By
Jason Napodano
:
We are initiating coverage of Organovo Holdings, Inc. (ONVO.PK)
with an 'Outperform' rating. We believe the company's pioneering
efforts into three-dimensional bioprinting have the potential to
dramatically improve drug discovery and development. Organovo's
bioprinter, the NovoGen MMX, is a first-in-class device capable of
creating three-dimensional living tissue that can be used to model
a specific disease or pathway, build complex pharmacokinetic and
toxicology assays, and even potentially create human organs for
transplantation or other regenerative medicine applications.
Cutting Edge Science
Tissue engineering is a complex process that combines living
cells, synthetic or natural biomaterials and growth factors
designed as a biological substitute for tissue. In the classical
approach to tissue engineering, cells are seeded and grown in a
biocompatible matrix designed to direct cell differentiation and
function. Scaffoldings play an important role in providing the cell
architecture for structure and migration, as well as enabling the
diffusion of vital nutrients and expressed product. Unfortunately,
there are challenges that exist with the classical approach.
Scaffolds, made from both natural and synthetic polymers, must be
engineered to degrade at a rate in which the cells within them
deposit and build their own extracellular matrix. Scaffold choice,
immunogenicity, degradation rate, toxicity of degradation products,
host inflammatory responses, fibrous tissue formation due to
scaffold degradation, and mechanical mismatch with the surrounding
tissue are key issues that may affect the long term behavior of the
engineered construct, and directly interfere with its primary
biological function. Additionally, scaffolds may elicit adverse
host responses and interfere with direct cell-cell interaction.
To get around the challenges of classical tissue engineering,
Organovo has developed the first 3D bioprinter, called NovoGen MMX.
The NovoGen MMX Bioprinter is a novel, fully automated, hardware
and software platform developed to fabricate three-dimensional (3D)
primary human or other living mammalian cells into tissue, with
tremendous cellular viability and biology that is superior to even
an animal model.
Organovo's NovoGen MMX mechanical extruder enables the
fabrication of three-dimensional tissue constructs in a wide
variety of geometries (tubular structures, networked sheets, etc.).
The speed and precision of this instrument enables the production
of small-scale tissue models for drug discovery as well as various
drug absorption and toxicology assays.
NovoGen MMX works similar to an inkjet printer, in where cells
are printed in tiny spheres; essentially "bio-ink". The concept of
bioprinting relies on the demonstrated principle that groups of
individual cells will self-assemble to generate aggregates, through
the actions of cell surface proteins that bind to each other and
form junctions. Furthermore, if two or more compatible
self-assembled aggregates are placed in close proximity, under the
proper conditions they will fuse to generate larger, more complex
structures. In essence, the physical properties of bio-ink are
analogous to those that drive fusion of liquid droplets.
(click to enlarge)
A key distinguishing feature of Organovo's platform is the
ability to generate three-dimensional constructs that have all or
some of their components comprised entirely of cells. The
fully-cellular feature of the NovoGen MMX technology enables
architecturally- and compositionally-defined 3D human tissues to be
generated for in vitro use in drug discovery and development to
potentially replicate the functional biology of a solid, fully
cellular tissue. The tissue structures created by Organovo's
bioprinter have the potential to create a paradigm shift in the
approach to the generation of three-dimensional human tissue and
the replication of clinical assay testing with respect to native
human biology. Organovo's device improves on previous technologies
by moving away from monolayer 2D cell cultures and by enabling all
or part of the tissues created to be constructed solely of
cells.
Applications
We believe that Organovo's NovoGen MMX Bioprinter is uniquely
positioned to provide three-dimensional human tissue for use in
drug discovery and development, as well as a broad array of tissue
suitable for therapeutic use in regenerative medicine applications.
Specifically, the NovoGen MMX Bioprinter has the ability to:
1. Produce highly specialized three-dimensional human tissues
that can be utilized to model a specific tissue physiology or
pathophysiology, such as cardiovascular disease, cancer, or
fibrosis.
2. Facilitate biological assays through ADME and DMPK testing,
as well as toxicology testing to determine the detrimental effects
of a particular drug on specific tissues. This is a particularly
attractive area for testing liver toxicity, which can be difficult
to model in cell culture assays because the cells flatten out
resulting in altered gene expression. We believe that Organovo will
be in position to launch its first assay-based products
specifically focusing on things like liver toxicology in 2014.
3. Provide the architectural precision and flexibility to
facilitate the optimization, development, and clinical use of
three-dimensional tissue constructs for use in regenerative
medicine. The ultimate goal is to enable fully cellular constructs
to be generated in a configuration compatible with surgical modes
of delivery, thereby enabling restoration of significant functional
mass to a damaged tissue or organ.
Partnerships To Drive Growth
A key component to management's business strategy is to pursue
collaboration agreements with drug development companies that will
allow Organovo to further develop the 3D bioprinting technology and
the potential uses of the cellular structures and tissues that can
be produced with the technology. Organovo's goal is to leverage the
ability of the NovoGen MMX Bioprinter, either in 3D modeling a
specific tissue physiology or pathophysiology, enhanced
ADME
and toxicology studies, or in regenerative medicine applications,
and form strategic alliances that generate revenues and further
push the technology forward.
Organovo has two active collaborations, one with Pfizer (
PFE
) (signed December 2010) to develop specific three-dimensional
tissue based drug discovery assays in two therapeutic areas and one
with United Therapeutics (
UTHR
) (signed October 2011) to establish and conduct a research program
to discover treatments for pulmonary hypertension. Organovo also
has formed academic partnerships with leading institutions to
provide its technology to scientists at the Harvard Medical School
and the Sanford Consortium for Regenerative Medicine. In addition,
the company has been awarded five federally funded grants to
date.
Our model assumes one new partnership with an upfront payment in
the area of $1 to $2 million in the next twelve months, with
potential backend milestone potential near $10 million along with
low single-digit royalties on sales. We model this rate of new
business - approximately one new partnership every nine to twelve
months, over the next several years. It is after this period,
starting in 2016, where we see the potential for a hockey-stick
like ramp in revenues based on developmental and regulatory
milestones from partners and sales of the company's ADME /
toxicology assays. As Organovo continues to build out its offering
to companies, we believe each new partnership turns into an annuity
stream of research funding and potential backend milestones and
royalties.
Understanding The Financials
Organovo came public via a reverse merger in February 2012.
Following the closing of the merger, Organovo completed three
private placements raising gross proceeds of approximately $13.7
million to fund operations and facilitate the advancement of the
bioprinting technology. Through the private placements, Organovo
issued 15.25 million shares of common stock and 16.75 million
five-year warrants to purchase common stock. These shares were
registered via an
S-1 filing
that became effective in June 2012.
In total, the fully diluted share count is 75.40 million. Of
these, the basic share count is 43.77 million and there are
currently 24.11 million warrants exercisable at $1.00 per share.
The warrants are carried on the balance sheet as "Warrant
Liability", which totaled $80.6 million as of June 30, 2012. We
note this is a non-cash liability marked-to-market at the end of
each quarter. As Organovo's stock price increases, the warrant
liability also increases (and vice versa). Valuation of the
warrants is done using a
Monte Carlo
simulation modeling. The increase in the liability recorded on the
balance sheet requires subsequent accounting on the income
statement. As a result, the company recorded a massive $32.5
million charge in the first quarter 2012 when the warrants were
first issued, and another massive $33.9 million charge in the
second quarter as the liability rose in accordance with the stock
price.
All of the above adjustments to income are non-cash. Organovo
only burned $3.6 million in the first quarter 2012 and $2.0 million
in the second quarter 2012. Operating cash burn since inception
(April 2007) is $8.9 million. Management expects operating burn of
around $0.5 million per month for the remainder of 2012. Cash at
the end of the second quarter 2012 stood at $8.5 million.
Exercising of the warrants has the potential to infuse $16.75
million in cash into the company. We remind investors that these
warrants are callable if the stock trades over $2.50 for
20-consecutive trading days. We expect Organovo to call all
applicable warrants if the opportunity presents itself.
We believe the current cash balance is sufficient to fund
operations well into 2013, and beyond if the company can sign
additional licensing partners with upfront payments in the area of
$1 to $2 million. We believe the company is financially sound and
could achieve breakeven operations with the signing of two more
corporate partnerships. With an estimated pace of one deal every
nine to twelve months, we believe that Organovo can start
generating positive cash flow from operating activities in
2015.
Valuation
We have built a year-10 discounted cash flow (DCF) model to
value Organovo. We assume that the company can secure one new
research alliance every nine to twelve months. We expect that these
deals will provide $1 to $2 million in upfront funding, along with
backend milestones around $10 million and low-single digit
royalties on sales. We also expect that Organovo will launch its
first commercial product in 2014, which is expected to be a liver
toxicology assay kit. Traditional cellular assays are a fast
growing segment of the overall $40+ billion life science tools
market. We believe that functional 3D cellular assays that can
deliver superior biology can gain meaningful market share in this
$14+ billion cell biology segment. We see this as a $20 to $30
million opportunity for Organovo in liver toxicology alone. New
assays essentially add tens of millions to the overall
potential.
(click to enlarge)
Our DCF model can be found in our full initiation report (
ONVO/Napodano-8/20/2012
). We expect the company's top-line to be lumpy, but eventually
take off in a hockey-stick like ramp starting in 2015. We expect
costs to remain low, as management looks to partner with larger
organizations and academic institutions. We see $3.25 per share as
fair value based on our modeling.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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