Organovo's Earnings: Patience Is Necessary

Imagine a day where there are no waiting lists for liver transplants. Instead, patients can have a perfectly tailored liver bioprinted and placed into their body. That sounds pretty far fetched, but it's the kind of technology that many believe Organovo could one day develop.

Source: Organovo.

But the reality is this: That day isn't coming any time soon. Instead, Organovo and its bioprinters are focusing on developing natural human tissues that can be used by drug companies in their developmental stages.

According to BioWorld Today, "Forty percent of drug development costs go toward molecules that ultimately fail, often due to unforeseen toxicities." These toxicities go unnoticed because of substandard testing methods. Organovo, with the ability to print fully functional, native liver tissues, is hoping to offer a much more effective strategy for drug companies.

Over the last three months, Organovo announced that it had developed a technique to print 3-D liver tissue that could retain key liver functions for 135 hours, including the ability to synthesize cholesterol in increasing amounts for up to 96 hours.

This type of technology could save drug companies billions of dollars in developing medicines and could present the first real revenue channel for Organovo.

Development-stage: A serious understatement
But before going out and putting all of your money behind this tiny company, it's important to get some perspective. Last quarter, Organovo recorded only $106,000 in revenue -- a 59% drop from the same quarter a year ago. And of that revenue, none was related to product sales; instead it came from a combination of collaborations and research grants.

The company does have promising partnerships in place with major pharma players. Pfizer began using the company's technology in 2010, with the collaboration ending in 2012. The results are currently being evaluated by Pfizer to see if additional agreements are in the near future .

But as Justin Fritz of The Wall Street Daily points out, no matter what, the deal was a win-win: "Pfizer dishes out an upfront licensing fee and funds the research. And Organovo gets to maintain intellectual property rights to new tissue constructions that develop through the partnership."

A deal with United Therapeutics was also made in 2011. That collaboration -- dealing with treatments for pulmonary hypertension -- has already been expanded upon, with United Therapeutics providing more research money.

Even though these deals are certainly encouraging signs, they haven't moved the revenue needle too much.

And yet, the company is valued at a whopping $370 million. The good news is that such a valuation could easily be justified if the company lands major contracts with drug companies wanting to either purchase Organovo's liver cultures, or the machines used to print them: the Novogen MMX Bioprinter.

The other piece of good news is that the company is doing all that it can to make that dream a reality. Last quarter, spending on research and development increased about 120% as the department's headcount increased from 14 to 24 full-time employees. General and administrative costs also increased by about the same amount, as the department hired four new full-time employees, bringing the overall count to 11.

Obviously, this is still a very small company, but it also has enormous potential. Spending increases like this, combined with actual drops in revenue, are never a lasting recipe for business success. But Organovo feels that spending money now will pay dividends in the future.

Apparently, the market agrees. Earlier this month, Organovo offered about 10.4 million new shares to the market, raising about $43.3 million for the company. That was 1.35 million more than was originally allotted due to increased demand.

Personally, I think it's worthwhile for investors interested in the space to consider buying shares; I announced I would be doing as much last week. But I cannot stress enough that my allocation will be very tiny -- less than 1% of my overall holdings.

By buying, I'm encouraging myself to follow the company and buy in when news of drug companies buying in comes to the fore. Of course, that will probably mean I'll have to pay more for shares, but that's OK -- because there's always a chance that the company's stock could go to zero.

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