S&P 500 Analysis & ETF Trading

[kiy]

ONVO speculation
Going to add this to the speculation list since KNDI is being such a yoyo dog...

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.

ONVO