A Dilution Deluge Sends Organovo Holdings, Inc. Lower by 34% in October

Organovo frustrates long-term investors with another secondary offering. Image source: Getty Images.

What happened

Shares of Organovo Holdings (NASDAQ: ONVO), a small-cap life-sciences company focused on developing bioengineered human tissue that can aid in the drug development and clinical research process, plummeted 34% in October, based on data from S&P Global Market Intelligence. The reason for the plunge can be traced to a single press release.

So what

Before the opening bell on Oct. 20, Organovo announced that it was pricing yet another secondary stock offering. The press release notes that Organovo intended to price 9 million shares of stock at $2.75 per share, which was a 21% discount from where Organovo had closed on the previous day. Usually, but not always, when we witness such a disparity between the previous closing price and the offering price it's because there simply isn't much demand for the new shares being offered.

Also, as is customary, the underwriters of the deal have the option of purchasing up to an additional 15% of the common stock being sold, or 1.35 million shares in this instance. Organovo will net $25 million in gross proceeds from its common stock sale that it plans to use for general corporate purposes, including marketing and the commercialization of its liver and kidney assays. Ultimately, the stock offering diluted the value of existing shares and pounded Organovo's share price. Since the end of fiscal 2012, Organovo's outstanding share count has increase from 43.15 million to well over 90 million shares.

On a brighter note, Organovo also announced its preliminary fiscal 2017 second-quarter results on Oct. 11. The company announced a roughly 400% increase in revenue to about $1 million, including $0.4 million in collaborations and grants, and $51.7 million in cash and cash equivalents on its balance sheet. Note, this doesn't include Organovo's aforementioned $25 million in gross proceeds, which will be reduced a bit by fees.

The company also updated its fiscal 2017 outlook in a favorable manner. Revenue projections are expected to range between $4.5 million and $6.2 million, which is an increase of $0.5 million on the low end and $0.2 million on the high end, while net cash utilization is now expected to be between $31 million and $34 million instead of prior expectations of $32.5 million and $36.5 million.

Image source: Getty Images.

Now what

Innovative technology has seemingly never been Organovo's issue. The company has real-world Star Trek-type technology that could substantially reduce the cost and time it takes for drug developers to check the toxicity of certain experimental drugs on the liver and/or kidneys. Down the road, Organovo may have the potential to bioengineer implantable organs at a cost-effective rate.

But, in the meantime we're left with a company that's been rolling out its ExVive liver tissue assay at an incredibly slow pace. Presumably, the kidney tissue assay will follow suit. Even with the announcement that Organovo has commercial orders for its ExVive human kidney tissue from two top pharmaceutical companies, we still haven't seen this hype translate into top-line sales. Until that happens, Organovo's losses are liable to continue, which could necessitate more dilutive stock offerings.

Based on its current spending habits, Organovo probably has enough cash to make it through 2018, but beyond that point things become murky. My suggestion, as it's always been, is to stick to the sidelines and wait for Organovo's top and bottom line to dictate a reason to jump in.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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