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ROSG: Three Platforms Will Drive Revenue Growth in 2014 and Beyond

By Grant Zeng, CFA

Strong 2013 Financial Results, Growth Momentum Expected for 2014

On March 31, 2013, Rosetta Genomics (ROSG) reported financial results for the year ended December 31, 2013.

Revenues for 2013 were $405,000, an increase of 102% compared to the $201,000 of revenues recorded for the year 2012.  The company recorded gross billings for 2013 of $1.1 million, which more than doubled from $490,000 in 2012.

Cost of revenues was $709,000 for 2013, up from $258,000 for 2012 primarily due to higher volume of processed samples as well as increases in personnel and infrastructure to meet current and anticipated sample volume.

Research and development expenses for 2013 were $1.7 million, compared to $1.2 million for 2012. The increase was primarily due to an increase in headcount and lab materials.

SG&A expenses for 2013 were $11.3 million, compared to $7.0 million for 2012. This increase was primarily due to the Company's ongoing investment in its U.S. commercialization efforts, as well as to increases in business development initiatives to procure collaborative and/or licensing agreements.

Operating loss for 2013 was $13.3 million ($1.37 per share), which included $847,000 of non-cash stock-compensation expense. Operating loss for 2012 was $8.3 million, including $549,000 of non-cash stock-compensation expense.

Net loss after discontinued operations for 2013 was $12.9 million or $1.34 per ordinary share on 9.6 million shares outstanding, compared with a net loss after discontinued operations for 2012 of $10.5 million or $2.35 per ordinary share on 4.4 million shares outstanding.

As of December 31, 2013, Rosetta Genomics had $24.5 million in cash and cash equivalents, restricted cash and short-term bank deposits. The Company used approximately $12 million in cash to fund operations in 2013.

We estimate that net cash requirements to fund operations in 2014 will be in the range of $14 million to $15 million. Therefore its cash balance of $24.5 million as of December 31, 2013, combined with projected revenue growth, will be sufficient to fund operations until late 2015.

We are pleased with the strong financial performance the company achieved for 2013; though it’s a little lower than our estimate of $44000 for 2013. The amount of revenue was still a small number, but we believe the growth momentum will continue in 2014 and beyond. This is already evidenced by gross billings of nearly $600,000 in the first quarter of 2014.

The company’s balance sheet was strong which will allow the company to focus on long term growth strategy.

Three Platforms to Drive Revenue Growth Going Forward

Focus on Currently Marketed Diagnostic Products

Based on its microRNA platform technologies, Rosetta currently markets four cancer tests it has developed: Rosetta Cancer Origin TestTM, Rosetta Lung Cancer TestTM, Rosetta Kidney Cancer TestTM, and Rosetta Mesothelioma TestTM.

Rosetta’s lead cancer test is Rosetta Cancer Origin Test, which is covered in the US by Medicare reimbursement at $3500/test. Rosetta Cancer Origin Test may be considered in-network by major payors for over 170 million lives. Rosetta is negotiating insurance coverage for their other three cancer tests.

These marketed products, especially the lead Cancer Origin Test will be the major revenue growth driver for 2014.

Long-term Pipeline Provides Sustainable Growth


In addition to the four marketed molecular cancer tests, Rosetta is also developing both tissue and body fluid based microRNA tests for other indications. Rosetta is also developing microRNA-based therapeutics. We believe the long term pipeline will provide sustainable growth for the company in the years to come.

Rosetta Genomics plans to launch at least one new diagnostic assay per year beginning in 2015. The company has a number of promising product candidates under development.

The first new diagnostic product the company is going to launch is the assay for indeterminate thyroid fine need aspirate, which is scheduled to launch at the end of 2015.

In 2016, the company plans to launch at least one of the following cancer diagnostics: a) Bladder cancer assay that predicts risk of invasiveness, for which the company has done two studies that have been published; b) ovarian cancer assay that predicts response to platinum treatment, for which the company has done a study and has a publication; and c) breast cancer, which the company is currently assessing.

The third diagnostic product under development is for
early diagnosis and refined risk stratification of patients following myocardial infarction (MI). Such a test has the potential to influence clinical management in a cost effective manner, by improving diagnosis, refining risk stratification and guiding therapy.

Heart Failure (HF) is a complex clinical syndrome that can result from any structural or functional cardiac disorder that impairs the ability of the ventricles to fill with or eject blood. It is the most prevalent disease in the western world and its prevalence continues to rise. It is estimated that 5 million Americans are diagnosed with HF and each year there are approximately 500,000 new HF patients. Besides its high prevalence, HF is also the most expensive disease in western countries.

Rosetta Genomics has so far performed two studies. The first study was published in the European Journal of Heart Failure (Goren et. al., 2012), showing that elevated serum levels of specific microRNAs identify heart failure patients. The second one was published in Am J Cardiology (Goren et al., 2013), correlating miR-150 to atrial fibrillation in patients with chronic systolic heart failure.

The company plans to launch HF diagnostics in 2017.

The company is also developing diagnostic candidates for chronic kidney rejection and Alzheimer's disease. Progress will be updated over the coming months.

Therapeutic Products

microRNAs are important regulators of gene and protein expression, and as such, they represent potential targets for the development of drugs. Expression studies have indicated significant changes in microRNA expression in different disease states in comparison to normal tissue. Therefore ThererthmicroRNAs can serve as a basis for a new class of therapeutic products.

Rosetta Genomics has demonstrated this in liver cancer, ovarian cancer and pancreatic cancer, where differential microRNAs that were shown in tissues of patients were used to find drug candidates that could inhibit those cancers through either microRNA inhibition or mimetics.

Those microRNAs served to design modified oligonucleotides with anti-sense sequences that were used in vitro in proliferation assays. If the microRNA inhibition can lead to reduction in proliferation of cancer cell lines, the anti- microRNAs with the strongest effect over cell proliferation were chosen as the drug candidates with most potential. The ability to specifically silence virtually every gene including previously non-druggable targets has made RNAi-based therapeutics a very attractive approach for treating diseases in many therapeutic areas.

Rosetta Genomics is developing a therapeutic for cytomegalovirus (CMV) infection.

In January 2011, Rosetta joined the Rimonim Consortium, which is supported by the Office of the Chief Scientist at the Ministry of Industry, Trade and Labor of the State of Israel (OCS). The purpose of the consortium is to develop RNA interference (RNAi)-based therapeutics. As a member of the consortium, Rosetta is entitled to certain grants to support its research and development activities. 

We believe the long term pipeline will provide sustainable growth for the company.

Collaboration Creates New Avenue for Revenue Growth

The third revenue growth platform for Rosetta is through collaboration with biotech/pharmaceutical companies to monetize its microRNA platform technologies. The company recently entered into a collaboration agreement with a major biopharmaceutical company to assist this company’s development of RNA-based therapeutics.

In January 2014, Rosetta Genomics announced that it signed a master service provider agreement with an undisclosed major global biopharmaceutical company, under which, Rosetta will provide its microRNA profiling and other services pursuant to a collaboration in important areas of unmet medical need utilizing a novel therapeutic approach.

This agreement leverages Rosetta’s microRNA biomarker platform and expertise to assist one of the world's leading biopharmaceutical companies to advance their research and development efforts on this important, novel therapeutic approach.

In addition to the company’s current cancer testing services and new products from its own, internal research and development initiatives, collaborations such as these represent third major platform for revenue growth for the company.

Moving forward, we believe Rosetta will enter into additional similar agreements as the company seeks to monetize its leading microRNA platform and expertise.

Valuation Attractive

We maintain our Outperform rating on Rosetta Genomics (ROSG) shares and reiterate our 12-month price target of $10.50 per share.

Rosetta is a revenue generating, emerging molecular diagnostics biotech company focused on molecular testing of cancers and other life threatening diseases. The company develops its diagnostic products based on the unique and proprietary microRNA platform technology. 

Currently Rosetta is marketing four cancer tests with focus on its lead Cancer Origin Test. This Cancer Origin Test is covered by Medicare reimbursement and other payors covering over 170 million lives. The company is negotiating for expanded coverage for the Cancer Origin Test as well as for reimbursement for its three other marketed cancer tests.

In addition to currently marketed tests, Rosetta is also developing other tissue or body fluid based molecular diagnostics using its microRNA technologies. Current focus is on the development of a test for heart failure. Furthermore, Rosetta is developing microRNA based therapeutics. These long term pipeline will provide sustainable growth for the company in the years to come.

Rosetta is also collaborating with pharmaceutical/biotech companies to assist these companies to develop microRNA based therapeutics. This collaboration creates the third avenue for revenue growth.

With a focused marketing strategy in place, revenue will be boosted in 2014 and beyond. Specifically, we model $1.5 million in revenue for fiscal 2014 and revenue will grow to $125 million in 2020, a tremendous compound annual growth rate (CAGR) of 123%. With accelerated revenue growth, Rosetta will become profitable in fiscal 2018 with earnings per share (EPS) of $0.32 based on total revenue of $50 million. EPS will grow to $1.31 per share in fiscal 2010 based on total revenue of $125 million, a 102% increase in the two year period.

Rosetta has a relatively strong balance sheet. Current cash is sufficient to fund operations into 2015 according to our model.

With all these in mind, we think Rosetta’s shares are undervalued at current market price. Currently, Rosetta shares are trading at about $5.2 per share, which values the company at about $52 million in market cap. This is apparently a huge discount compared to its peers. As we said, Rosetta is a revenue generating diagnostics company targeting the high growth market of molecular diagnostics. The company’s microRNA platform technology has broad applications targeting both diagnostics and therapeutics. We don’t think the Street has recognized the potential of high revenue growth in the coming years for Rosetta.

Based on our financial model, we think a P/E multiple of 25x is appropriate for Rosetta. If we apply this P/E coupled with EPS of $1.31 in 2020, discounted at 20% for 6 years, we come up with our price target of $10.50 per share. Our price target values Rosetta at $105 million in market cap, which we think is still conservative.

Execution is the key to achieve expected growth and will have a significant impact on the share price. The fluctuation of the broader market in the US will also have impact on the company’s share price in the next 6 to 12 months.  In general, we think the company has a favorable risk/award profile at this time with downside risk relatively low and high upside potential.


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