Is Organovo Coming of Age?

Source: Organovo

Long term investors hope that the launch of Organovo's exVive3D Human Liver Model marks a significant turning point for the company. After years of research into developing bioprinting technology to create 3D liver tissue for clinical drug research, the company will soon learn whether or not there's a market for it.

It will be a couple quarters before investors can get a firm grasp on the market opportunity, but industry excitement suggests that demand for liver cells for drug testing could prove to be big.

Solving a problemMembers of the industry trade group PhRMA spent $48.5 billion researching new medicine last year, or roughly 20% of their sales. Yet despite that spending, the percentage of new drugs making it through clinical trials to market remains discouraging.

According to research published in Nature earlier this year, 92% of small molecule drugs entering early stage human trials never reach the market. Meanwhile, 60% of drugs that reach mid stage trials and 40% of drugs that reach phase 3 trials fail. As a result of this disappointing success rate, researchers at Tufts Center for the Study of Drug Development estimate that the cost of developing a new medicine, including the cost of missed opportunities, totals $2.9 billion.

The increasing complexity of next generation personalized medicine is partially to blame for the soaring research costs, and liver toxicity is a major contributor to the failure rate of compounds during trials. About 25% of all drugs that have either been withdrawn from the market or failed a phase 3 trials between 1990 and 2010 were pulled due to liver toxicity.

While Organovo's new liver tissue isn't likely to cure trial complexities, it could make a big impact on drug failure rates and overall spending. That's because Organovo believes that its new liver tissue does a far better job at identifying drugs likely to fail due to liver toxicity than prior-generation 2D cell culture assays.

Source: Phrma

Built it. Will they come?The potential for using more robust testing methods earlier in clinical development could significantly improve drugmakers' win-rate. Drugmakers could conceivably shave years off development timelines and billions of dollars in wasted research spending by identifying and discarding toxic medicine sooner.

Whether or not Organovo's new bioprinting solution can break down research practices and processes that have become deeply embedded in pharmaceutical and biotechnology R&D departments over the years remains an important question. Investors are also right to worry over how much the company might have to spend on sales and marketing to persuade drugmakers to give its liver tissue a shot.

So far, Organovo has indicated to investors that there is interest. This past spring, management let investors know that various drugmakers had approached it, and as a result it was pre-releasing its liver tissue to a select group of customers. In July, Organovo announced a deal with Johnson & Johnson to develop additional non-liver bioprinted assays. And in September, the company reported that a study by Roche showed its liver tissue successfully identified a toxic drug that hadn't been identified by prior generation 2D liver assays. If those kind of findings continue, then it's possible that Organovo may become an integral part of drug development.

Better hope soOrganovo estimates that the total addressable market for liver toxicology testing may be $1.3 billion per year. Since Organovo is arguably best-in-breed, it could capture a big chunk of that market over the coming years.

Investors hope that's the case, given that Organovo's spending pace suggests that it will need to raise more cash over the coming years to support the development of additional bioprinted tissues, including solutions for testing kidney toxicity. The company had negative cash flow of $9.7 million during the first six months of this year, and in September's investor meeting management said that it will likely need more cash than the $54 million currently sitting on its books.

Given the risk of additional dilution and the fact that we don't have any revenue (yet) to model just how much market share Organovo will capture, shares remain highly speculative, and that means that all but the most risk tolerant investors may want to see a couple quarters of sales success before buying.

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Todd Campbellis long Organovo. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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