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Rosetta Genomics Ltd. (NASDAQ:ROSG)

25th Annual ROTH Conference

March 19, 2013 7:30 p.m. ET

Executives

Ken Berlin – President and CEO

Analysts

Yale Jen – ROTH Capital

Operator

Yale Jen – ROTH Capital

Good afternoon. Next presenting company is Rosetta Genomics, and presenting for the company is CEO Ken Berlin, and he asked me to not spell that incorrectly.

And Rosetta has this microRNA for diagnostic for cancer, has already get quite a few milestones accomplished. Ken certainly illuminate all those, so it's all yours.

Ken Berlin

Thank you. So, 13 years ago this month, we opened our doors for business, firmly planting our flag in the area of junk. That junk are small, non-coding RNA sequences, that are now called microRNAs. And as it turns out, microRNAs have actually revolutionized our understanding of gene expression and cell biology. And we've been at the forefront of that revolution.

We have discovered hundreds of microRNAs when they were thought to believe -- when it was believed that they were thought that there were only 100 microRNAs. We have the leading patent [slate] in the field. We have led studies related to our platform that have resulted in over 40 peer reviewed publications. And we've launched already six assays in the space, by far the most in the space.

And while these accomplishments have been significant, they've been largely in the technical and scientific arena. So now as we mark our 13-year anniversary, we believe we're poised to make some progress in the commercial front. So for the next 25 minutes or so, I'll take you through the commercial opportunities that we're going after and how we plan to seize them.

Here's our disclaimer regarding forward-looking statements and our duty to update.

So, really some highlights, we like the space that we're in. We think molecular diagnostics has been and will continue to be a high-growth space. And just a word on our business model, because it's different from some others, we're a sole source laboratory, so we develop laboratory tests and all the samples come into our lab, and we bill directly to patients. And we believe that diagnostics space on genetic information of patients and their disease will continue to be important and going with the grain of healthcare, not the one-size-fits-all healthcare, but really more and more personalized healthcare.

Our edge in the space is, as Yale mentioned, microRNAs. MicroRNAs are these small non-coding RNA sequences which are extremely sensitive biomarkers. And as I mentioned, we have a leading patent position in the space. We also have launched products on the market today, I'll take you through those products and how we plan to optimize their revenue potential. But some of the key highlights from last year, including getting Medicare coverage for our lead product, also entering into a co-marketing arrangement with a party that has 30 sales reps out there calling on the docs that we need to call on. And we've also launched another assay called miRview kidney which I'll talk about in a little bit.

We also have a nice cash runway. We raised a fair amount of capital last year, so we have at least 24 months of cash to run our operations. And we have a management team that's been there and executed in similar spaces, which I'll talk about.

So, on our management team, we have Chairman of the Board, Brian Markison. Brian has a ton of commercial experience. He's led two companies through very nice exits, King Pharmaceuticals who was sold to Pfizer for close to $4 billion, and Fougera Pharmaceuticals, a derm business, which was sold to Novartis for north of $1 billion. Brian also brings some relevant oncology commercial experience, which is very helpful.

I came to Rosetta back in November of 2009 directly from Johnson & Johnson. At Johnson & Johnson, I ran their cancer diagnostics business and faced very similar challenges as the ones that we face here at Rosetta today, namely we launched some novel technologies in that space at J&J, and when I joined, the company was struggling, it needed traction in that space, and we're really able to get that up the revenue curve. So we're looking to do the same thing here.

I have a CFO that we brought in recently from Israel, Ron Kalfus, who actually did his training here in the US. He's been a great partner for me. We also recently brought on board a new Chief Medical Officer who brings over 30 years of medical genetics experience, a new Chief Scientific Officer, Dganit Bar, who brings a wealth of experience relevant to the things that we're working on, and new Head of Corporate Development, Guy Malchi, who's helping us on a number of our business development initiatives.

So a little bit more about microRNAs, they are truly acknowledged as outstanding biomarkers. They play a master gene regulatory role in cell biology by how they regular messenger RNAs and determine what proteins those messenger RNAs are going to produce, and that has a major impact on the cell biology. They're very tissue specific. You see that borne out in the accuracy data that you'll see associated with the tests that we've launched. And they're implicated in most major diseases and they're very easy to work with because they're extremely stable.

In terms of our patent position, we have access to over half of the known microRNAs. We just had another patent issue or allowed that we announced earlier this week, so we now have 29 patents that are either issue or been allowed. We have 41 patent applications. And we have, exclusively to ourselves, about one-third of the publicly-known microRNAs an access to close to three-quarters of the known microRNAs.

We optimized our development platform, so we've been able to launch a number of tests, including six that we've launched to date. I'll take you through a few of those in a little bit.

Next big thing for us is looking at microRNAs in body fluids. To date we've launched tests that look at microRNAs in tumor tissue. So by definition we've been in cancer. But we believe there are opportunities outside of cancer, and I'll talk a little bit about those.

And then medium term, we think that we can use our platform to help others, namely big pharma, med-tech companies who are looking to target their therapeutics based on the genetic profile of the patients. So really matching the particular therapy to the right patients so the right patient gets the right therapy at the right time.

So, how are we generating revenue today? So our lead product is a product we call mets2. The issue that this product helps solve is when a patient presents to a doctor with a metastatic lesion, in other words, it's a cancer that we know that spread from some other tumor, and after initial workup, the pathologist can't determine the primary tumor of origin.

And why is that important? Well, that's important because we still determine the therapeutics to provide a patient based on the primary tumor of origin. So without that knowledge, it's very difficult to put patients on the right therapies to extend survival.

So what our test does is we take the tissue and we run the tissue on an array platform looking at 64 different microRNAs, and we can tell whether the tumor emanated or started from one of 42 different tumors of origin, with a very high level of accuracy, up to 90% accuracy.

So we've also done some post-market studies. So this is all internally validated, lab-developed test-type testing, but it's important to go out to the real world and see how your test does in the real world. So we've teamed up with a number of world-renowned institutions to compare how our test does versus their calls on these tumor types. So we've done studies with M.D. Anderson, Heidelberg University in Germany, as well as some of the key thought leaders in Greece, who had demonstrated 88% up to 92% concordance between our answers and their calls on their tumor types.

Now, why is that important? Because there are a couple of competitors out there who have a similar test offering but are looking at a different set of genes or gene fragments. They're looking at messenger RNAs.

Now, compared to our 88% to 92% concordance, they've published on the low end 45% concordance in similar studies, up to 75%. So, well short of the 88% to 92% concordance that we've been able to demonstrate in peer reviewed and other publications that we've put out there. And we use this in our marketing.

And we think the reason for that is because we're looking at the microRNAs and our competitors are looking at messenger RNA. And given where microRNAs sit in the hierarchy of cell biology, we believe, by looking at microRNAs, you're looking at the main event, whereas if you're looking at messenger RNA, you're looking at the downstream effect of something awry with the microRNAs. So we believe we have a competitive advantage. In addition, microRNAs are much more stable than messenger RNAs. So we believe that we're going to continue to have lower failure rates than our competitors who are looking at messenger RNA.

So let's take a look at the market opportunity. We estimate that the market opportunity is approximately $600 million. Now we get there by looking at two numbers obviously. We believe that the market is about 200,000 patients large, made up of really two segments.

The first segment are true CUP patients. And what do I mean by that? So, CUP means cancer of unknown primary. True CUP patients are those patients that no matter how much testing you do, you're never going to find the tumor of origin, right? And on average, it takes about three or four months to come up with an answer that we don't know where the tumor started from, and costs about $40,000. And the one thing these patients don't have is a lot of time. So anyway, that's the first segment, that 50,000 patients.

The other segment, which we think is somewhere between 100,000 and 150,000 patients, are those patients that present with metastatic disease where, after an initial workup, the pathologist still has not -- hasn't developed certainty around what the tumor of origin is. In other words, they've narrowed it down to potentially three or four culprits and they're not sure which one of those three or four is the right primary tumor of origin. And there the oncologist is still faced with a difficult decision about what therapeutics to give the patient. There are a lot of permutations and combinations that the oncologists have to think about when still three or four tumor types that they're considering. So that's how we get to the 200,000. We use an average selling price of about $3,000 a test. Medicare is currently paying us close to $3,600. So that's really a mix of Medicare/non-Medicare patients.

So, how are we going after this opportunity? Really we have a two-pronged approach, right? We're trying to generate demand through our own direct selling effort and through a third party. So, our own selling effort right now consists of seven sales reps, soon to be eight, calling on oncologists mostly, and pathologists, in certain areas in the country. The other approach is through a third party. So we signed a co-marketing arrangement with a company called Precision Therapeutics that has approximately 30 sales reps deployed across the country, calling on oncologists, surgical oncologists and pathologists.

So this is a game of really numbers, right? So these are not common events. So it's very important that in your selling effort you have a lot of reach and frequency. You've got to get out there, talk to the docs, talk to them again. The most ideal opportunity is when our rep is seeing a doc and they have a patient for whom they have this conundrum, where they don’t know the tumor of origin. That doesn’t always happen, unfortunately, but when that happens and they send us the sample, and we give them some information that's useful, the message is very [sticky]. Now, as I said, it doesn’t always happen. So we need to make sure we have a lot of reach and frequency, calling on oncologists.

So, who are we calling on? By and large we're calling on community-based oncologists, right? So when you look at the oncology marketplace, 85% of patients are seen in the community setting. So that's where we're focusing our selling effort. We're calling on the large community clinics, again it's a law of numbers so we want to get to the large clinics, but it's in the community setting where they don't have the same tools at their disposal as the folks at Memorial Sloan-Kettering or M.D. Anderson. And we think that's where the message is going to resonate. And mostly that's where we're seeing some traction.

That's not to say we haven't seen samples from some of those [within] institutions. We have. But we think the bulk of the business is to be had in the community setting.

So, switching gears, we launched a couple of other tests for which we don't have Medicare coverage yet. One is miRview lung. So this test is looking at primary lung cancer, looking at microRNA signatures to subtype for lung cancer patients. And this is important again because it's a subtype of a lung cancer that will help determine the appropriate therapeutic regimen.

Our test has a very high level of accuracy, as with our other tests. So the test for lung had a 95% accuracy in the smaller sample sizes, the cytological specimens. Overall accuracy of just under 94%.

And we're positioning this test for those situations where the pathologist really struggles, and that's when they're forced to work with small amounts of tumor size, right? So, a lot of times, especially in the community setting, the pathologist is looking at finding the [inaudible] very small sample sizes. And in a number of cases, we think upwards of about 25% of the cases, either the sample is inadequate from a quality perspective, in other words, they don't have the right tumor tissue, or there's insufficient amount of tumor tissue. And that's how we're positioning the lung cancer tests in this segment.

So the third test that we're focusing on from a clinical perspective is something called miRview kidney, very similar to miRview lung. We're looking at subtyping the kidney cancer patient into one of the four major subtypes. Kidney cancer is one of those cancers that's coming into the 21st century of personalized medicine. A lot of new targeted therapeutics that are in development or on the market. And we're learning that those therapeutics don't work the same in each subtype. So, subtyping these patients is important to determining how to manage these patients.

Again, this could be complicated for the pathologist looking through a microscope trying to discern what subtype of kidney cancer the patient has, because in some cases patients will present with elements of different subtypes. So they could have two different subtypes. Making the call of the kidney subtype, looking through a microscope isn't easy. And we can do it molecularly with a high level of accuracy, 95%.

So one thing we're doing in the case of our miRview kidney test and our miRview lung test is we're looking to get these tests embedded into clinical studies. And what do I mean by that? So we know that principal investigators for new agents in kidney cancer and lung cancer are always interested in reading out how those drugs do in the different subsets of patients. So in the case of lung cancer, how does the agent work in the squamous subset or the adenocarcinoma subset?

So we're talking to principal investigators to say, hey, we have a test that pretty cleanly separates these patient populations, so if you want to get a good read out of how these agents work in those subsets, you should embed our test in your study and get better readout rates. So this is early in development, but we think this is something that has some nice potential.

The fourth test that we've launched that we'll talk about is something called miRview meso. Our approach here is a bit different than the approach of the other tests in that we're targeting it to a different segment.

So what does this test do? So this test can differentiate mesothelioma from other cancers in the lung, which isn't always easy to do. And really we think the best opportunity for this is in the legal setting. There's a lot of meso litigation that goes on, not a lot of numbers, but big money at stake, and the delta between a payout for a meso case and a non-meso case for a defendant is, on average, $1.5 million a case. So if some defendant believe meso is being over-called in some cases, it's a potential for some savings. So this is a very different targeting effort, really focusing on the legal arena for this test. We think it has some potential, but we're doing this as more of an upside opportunity.

So, looking forward, all of the tests that we've launched look at tumor tissues, so by definition we've been in oncology, but we do think there's some nice opportunities outside of oncology. So we've done some work looking at microRNA signatures in the blood. In fact we had a proof-of-concept study of a microRNA signature in heart failure that was published, with a 90% sensitivity and specificity. So we do believe that there's some nice opportunities out there, longer-term opportunities, high risk but high reward.

So we have revitalized our R&D efforts and we're working on some of these longer-term high risk/high reward opportunities, looking at blood-based diagnostics. But in addition, we're looking at tumor based and tumor tissue based diagnostics as well, so we can leverage the commercial infrastructure that we're building and investing in.

So here's our pipeline. We've launched six tests, we're really focused commercially on three of them in the clinic and the fourth one in the legal arena, as I mentioned, and we have some longer-term projects like the heart failure project there at the bottom.

In terms of go-to market, make no mistake about it, the US is the main event. Ninety-five percent plus of market opportunity for our current tests is in the US. And that's really because, A, the mindset of the physician to use these expensive tests is already there, sort of paved the way by folks like Genomic Health [inaudible] and Myriad Genetics. But in addition, reimbursement is very different around the world. So in the US we have a much more progressive, although sometimes difficult, but yes, progressive reimbursement regime, whereas outside the US, that's not the case, particularly in Europe in Japan where those countries very lag behind the US in terms of reimbursement for the high-value, high-cost diagnostic products.

Nevertheless, we do have a small distribution network outside the US, and we're looking to ramp up that business this year as well as we fine-tune our distribution network outside the US. But by and large, our main focus today is in the US marketplace where we think that's where the biggest opportunity lies in the near term.

So, moving beyond proprietary diagnostics, this is our medium-term opportunities. We do think there's opportunities to leverage our microRNA platform for predictive biomarkers for use for therapeutics. And so what I mean by that, really targeting either a drug or a device to be used on patients who are most likely to respond. It's what payers want and it's what regulatory authorities want. So we have a large outreach program going on, reaching out to these players to really get our technology embedded with their different therapeutic approaches.

And speaking of therapeutics, we do have a very small therapeutics approach. We're part of a consortium in Israel, so the Israeli government actually funds the lion's share, excuse me, of that therapeutics effort right now.

So as we've worked in this area for 13 years, we've done a lot to fine-tune different technologies to work with microRNA, and it's really to optimize those technologies, and I could spend an hour but it looks like I have less than an hour to talk about this technology. So I'll focus in on something that makes them trivial, which is the RNA extraction piece on the lower left. That's the front end of the process. Actually it's the most important part of the process, because if you don't get that right, the downstream stuff isn't going to matter at all.

And so it takes us three months to train a tech, a lab tech, a new lab tech, on how to do this process, right? That's the bad news. The good news is it creates another barrier to entry. So, right? We have a lot of patents and some of which will continue to stand after the Supreme Court rules on the Myriad decision, but this is a real important barrier to entry because there's a lot of knowhow in learning how to optimally extract the RNA from samples. It sounds trivial but it's really important.

The other piece of good news is Medicare recognized this when setting our payment rate. We took them through the lab, they saw how cumbersome and expensive the process was, that we weren't using an off-the-shelf extraction kit, and therefore we got some credit for it on the back end. So this is a nice little barrier to entry which we think is pretty important to the business at the end of the day.

In terms of our footprint, we have 32 employees, formally speaking, and I'll get to that in a minute, 18 are in Israel. Half of those approximately are in R&D, the other half are in G&A. The other 14 are in the US. So, some in commercial but most in the laboratory in Philadelphia.

And then we have another seven, soon to be eight, heads that are not formally our headcount as we hired them through a contract sales organization, but we pay for them, and they're exclusively dedicated to our products.

So, R&D continues to be performed in Israel, and once we develop an assay, we transfer it to the lab in Philadelphia. All samples from around the world come to Philadelphia. There's no special [hemlock]. We have a kit. Someone can drop the sample specimen in our kit, put it in FedEx, and send it to our lab. It takes about a week of turnaround time to get an answer out. Most of that time, most of that week is spent with the RNA extraction process we're describing before. Our lab is CAP and CLIA certified. All of our tests except for the most recent-launch tests has New York State certification, which is the highest level of scrutiny for these types of tests, and we hope to get our kidney cancer certification within the next 12 months.

So, a little bit about financials, you know, so Yahoo Finance and Google Finance can't seem to get these numbers right, but hopefully after our annual reports filing, they will. We have 9.1 million shares outstanding today on a fully diluted basis. That's about 10 million because we have about 800,000 plus options and warrants and restricted stock units. There are no convertible securities, there's no debt, so it's a pretty clean cap structure. And we raised a fair amount of money last year. So we did lean pretty heavily on our shareholder base, but we think we've put ourselves in a very nice position to take advantage of a number of opportunities that we have in front of us today. So we think we have cash to fund our operations for at least the next 24 months. And we're debt-free.

So there are a lot of milestones on here, some that checks next to them, some that don't. But there's only one that's highlighted, because the story for this year is really about gaining traction in the marketplace, so it's generating demand for mets2 and generating demand for mets2 and generating demand for mets2. So if you can't tell, that's our focus. So we are working at that.

We have almost all the pieces in place to do that. The last piece that we're working on that we should have in place in the next several weeks is the peer-to-peer marketing initiatives. And what do I mean by that, that's what I'd like to talk about. It's great to have sales reps try to get access to docs, which is increasingly difficult, but docs can talk to docs and they're willing to talk to docs. So we're rolling out a program where we can have speakers speak in our behalf, and we're having hopefully a nice program at ASCO to get more awareness. Because we think the single biggest issue holding us back today, again because these are not common events, these cancer [are of non-primaries] is awareness. So we're working on that. So the peer-to-peer interactions will help. What we're doing at ASCO will help. And we're gearing up for gaining traction in the marketplace for mets2 this year.

So, bringing it all home, we think we're in a great space. We think molecular diagnostics will continue to be a high growth space. We have an edge in our expertise in microRNAs. And I think the products that can get us to profitability are more than likely at hand today. So we're hopeful that that is the case. And we have a nice cash runway to help us give us some time to execute on our plans. And we've got a team that's executed in similar spaces in the past. So we think we know what to do and we're going about doing it.

Yale Jen – ROTH Capital

Thank you.

Ken Berlin

I think we have some time for some questions.

Question-and-Answer Session

Operator

Unidentified Audience Member

[Inaudible Question]

Ken Berlin

So the need to raise $40 million was really to fuel the commercial enterprise, right? So the problem that we have is we've never had enough cash to do the commercial execution piece the right way, right? So we started with four sales reps back in 2011, and that helped us get to Medicare coverage, but it wasn't sufficient to really go after this the right way. So what we needed to do was beef up the demand generation efforts, right, both with our own sales reps plus, you know, Precision Therapeutics doesn’t work for free, so we have to pay them as well. Also we had to bolster our lab infrastructure, right? We had a pretty skinny organization. So we had to build for capacity there in the lab. And we wanted to add more to R&D because we had totally shut down R&D as we went through this cash-constrained period.

So most of the money that we've raised will go into the commercial. It is going into the commercial efforts. But some will go in to the future products effort, the R&D effort.

Unidentified Audience Member

[Inaudible Question]

Ken Berlin

So we haven't published that yet. Our annual report will be coming out in the very near term.

Unidentified Audience Member

[Inaudible Question]

Ken Berlin

It's de minimis. We're talking about hundreds of thousands of dollars. So it's still early days.

Unidentified Audience Member

[Inaudible Question]

Ken Berlin

I'm sorry?

Unidentified Audience Member

[Inaudible Question]

Ken Berlin

We think that's the place you want to be, right? So a lot of the stuff that we're thinking about and working on is trying to predict response, right? These types of opportunities where you're separating patient types is important, but we think predicting a response is where the action is and will be. So that's where we're trying to go with our technology.

Unidentified Audience Member

And what are some of the challenges that sales reps run into when calling on the oncologists and pathologists?

Ken Berlin

Access. Access, getting to the doc, right? So it's gotten harder and harder to get to the docs. So you need creative sales reps who can figure out a way to get past the gatekeeper to get to the docs. And so we are sharing with the sales force how this is happening. It isn't easy. It's a lot easier to get to the pathologists because the pathologists still are relatively unloved by the sales forces so they're willing to talk to you. But at the end of the day, you need to get the oncologists onboard too. So, working out the access piece, that's where the doc-to-doc, the peer-to-peer interaction is so important, because docs will talk to docs, right? So we want to have lunches, dinners where we've got docs who are coming to present and you can get docs [inaudible] in the seat. It's just the sales rep that's much tougher. But access is the single biggest issue. Access, which is the flipside of awareness. Because if you can't get access to the doc, you can't make them aware.

Yale Jen – ROTH Capital

Great. Really appreciate that presentation, and I look forward to chatting --

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