The Issue With Buying Organovo Holdings Inc (ONVO) Stock in 2016

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As investors, we’re not getting better if we’re not constantly learning, and unfortunately, lessons on Wall Street can cost a pretty penny. If you own Organovo Holdings Inc (ONVO) stock, I’d like to share an expensive lesson I learned that may be able to help you avoid some losses in 2016.

The Issue With Buying Organovo Holdings Inc (ONVO) Stock in 2016If you don’t know the story behind ONVO stock, perhaps you should. It’s a fascinating small-cap life sciences company that specializes in developing human tissues for drug testing, discovery, biological research, implants and the like.

Right now, ONVO’s only commercial product, exVive3D Human Liver Tissue, is an assay that tests the toxicity levels of bioengineered human liver and kidney tissues. In commonspeak, that means pharmaceutical companies can basically use Organovo’s product to test how their drugs work on human tissues … without testing them on humans themselves.

That’s a pretty powerful product, and one that immediately generates excitement for pretty much anyone who first reads or hears about ONVO stock.

And therein lies the problem.

The MannKind Mania

Every company is different, and so comparisons between them should be made cautiously, to avoid the ol’ apples-to-oranges fallacy. While the following comparison is indeed a comparison between two disparate companies, I see it as more of a tale of caution for stock market investors.

MannKind Corporation (MNKD), like ONVO, is a small-cap biotech with one commercial product on the market. Like Organovo’s exVive3D, that product could be potentially revolutionary … in theory. MannKind’s Afrezza is an inhaled insulin, delivered through a small, convenient and proprietary inhaler-type device called the Technosphere.

After Afrezza was approved to treat both Type I and Type II diabetes by the FDA in the summer of 2014, the stock roared higher. And when MannKind, which didn’t have the capital resources to make the drug a commercial success on its own, secured worldwide pharmaceutical giant Sanofi (SNY) as a marketing partner, investors were giddy with expectations.

Afrezza hit the shelves in early 2015. Investors waited, quarter after quarter, to see impressive sales of MNKD’s only hope. They never came, and last week Sanofi terminated its agreement with MannKind, as soon as it was legally allowed to do so.

My concern is that investors have the same unrealistic expectations for ONVO that they did for MNKD. The early sales numbers for exVive3D are hardly impressive, and Organovo’s market cap is over $200 million right now, an absurd multiple of the $1.66 million in sales Wall Street expects ONVO to do in fiscal 2016, which ends on March 31.

It’s true that ONVO stock already posted huge losses, shedding 66% in 2015. So the fact that shares were priced unrealistically isn’t exactly a new revelation. But the scary part for shareholders is that the stock still looks be priced for perfection, so huge losses in 2016 aren’t altogether unlikely either.

Personally, I was a believer in MNKD, and lost an embarrassing percentage of my investment, merely because I loved the Afrezza story so much. Don’t fall for the Organovo story — wait for it to start playing out first. You may miss out on some initial gains, but the returns over the long-run if you’re right and exVive3D takes off will dwarf those early returns you’re sitting out.

Plus, the fact that the company can very realistically still issue more shares and dilute current shareholders to raise more capital — something it actually did in 2015 — is worrisome. I’d stay away from this speculative stock for now, no matter how compelling its story is.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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