On 6/25/2012 we sent our premium members an email stating that we were taking a small short position in ONVO due to the recently filed S-1 that could lead to massive selling. On 6/27/2012 we sent our members our follow-up research article titled, “Organovo Shares Could Be Headed To $3 Per Share” explaining why we believed that shares could get destroyed once the S-1 goes effective.
Our valuation scenario at that time led us to a price target of $3.00 per share based on 4x an overly aggressive and unrealistic revenue assumption for 2012 of $45 million (the company had $1 million in revenue at the time).
The stock was trading at $9.08 at the day of our article, shares hit a low of $3.50 in the same trading day.
As we will show we still are having a difficult time justifying elevated levels in ONVO shares and still think the stock is worth $3.50 or lower based on new valuation scenarios.
Quotes from our article:
“It is easy to get excited about a company like ONVO that is attempting to make strides in medical research, but we think the valuation, given the facts, is insane.”
“A bullish ONVO Seeking Alpha article mentioned two comparables, Scolr Pharma Inc (NYSE AMEX:DDD) and Stratasys, Inc. (NASDAQ:SSYS). Both firms generate significant revenues, are profitable and are selling at market cap to sales ratios of 5. Both of these companies serve the three-dimensional (3D) printer market, so we are not sure why the author even used them as comparable to ONVO. Regardless, the author should realize that ONVO, a company with minimal revenues, is selling at a market cap to sales ratio of over 500, assuming all in-the-money warrants are exercised!”
“We believe a more appropriate comparable would be a direct competitor mentioned in ONVO’s S-1 filing, Advanced BioHealing, Inc. Advanced BioHealing planned an initial public offering in May of 2011, but chose not to when Shire Plc agreed to buy the company a day before the biotechnology company was to go public. The company had planned to offer 13.4 million shares, priced from $14 to $16 and would have had 39.8 million shares outstanding, giving its shares a market-cap of around $600 million or a market-cap to sales ratio of 4. Advanced BioHealing achieved 2012 revenues of $140 million and was profitable on a non-GAAP basis. Investors can view the Advanced BioHealing May 16, 2011 prospectus here.”
“Armed with this data, we can derive an approximate value of ONVO’s shares of it were to IPO today:
- ONVO’s 2011 revenues ~ $1 million
- ONVO’s market-cap assuming all warrants are exercised: 60 million outstanding shares times current price per share of 9.1 = $546 million
- ONVO’s market-cap to sales ratio >500
In making a casual observation, we believe it is ridiculous that the valuation ($546 million) of a company with virtually no revenues is on par with a top tier company with meaningful revenues that is profitable. But we will still give ONVO the benefit of the doubt.”
“Let’s be foolishly optimistic and assume that ONVO will accomplish the unthinkable and generate $45 million in revenues in 2012, which matches the revenues Advanced Biohealing, inc. achieved after its first full year of product commercialization.”
“Let’s also assume that investors are willing to pay four times our revenue 2012 assumptions. Doing this yields a valuation scenario of $3.0. ($45 million in sales times 4 divided by 60 million shares).
Well it’s been over a year since our article and ONVO is actually generating less revenue than it did at that time ($1 million then vs. $258 thousand 2013 run rate) and has around 80 million shares outstanding. We are now providing new valuation scenarios based on current SEC filings and Rick Pearson’s negative article, “A Very Detailed Look At Organovo,” published this morning.
Using the same principles that we did in our first article, and a new share count assumption of around 80 million (vs. 60 million at time of our article) yields the following targets:
- Scenario One: Once again being foolishly optimistic on revenue assumptions, and using the Advanced Bio Healing takeout Price to Sales multiple of 4, gives us a price target of $2.25 ($45 million revenues x 4 = 360 million/ 80 (shares) = $2.25)
- Scenario Two: Rick Pearson’s high side assumption that ONVO can achieve $5 million in revenues within the next three to five years gives us a price target of $0.25 ($5 million revenues x 4 = 20 million/ 80 (shares) = $0.25)
- Scenario Three: Using the highest annual revenue number the company has ever achieved gives us a price target of $0.05 ($1.0 million revenues x 4 = 4.0 million/ 80 (shares) = $0.05)
Those investors who believe in the ONVO story can add ONVO’s cash per share of $0.53 as of most recent 10Q and some nominal business value to these targets.
Notice that we are not even using a present value assumption, which would lead to even lower numbers.