NYSEMKT:ONVO) saw its shares rally more than 28% in April. The gains were driven partly by the company's announcement of preliminary financial information for the fourth quarter and fiscal year ended March 31, 2015. During the fiscal year ended March 31, 2015, ONVO launched its liver toxicity product and service. ONVO noted that the results for fiscal 2015 mainly reflect the initial uptake of its pre-launch product and service. While the revenue generated by ONVO in fiscal 2015 was just $571,000, the initial uptake is encouraging. However, for significant revenue growth, ONVO will require greater adoption of its product and services.
ONVO is focused on the development and commercialization of functional tissues, which can be utilized in drug discovery and development, biological research, and as therapeutic implants. ONVO uses its platform technology to create human tissue constructs in 3D. In November 2014, ONVO launched its liver toxicity product, which is part of the exVive3D™ portfolio offering. The company expects to launch exVive3D™ Human Kidney Tissue in the second half of calendar year of 2016.
Pharmaceutical and biotechnology companies spend billions of dollars in developing drugs. However, only a small percentage of experimental drugs get to the commercial stage, resulting in significant sunk costs. On several occasions, the failure of a trial is due to safety issues, specifically toxicity issues. This is where ONVO's technology comes in. The toxicity of a drug is only found out in human clinical trials, which means that particular drug has already reached advanced clinical trial stages and the company has already spent billions in research and development. ONVO's technology has the potential to save pharma and biotech companies billions of dollars.
ONVO's technology can help drug developers in identifying toxicity issues early on in the clinical trial stages. This is because ONVO's 3D tissues are human and reproduce many aspects of in vitro tissue architecture and function. As a result, they offer an advantage over non-human animal models with respect to prediction of in vivo human outcomes.
There is no doubt that the toxicity products have tremendous potential. ONVO believes that its liver toxicity product and service alone has potential of generating more than $100 million in revenue. In a presentation last year, ONVO noted that the combined value of the total addressable market for liver and kidney toxicology products is around $3.4 billion. However, the main issue is adaptability.
ONVO's success depends on whether drug developers adapt its toxicity products. These products can save pharma and biotech companies billions of dollars in research and development expenses but there is also a risk for them. At this stage, there is not sufficient data to confirm the accuracy of ONVO's toxicity products' prediction. And without this data, it is difficult to predict the adaptability of ONVO's products.
In fiscal 2015, ONVO generated $571,000 in revenue and burned $21.1 million. Although the company had $50.1 million in cash on its balance sheet at the end of fiscal 2015, its annual burn rate is expected to be $25 million in the current fiscal year. This means that ONVO will see some dilution in the medium-term. While dilution risk is understandable for a development stage company, my concern is that if ONVO's toxicity products do not see greater adoption in the medium-term, the company will continue to burn a lot of cash. I believe this is the reason why ONVO shares have been trading more than 50% below the levels they traded in early 2014. As of April 30, 2015, nearly 27% of ONVO shares were shorted. It must be noted though that the short ratio was quite high at nearly 9 days. This means that any positive news can result in a short squeeze. This possibly explains the 28% surge in April as well.
Of course, the toxicology products are just one part of the ONVO story. The other major and perhaps bigger opportunity for the company is in printing organs for transplants. But this is a long-term opportunity and to an extent relies on the success of toxicity products and services.
I believe that there is far too much uncertainty with ONVO at this stage. While there is tremendous potential in the company's product offerings, a lot will depend on the uptake of its liver and kidney toxicity products. The initial uptake has been encouraging but more evidence is needed before the product can be deemed a success. The success of the toxicity products is crucial for ONVO as it will enable the company to capitalize on long-term opportunity in transplants. Given the high short interest and high short ratio, ONVO shares could see some short period of strong gains on the back of some positive development but long-term investors should only look at this stock when there is evidence of greater adoption of toxicity products.
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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
