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ATOS: A Pure Play Breast Care Company with Great Potential to Grow

By Grant Zeng, CFA


Pharmacogenetics Testing Will Generate Meaningful Revenue for Atossa in 2015

Atossa’s (ATOS) subsidiary, the National Reference Laboratory for Breast Health, Inc. (the NRLBH), is offering pharmacogenetics (PG) testing for patients. Results from PG test can help doctors prescribe drugs and doses best suited for each person based on an analysis of their genetics.

The PG test was launched in late October 2014. Since then, more than 500 tests have been processed for patients in the US with an average retail price of approximately $1,700 per patient. The NRLBH is also in the process of offering the test in select European markets.

Current capacity at NRLBH can process approximately 5,000 pharmacogenetics tests per month and can increase capacity by hiring additional employees and adding additional equipment to its facility.

In order to accelerate the growth of the PG test, Atossa has retained BioVentive Inc. as its sales and marketing partner for the pharmacogenetics tests in the US. Going forward, BioVentive’s experienced sales and marketing team of over 85 women's health sales representatives will greatly raise the visibility of the PG tests for Atossa. 

Atossa plans to utilize its third-party reimbursement firms, FedMed, MultiPlan, Xifin and HealthSmart, to maximize the amount and speed of collections and help ensure that insurance companies that are members of these organizations pay for this test for their covered patients. 

It’s our belief that the new PG test will generate meaningful revenue for Atossa beginning in fiscal 2015.  Pharmacogenetics testing is a subgroup of molecular testing. PG test has become an emerging market with great potential for growth over the next 10 years. Pharmacogenetics involves testing an individual's genetic make-up to determine which drug regimen will best benefit his or her condition.

According to a study by Kalorama Information, pharmacogenetics testing represents just 2% of molecular testing at this time. The PG testing will eventually represent the largest segment in terms of dollar volume. 

The PG testing at Atossa already has gained traction since its launch in late October 2014. With the help of BioVentive, Atossa can maximize the revenue and profitability of the pharmacogenetics testing to help finance the company’s broader business. Revenue from the pharmacogenetics testing should add substantially to the company’s bottom line and help finance its therapeutic development and device business in a non-dilutive manner. 

The ForeCYTE Breast Aspirator Device Serves as Second Source for Revenue Generating 

In October 2014, Atossa received CE Mark from the European Medical Device Directive (MDD) for its ForeCYTE Breast Aspirator, which allows for Atossa to distribute the device in the European Union and its member states. 

The ForeCYTE Breast Aspirator device is a reusable, hand-held pump device intended for the collection of a small amount of nipple aspirate fluid (NAF) from a woman's breast for cytological testing. The CE Mark verifies that the ForeCYTE Breast Aspirator device meets the applicable regulatory requirements for the European Union.

To facilitate the planned launch of ForeCYTE Breast Aspirator in select European markets in the first quarter of 2015, Atossa contracted in early December 2014 with Rhenus Advanced Services BV to provide comprehensive logistics services and support in European markets.  Rhenus will provide Atossa with logistics services and support throughout European markets from its facilities located in Tilburg, The Netherlands, including warehousing, packaging, shipping, invoicing and collections.

Rhenus is one of the largest logistics firms in Europe and manages logistics operations for many of Europe's leading medical device and healthcare companies. Contracting with Rhenus is a critical step in Atossa’s European launch, which provide second revenue source for Atossa.

In mid-December 2014, Atossa announced that it had hired Pieter van der Poel as Vice President of European Commercial Operations.  Mr. Van der Poel brings over 20 years of global medical device markets and business development experience for leading medical companies, including Philips Medical Systems, Hewlett-Packard Medical (now Philips Healthcare) and GE Healthcare.  He brings broad experience in change management, corporate strategy, up and downstream marketing and continuous process improvement gained while at GE Healthcare in Milwaukee. 

Focus Shifted in the US to FullCYTE Breast Aspirator 


In October 2013 Atossa initiated a voluntary recall of the ForeCYTE Breast Health Test and Mammary Aspirate Specimen Cytology Test (MASCT) device from the US market.  This was in response to concerns the FDA had made that Atossa had made changes in the device that required submission of a new 510(k) Pre-Market Notification.

In December 2013 Atossa submitted a new 510(k) for the ForeCYTE device but in September 2014 the FDA determined that it did not meet the criteria for substantial equivalence.  Atossa intends to request a pre-submission meeting with the FDA to reach agreement on the new clinical studies FDA is seeking and then intends to perform those studies and submit a new 510(k) notification for the ForeCYTE Breast Aspirator to the FDA.

Focus Shifted to FullCYTE Test in the US

With the delay of ForeCYTE breast aspirator re-launch in the US market, Atossa plans to now commercialize in the US an alternative breast aspirator, called the FullCYTE Breast Aspirator. The FullCYTE Breast Aspirator is an FDA-cleared device that was acquired by Atossa in 2012 and is a subset of Atossa's FullCYTE Microcatheter which Atossa has been preparing for commercialization over the past 12 months. Atossa will now prioritize the commercial launch of the FullCYTE Breast Aspirator in the US market, which serves as the third revenue source for Atossa in 2015 and onwards.

The FullCYTE Breast Aspirator is designed to collect a nipple aspirate specimen for cytological testing. 

The FullCYTE Microcatheter involves collecting ductal lavage samples from each of the five to seven individual breast milk ducts using the Company’s patented and FDA-cleared Mammary Ductal Microcatheter System and analyzing the samples by cytological examination. 

The aspirator device is comprised of a rigid polycarbonate cup which is placed around the breast nipple. The polycarbonate cup is attached to a user supplied standard syringe, which is used to pull a gentle vacuum to express breast ductal fluid. This fluid can be placed directly into a non-gyn liquid-based cytology fixative for transport to a pathology laboratory. The FullCYTE Breast Aspirator device is intended for single patient use only. 

FullCYTE was acquired in April 2012 from Hologic, Inc. Atossa paid an up-front fee and is obliged to pay royalties between 2% and 6% on aggregate net sales in the countries with issued patents. 

Strong Balance Sheet

As of September 30, 2014, Atossa held $11.4 million in cash.

In Jan 2014, Atossa closed a public offering of 5,834,234 units at a price of $2.40 per unit. The Company has received approximately $14.0 million in gross proceeds. Each unit consists of one share of common stock and one warrant to purchase 0.20 of a share of common stock.

Current cash can last through the end of 2015 according to our financial model. 

Atossa’s Shares are Undervalued 

We are re-initiating coverage of Atossa Genetics with an Outperform rating. Our 12-month price target is $5.50 per share. 

Atossa is an emerging medical diagnostics company with a focus on breast care. The Company currently has three sources for revenue generation: pharmacogenetics testing, FullCYTE breast aspirator and ForeCYTE breast aspirator distribution in the EU.

Atossa also holds 148 issued patents and 19 pending patent applications directed to its products, services, and technologies. This strong intellectual property position provides long term growth for the Company in the years to come. 

We think revenue will accelerate in the coming years thanks to its focused marketing strategy and continued new products/services offering. We see total revenue growing at an impressive 230% compound annual growth rate (CAGR) from fiscal 2014 to 2020 according to our financial model. We model that the Company will become profitable in fiscal 2019 with earnings per share (EPS) of $0.15 based on total revenue of $38.5 million. We forecast EPS will grow to $0.36 per share based on revenue of $55 million in fiscal 2020. This is impressive considering the relatively short history of the operations and the small size of the Company.

Based on Atossa’s strong fundamentals, we think the Company is undervalued. Currently, Atossa shares are trading at about $1.00 per share which values the Company at $25 million in terms of market cap based on 25 million shares outstanding. This is a deep discount compared to its peers. Based on our financial model, revenue will grow at amazing 230% CAGR from 2014 to 2020. Atossa will become profitable in 2019. We think Atossa shares should trade at 38 x P/E multiple which is similar to the biotech industry average P/E ratio. If we use this P/E multiple, coupled with our estimated EPS of $0.36 in 2020, discounted at 20% for five years, we come up with a price target of $5.50 per share.

One wild card for Atossa valuation is that the Company could be an acquisition target for big players. The clinical lab testing industry is quite fragmented currently, and merger & acquisition activity is looming. We all know that big players LabCorp and Quest Diagnostics are increasingly acquiring smaller players in this field. Qiagen NV, a research service company based in Netherland, entered into molecular diagnostics market in 2007 by acquiring Digene Corp. Since then, Qiagen has been quite aggressive in acquisition of other small genetic/molecular testing companies. 

With the increased activity in M&A in the industry, Atossa could be an easy target for acquisition. If acquired by big players, share price of Atossa may soar. 

We are optimistic about the Company’s prospect. With a rapidly growing market worldwide, combined with its unique technology and broad range of product offering, the Company is well positioned to boost its top line and bottom line in the coming years. We think at this time, downside risk for Atossa is relatively low while upside potential is high.


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