As noted in previous ValueWalk articles here and here, the 3D printing market continues to find hedge fund short sellers, who now appear to be piling on the beleaguered and, some fund managers say, over-hyped category with increasing regularity.
The latest to trash 3D printing high stock valuations was hedge fund Lakewood Capital Management. In a letter to investors reviewed by ValueWalk, Lakewood’s Anthony T. Bozza mocks the hype, commenting on one of its short in the category: “Perhaps no company has ever positioned itself at the intersection of two hotter industries than Organovo Holdings Inc (NYSEMKT:ONVO), which appears to be both a 3D printing and biotech play at the same time. In our first quarter 2013 letter, I highlighted Uni-Pixel as a company that possessed as many traits that we seek in a short as we had ever seen (the stock is down over 70% since). Organovo might be a close second.”
High R&D expenditures cost of entry into 3D printing market
Noting an absurd market capitalization with correspondingly high levels of investment in R&D synonymous with so many in the category, the letter points out that Organovo had 36 full time employees, $1 million in property and equipment and had spent $11 million cumulatively on R&D since inception in 2007. The stock has nearly tripled since last summer to recent levels around $10 per share, representing a market capitalization of nearly $1 billion.
The letter notes Organovo is optimistic in regards to selling bioprinted tissues with the first such product being a 3D liver assay product for use in research labs during drug development by pharmaceutical companies. Organovo believes this product will be in high demand by major pharmaceutical companies.
“We are skeptical,” the letter notes. “Our research indicates Organovo is just one of several groups working on such a product, and the machines are relatively easy to build and have been around for a while. Many pharmaceutical companies build their own 2-D cultures, so if they are dissatisfied with the existing protocols, one might imagine they can afford to match Organovo’s cumulative R&D spend of $11 million to make a 3-D culture (Eli Lilly, the smallest of the large cap U.S. pharmaceuticals companies spends $15 million per day on R&D). Furthermore, a general protocol for drug development that includes the use of 2-D cultures for toxicity has been in place for over a decade and is going to be very difficult to change to 3-D cultures.”
Personal attacks on Organovo
The attack on Organovo doesn’t end at the company balance sheet, it gets personal. “Some bullish investors have claimed that Organovo might one day even print human organs which, if true, would make Organovo Holdings Inc (NYSEMKT:ONVO) a major step up for CFO Barry Michaels who previously served as the CFO of two public companies that have both since been delisted,” the letter snarks. “Furthermore, one might wonder why two of Organovo’s founders, Gabor and Andras Forgacs, would have left behind such a fascinating opportunity to start Modern Meadow, a company whose ambition is to print meat and leather.”
But perhaps Lakewood’s most effective attack comes when pointing out the lack of sales. “Researching a company that has basically sold nothing can be a challenging task,” the letter dryly noted, “but we were lucky enough to have found one university professor (and prominent tissue researcher) who had evaluated Organovo’s machine for purchase.” When Lakewood asked the researcher why she never purchased from Organovo Holdings Inc (NYSEMKT:ONVO), “she pointed out that it was cheaper to build the machine in-house with ‘a few grad students.’ When we asked her the total cost of the project, she estimated ‘tens of thousands of dollars.’
War of the shorts continues unabated
But the issues don’t stop with Organovo Holdings Inc (NYSEMKT:ONVO)’s machines being built more cost effectively by a group of grad students. “Surely, a machine made by ‘a few grad students’ would never match up against the revered product of a $1 billion market capitalization company like Organovo,” the letter notes, setting up the punch line. “We asked the professor how much they had to sacrifice in terms of quality by making it themselves. She responded, “Oh no, our machine is better.”
And thus the war of the shorts in the 3D printing market continues unabated.