Small-cap companies like Organovo (ONVO) frequently go through a lot of ups and downs – particularly with regards to their share price. That said, the roller coaster Organovo’s been on over the last couple of years has been notably dramatic, even by the standards of the small-cap biotech space.
I’ve written a lot about Organovo, a company that’s been the source of some real confusion over its short-term value proposition. The company has also been targeted by short sellers, so it’s not surprising to see the name pop up in the news on any given day, whether for another major swing in the value of its stock, or a news release.
However, one recent news item provided yet another angle to Organovo’s already complicated story. On Tuesday, the company had signed a research collaboration deal with L’Oreal ($LRLCY) to develop their 3D bioprinting process for human skin.
The Revolutionary Long-Term and Surprising Short-Term Value of Organovo
Organovo’s precise value has frequently been misunderstood by the investing public, which is understandable, since the work they do is truly at the frontier of science and engineering. The company uses 3D bioprinting to print human organs. While this technology could potentially have a variety of valuable applications in the distant future by creating actual functioning organs that could be transplanted into people, in the short term it’s a potential boon to biotech companies by creating laboratory proxies for those organs.
Right now, Organovo can create liver tissue that remains functional for up to 40 days. That may not sound like much to someone in need of a liver transplant, but to a company developing a drug that affects the human liver, it’s gangbusters. Industry experts currently estimate that 40% of the $50 billion spent annually on developing new drugs goes towards treatments that will never make it to market. The chance to test on human liver tissue and discover a drug’s ineffectiveness or toxicology prior to spending years of research and millions of dollars on time-consuming clinical trials is worth a lot to biotech firms.
Essentially, Organovo is a medical testing technology play. They’re helping carve a huge inefficiency out of medical testing in the form of tons of R&D money getting pumped into drugs that ultimately fail. However, the deal with L’Oreal may offer a hint at another benefit: the dramatic reduction, and in the long run, perhaps the complete elimination of animal testing.
The Uncomfortable Truth of Animal Testing in the Cosmetics Industry
Animal testing and the cosmetic industry have an uneasy relationship. Animal testing of all kinds has long been a point of contention between animal rights activists and the companies that rely on testing to ensure their products are safe and effective. For companies that are working on potentially life-saving medical treatments, it’s always been a lot easier to absorb criticism. “Nobody likes animal testing, but we’re trying to cure cancer here,” is a pretty solid defense for most people.
However, it wasn’t so easy for the cosmetics industry. “Nobody likes animal testing, but we’re trying to sell lipstick here” hasn’t had quite the same ring to it. As such, they would frequently become a whipping boy for the animal rights crowd.
The industry has made a lot of changes in response to the bad press. L’Oreal, for instance, goes out of its way on the company site to make it clear that they don’t test on animals. PETA, however, disagrees, at least with regard to L’Oreal USA. Push comes to shove, no corporation wants their brand associated with hurting little bunny rabbits – that’s PR 101. It’s also a big part of why animal testing has declined as much as it has, with less than a million animals used in tests in 2012, down from some 50 million in 1970.
However, that doesn’t mean that there aren’t still tests being run. Tests that aren’t likely to stop in the near future. These companies test on animals for a reason. Better to get bad PR for being a company that tests on animals than getting flagged as the company that sold people lipstick that burned their faces off. I exaggerate, but it’s true.
It’s also a real catch-22 for consumer goods companies. Enter Organovo.
Could Organovo put an End of Animal Testing?
It should come as no surprise that L’Oreal, and plenty of other consumer goods companies that are targeted by animal rights groups, would be very interested in a chance to test products on 3D-printed human skin. This would be an ideal solution, allowing for continued rigorous testing that ensures their products are safe for consumption by the general public without the bad PR of being a company that tests on animals.
L’Oreal is likely hoping that Organovo is that rare chance to have their cake and eat it, too.
For Organovo, it’s another example of just how much opportunity they have for applications of their core technology. Certainly, a small-cap biotech company with a lot of potential is nothing new, but Organovo continues to demonstrate that they have a lot of options for potential revenue streams.
Unlike most small-cap biotechs, Organovo actually has a product on the market. Add to this the deal with L’Oreal, and their efforts to print functioning kidney cells, and it should be clear that Organovo is only beginning to leverage its possibilities. More than simply a chance for pharmaceutical companies to determine which drugs to take to trial, Organovo could appeal to a wide variety of consumer products that require testing.
The full story of Organovo remains unclear, but that’s the nature of small-cap investing. The stock has reached major highs and plunged hard from them, but in many ways, this isn’t a typical small-cap play. With one service already on the market, and tremendous potential for expansion into a variety of new areas by way of the same foundational technology, Organovo continues to be the sort of company that’s likely to attract a lot of attention.
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