even better way? Well, maybe you can print them.

We've covered 3D printing in the past (September 12, 2011 and February 2, 2012), but fully functioning organs are a huge leap beyond plastic prototypes and even fully-dense metal final products. Dr. Atala is also very much involved in this cutting-edge science as well; but it's still very early stage – no one has received a printed kidney transplant yet.

Dr. Atala and his team are not the only players in the game, however. Organovo – a company at the cutting edge of this revolutionary technology known as "bioprinting" – has gone public in the past year, allowing ordinary investors to participate in arguably the most exciting and potentially profitable of all 3D printing technologies: to print human tissues and organs.

Organovo was founded in 2007, began operations in 2009, and became publicly traded over the counter under the symbol "ONVO" in February 2012. The company develops three-dimensional human-tissue printing technology to create tissue on demand for research and surgical applications. Its technology platform works across various tissue and cell types to serve physicians and researchers in the fields of cardiovascular medicine, medical research, and transplant medicine.

This technology, which has the potential to create fully functional tissues (and ultimately organs) cell by cell, is based on the fact that a cluster of human cells (what the team at Organovo calls "bio-ink") behaves just like a liquid. When placed next to one another, the bio-ink particles (each composed of between 10,000 and 30,000 cells) will flow together and fuse, forming layers or other shapes. To build 3D structures like organs, Organovo uses a printer to assemble the human cells into the desired shape. It's similar to how an inkjet printer produces words.

The company's NovoGen MMX Bioprinter works by first creating a sheet of cell-friendly bio-paper. Then it prints out the living cell clusters onto the paper drop by drop. Once in place, the bio-paper dissolves and nature takes over, as the cell clusters fuse to each other, creating more complex tissue structures. The scientists at Organovo cannot control every detail of the process, but it turns out they don't have to: the biological material by its fundamental nature is able to self-organize. As each layer is completed, another layer of cell clusters is added.

To date, the company has only printed small pieces of human tissue. But since cells from any organ can be put through this printing process, Organovo foresees using this technique to print complete organs for transplant. These organs would be printed from a patient's own cells, which would minimize the chance of rejection.

Exciting stuff. It's no wonder Organovo landed itself on the MIT Technology Review's 2012 list of the world's most innovative tech companies. Eventually, we may even get to the point where the printer can print the new organ right into the recipient's body. While 3D printing working human organs is most likely still at least a decade or more away, that has not prevented a couple of meteoric rises (and falls) in ONVO stock.

Just take look at ONVO's one-year price chart. (The chart shows daily closing prices.)

(Click on image to enlarge)

ONVO went public at $1.65 per share on February 14, 2012 and experienced some impressive momentum out of the gate, climbing to $3.01 (an 82% increase) by May 17. That's when things really went crazy. Just one month later, ONVO traded as high as $10.90 (a 560% increase from the close on its first trading day just four months prior) after some of the larger newsletter companies like Motley Fool wrote numerous positive articles about the company and helped propel it to a $500-million market cap (despite no change in fundamentals) virtually overnight.

Think about that for a second. ONVO was trading for half a billion dollars despite generating less than $1 million in revenue during the prior twelve-month period. Yes, that's a price-to-sales ratio of over 500. And it's not like the forward one- or even two-year revenue projections were calling for growth that could come close to justifying that valuation. The numbers just didn't make sense. When investors once again came to their senses and recognized this reality, the stock fell – hard. By mid-July 2012, ONVO was once again trading below $2.00 per share. Despite a brief pop above $3 per share in mid-October, the stock remained flat through mid-December.

But the stock has been on another big move over the past month. On December 18, the company announced that it had joined forces with researchers at Autodesk (ADSK), a leader in 3D design, engineering, and entertainment software, to create the first 3D design software for bioprinting. The company hopes that the software, which will be used to control Organovo's NovoGen MMX bioprinter, leads to advances in bioprinting – including both greater flexibility and throughput internally and the potential long-term ability for customers to design their own 3D tissues for production by Organovo.

The day before the company announced this news (December 17), ONVO closed at $2.10. On January 22, 2013, the stock closed at $5.91, reflecting a 181% increase (and a market capitalization of $346 million based on the current share count reported by S&P Capital IQ). At least the recent run-up coincided with one positive fundamental development for the company; i.e., the collaboration with Autodesk. But let's look at what that really is – an agreement with no terms, no numbers, nothing that's been done – just a press release from Organovo saying basically that "we're going to get together with these guys and do something." Not really earth-shattering news. Autodesk did not consider it important enough even to issue a press release.

What's really going on here, just like before, is hype. There have been some positive articles about Organovo circulating among the major financial news sites over the past couple weeks. That has sparked renewed interest in the stock and taken it to an outlandish valuation despite the underlying fundamentals of the situation. And in the past two days, in fact, we've seen reality start to set in again as shares of ONVO are down 34% from Monday's close to $3.89 as of this writing.

To be fair to the company and those caught up in the hype of the stock, however, I need to point out that I'm a long-term Organovo bull, but would only buy today at a much lower valuation. However, the possibility for significant, relatively near-term revenue is quite real. In other words, we won't have to wait until Organovo is printing fully functional human organs before the stock makes sense as a legitimate investment opportunity.

The immediate opportunity for the company is in tissue printing for drug makers. As you no doubt know, in order for biotech and pharma companies to market their drugs in the US, they first must receive FDA approval. I won't go into a lengthy description of that approval process here, but I will note that bringing a drug from the pre-clinical or discovery phase all the way to market can easily take more than a decade and cost significantly more than $1 billion. (Only about 1 in 10,000 compounds evaluated in the pre-clinical stage will ever successfully navigate the entire process.)

A big part of that pre-clinical phase involves assessing safety and biological activity in the laboratory – especially in animal studies. (It's difficult to access reliable figures, but it's safe to say that billions of dollars a year is spent on animal tests.) The problem with these animal models (without even touching on the various potential ethical issues involved) is that although they have historically been one of the most trusted tools in drug development, they are not actually all that predictive of the human situation. Not only do animal models fail to identify numerous drugs that are toxic to humans, they also derail drugs that would have been good treatments for patients.

Organovo's technology has the potential to help solve this problem. The company can fill the gap between animal models that are used today but often don't provide the best answer and clinical trials in humans – by creating this functional, living human tissue with a three-dimensional architecture that allows for doing drug testing there. As Organovo scientists have said, "If this tissue resembles an equivalent to a human liver, architecturally, structurally, and even functionally, then we could use it to test the drug… after successful or promising animal trials. Then move on to real human trials if those tissue tests prove successful."

This is something that pharma companies have never had access to before, and it has the potential to lead to safer and more effective drugs and to do so faster and cheaper (if it can reduce failure rates in clinical trials). We've already seen some progress here, as the company has entered into two separate research contract agreements with third parties (believed to be Pfizer and United Therapeutics), but there's still a long way to go.

So, to answer the question posed by this article: Organovo is both a good company and a lesson in hype. I'm extremely bullish on the company's long-term prospects, but there are some big risks in the meantime – including large mounting losses, very uncertain future revenues, and a relatively weak cash position that will necessitate shareholder dilution or taking on debt over the next year – that should keep the market valuation below a couple hundred million dollars over the short run.

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