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ValueWalk Responds To Organovo Holdings Inc

This week Organovo Holdings Inc (NYSEMKT:ONVO) announced that it had won a libel suit against little-known research firm Simeon Research. As part of that announcement, the company took a shot at our “editorial standards” in publishing the original Simeon report, mentioning ValueWalk specifically. We’ve put together a lengthy (although not complete) rebuttal statement in response, trying to set the facts straight.

Organovo

Lakewood Capital, others shorted Organovo first

We have since removed the Simeon report from our website as per the court order, but the fact of the matter is that Simeon’s report isn’t all that different from other short ideas from other firms. It’s not all that uncommon for short-sellers (or the buy side either) to sort of steal from or “regurgitate” the views of others. Also there are some common indicators of trouble that run across the board and come from a company’s SEC filings and / or actions.

After all, there are usually reasons to view a company from both sides, and those reasons are usually similar across multiple firms. So when we saw Simeon’s short thesis on Organovo Holdings Inc (NYSEMKT:ONVO), we weren’t really surprised. There is a well-documented history of short ideas on the company that stretches back years—in spite of Organovo’s repeated efforts to stifle these ideas.

NOTE: We do not take a stance on Organovo either way. All we do is report what is said about the company. It’s always up to investors to decide the veracity of any long or short report on any company. Nearly every public company has both buy-side and sell-side reports on it, but do most feel it necessary to lash out at negative reports? Certainly not.

That said, reputable firms like Lakewood Capital had short reports out before Simeon’s report came out. So while Simeon was perhaps more inflammatory with its remarks—and certainly less well-known and far less established than these other firms—the short thesis on Organovo wasn’t new. So what’s one more report to add to the pile?

Also one of Organovo’s complaints was that Simeon was new and had never published any research before. But why does this matter? After all, Gotham City Research was barely known before the firm took down Let’s Gowex. Incidentally, Gotham recently lost a libel case versus a U.K.-based company, Quindell.

So is there anything wrong with our editorial standards in this case? Absolutely not—unless you would also prevent short ideas from Lakewood Capital and others firms from being published for investors to read, simply because these short ideas make the company angry. Also why does Organovo feel it necessary to take a jab at ValueWalk on the Frequently Asked Questions page under Investor Relations on its website?

The fact that ValueWalk has partnerships with major asset managers, media outlets, etc. and they want to be associated with the site speaks for itself, as does the fact that ValueWalk is read frequently by compliance officers, analysts, CEOs, investor relations at major hedge funds, research firms, banks, etc. Additionally, ValueWalk breaks news and moves securities, which means big investors (or computers) also trust our content.

And then there’s the mention of Seeking Alpha. ONVO began the same post by bashing that website too while also complimenting them for not publishing Simeon’s piece.

So let’s take a look at the history of the short view on Organovo Holdings Inc (NYSEMKT:ONVO). It’s very lengthy, and the opinions reported on here do not necessarily reflect the views of ValueWalk, its writers or management. These are also not the only investors or research firms with short views of Organovo, although they have been the most public about this.

Organovo short dates back to 2012

What appears to be the first short idea (or at least one of the earliest published) on Organovo dates from June 2012. GeoInvesting stated that the company was overvalued, noting that after an S1 filing around that time became effective, a lockup on some of the company’s shares would end, paving the way for insiders to start selling their shares. It’s not uncommon for investors to view a lockup expiration badly, no matter what company we’re talking about.

The report also indicated that it would be a long time before there would be any meaningful commercialization of the company’s technology. Also it said Organovo would require constant funding and noted a price to sales ratio of 400 times. No, that’s not a typo—400 times, according to data from ActivistShorts.com.

Seeking Alpha contributor on the attack

Also Richard Pearson, a self-described activist investor and contributor to Seeking Alpha, has been posting about his short thesis on Organovo for some time. On July 9, 2013, the company up-listed to the NYSEMKT. Then later that month, Pearson suggested that Organovo’s 100% spike after its up-listing wasn’t warranted and that shares would decline.

He also noted that Organovo Holdings Inc (NYSEMKT:ONVO) had filed a $100 million shelf registration around that time and observed that the up-listing would probably make the company more vulnerable to short-sellers.

Then on Aug. 1, 2013, Pearson reported on an undisclosed legal action filed against Organovo by its own investment banker, Spencer Trask Ventures. In the action, the banker demanded that the 3D printing company fork over $28 million in compensation for a stock and warrants placement it had completed.

Organovo seeks to stifle short ideas

Pearson also criticized Organovo’s stock promotion practices, including how it used the website Retailinvestorconferences.com. That same day, the company made another public offering that was later set at $46.6 million. A couple of weeks later, Organovo warned investors about what it called “‘short and distort’ articles.” The 3D printer issued a similar warning after Simeon’s report was released earlier this year. The 2013 warning said that some articles written about it included “significant factual errors.”

Writing on Seeking Alpha again, Pearson took a “very detailed look at Organovo” in November 2013. At that time, he didn’t think the company would ever see significant revenue and noted that there was a lot of private competition in the 3D bio-printing market. He also noted that Organovo didn’t spend much money on research and development, so it seemed unlikely that its intellectual property was worth anything. Once again, this is something from the company’s public filings. There’s nothing remarkable about doubting a company’s intellectual property value if it doesn’t spend much on research and development.

GeoInvesting reminds investors of Organovo short

Then that same day, GeoInvesting said it was still shorting Organovo, although it was unclear whether that short position was held continuously since June 2012. The firm also raised questions about the bio-printing company’s chance to earn any kind of revenue.

It also noted that even “foolishly optimistic” revenue assumptions warranted a $2.25 per share price target. At that time, Organovo Holdings Inc (NYSEMKT:ONVO) stock was trading at around $12 a share.

In late November of 2013, Organovo said it would sell up to 4 million more shares through JMP Securities. Pearson pointed to insider selling around that time which suggested that the bio-printer maker’s management was eager to sell at the stock price at that time. This year Organovo found it necessary to publicly defend insider selling among its executives.

Citron Research issues short thesis

In January of this year, Citron Research then revealed its short idea about Organovo, calling it “a highly speculative company in biotech which has been swept up in the mania for 3D printing stocks.” The firm also called attention again to the company’s stock promotion tactics—again, something we have heard before from other sources.

It reported that a Japanese firm called Kanagawa Associates was cold-calling investors with a track record of investing in retail stocks to talk them into buying shares of Organovo. Citron also noted that few institutional investors held shares. Organovo Holdings Inc (NYSEMKT:ONVO) later responded to Citron to say that Kanagawa never actually sold any of its stock to any investors.

Lakewood Capital Management goes short on Organovo

In February, we reported that Lakewood Capital told investors in its letter at that time that it held a short position in Organovo.

In the letter, the firm said, “Researching a company that has basically sold nothing can be a challenging task, but we were lucky enough to have found a university professor who had evaluated Organovo’s machine for purchase.”

Upon asking why she didn’t buy from Organovo Holdings Inc (NYSEMKT:ONVO), she said it was less expensive to build the machine themselves using “a few grad students.” She estimated the project’s total cost at “tens of thousands of dollars.” She also told Lakewood that the machine they built is better than Organovo’s machine.

Organovo didn’t seem to have a response to Lakewood’s investor letter.

Valkyrie Capital adds fuel to the Organovo fire

In March, Jake Bergmann of Valkyrie Capital took to Seeking Alpha and suggested that the company’s dream of creating 3D printed human organs was “decades away.” He was also critical of Organovo’s technology and patent protection.

In addition, he also pointed to insider selling as a sign of concern about the company’s near-term capabilities, noting that the company’s top three executives had sold about $7 million worth of Organovo stock and also pay themselves almost $1 million a year.

At that time, his recommendation was to pair a short position in Organovo Holdings Inc (NYSEMKT:ONVO) with a long in Cellular Dynamics International Inc (NASDAQ:ICEL).

Simeon Research joins the party… finally

Later that month, Simeon Research sent out its controversial 56-page report, reigniting a firestorm of controversy about Organovo and “dissecting the fairy tale,” as the firm said. The firm said that the bio-printing company was at the “intersection of the boiling point of 3D printing and biotechnology euphoria” and that shares would have to fall back down to Earth. These comments are pretty much the same as what was said previously.

The report also echoed previous comments from others that the company’s technology wasn’t anything remarkable and claimed that it was lagging years behind its competitors.

Value Investing Congress furthers the Organovo debate

Well-known investor Whitney Tilson also gave a short thesis on Organovo in April at the Value Investing Congress. A couple of days later, Pearson, who was introduced as “The Sleuth,” also spoke at the event about shorting the bio-printing company. He once again criticized the company’s stock promotion practices, saying that its share price was a result of those efforts. He also said heavy dilution was ahead.

On Apr. 8, 2014, Simeon published a second report on Organovo Holdings Inc (NYSEMKT:ONVO), echoing Pearson’s remarks about the use of penny stock promoters. The firm said that those promoters essentially were trying to “dump shares onto retail investors while spending nearly three times as much on these promotional efforts as it has on research and development since inception.”

It also said that its own research suggested that Organovo was paying for those promotion services without disclosing its payments.

Organovo responds again

On Apr. 14, the bio-printing company again issued a statement about “misleading and inaccurate reports.” It added that it planned to launch its 3D liver printing product this year and attempted to cast doubt on the reputations of Valkyrie and Simeon. Admittedly, we at ValueWalk also know little about these firms either, but that does not make their opinions any less valid, particularly when they are so similar to comments made by others previously.

The company stated, “One firm appears to have been formed in February 2014 and has not issued any other reports other than on Organovo [Simeon]; the other firm has a mailing address at a virtual, rent-an-office [Valkyrie].”

The company filed a libel suit against Simeon days later, claiming that the firm’s statements were “factually inaccurate, grossly misleading or potentially harmful to its business.” Nearly a month later, Organovo Holdings Inc (NYSEMKT:ONVO) posted a document on its website about insider sales of its shares, defending its executives’ sales of its stock.

Then this week we reported that Organovo had won the libel suit against Simeon Research. The company also updated the frequently asked questions on its website to reflect the victory. Under the court order, Simeon Research had to remove its reports about Organovo from its website and social media.

The company also bashed ValueWalk in its statement, questioning our “editorial standards.” But with such a long and well-documented history of short interest, Simeon’s report contains few, if any new allegations.

None of the ValueWalk contributors to this report have any position in Organovo.

Michelle Jones also contributed to this report.