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Atossa Genetics (NASDAQ:ATOS) is a medical diagnostics company focused on the prevention of breast cancer through the development and commercialization of diagnostic tests which can detect precursors to breast cancer. Atossa also develops treatments for pre-cancerous lesions.

We initiated our coverage of Atossa on January 2, 2013 with price target of $7.50 per share. At that time, Atossa's share price was trading at $3.90 per share. Currently the share price of Atossa is trading at $10.90. We raised our price target to $15.00 based on the reimbursement progress the Company has made post our initiation.

Progress Has Been Made in Reimbursement, Price Target Is Raised to $15.00

On Mar 13, 2013, Atossa entered into an agreement with FedMed, Inc. for Atossa's diagnostic testing.

FedMed is a National Provider Network and Healthcare Financial Services Organization (fednedubc.com). FedMed has developed innovative programs and services for the healthcare provider community in conjunction with large payors of healthcare services. FedMed's network is comprised of more than 550,000 providers, including 4,000 hospitals and more than 60,000 ancillary facilities, serving over 40 million Americans.

The agreement with FedMed is a great achievement for Atossa for the reimbursement of its diagnostics testing. The agreement will give FedMed's participating providers and their members greater access to Atossa's tests, including the two launched products the ForeCYTE Breast Health Test and the ArgusCYTE Breast Health Test.

The addition of FedMed further expands Atossa's reimbursement network. Before FedMed, Atossa only has an agreement with MultiPlan, Inc. which was established in September 2012. MultiPlan is a leading provider of healthcare cost management solutions for diagnostic testing. Approximately 20% of Americans are covered by MultiPlan.

Going forward, we believe Atossa will make continued efforts to further expand its relationships with network providers to facilitate the reimbursement for its diagnostic testing.

Based on the agreement with FedMed, we have raised our revenue forecast for 2013 and beyond. According to our new financial model, Atossa will break even in 2014 and become profitable in 2015 with EPS of $0.05 based on total revenue of $15.5 million, which is one year ahead of our previous estimate for profitability. As a result, we raise our price target to $15.00 from previous $7.50 per share.

Atossa Currently Offers Two Diagnostic Tests

The ForeCYTE Breast Health Test

In December 2011, Atossa began limited marketing of the ForeCYTE Test to physicians, primarily obstetric-gynecologists, as well as breast health and mammography clinics, for use in conjunction with other health screening examinations, including annual physical examinations and regularly scheduled cervical Pap smears and mammograms. Atossa, together with Clarity Women's Health, formally launched the ForeCYTE Test nationally on January 14, 2013.

The ForeCYTE Test uses the company's patented MASCT System medical device for the collection, shipment and clinical laboratory analysis of nipple aspirate fluid (NAF). The NAF specimen is collected by a physician and returned to Atossa's CLIA-certified laboratory for analysis. The NAF is analyzed by microscopy for cytological abnormalities and by a patent-pending IHC staining technique for five biomarkers of hyperplasia and a sample integrity marker.

The results of the ForeCYTE Test provide personalized information about the 10-year and lifetime risk of breast cancer for women between ages 18 and 65.

The ForeCYTE Test provides Atossa with two revenue sources:

  • Revenue from the sale of the MASCT System device and patient kits to physicians, breast health clinics, and mammography clinics;
  • Service revenue from the preparation and interpretation of the NAF samples sent to the company's laboratory for analysis.

The ArgusCYTE Breast Health Test

The ArgusCYTE Breast Health Test, launched in December 2011, provides information to help inform breast cancer treatment options and to help monitor potential recurrence. It involves collecting a blood specimen from a patient using the company's patented, FDA 510(k)-Exempt blood collection tube and submitting it to its CLIA-certified laboratory.

The ArgusCYTE Breast Health Test tells physicians two important things:

  • If circulating breast cancer tumor cells are present;
  • And if they are present, what type of cells they are.

This tells the physician what type of treatment to give to kill the circulating tumor cells and hopefully prevent metastatic recurrence.

To our best knowledge, the ArgusCYTE Test is the only CLIA-certified test for circulating breast tumor cells. The ArgusCYTE test identifies mRNA expression levels for estrogen receptors (ER), progesterone receptors (PR), and HER-2 antigen in a single blood draw. This will help guide treatment selection. The test can identify circulating tumor cells immediately after a woman begins breast cancer therapy or at the time of diagnosis or biopsy so that she and her healthcare provider can make better-informed decisions about effective treatment options.

Growth Will Be Further Driven By New Products Offering

In addition to ForeCYTE and ArgusCYTE which are already on the market, Atossa plans to offer two additional tests in 2013.

The FullCYTE Breast Health Test

The FullCYTE Breast Health Test, which is currently in development, and will be launched in mid-2013, is designed to assess the individual breast ducts for pre-cancerous changes in women previously identified to be at high risk for breast cancer.

The FullCYTE Test first collect 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 then analyze the samples by the same molecular and cellular biomarkers used in the ForeCYTE test.

The FullCYTE test enables physicians to ascertain which individual duct contains pre-malignant or malignant changes. Therefore, the test allows the physician to better target treatment to the specific duct with the pre-malignant changes or malignant changes. This will avoid side effects associated with systemic treatment. Traditional biopsies, involving invasive procedures in which tissue is removed surgically, typically cut across the natural anatomy of the breast ductal system, making subsequent intraductal treatment difficult or, in certain cases, impossible.

The NextCYTE Breast Cancer Test

The NextCYTE Breast Cancer Test, which is in the pre-validation phase and will be launched in 2013, is designed to profile breast cancer specimens for prediction of treatment outcomes and distant recurrence in women newly diagnosed with breast cancer.

The test uses surgical biopsy specimens that have been routinely processed into formalin-fixed, paraffin embedded tissue blocks to extract RNA and analyze the whole-genome mRNA (transcriptome) expression profiles of the extracted RNA to predict breast cancer 10-year survival.

The NextCYTE Breast Cancer Test uses advanced genome sequencing techniques to quantify and analyze the entire tumor genetic transcriptome, which represents all genes that are being actively expressed within the tumor. Atossa's scientists made inventions regarding this technology and have filed a PCT patent application related to the NextCYTE test to the use of full transcriptome analysis of 22,000 human genes in predicting breast cancer recurrence.

Physicians will be able to use the information provided by the NextCYTE test to better customize treatment options for women, based on the genetic composition of the individual tumor.

Atossa Targets the Large Medical Diagnostic Market

Atossa is a pure-play medical testing service provider specifically focused on breast health testing. Recent advances in the genomic and proteomic research, combined with the complete sequencing of the human genome, have made sophisticated new scientific testing tools to diagnose and treat diseases possible, and therefore boosted the lab testing market dramatically.

Atossa is an independent lab testing provider and is focused on breast cancer diagnostics. It is estimated that the genetic/molecular testing segment is growing 20% to 25% per year as new applications are developed and commercialized. The market for cancer testing is also growing rapidly due to the following key factors:

  • Cancer is the leading cause of death in the US (it overtook heart disease as number one killer in 2011), and one in 4 deaths in the United States is due to cancer. A total of 1,638,910 new cancer cases and 577,190 deaths from cancer are estimated to occur in the United States in 2012 according to American Cancer Society (www.cancer.org);
  • Cancer is primarily a disease of the elderly and now that the baby boomer generation has started to turn sixty, the U.S. is experiencing a significant increase in the number of senior citizens. The American Cancer Society estimates that one in four senior citizens will develop some form of cancer during the rest of their lifetime;
  • Every year more and more genes are implicated in development and/or clinical course of cancer. These associations fuel the development of new genetic or molecular tests.

According to Life Science Intelligence report (here), the total cancer testing market is about $10 billion to $12 billion in the US, and grows very rapidly. Atossa currently addresses approximately $2.8 billion of the breast cancer testing market. This market is expected to grow at a compound annual rate of 5.4% despite the present economic uncertainty, impending healthcare reform, and cost/reimbursement issues.

Valuation Is Still Attractive For Atossa

Atossa is an emerging medical diagnostics company with a focus on breast cancer detection. The company launched two breast health tests in late 2011 and will launch two additional tests in 2013. Atossa also holds 179 issued patents and 50 pending patent applications. The company has eleven 510(k)-cleared medical devices and two 510(k)-exempt medical devices. This strong intellectual property position provides long term growth potential 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 83% compound annual growth rate (OTCPK:CAGR) from fiscal 2013 to 2018 according to our financial model. We model that the company will break even in 2014, and become profitable in fiscal 2015 with earnings per share (EPS) of $0.05 based on total revenue of $15.5 million. We forecast EPS will grow to $1.08 per share based on revenue of $66.5 million in fiscal 2018. 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 there is still room for further appreciation of its share price. Currently, Atossa shares are trading at about $10.50 per share which values the company at $136 million in terms of market cap based on 13 million shares outstanding. We think Atossa shares should trade at 35 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 $1.08 in 2018, discounted at 20% for five years, we come up with a price target of $15.00 per share.

One wild card for Atossa's share price is that the company could be an acquisition target for big players. The clinical lab testing industry is quite fragmented currently, and mergers and acquisitions activity is looming. We all know that big players LabCorp (NYSE:LH) and Quest Diagnostics (NYSE:DGX) are increasingly acquiring smaller players in this field. Qiagen NV (NASDAQ:QGEN), a research service company based in The Netherlands, entered into a molecular diagnostics market in 2007 by acquiring Digene Corp. Since then, Qiagen has been quite aggressive in acquiring small genetic/molecular testing companies.

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

We think downside risk for Atossa is relatively low while upside potential is high at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Atossa Genetics: Room For Further Price Appreciation