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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%.
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4 ONVO F2018 10-K, pg. 22
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