Atossa Genetics: My Top Biotech Idea For 2013

Mar.15.13 | About: Atossa Genetics, (ATOS)

As promised in my previous article, I have been busy researching an exceptionally compelling hidden gem in the biotech sector. Following a significant milestone just disclosed by the company, I am now prepared to announce it. The previous three ideas I have presented have generated average gains exceeding 100%. Today, I am eager to share an idea that may dwarf these extraordinary returns. The name of the company is Atossa Genetics (NASDAQ:ATOS). I am so excited about the prospects of this company that I am naming it my best biotech idea for the year.

Atossa Genetics is at the forefront of breakthrough procedures to make breast cancer a relic of the past. Investors are constantly on the prowl for a promising biotech with groundbreaking technology that could transform it from a small company into the next biopharma giant. Atossa may well be the one.

A New Paradigm in Breast Cancer Detection

Breast cancer has haunted women of all cultures for centuries. In fact, the name Atossa Genetics is derived from Queen Atossa, the most powerful woman of the Persian Empire. She became the first woman in recorded history to be diagnosed with breast cancer (circa 470 BC). We certainly have more options to treat the disease now than back in those times, but the level of suffering and mortality that still persists as a result of this disease is unacceptable. This is how Dr. Steven Quay, Chairman and CEO of Atossa, characterized the standard treatment options:

The paradigm of breast health is to do nothing until you have cancer and then to cut it out, radiate it, and give the patient chemotherapy.

Most of us, myself included, have had close friends or relatives afflicted with this disease. Twelve percent of women will develop invasive breast cancer in their lifetime. A new case of breast cancer is detected every single minute. Breast cancer claims the lives of 110 women every day in the United States. A paradigm shift is long overdue, and this is where Atossa comes in.

Move Over Mammogram: ForeCYTE as the New Standard of Care

Nearly 40 million mammograms are performed annually in the United States. The procedure, however, has been embroiled in a storm of controversy for a number of reasons. Malpractice resulting from misdiagnosed mammograms represents one of the highest costs for insurance companies. Mammograms themselves may place women at higher risk of breast cancer. The accuracy of mammograms has been shown to plummet based on higher breast density. Mammograms may not even be effective in over half of pre-menopausal women.

Atossa's ultimate quest is to make mammograms obsolete and replace them with its ForeCYTE Breast Health Test. Atossa envisions physicians administering the ForeCYTE as part of a woman's ob/gyn visit. Atossa refers to its ForeCYTE test as a "pap smear for breast cancer." Just as pap smears virtually eliminated cervical cancer for those regularly tested, Atossa aims to do the same for the breast. The device can be described as a modified lactation pump that uses Nipple Aspirate Fluid (NAF) to detect atypical ductal hyperplasia, considered a precursor to breast cancer. It is a noninvasive, unintimidating procedure that takes less than 10 minutes and can successfully extract the sample necessary for 99.8% of women. Only a microscopic amount of fluid is necessary. A tumor that's large enough to show up on a mammogram or to be felt as a lump already contains more than 100 million cancer cells. In stark contrast, ForeCYTE can spot as few as 10 abnormal cells. Thus, ForeCYTE identifies abnormalities years before mammograms can, and can distinguish between low, intermediate, and high risk patients.

Mammograms are not recommended for women under the age of 40, even though the incidence of advanced breast cancer among younger women has increased in recent years. The noninvasive, safer, more predictive ForeCYTE test would be ideal for this younger patient population. One out of eight invasive breast cancers are found in women younger than 45. The Journal of the American Medical Association reports that the rate of metastatic breast cancer in American women 25 to 39 years old has nearly doubled over the past 35 years. Atossa's ForeCYTE test can detect abnormal cells from the age of 18.

Reminiscent of Rosetta: Game-Changing News Just Announced

In May of last year, Rosetta Genomics (NASDAQ:ROSG) disclosed that it had received Medicare coverage for one of its molecular diagnostic tests. Investors presumed this would give patients greater access to Rosetta's tests. The stock subsequently surged on the news from under $2 to over $23 in under a week. Analogously, Atossa just announced that it has entered into a contractual agreement with FedMed, Inc., one of the largest proprietary Preferred Provider Organization (PPO) networks in the U.S., for diagnostic laboratory testing. FedMed's massive network is comprised of more than 550,000 providers, serving over 40 million Americans. Atossa has also inked a deal with MultiPlan, covering an additional 57 million patients. Shares surged on the news but have since retraced, proving an excellent opportunity to initiate a position. This is a game-changing milestone for Atossa. I certainly would not rule out a Rosetta-like parabolic run for this stock as more providers sign on. In fact, during the course of his presentation at last month's BIO CEO conference, Dr. Quay mentioned "reaching out" to Kaiser, Aetna, and United. Any such announcement will launch Atossa shares into orbit.

Multiple Significant Catalysts Ahead

ROTH Conference: Investors have numerous catalysts to anticipate the rest of this year, including one on the immediate horizon. CEO Steven Quay is presenting at the 25th Annual ROTH Conference on March 19. These presentations are inconsequential events at times; however, I believe it may be prudent to buy the stock ahead of the event for two significant reasons. At the last conference the company attended, Atossa shares surged over 50% in the days following an impressive presentation at the BIO CEO & Investor Conference. Additionally, ROTH Capital Partners, the sponsor of the conference, covers a wide array of small biotechs in its research department. I would not be surprised to see an extremely ambitious research report and price target issued by one of its analysts following the presentation. This is purely conjecture, of course, but I have seen this play out innumerable times.

Product Launches: This is truly a landmark year for Atossa, as it is conducts a nationwide launch of its four diagnostic tests that compose the Breast Health Care Path: two early detection tests (ForeCYTE and FullCYTE) and two cancer survivor tests (NextCYTE and ArgusCYTE). They are designed to monitor women from the very early stages of pre-cancer to monitoring survivors for recurrence (50% of women have local recurrence). The ForeCYTE test was discussed in detail above. FullCYTE identifies which particular duct of the breast contains abnormal cell activity. This targeted pre-cancer treatment enables local delivery of a pharmaceutical and often obviates the need for chemotherapy. NextCYTE predicts the most efficacious therapy response for cancer survivors. This can avoid unnecessary chemotherapy, in which 1/3 of women will suffer the side effects but will not benefit from it. ArgusCYTE is a patented, FDA cleared blood test designed to detect signs of metastatic disease before it occurs, which is what typically kills women, not the primary tumor. Once a tumor appears in a distant site in the body, the 5-year survival rate is below 15 percent.

ObamaCare: Under the Affordable Care Act, health plans must cover an expensive genetic test for breast cancer if a woman's doctor orders it. This is a huge windfall for Atossa.

Risks

Atossa is a small, speculative biotech that offers tremendous potential for those with high risk tolerance. Last month, the company received an FDA warning letter regarding its MASCT System Collection Test. However, an analyst at Zacks Equity Research believes this will have a negligible impact on Atossa's operations. In fact, shares have fully recovered from the minor blip incurred when the FDA warning letter was issued. Shareholders also need to be aware of the possibility of financing when investing in small biotechs. As Atossa raised capital through its IPO just a few months ago, and currently generates some cash flow, it should have sufficient capital to move ahead with the nationwide launch of its Breast Health Tests. Finally, physicians, hospitals, and insurance companies can sometimes be loath to adopt new procedures and tests. The initial reception has been quite favorable, however, and as discussed above, providers are signing on.

Insider Pedigree

The executive team and Board of Directors at Atossa own well over half of the shares outstanding. CEO Steven Quay has an almost 5 million share stake. Chief Scientific Officer Shu-Chih Chen holds nearly as many shares. Director Lawrence Remmel has purchased shares in the open market. Directors John Barnhart, Stephen Galli, and Alexander Cross also each hold thousands of shares. Thus, those running the company obviously have a huge vested interest in the performance of the stock.

Christopher Destro, Vice President of Marketing & Sales, came from Thermo-Fisher Scientific (NYSE:TMO), a $28B dollar giant in the industry. Director of Operations Mike Melafronte hails from venerable Abbott Labs (NYSE:ABT), a $55B company.

M&A Prospects

Dealmaking on Wall Street has made a big comeback so far this year. Transaction volume is up 27% year-over-year, and the fourth quarter of last year was the most active since 2008. Specifically in the genetics arena, Complete Genomics (NASDAQ:GNOM) was recently purchased by BGI-Shenzhen. Life Technologies closed a deal to buy privately-held bioinformatics company Compendia Bioscience. KKR and other PE firms are considering a bid for Life Technologies. Puma Technology (NYSE: PBYI), which is working on an experimental breast cancer treatment, is considered a prime takeover target. It sports a market capitalization 10 times higher than Atossa's. Coincidentally, Cougar Biotechnology was purchased by J&J (NYSE:JNJ) at just over 10x Atossa's current market value for its oncology pipeline, including breast cancer. Atossa clearly lies squarely in the "sweet spots" of buyout interest--genomics and cancer detection/treatment.

Unlike many of these billion dollar biotechs that concentrate on extending life by a mere few months, Atossa is focused on prevention/early detection and thus extending lives for years and decades pain-free.

Fair Valuation

The market potential is, quite frankly, jaw-dropping, and shows just how undervalued Atossa's shares are.

The numbers below come from CEO Quay:

  • ForeCYTE Test: 110 million women x $500/test = $55 billion
  • FullCYTE Test: 10 million women x $3000/test = $40 billion
  • ArgusCYTE Test: 2.9 million women x $1500/test = 4.4 billion

These figures do not include the large market for the NextCYTE test, and place no value on the intellectual property portfolio. If Atossa penetrates even a miniscule portion of this $100+ billion market, shares here seem wildly undervalued at a mere $85 million market capitalization.

Dr. Quay identifies Genomic Health (NASDAQ:GHDX), which has a $900 million market cap, and Myriad Genetics (NASDAQ:MYGN), a $2B company, as his peers in the industry.

Ground Floor Opportunity

"Atossa should be looked at as a ground-floor opportunity with significant upside potential for investors." These are the words of CEO Quay in a recent interview, and they couldn't ring more true. I expect shares to rally into the ROTH conference next week, and the stock should be one of the best performing biotechs this year. Perhaps the major Wall Street firms will finally initiate coverage, and the Stocktwits stream will finally recognize the ticker symbol, when shares hit $30 later this year.

Disclosure: I am long ATOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.