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Organovo Holdings, Inc. (ONVO)

Corporate Overview

Rating: Strong Sell

Price Target: $0.34

Date: July 30th, 2018

This research report reflects the opinions of Cliffside Research. We have based our opinions on facts and

evidence collected and analyzed, all of which we set out in our research reports to support our opinions. This

is not an offer to sell or a solicitation of an offer to buy any security. We strongly recommend that you do

your own due diligence before buying or selling any security, and each investor must make any investment

decision based on his/her judgment of the market and based upon all available information. At any time, you

should presume that the principals of Cliffside Research and/or Cliffside Research clients and/or investors

hold trading positions in the securities profiled on the site and therefore stands to realize significant gains in

the event that the price of the stocks covered herein rises or declines in conjunction with our investment

opinion. See our important full disclaimer titled “Terms of Service” at the bottom of this report.

CLIFFSIDE Research

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➢ ONVO essentially admitted on their recent earnings call that their current business will never be

profitable and is purely a “funding mechanism” for advancing their therapeutic tissue program

(NovoTissue) to clinical trials.

➢ We do not believe NovoTissue will ever receive FDA approval, but in a best-case scenario it

appears approval is not likely until 2024 at the very earliest.

➢ Recent preclinical studies reveal NovoTissue is only effective to a depth of 1mm on mice livers

and biomarker data appears too small to be meaningful even for a mouse.

➢ Due to the vast discrepancy between the size of mouse livers and human livers, which at 3lbs

are the largest internal organ in humans, we conclude NovoTissue will be ineffective in treating

human liver diseases.

➢ Research reveals that 10 – 30% of liver hepatocytes would need to be replaced by NovoTissue to

produce therapeutic benefit to patients.

➢ ONVO intends to produce “dollar-sized” sheets of NovoTissue for implant although the current

Director of Therapeutics admitted as recently as March that printing tissue that large is a

challenge that still lies ahead.

➢ ONVO is unable to print thick tissue because they can only vascularize NovoTissue to a depth of

1mm at most.

➢ Like human livers for transplant, human liver tissue used in NovoTissue is in short supply, is

difficult to proliferate in vitro, and has limited viability.

➢ ONVO claims the market for NovoTissue is $4bil but our estimate is that they would be lucky if

their initial indication in alpha-1 antitrypsin deficiency is worth even $40mil.

➢ ONVO’s recent foray into “disease modeling” is a tiny market worth only $80mil cumulatively

over five years and requires costly customization for each project.

➢ ONVO hopes to collaborate with partners but has already had what we consider to be four

major collaboration failures including Pfizer, United Therapeutics, Merck & L'Oréal.

➢ ONVO has diluted shareholders by 72% since 2013 and said they will continue to dilute.

Organovo Holdings, Inc. (ONVO)

Our price target of $0.34 represents approximate downside of 72%.

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Hope Springs Eternal:

Founded in 2007, Organovo Holdings, Inc. (ONVO) came public via reverse merger in February 2012 into

an OTC listed company called Real Estate Restoration and Rental. Spencer Trask Ventures was the

placement agent. In the process they raised $6.5mil in private placement funding. In 2013 ONVO

uplisted to the NYSE and moved to NASDAQ in 2016. They are serial issuers of equity, having raised cash

via equity every year since coming public and substantially diluting shareholders in the process. 2018

was a light year for equity issuance although they continued to access capital via an at-the-market

(ATM) facility (which they plan on continually accessing as needed). Since they burn well over $20mil per

year in cash, they have about two years of cash left and are likely setting up for a sizeable raise over the

next year or so. Since 2013 ONVO has grown the share count by about 72%.

Source: SEC filings & Cliffside Research

Organovo has a long history of over promising and under delivering. It appears those new to the story

believe there is hope for a miraculous turnaround based on exciting results from the company’s

preclinical 3D therapeutic tissue (NovoTissue) studies and renewed interest in their 3D bioprinted tissue

(exVive3D) for disease modeling. We believe nothing could be further from the truth.

Look Out Below:

When ONVO reported FQ4 on May 31st initially it looked like another ho-hum quarter. Revenue came in

light as it has many times before, but the company remained optimistic about the future. What initially

looked like a non-event turned out to be nothing of the sort. By the end of the following trading day the

2013 2014 2015 2016 2017 2018

Equity Proceeds $3,718 $48,003 $22,748 $43,127 $30,530 $9,168

Ending Cash $15,628 $48,167 $50,142 $62,091 $62,751 $43,726

Shares Out 64,687 78,113 81,537 92,392 104,551 111,033

60,000

70,000

80,000

90,000

100,000

110,000

120,000

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

ONVO will be out of cash in under two years at the current burn rate

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stock was down nearly 30%. The conference call revealed a highly disappointing perspective of the

current business and what looked benign on the surface was incredibly shocking to those who were

paying attention to detail. To explain why, first we’ll provide some background for context.

The Pivot

For the past several years ONVO has tried to expand usage of their 3d bioprinted liver tissue, exVive3D,

in toxicology testing. Toxicology testing is a highly competitive low margin business and ONVO couldn’t

get any traction primarily based on the high price of exVive3D vs. competitive offerings. In FQ2 new

CEO Taylor Crouch decided to take the company in a different direction. Instead of focusing on

expanding use of exVive3D in toxicology testing, he shifted to disease modeling.

Disease modeling is a much smaller market, but it appears to have better (gross) margins and few

competitors. For the last couple of quarters ONVO has focused on expanding exVive3D in disease

modeling while selling commodity human liver and kidney cells via their Samsara Sciences subsidiary.

These are the company’s primary sources of revenue. The long-term goal remains FDA approval for

NovoTissue.

Samsara is growing but it’s a commodity business controlled by the available supply of human tissue.

According to ONVO, in fiscal 2018 (F18) Samsara revenue was “over $1mil.” When we spoke with the

company they said Samsara wasn’t created as a profit center, but as a source for cheaper liver & kidney

cells to fund internal studies. They sell what they don’t use to third parties. Therefore, we have no

reason to think Samsara will do anything other than continue to suck cash out of the business.

Revelations

So far, ONVO has had difficulty getting traction in disease modeling. Following the pivot to disease

modeling, ONVO lowered revenue guidance twice in F18 and still came in at the low end. None of this is

particularly surprising for a company that regularly misses revenue targets and is years from

profitability, so why was the stock down 30% after reporting FQ4? What was revealed in the FQ4 call

was that the CEO views disease modeling purely as a “funding mechanism” for NovoTissue. This is

highly significant since NovoTissue (therapeutic tissue) is several years from possible approval and

Samsara with just over $1mil in revenue last year is the only other “meaningful” source of revenue.

Below is a quote in response to an analyst question about disease modeling revenue.

“first and foremost, we now view these as funding mechanisms for our main mission,

validation and exploration of key functionality of our tissues and finally, actually, as a

way to generate new pipeline and new pipeline ideas. So we're just fundamentally

moving away from a tools or P&L orientation to that side of the business and focusing

much more heavily on our midterm goals to bring therapeutic products to the

marketplace.”

~CEO Taylor Crouch, FQ4 transcript

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According to the CEO, disease modeling is a “funding mechanism” for therapeutic products

(NovoTissue). They are “moving away” from a “P&L orientation.” We surmise that these are comments

made when you have no intention of ever turning a profit on the existing business! In other words,

THEY HAVE GIVEN UP ON EVEN TRYING TO TURN A PROFIT IN DISEASE MODELING!!!

Again, disease modeling and selling commodity liver cells via Samsara are the primary source of ONVO

revenue for the foreseeable future. In addition to the disease modeling bombshell, they also chose not

to provide revenue guidance for fiscal 2019 (F19) and the reason for doing so wasn’t exactly confidence

inspiring.

“As you’ve looked back over the last year-and-a-half and evaluated our approach to

giving revenue guidance, one thing we concluded is that we are providing a disservice

to shareholders to try and predict our immediate revenue inflection points.”

~CEO Taylor Crouch, FQ4 transcript

Not to worry, even if they did provide guidance, it appears they have no intention of turning a profit on

it! This leaves ONVO investors with nothing more than a cash sucking science project funded by

shareholders to advance efforts in NovoTissue, a product several years from any possible FDA

approval. ONVO guided to cash burn of $22mil to $24mil for F19 and there is no reason to believe they

won’t burn at least that much every year going forward. In our opinion, this simply shouldn’t be a public

company.

We believe ONVO investors should be asking themselves one question:

Is this company toast?

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We believe the answer to that question is an emphatic “yes!” It appears the only conceivable way ONVO could ever reach profitability is upon FDA approval and

market wide acceptance of NovoTissue, but as we’re about to explain, we don’t believe that will ever

happen.

Why We Believe NovoTissue Will Fail

What is NovoTissue?

ONVO’s long-term goal is to seek FDA approval to treat genetic liver diseases broadly known as Inborn

Errors of Metabolism (IEM) with 3d bioprinted therapeutic tissues they call NovoTissues. IEM leads to

deteriorating liver function and eventually requires a liver transplant. ONVO’s goal is to produce thin

dollar-sized patches of NovoTissue that are engrafted to a human liver. Liver based NovoTissue is made

of human hepatocytes (liver cells) and key non-parenchymal cells found in the liver including hepatic

stellate and endothelial cells. ONVO hopes NovoTissue will provide patients a bridge to transplant, or

possibly as a substitute to liver transplant. Implanting the tissue requires surgery and to date in

preclinical studies the tissue is only viable up to 125 days, or a little over 4 months.

ONVO is initially seeking FDA approval for NovoTissue to treat a type of IEM called alpha-1 antitrypsin

(AAT) deficiency. AAT deficiency is a genetic disease cause by mutation of the AAT gene. AAT

deficiency leads to lung and liver damage. Liver damage caused by AAT deficiency can lead to cirrhosis

requiring liver transplant. Like disease modeling and toxicology testing before it, seeking approval for

therapeutic tissue (NovoTissue) is nothing new and has been a goal of the company from the very

beginning. We believe most of the recent excitement in the stock has been based on positive results in

recent preclinical NovoTissue studies on mice. We have found several major hurdles that we believe

make any approval in NovoTissue impossible.

Reason 1: A Matter of Scale

On October 20th, 2017 ONVO published a press release that provided the most current preclinical data

to date for NovoTissue’s therapeutic impact on AAT deficient mice. The importance of these results

cannot be overstated. Now that the company has abandoned advancement in toxicology testing, and

disease modeling looks like nothing more than a shareholder funded science project, NovoTissue

approval is currently the only light left at the end of the tunnel for investors. AAT deficiency is the first

indication ONVO plans to submit to the FDA for NovoTissue approval.

The press release stated that the “pathologic evaluation of diseased animals receiving implanted

bioprinted liver tissues [NovoTissue] suggests an approximately 75% reduction in pathologic hallmarks

of the disease in treated animals versus non-treated control animals in the region of implant.” Wow!

That sounds spectacular! But let’s take a closer look at what they said.

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Note the point at the end where they say, “in the region of implant.” It’s a bit cryptic. The “region” of

implant could mean anything but they chose not to define it in the press release. It’s common in press

releases for companies to brush over the details without getting too granular. Often the minutiae of

clinical data are too complex for the casual observer to understand and it’s easier to wrap results in a

nice tiny package and put a bow on it. And let’s face it, most investors probably don’t look beyond what

is said in the press release anyway, but we like minutiae so we decided to investigate. We found our

answer in the company’s poster presented in October of last year at the American Association For the

Study of Liver Diseases (AASLD), and it turns out the “region” wasn’t difficult to understand at all.

“Reduction in globule number of ~75% was seen in treated vs.

sham-operated animals at 125 days post implantation, in the region

surrounding the [NovoTissue], to a depth of approximately 1mm.”

The “region” of improvement only extended to a depth of 1 millimeter. Let that sink in for a minute.

This happens to coincide with the approximate thickness of NovoTissue. In case you’ve forgotten your

metric system measurements, we’ve provided a miniature ruler below.

Source: difference between.info

(for approximation only)

Now consider the size of a mouse liver vs a human liver. A depth of 1 millimeter might mean a lot for a

tiny mouse liver, but how much is that going to help a human liver? The human liver is the largest

internal organ in the body, weighing in at 3 to 3.5lbs on average. In places it’s up to 6 inches (152.4mm)

thick. Initially, ONVO is focusing on pediatric treatment. Perhaps NovoTissue could work on smaller

livers? We doubt it. An entire mouse weighs about 20 - 25 grams, or about 0.05lbs. A mouse liver

weighs around 1 -2 grams. 2 grams is 0.0044lbs. Newborn infant livers weigh approximately 150

grams, or about 100x a mouse liver. A one-year old’s liver is approximately 400 grams, or 266x a

mouse liver.

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Source: BMC Clinical Pathology & Cliffside Research

If even the smallest human liver is far too big for therapeutic effect, how can anyone think NovoTissue

will be able to treat the human population at large? It is estimated that to induce normal liver function,

at least 10% and up to 30% of the diseased liver needs to be replaced by healthy, functioning liver cells

(hepatocytes).

When you consider the vast difference in size between mouse

and human livers and the amount of NovoTissue required for

therapeutic impact, it is very hard to imagine NovoTissue

producing clinically meaningful results on humans if the impact

only extends to a depth of 1mm!!!

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Source: ONVO AASLD Poster No. 805, Cliffside Research

Reason 2: Wonky Data

This same AASLD poster on AAT deficient mice provided other reasons for concern. The study found

that mice implanted with NovoTissue saw improved liver function for up to 125 days with increases in

key biomarkers including human albumin (hAlbumin) and human alpha-1 antitrypsin (hAAT). We found

the poster presented the data in the best light and was arguably deceptive.

One of the key charts in the poster displayed human albumin (hAlbumin) concentration in the blood of

PiZ mice implanted with NovoTissue. Albumin is a protein found in blood that is produced by the liver.

Finding hAlbumin indicated successful engraftment of NovoTissue. In our opinion, the chart on

hAlbumin concentrations implied Albumin levels were steadier than they really were over the 90-day

observation period. In the chart below from the poster presentation, you can clearly see the scale was

adjusted for the most extreme observations between days 14 to 35. The casual observer may assume

the hAlbumin concentration levels were more consistent over the entire period, when in reality there

was a massive, short-term spike.

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Link

Not only do study results indicate NovoTissue did not result in a long-term sustained increase of

hAlbumin in mice, it appears the amount found was miniscule, even for a mouse. As you can see in the

chart above, hAlbumin peaked at day 21 in mice at about 250 nanograms per milliliter (ng/ml). A

nanogram is 1 billionth of a gram. A study conducted to determine serum protein levels in common

laboratory rodents found that the blood of a typical adult lab mouse contains roughly 2-3 grams per

deciliter (g/dl) of albumin. Converting g/dl to ng/ml and assuming the midpoint of the range equates to

25,000,000 ng/ml of albumin in a common lab mouse. This implies that the 250 ng/ml of hAlbumin

found in ONVO’s mice study was about .00001% of the typical amount of albumin found in lab mice.

HAlbumin concentrations in human blood is roughly double that of mice (3.5-5.0 g/dl).

It’s important to note that the study utilized hAlbumin as a biomarker to demonstrate engraftment and

the amounts of hAlbumin are not equivalent to hAAT, but if the miniscule increases in hAlbumin are any

indication of the increases in hAAT, we do not believe NovoTissue will be efficacious. ONVO also

provided a chart of hAAT concentration, but instead of showing the absolute concentration in ng/ml

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they provided it as a percentage relative to sham. We noted that several observations appear to be

below some sham mice. The results appear weak with a short-term increase led by a return to levels

near sham. Again, we doubt the efficacy of NovoTissue to treat AAT deficiency based on these results.

Link

Reason 3: It Requires Too Much Healthy Tissue

The liver is the only internal organ capable of natural regeneration. Still, even with this unique capability

there needs to be a minimum amount of healthy tissue to induce regeneration. Unfortunately, there

are two major obstacles hampering liver cell tissue therapies like NovoTissue.

A. Supply - Although hepatocytes have shown amazing regeneration capability in vivo (in the

body), they are notoriously difficult to proliferate in vitro (outside the body). This issue appears

to apply to NovoTissue. NovoTissue is not grown, it is “printed” from liver cells sourced from

human bodies. This means NovoTissue is made of human liver tissue, and like livers available

for transplant, liver tissue is in low supply. Study after study highlights that the primary

limitation for cell transplantation therapies is a severe lack of adequate supply of primary

human hepatocytes due to donor shortage.

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B. Demand - As we stated earlier, an adult human liver weighs up to 3.5lbs. Hepatocytes are the

primary functioning cell (parenchymal cell) in the liver constituting about 80% of its mass. An

adult liver contains about 200 billion hepatocytes. Earlier we established that to produce

therapeutic impact requires replacement of at least 10% and up to 30% of the livers

hepatocytes. Therefore, we estimate that a cell replacement therapy like NovoTissue would

need to contain a minimum of 20 billion healthy, functioning hepatocytes to replace 10% of the

liver. Realistically, to be effective we speculate this figure is probably closer to 20% of liver

mass, equal to 40 billion hepatocytes.

Reason 4: Production Limitations

In addition to short supply, ONVO faces other production limitations that they will need to overcome to

make NovoTissue therapeutic implants a reality. Currently the company provides exVive3D liver tissue

in 24-well assays that contain a very small amount of tissue as seen in the photo below. This tissue in

each well is approximately 3 to 4 millimeters wide and .5 millimeters thick.

Source: Organovo

ONVO intends to produce dollar-sized sheets of NovoTissue for implant in humans. To date we found

no proof that the company is capable of printing dollar-sized sheet of NovoTissue. According to a

Financial Times article from March 4th of this year, Ben Shepherd, Director of Therapeutics at

Organovo believes “the challenges ahead are about increasing the size of the tissue that can be

grown.” We feel it is entirely possible that they will not be able to scale production to this size. The

tissue may lack uniformity, or parts of the tissue may begin to die before printing is complete. Since the

tissue is so thin, even if they can scale production to a dollar-sized patch, the tissue may lack structural

integrity making it too delicate to handle. This brings up an obvious question. Why not print thicker

tissue?

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Reason 5: Vascularization

The reason ONVO doesn’t print thicker tissue is because they can’t. When we spoke with the company

they said the thickest tissue they’ve been able to produce is about 1 millimeter thick. The reason for

this is due to lack of vasculature. Living tissue requires nutrients and oxygen typically supplied via blood

through vasculature. Lack of vascularization is the primary limiting factor to producing thicker tissue.

Beyond a depth of about 1mm the tissue will not survive. As a result, they are only able to print a very

thin amount of living tissue. This is not an obstacle that will be easy to overcome. The company has

been faced with this issue from the beginning and has appeared to make almost zero progress toward

creating thicker tissues. An interview with Xconomy in 2011 with former founder and CEO Keith Murphy

reveals the obstacles in place then are the same obstacles in place today.

“The next challenge is getting to greater and greater vascularization of the construct.

The emerging story is going to be, who can make thicker tissues with more blood

vessels inside?”

~Former CEO Keith Murphy

Reason 6: Other Bioprinting Challenges

3d bioprinting presents several other challenges that ONVO will have to overcome to make NovoTissue

a reality. For example, bioink viscosity is also very important to creating thicker tissue. When liver cells

are printed, they are extruded through a nozzle. If the bioink is of high viscosity (thick), then there is

added pressure on the cells that can damage their viability. Bioprinting generally requires low viscosity

(thin) bioink to maintain cell viability. When the cells are printed with low viscosity ink, the material

spreads after ejection from the nozzle. The spreading of the bioprinted material makes it difficult to

print thick tissue. Ultimately, we believe the money will run out long before they are able to

overcome these challenges.

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Link

NovoTissue is Several Years from Possible Approval:

The company is several years from FDA approval for NovoTissue. Based on FQ4 comments, it appears

the company sees NovoTissue as the only viable path to possible profitability for the company. They

stated in their FQ4 earnings release an intent to submit an Investigational New Drug (IND) application

with the FDA in calendar 2020 for alpha-1 antitrypsin (AAT) deficiency. We think it's highly probable

that the IND could slip to 2021 and potentially later. On the company’s FQ3 earnings call instead of

saying the IND application would be submitted during calendar 2020 as they have said in the past, CEO

Taylor Crouch said that the IND would be submitted by the end of calendar 2020.

“We continue to target distribution of our first investigational new drug application to

the FDA by the end of calendar year 2020.”

~ CEO Taylor Crouch, FQ3 transcript

Following the IND, they will have to conduct clinical trials (phases I-III). Currently they hope to begin

clinical trials in 2020 or possibly 2021. According to ONVO, the typical path to approval can take 7 – 10

years. Last December they received orphan designation for treatment of AAT deficiency with

NovoTissue. They believe with this designation approval time could be cut in half. That still puts them

on track for any possible approval in therapeutic tissue around 2024 at the very earliest assuming

everything goes as planned.

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Often things do not go as planned, especially when it comes to FDA approval. We suspect that if the

company is to ever reach approval it would be some time beyond 2024. This puts hope for any

profitability so far into the future it’s not worth attempting to forecast. Also, achieving FDA approval for

therapeutic tissue will take far more money than the $43.7mil in cash currently on the books. The

company alluded to this fact on their FQ4 call when they stated that they would continue to access the

$50mil ATM facility as needed and look to increase their authorized shares from 150mil to 200mil shares

for additional equity raises. With the stock well under $2 any equity raise will be highly dilutive to

current shareholders. We believe the brutal 72% dilution shareholders have endured to date since

2013 isn’t the end of dilution, it’s the beginning.

“Related to our financing strategy, we’ll be seeking an increase in our total authorized

common stock at our annual meeting in July. In order for this proposal to pass, the

majority of our outstanding common stock must be voted in favor of this proposal. We

encourage our shareholders to vote in favor of this critical measure, as it's important

to have an ongoing access to capital, as we move through the IND process and into the

clinic with our lead programs.”

~CFO Craig Kussman, FQ4 transcript

They intend to “piggyback” the initial indication in AAT deficiency with other indications. Based on mice

study results presented in May at the World Advanced Therapies and Regenerative Medicine Congress,

it appears the 2nd indication will be for fumarylacetoacetate hydrolase (FAH) deficiency, also known as

Type 1 Tyrosinemia. This indication will require additional studies and the money to fund the studies

will also likely come via equity dilution.

A Four Billion Dollar Market?

On the FQ4 call ONVO laid out a framework for the size of the total addressable market (TAM) for

NovoTissue. Assuming they ever reach approval, the company claims the market for NovoTissue is as

large as $4bil. They claim their first indication in AAT deficiency is a $1bil market.

“Our objective is to simultaneously advance multiple IND-track research programs in critical unmet disease areas, commencing with Alpha-1-antitrypsin deficiency or A1AT. We believe this indication alone represents the opportunity to generate peak revenues approaching $1 billion. Adding in other liver diseases that typically end in the common need for liver transplant, such as single mutation inborn areas of metabolism, urea cycle deficiencies, and acute-on-chronic liver failure, a total peak revenue target exceeding $4 billion may be achievable for our NovoTissues platform”

~CEO Taylor Crouch, FQ4 transcript

Of course, the company didn’t address how many years it might take to tap this market and they have

no idea what competitive offerings will be in play if they ever get there. In the past they have claimed

huge TAM’s that haven’t panned out. Their 2014 presentation claimed a $7bil TAM for preclinical

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testing services. Over the ensuing four years they produced only $7.9mil in product & services

revenue. These types of pie-in-the-sky TAM’s are common for public companies but are rarely realistic

predictors of revenue.

Source: ONVO 2014 presentation & Cliffside Research

A Dose of Reality:

Organovo would like us to believe that they will eventually get FDA approval for NovoTissue in several

indications including single mutation IEM’s like their initial indications in AAT deficiency and

Tyrosinemia, urea cycle deficiencies, and acute-on-chronic liver failure. Perhaps one day in the much

distant future they will, but each of those indications are going to require separate clinical trials. If they

can’t get approval in the initial indication in AAT deficiency, the chances of accessing the rest of the

market are slim to none.

What is feasible is what they are working on today, and that only includes AAT deficiency and possibly

Tyrosinemia. Still, they claim AAT deficiency alone is a $1bil market. If that were true then the market

in the US for AAT deficiency should be pretty big, right? After all, the US spends more on healthcare

than any other country in the world by a large margin.

Here are some simple facts. In the United States last year there were 8,082 liver transplants. As you can

see in the chart below, in the US currently there are a total of 13,731 patients on the liver transplant

waiting list. ONVO said on their FQ4 call that they believe they will be able to charge about $250k per

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NovoTissue procedure. That makes for a big market, but here’s the problem; it appears that initially

ONVO is targeting only the pediatric AAT deficiency population. The pediatric population is far smaller

than the adult population. Currently in the US there are only 417 total pediatric liver transplant

candidates on the waiting list.

U.S. Liver Transplant Waiting List (Candidates)

26-Jul-18

Waiting List Candidate Age

Liver Transplant Candidates % of Total

< 1 year 51 0.37%

1-5 years 154 1.12%

6-10 years 90 0.66%

11-17 years 122 0.89%

Total Pediatric 417 3.04%

18-34 years 714 5.20%

35-49 years 1,992 14.51%

50-64 years 7,169 52.21%

65 + 3,439 25.05%

Total All Ages 13,731 100.00% Source: Organ Procurement & Transplantation Network

It would be fair to assume that not all of them have AAT deficiency. In fact, according to The Childhood

Liver Disease Research Network there are approximately 50 children with AAT deficiency that undergo

liver transplantation each year in the US. If ONVO were to capture this entire market with NovoTissue

as a bridge to transplant, at $250k per procedure they would only generate $12.5mil per year in

revenue! At that pace it would take ONVO 80 years to reach $1bil in revenue. Admittedly, this only

includes the US pediatric market, but internationally markets will be much smaller than the US and at

$250k per procedure it’s unlikely most patients would be able to afford it.

ExVive3D: New Target Market, Same Old Problems and More!

When we spoke with ONVO, the company stated that the biggest impediment to toxicology testing

market penetration for exVive3D had been a lack of validation data and peer-reviewed publications.

They believed this issue would continue to limit their success until they reached “critical mass,” which

they defined as somewhere in the low 10’s of millions of dollars in revenue.

Now they have essentially abandoned toxicology testing and switched focus to disease modeling, but

they are still using the same 3d bioprinted tissues for disease modeling (exVive3D) that they did for

toxicology testing. This means they will still need to validate it's use in disease modeling the same way

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they needed to validate it in toxicology testing. Assembling enough validation data to reach a point of

market acceptance in disease modeling for exVive3D will likely take several years.

Toxicology testing is typically conducted on healthy tissue. It’s likely that disease modeling is more

complex than toxicology testing because it can involve tissue in a variety or disease states from healthy

to end-stage failure. Therefore, validation studies should be costlier and more time consuming than

validation studies for toxicology testing.

CEO Taylor Crouch alluded to the validation issue for disease modeling on the FQ4 call. Since the

disease modeling platform has not been validated, each customer is requiring customized results

specified to their needs. This issue is critical to profitability. Validating the platform would allow for an

ExVive3D production ramp and associated economies of scale. Customizing each project likely increases

project costs.

“Typically, those same adopters want to pursue a stream of projects, but all of the

projects are aimed at customizing our research to their specific needs. In other words,

requiring significant design elements and customization and unpredictable results, and

the outshot of that is, we are rarely able to predict which project will lead to the next

project with what timing, and typically there is a break for quite a lengthy scientific

discussion of, okay, we've found some cool things, we've developed some cool

functionality, what's the best next step. And so, we’ve really begun to think of our

revenues in a completely different way.”

~CEO Taylor Crouch, FQ4 transcript

Disease modeling is also a much smaller market than toxicology testing. In the past ONVO has said that

the market for toxicology testing was about $200mil per year. In their most recent corporate

presentation they claim the market for disease modeling is a ~$80mil over the next five years. That

would only produce an average of $16mil per year for the next five years. We don’t believe disease

modeling will be profitable under any scenario.

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Source: ONVO 2018 presentation & Cliffside Research

Growth Isn’t What It Seems:

Last year ONVO provided initial F18 guidance for revenue of $6 - $8.5mil. That was later reduced twice

to finally arrive at $4.5 - $5.2mil, or growth of 6.4% - 23%. Even at the high-end of guidance, total

revenue is a miniscule amount for a public company, but at least hapless investors can claim that “it’s

growing.” While this is technically true, we found upon closer review that even the reduced revenue

growth guidance isn’t what it seems. F18 revenue appears to have been “boosted” with two short-term,

likely unsustainable revenue sources that we think will come back to bite them in the form of tougher

comparisons.

Source 1 - Related Party Transactions

In August of last year during the FQ1 2018 earnings call CEO Taylor Crouch said that he expected further

multiyear collaborations by the end of the fiscal year (March ‘18).

“First of all, as I mentioned, I really hope and feel pretty confident that we’re going to

be able to talk about multiyear collaborations by the end of our fiscal year.”

~CEO Taylor Crouch, Q118 transcript

To date, developments on the collaborative front have been sparse. In 2018 the only collaboration we

are aware of is with a start-up called Viscient Biosciences to develop a custom research platform for liver

disease. Perhaps not so coincidentally, Viscient is Organovo co-founder Keith Murphy’s latest venture.

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Mr. Murphy is the former Chairman & CEO of ONVO and left the company just last year. In F2018

Viscient generated $358k in related party revenue for ONVO.

We see this as a major step-down from prior collaboration partners including Pfizer and Merck. As a

start-up, it’s unlikely Viscient has the funding to become a meaningful long-term partner to ONVO and

with the former founder directly involved we question the motives. This relationship has the feel of a PR

stunt to generate interest, or perhaps some type of quid pro quo arrangement.

The company has also received another $161k in related party revenue via ONVO board member Robert

Baltera, Jr. from another start-up called Cirius Therapeutics, Inc. Mr. Baltera became CEO of Cirius,

formerly known as Octeta Therapeutics in April of last year. Combined related party transactions

accounted for 11.3% of revenue for ONVO in F2018. If this doesn’t sound like much, consider this;

without the revenue contributions from related party transactions, instead of growing 9% revenue

would have been down 3% in 2018.

Source 2 - Grant Revenue

Grant revenue was common in ONVO’s early years. Sources of grant money have included the NIH and

the National Heart, Lung and Blood Institute, a division of the Department of Health and Human

Services. But here’s the thing about grant money, it’s not terribly meaningful and tends to run out.

Between F2013 and F2016 ONVO generated $725k in grant revenue, but by F2017 it was down to $41k.

In July of last year ONVO received a NIH grant worth $1.7mil over 3 years. In F18 they recognized $554k

in grant revenue, representing 12% of total revenue. This provides a short-term revenue bump, but it

sets the company up for difficult comps. They’ll get another roughly $600k/yr for the next two years but

that won’t add to growth, then it drops off and becomes a drag. Even though the amounts are small on

an absolute dollar basis, they are not that small to ONVO. Grant revenue also provides little to no help

in terms of reaching sustained profitability.

Excluding revenue from related party transactions and the NIH grant, which we view as unsustainable

short-term revenue pops, total revenue would have declined in F2018. Recall that original revenue

guidance for F2018 was for $6 - $8.5mil, or growth of 42% - 101%. Excluding grant and related party

revenue, fiscal 2018 revenue was down 15.7% vs 2017.

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Source: SEC filings & Cliffside Research

Prior Collaboration Fails:

ONVO has historically collaborated with several companies including Pfizer, United Therapeutics, Merck

and L’Oréal. Unfortunately to date these collaborations have been dead ends. The Pfizer collaboration

began in 2010 and focused on developing ONVO tissues for drug discovery. The Pfizer collaboration

concluded in 2012 with no follow-on order. The United Therapeutics collaboration began in 2011 and

focused on treatment for pulmonary hypertension. Similarly, the work for United Therapeutics

concluded in 2013 with no follow-on order.1

As recently as 2017 ONVO had been working with L’Oréal and Merck. L’Oréal was interested in 3D skin

tissues for cosmetic testing. Merck was interested in custom tissue modeling. According to the

company, both programs ended after reaching targeted milestones in FQ3 2017. Management stated

that they don’t expect revenue from L’Oréal going forward as they look to deprioritize this relationship

due to limited revenue opportunity and cost.

ONVO hopes to secure further collaboration revenue from Merck, which they consider to be the more

important relationship, but haven’t provided a timeline. Based on recent comments from management,

1 ONVO S-1 2012-06-13, pg. 26

0 0 0 0 0

519

1292

379571

1483

4230

4603

1013

248448

1292

4189

3530

2013 2014 2015 2016 2017 2018

FY FY FY FY FY FY

ONVO revenue was down 15.7% y/y excluding related party revenue and grants in F2018

Related Party Revenue Total Revenue Revenue ex grants and related party revenue

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we suspect Merck is no longer interested in collaborating with ONVO. Below is what the CFO had to

say regarding an analyst question about renewing collaboration revenue that has been completed. We

believe this is a clear reference to the collaboration with Merck.

“Yeah, these collaborations were basically around the development of specific tissues

and they are pretty much - you can think of them, at least the historical ones that

we've done, have really been kind of one off and are not necessarily intended to lead

to what I would call routine type of screening or disease modeling.”

~CFO Craig Kussman, Q318 transcript

If we are in fact correct that Merck decided to end collaboration efforts, this is at least the fourth time a

major corporation has ended collaboration efforts with ONVO.

Conclusion:

Since 2014, when Organovo (ONVO) first announced that exVive3D was commercially available, they

have been pursuing its use in drug compound toxicology testing. Over the past three years at

conferences, on roadshows and in investor presentations, the company has been pitching the idea that

their tissue could disrupt the $3bil+ market in liver and kidney toxicology testing and eventually

generate at least $200mil in annual revenue for ONVO. During subsequent years ONVO has been

unable to generate meaningful revenue in toxicology testing with total sales peaking at only $4.6 mil

for F18.

We believe the company specifically chose to focus on toxicology testing because they felt it was the

easiest, lowest hanging fruit for their technology. Last November on their fiscal Q2 earnings call, new

CEO Taylor Crouch made a major strategy shift when he announced ONVO would no longer actively

pursue the toxicology testing market for exVive3D. He stated that the return on investment in

toxicology testing was too low and that they weren’t seeing the “routine tox business” from clients that

they had expected. This was a major development for ONVO. The failure in toxicology testing implies

that the pharmaceutical industry simply is not that interested in what ONVO is selling.

Now the company is focusing on generating revenue for exVive3D in disease modeling, but this is

nothing new. Like toxicology testing, ONVO has been attempting to tap the disease modeling market

from the very beginning.2 If the market in disease modeling is more attractive than toxicology testing,

why haven’t they had any meaningful disease modeling revenue over the past three years?

ONVO also looks to supplement revenue by selling human liver and kidney cells collected from their

wholly-owned subsidiary, Samsara Sciences. Samsara is purely a commodity-based business formed in

2016 primarily to procure low cost liver and kidney cells for internal R&D efforts at ONVO.3 With the

renewed focus on Samsara, it appears the company has stumbled upon the possibility that the market

has more interest in commodity cells that employ none of their technology than it does for their 3D

bioprinted cells. However, based on our discussions with the company, it appears Samsara was never

2 ONVO 2013-05-24 10-KT, pg. 3 3 ONVO 2016-06-09 10-K, pg. 5

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intended to be a profit center and will continue to be a money-losing cost center for the foreseeable

future.

Based on FQ4 comments, the company appears to have abandoned efforts to reach profitability on

the existing business. Instead they are focusing their efforts on FDA approval for NovoTissue and using

what’s left of the existing business as a source of funds. They claim this is a $4bil market, but initially

they are targeting a very tiny piece of that pie that probably doesn’t amount to even $40mil. If

NovoTissue were ever approved, we estimate the earliest approval would be in 2024 or later.

Ultimately, we believe NovoTissue will fail clinical trials due to lack of efficacy. Other obstacles include

lack of supply, and production limitations.

For F19 they have provided no revenue guidance because revenue is admittedly unpredictable and they

badly missed F18 revenue guidance. They’ve guided to cash burn of $20-22mil for F19 and that should

continue for the foreseeable future. Once they begin clinical trials for NovoTissue, cash burn will likely

increase substantially. They have already diluted shareholders by 72% over the past six years and

indicated on the last conference call that they intend to continue diluting shareholders going forward.

We do not think ONVO should be a public company. They have some interesting technology, but at

this stage we feel the company is primarily an expensive science project funded by shareholders. On a

fully diluted basis the company has 129.5mil4 shares outstanding and a market cap of approximately

$160mil. ONVO has an accumulated deficit of $234mil and has burned through over $137mil in cash in

just the past six years with no end in sight!

At the end of the day, companies that can’t turn a profit are worth zero, and we believe ONVO will

never be profitable. Since the company has consistently produced disappointing results and

consistently misses estimates while burning vast amounts of cash, we can not justify a valuation above

cash. ONVO had $43.7mil of cash as of the most recent quarter equating to 34c per share. Therefore,

we feel fully justified in our target price of 34c per share representing downside of approximately

72%.

FULL DISCLOSURE:

Cliffside Research and our affiliates invest in the companies in our reports. We spend great effort in

our due diligence process. We make investments based on our conviction in our due diligence

process. You should assume at the time of publication we hold a short position in securities of the

company discussed in this report. Please see our full “Terms of Service” at the bottom of this report

or at cliffsideresearch.com.

4 ONVO F2018 10-K, pg. 22

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