Will Organovo Holdings Inc. be Bought Out in 2015?

By Markets Fool.com

Continue Reading Below

Source: Organovo.

The end of 2014 brought a lot of excitement for shareholders of Organovo . First, the company announced that it would finallyoffer its first product to the market: exVive3D Human Liver Tissues. Then, in mid-December, CEO Keith Murphy stated at an Oppenheimer investor conference that he would not be opposed to selling the company.

While the former was great news for long-term investors, it was the latter that really got the market's attention. But what are the chances that a buyout could actually happen in 2015? Read on for my take on the situation.

For those unfamiliar with Organovo
If you're new to Organovo, here's a quick primer. Using its NovoGen MMX bioprinter (shown below), Organovo can print out cells that can behave in a laboratory setting the same way they would in a human body.

Continue Reading Below

Source: Organovo.

Currently, the company only has liver tissue available for use. These liver assays can function like native tissues for over 40 days in laboratory settings.

Liver toxicities are one of the primary reasons that drugs fail in clinical trials. To date, there has been no reliable way to predict these toxicities before entering trials. By using Organovo's liver assays, drug companies could save billions by redesigning or killing their products earlier in the development process.

The company also plans to develop other types of cells for testing -- kidney cells likely being next -- as well as cells that could be used for therapeutic processes.

If Organovo isn't bought out in 2015, this will be why
In its entire history as a company, Organovo has almost no revenue to speak of -- but it sports a market cap of $500 million. Previously, almost all money coming into the company has been in the form of dilutive equity offerings and research partnerships with other companies or academic institutions.

If Organovo were to be bought out for, say, a 30% premium today, some Big Pharma company would be taking a $650 million bet on a company that has produced just $400,000 in revenue in the last 12 months. That's a price-to-sales ratio of 1,600!

Of course, the argument is that the company's technology and potential will more than offset the buyout price over the coming years. But Organovo's ability to fulfill that potential is uncertain, at best.

Murphy has already said that any revenue from the product's launch in November won't show up on the balance sheet until at least the second quarter of 2015, and those results won't be made public until August.

Furthermore, the CEO has also stated thatthe growth curve for the exVive3D Human Liver Tissues will be very different from that ofa pharmaceutical launch, where data has been collected for years and the market already knows a drug's potential.

Source: Organovo.

Given these constraints, it could be a year or more before we see Organovo's real potential to help drug companiessignificantly reduce their research and development spending. Many potential buyers would consider it wise to sit on the sidelines and see how this plays out before making any moves.

But there's a chance that someone is willing to take a risk
That being said, waiting until Organovo has proven its technology means potential suitors would likely pay a much higher price tag.

It's impossible to know exactly what type of data insiders have access to that we don't, but executives at Big Pharma companies could be impressed with the results from what they have seen so far.

Two companies stand out as potential suitors: Pfizer and Roche . Both have partnered with Organovo in the past and -- among all Big Pharma companies -- are likely the most familiar with Organovo's leadership team and the technology's potential.

Roche has $10 billion in cash on its balance sheet and Pfizer has over $30 billion. While buying Organovo would involve a significant dip into that cash pile, it also wouldn't break the bank.

One company that has been mentioned as a potential dark horse suitor is Gilead Sciences . The thought process here is that the company is intensely focused on liver treatments, having just paid out $470 million for rights to a liver treatment from privately held Phenex Pharmaceuticals.

Gilead has less cash on hand than the other two behemoths -- roughly $6 billion -- but could be considered a better fit.

The takeaway on buyout rumors
In the end, long-term, buy-to-hold investors should never factor in the potential for a buyout into their investment thesis. Organovo has the potential for a very exciting future, but it is also highly speculative. Investors need to keep that in mind when allocating their dollars.

If Organovo's technology truly can help pharmaceutical companies as much it says it can, investors should hope the company doesn't get bought out, as the long-term potential for price appreciation is much greater as a stand-alone entity.

Either way, as a shareholder myself, I think it's best to tune out the buyout rumors, and to focus on how the exVive3D Human Liver Tissues are received by the medical community over the next 12 months.

The article Will Organovo Holdings Inc. be Bought Out in 2015? originally appeared on Fool.com.

Brian Stoffel owns shares of Organovo. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.