Zacks Small Cap Research – ONVO Continues Progress – Earn Charter

By Brad Sorensen, CFA



Organovo (NASDAQ:ONVO) reported its fiscal 3Q earnings and results were roughly inline with our expectations and illustrate to us that the company continues to progress toward bringing important products to market.

Specifically, the company reported:

• Earnings of -$0.40 per share, inline with estimates as expenses remained steady.

• Cash and cash equivalents of $5.2 million, allowing the company to continue to move forward in the face of tighter credit conditions.

Additionally, the company announced a share sale that will raise up to $2.6 million. We understand that dilution is not an action appreciated by shareholders at times, but we believe this is a beneficial capital raise that will aid in getting FXR314 through the approval process. FXR314 is the lead development product for ONVO and aims at creating much-needed treatments for those suffering from UC and Crohn’s disease. These funds will help the company as it aims to begin Phase 2 trials for this treatment this year, which we believe has shown great potential to benefit a great number of patients.

Organovo Holdings is a biotechnology company that is both a developer of 3D tissue technology that has the potential to change the way treatments are discovered and tested, as well as being a creator of new therapies using that technology, the focus of which is currently around the intestinal area and inflammatory bowel disease—something which impacts over 3 million Americans according to the CDC.

It is this dual path and how the two paths can work together that continues to excite us about Organovo. Regarding the 3D technology, Organovo’s advances in the area include cell type-specific compartments, prevalent intercellular tight junctions, and the formation of microvascular structures. Management believes these attributes can enable critical complex, multicellular disease models that can be used to develop clinically effective drugs across multiple therapeutic areas. The company’s technology, known as NovoGen Bioprinters, are automated devices that enable the fabrication of 3D living tissues comprised of mammalian cells. The Company believes that the use of its bioprinting platform as well as complementary 3D technologies will allow it to develop an understanding of disease biology that leads to validated novel drug targets and therapeutics to those targets to treat disease. To this point, the company’s technology has been used to create a wide variety of tissues such as: healthy liver, NASH (nonalcoholic steatohepatitis) liver, kidney, intestine, skin, vascular, bone, skeletal muscle, eye, breast and pancreatic tumor.

There are two avenues that we believe the company can benefit from this technology. First, Organovo can use the technology internally to develop drugs that able to be tailored more specifically to the targeted condition because the company can manipulate the 3D created tissues to reflect the disease as it would appear in actual human tissue. This also allows the company to move through the initial stages of research and testing in a more rapid and precise manner, which makes the process more efficient and cost effective and the treatments potentially more effective.

Additionally, many clinical stage companies have no revenue inflows to help offset the costs of developing much needed treatments. However, as already demonstrated, Organovo has the ability to license the company’s 3D technology to other companies to aid in their research process, leading to a revenue stream coming into Organovo as it continues to push to bring treatments to the market. According to company management, in any deal achieved with a pharma company, Organovo intends to avoid “fee for services” revenue, which it believes provides limited benefit. Instead, the company will target deals with large, up-front payments, followed by milestone payments that the company believes could be in the hundreds of millions of dollars. These deals will involve the company working with the pharma partner to push novel drugs to the market. The partner company would own the rights to the drug, but Organovo would expect to earn milestone payments as a drug advances and royalties upon a drug’s commencement of commercial sales. These deals can be hard to predict the timing or probability of, but when achieved they have the potential to provide further validation of the company’s science and approach, as well as being a potential catalyst for investors.

The other path is the drug development path, which is obviously complemented and fueled by the 3D technology side of the business. Organovo has the potential to develop drugs in a more cost-effective manner and at a quicker rate by using 3D-created tissue as opposed to animal subjects. This ability also has the potential to provide more effective treatments due to the testing being done on human tissue as opposed to animal tissue, which also has the advantage of saving the animal as well.

As mentioned, the company is currently focusing on treatments surrounding IBD and the initial test results look promising and a Phase 2 trial for its signature treatment is approved to proceed by the FDA and will get started soon.

We believe Organovo is at a good spot for potential investors, with a proven technology that is bringing in revenue and is about to begin human testing on a treatment for a condition that millions of people are dealing with.

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