Atossa Genetics: Pullback In Shares Of Breast Cancer Testing Firm Present Opportunity

| About: Atossa Genetics, (ATOS)

Atossa (NASDAQ:ATOS) is a medical diagnostics company focused on the prevention of breast cancer through the development and commercialization of diagnostic tests that can detect precursors to breast cancer, and through the research, development and ultimate commercialization of treatments for precancerous lesions. ATOS is going after a 55 billion plus breast cancer testing market, and in our opinion, its two FDA approved genetic breast cancer tests have the potential to be the "Pap Smear" tests if you will for breast cancer detection. In a December 2012 CEO-CFO Magazine interview with the CEO, Dr. Steven C. Quay, M.D., Ph.D, the opportunity was summed up well: "We believe that if we can identify the genetic and molecular changes that are going on in the ducts of the breast up to 10 years before a cancer appears, and then intervene in their progression from precursors of cancer to cancer, we can actually take measures to prevent breast cancer."

Atossa is a company that has the potential to create dramatic change in the way Breast Cancer is treated, detected and managed and we think it requires further consideration and due diligence by investors. As it stands, after 15 years of research and development and 179 patents protecting its intellectual portfolio, the company has rolled out two FDA approved Breast Cancer tests that we think are game changers, and has two more due in the 2nd quarter of 2013. The recent pullback in the shares appears to be a combination of traders, confusion and the misinterpretation of news and recent developments. We are not alone in our enthusiasm for the company and its future growth as we will outline below, but investors have not yet caught on to the potential for a few reasons which we will go over.

Some of the ingredients we look for prior to considering a long position in a small cap growth stock are skepticism, misinterpretations of news or SEC filings, and possibly confusion. Often these obstacles to winning over investors come just ahead of major catalysts or fundamentally meaningful changes not yet obvious to the investing community. Lack of awareness or understanding can often present a good pullback or opportunity to enter a position at attractive valuations. A recent example includes our article on Wearable computing and Himax (HIMX), which rallied some 50% in the weeks after our article pointing out the opportunity. There was confusion there regarding supplying components to Google (NASDAQ:GOOG) and a bit of research and digging would have cleared that up.

Atossa Genetics in our opinion represents an excellent opportunity for long term investors and is at a psychological buy point right now. Small Cap Biotech-Healthcare Analyst, Grant Zeng, of Zacks Research recently projected a 79% annualized compounded growth rate over the next 5 years alone. With Atossa, there is skepticism, a lack of investor awareness, and in a recent case a misunderstanding of a stock filing to boot. Let's examine the Bull case for Atossa, a bit about the ForeCYTE test, and why we think the shares represent extreme value and timeliness for purchase.

A recent SEC filing caused some confusion and we would like to clear it up. On April 5th, a headline from The Fly on The Wall was a bit misleading and probably led inexperienced investors to sell the stock. The headline read: "Atossa Genetics files to sell 2.83m shares of common stock for holders." This headline could not be further from the truth, a perfect sample of confusion and an inappropriate use of the English language. As part of their recent share purchase agreement with the Institutional Investor, Aspire Capital LLC, it was agreed that a prospectus would be filed and therefore shares would be "registered" for future sale under SEC regulations. When the registration was filed on April 5th by ATOS, it was to meet the terms of the agreement, and not for any shareholders to be selling anything near term. Aspire has just begun to purchase shares from ATOS, most recently at $12.00 per share for 83,000 shares as part of a $30,000,000 commitment. These shares are now fully registered and the 2.8 million figure used in the filing is simply a mathematical guesstimate of the number of shares that may be sold to Aspire in the future based on a weighted average price at the time of the filing and the $30 million investment agreement.

If an investor had read that headline, they may have assumed that insiders were selling 2.83 million shares of ATOS, when in fact the opposite is true. Insiders are holding some 10 million shares of the 13 million total outstanding, and in this case, Aspire Capital is expected to purchase millions of shares at varying prices going forward as determined by ATOS, and not the market nor Aspire. These shares were approved and registered by the SEC on April 24th this past week, which caused yet another filing headline that probably created selling late in the trading week. Investors who don't take the time to research and understand SEC Filings probably assumed 3 million shares are about to hit the market, when the opposite is actually true.

Aspire Capital is a well respected investment firm with a history of being a long term holder and investor in biotech and health related companies. Per the CEO of Aspire, "Over the past few months we have spent a lot of time with the management team and done significant due diligence on Atossa as well as talked with physicians and users of its products. During this process, we have come to see the tremendous opportunity that Atossa presents as the 'Pap Smear' for the breast and for early non-invasive treatment of breast cancer," commented Steven G. Martin, Managing Member of Aspire Capital." (Source: Market Wired Press Release March 28th, 2013)

Other catalysts and value propositions to consider:

May 4th-8th OBGYN Conference: Atossa will be exhibiting and presenting at the upcoming 61st annual Clinical Meeting of the American Congress of Obstetrics and Gynecology in New Orleans. The ForeCYTE Breast Health Test, developed and marketed by Atossa Genetics, detects reversible precancerous conditions in the breast up to eight years before they become cancer. The test uses a hand-held, FDA Class II medical device that is quick and can be administered during an OB/GYN office visit.

The ForeCYTE test is painless, uses no radiation, no invasive biopsy needles and no surgical incisions. Unlike the Mammogram exam (commonly advised from women 40-50 years of age) which is often painful, uncomfortable, difficult to administer, and a lengthy process each year to go through. In addition, the ForeCYTE test addresses the market of 110 million women from 18-73 inclusive. It also does away with the assumption that women who have breast cancer history in their family should automatically take drugs or even consider a mastectomy in some cases. Spotting pre-cancerous changes before tumors actually develop is a game changer for breast cancer detection. The ForeCYTE test can actually spot these up to 8 years before a tumor would even show up on a mammogram. This changes the pre-treatment methodology completely. The Pap Smear test has eliminated a significant percentage of cervical cancer simply by spotting cervical cells that undergo changes before becoming cancerous. That test initially met with some resistance as well but obviously is now widely used across the world with great success.

With the traditional approach to breast cancer screening simply looking to find the cancer, this methodology turns that entire platform upside down. 85% of breast cancers develop directly from the breast milk ducts. This new methodology specifically addresses the breast milk ducts in the testing. Obviously it is normal to have skeptics early on whenever a paradigm shift arrives. However recently the Aurora Breast Center announced it will be providing the ForeCYTE tests. This clinic is a leading comprehensive breast care center in San Antonio featuring cutting-edge breast imaging, biopsy and cancer treatment technology. The center is run by Dr. Jui-Lien "Lillian" Chou. She is a breast cancer survivor herself. With this early adopter already on board, we expect that of the 55 billion market that Atossa only needs to garner 1/2 of 1% of market share to achieve $280 million in revenues down the road. The market cap today is less than $90 million. A recent report by Zacks projects nearly $3 million in revenue in 2013 growing to $53 million in 2018. In addition, Aspire Capital, LLC from Chicago had numerous meetings while conducting due diligence with management, Physicians and test centers and is committing up to $30 million in investment dollars over the next three years.

Insider ownership: Insiders control a relatively high percentage of the shares outstanding at 75%. The CEO himself owns nearly 5 million shares of the 13 million share count. Dr. Steven Quay is the original brains behind the various breast cancer tests themselves, and the $50 million invested over 14 years with 179 patents and quite a few more pending represents real value by itself. Chief Scientific Officer Shu-Chih Chen holds nearly as many shares as the CEO. Both of them therefore have a fair amount of skin in the game going forward.

Limited Share Float: Only 800,000 shares were sold in the IPO at $5 per share, so barely 6% of the shares outstanding are freely trading. 83,000 shares were recently sold to Aspire Capital at $12.00 per share, a 140% premium to the IPO price and almost 85% above current levels. Therefore less than 1,000,000 shares of trading stock is available and often due to this the shares can move sharply higher or lower on any given day. With that said, this is an ingredient we look for in small companies that have a lot of catalysts and developments to drive shares much higher.

Nationwide Product Rollout: Atossa is aggressively rolling out 4 Breast Cancer detection tests this year, with 2 already being met with rapid adoption and 2 more to come in the 2nd quarter. (Two early detection tests (ForeCYTE and FullCYTE) and two cancer survivor tests (NextCYTE and ArgusCYTE). With 40 million mammograms administered each year, Atossa's aim is to eventually replace these with their own tests. This revenue potential alone at even a fraction of that market is many multiples over the total market cap of the company today. In fact, two major health provider and management organizations have already signed on for reimbursement and distribution related agreements with FedMed, which covers 40 million Americans, and Multi-Plan with another 20% of Americans covered under their diagnostic management plans. As the company rolls out the additional two tests this calendar year we expect wider adoption and further share price appreciation.

Growth: One of the better known cap biotech and healthcare analysts in the country is Grant Zeng of Zacks Research. We put a little more weight on Zack's Research as they are best known for their earnings estimates and they avoid conflicts of interest such as Investment Banking. Mr. Zeng has written about or commented on ATOS a few times in the past 4-6 weeks. He recently he upgraded his 12 month target to $15 per share based on an announced agreement with FedMed. His expectations are currently for 79% compounded growth rates in sales over the next 5 years. Any additional agreements with HMO providers or others this year are likely to spark a sharp rally in the shares of ATOS in our opinion. In addition, Sidoti recently recommended the stock on April 15th with their own buy rating, joining Mr. Zeng in early coverage.

Technicals: The stock has recently retraced a Fibonacci 61% of the gains from the 3's to the 12's over the past several weeks as traders have moved on. We argue that these types of retracements are commonplace in emerging growth stocks and usually the tail end of them revolves around poor interpretation of news, filings, or misunderstandings and low sentiment. Often traders who chased the stock up to $12 placed stop loss orders and they finally trigger, ushering in a new wave of stronger hands from the weak hands.

Risks: Obviously with any bio-medical related entity, and in this case a medical instrument based company there are risks. Adoption may be slower than expected or physicians may be skeptical about changing procedures. However, according to Zacks this has been mitigated as the company has done a great job of educating physicians on the benefits of these genetic tests for breast cancer. The FDA has also already approved both tests and two more are due out in the 2nd quarter. Financial risks have been overcome with the agreement with Aspire Capital as well.

In summary, we like ATOS Genetics to accumulate during this pullback with the potential to rally towards the 52 week highs in the low 12s in the coming months as further developments are announced. Sidoti and also Grant Zeng of Zacks Research are early in coverage and we would like to join them as well while the opportunity presents itself. Once investors reinterpret recent developments correctly and put 2 and 2 together, and with only 800,000 shares in the public float, we think the shares will quickly recover.

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.