(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
I've been following and trading shares of little know company Rosetta Genomics (NASDAQ:ROSG) for the past few years. During that time I've watched the extremely volatile shares of ROSG rise to over $375 and then down to a low of $1.40, then rise slowly back up to the current price around $3.
Why The Volatility and Such A Steep Decline?
Investors understand the potential value a company like ROSG can offer the medical industry - I offer more insight into this statement later in the article. As such they have been keen on getting into the stock quickly upon any positive breaking news. Since incorporating in 2000, ROSG has been in the research and development stage and as such has been spending much more cash than it has brought in - they have not been a profitable company. Not only has the company been putting in significant R&D funds into their products, but it's been spending a significant amount of funds on marketing them. Time has taken a toll on ROSG, as investors have become wary of them turning the corner from a R&D company burning through cash into a successful presence in the biomed community.
The main factors for the decline in price were two reverse splits - a 1:4 in June 2011 and a 1:15 in May 2012 - as well as numerous share offerings to fund ongoing operations. They have relied primarily on investors to raise the capital for their ongoing operations as their products had yet to really materialize into significant income.
Take a look at the following table that details the company's revenues, operating expenses and share totals for the past 3 years:
It's fairly obvious why the stock has gone down. ROSG is not seeing substantial revenues result from the expenses yet. 5 Year chart for ROSG share price (return of -88% is adjusted for reverse splits):
Turning The Corner
I believe, and hope to support with a thorough detailing of the past few significant events regarding ROSG, that the company has finally turned the corner that we've been waiting for so long. Recent press releases by the company as well as news headlines indicate that the continuous decline in share price may be over as 2014 looks to be a bright year for ROSG to finally capitalize on its R&D work over the past few years. There are quite a few positive catalysts occurring right now at ROSG, some of which I'll highlight in this article. I'll also do my best at explaining the business of Rosetta Genomics' microRNA tests in terms all can understand, as well as highlight the potential risks that are involved with an investment in ROSG.
That being said, investors will want to pay close attention to shares of ROSG in the coming months as they look to be poised for a break out from recent levels.
ROSG share data (as of 12/9):
|Avg. Volume (10 day)||159,100|
Rosetta Genomics, Ltd. is a leading molecular diagnostics company advancing microRNA-based diagnostics discovered and developed through its proprietary microRNAs and platform technologies.
Backed by a strong IP portfolio, Rosetta Genomics' scientists have developed proprietary platform technologies for the identification, extraction, quantification, and analysis of microRNAs from a wide range of sample types. These technologies enable the identification and advancement of multiple diagnostic projects addressing critical unmet needs in cancer, cardiovascular diseases and other indications. The Company's four commercial oncology tests have been launched in multiple countries worldwide via partners, and by a Company-led effort in the U.S. The Company is now working to develop additional tests in the cancer realm and in other fields.
Founded in 2000, Rosetta's integrative research platform combining bioinformatics and state-of-the-art laboratory processes has led to the discovery of hundreds of biologically validated novel human microRNAs. Building on its strong patent position and proprietary platform technologies, Rosetta is working on the application of these technologies in the development and commercialization of a full range of microRNA-based diagnostic tools. Rosetta Genomics' testing services are commercially available through its Philadelphia-based CAP accredited, CLIA certified lab. Frost & Sullivan recognized Rosetta Genomics with the 2012 North American Next Generation Diagnostics Entrepreneurial Company of the Year Award.
Rosetta Genomics' proprietary technologies enable the development of a wide range of diagnostic tests for cancer. Rosetta Genomics believes that utilizing microRNAs as biomarkers in the development of next generation molecular diagnostics, presents several advantages over other currently used methods:
- While many currently available cancer tests are largely qualitative and subjective, measuring microRNA expression levels in tissue samples offers quantitative, objective diagnosis.
- Rosetta Genomics' proprietary technologies enable microRNAs to be profiled with high sensitivity and specificity.
- MicroRNAs are stable markers in many body fluids and tissue samples, making them an ideal platform for molecular diagnostics.
So what does this all scientific jargon mean, and how does it relate to Rosetta Genomics?
MicroRNA - also known as "miRNA" - are a class of post-transcriptional regulators about 21-25 nucleotides in length. Similar to messenger RNA - or "mRNA" - they function in the genetic makeup of all organisms. Over 700 different miRNAs have been discovered in humans, with an estimated 800 more remaining to be discovered.
All MicroRNAs are created by the body to serve a function. Sometimes they are created to stimulate cell growth and development. Over the years of researching miRNAs, scientists have been able to catalog and classify the many different miRNAs and what their functions are in the human body. They began to notice that certain miRNA strands presented themselves in the bodies of cancer patients. Thru further research they were successful in identifying which specific miRNAs would present themselves in response to different cancers - breast, lung, kidney, liver, etc, as well as things like heart disease.
It was only natural that what followed these discoveries were the launch of "Genomics" companies in the biotech sector such as ROSG. These companies are involved in the research, development and use of tests which can identify miRNA stands in human cell samples to determine the presence of cancer. It is quite clear that miRNA research has great promise and may be the backbone of many of the most cutting-edge medical therapies of tomorrow. Recent headlines concerning Rosetta Genomics indicate that this is already beginning to take shape.
I believe it is important to distinguish what Rosetta Genomics is not - it is not in any way a cancer treatment company. Cancer treatment is a very complex and complicated business which requires a team of physicians to develop a plan and observe a patient over a long period of time. ROSG more so provides a product to physicians, not patients. They provide a testing service which physicians can use to identify cancer and cancer types in their patients. They are expensive tests, ranging from $3000 - $3600 per test, due to them requiring precision accuracy as well as still being so young and in developmental stages. That has been one of the most difficult hurdles for companies such as ROSG - the price. Insurance plans and healthcare networks are just not beginning to realize the effectiveness of these miRNA based tests and therefore are beginning to cover more of the costs associated with them.
Recent Headlines and Catalysts
Today, ROSG announced that the New York State Dept. of Health has given the company conditional approval to use their patented "Rosetta Kidney Cancer Test" to test patient samples. "With this approval, Rosetta Genomics can offer the Rosetta Kidney Cancer Test in all 50 U.S. states." Final approval is expected within 60 days as ROSG provides officials with additional information regarding the test.
Rosetta's Kidney Test accurately diagnoses the four most common kidney tumors: clear cell renal cell carcinoma (RCC), papillary RCC, chromophobe RCC and oncocytoma. It is 1 of 4 testing services that they currently offer, others are:
- Rosetta "Cancer Origin Test" - identifies tumor type in unknown cancer area cases
- Rosetta "Lung Cancer Test" - identifies the four main types of lung cancer tumor cells
- Rosetta "Mesothelioma Test" - diagnoses mesothelioma, a cancer connected to asbestos exposure.
Investor sentiment had improved a bit during the spring and summer of this year as shares went from $3.30 to over $4 when Robert Pedone of TheStreet.com authored an article calling for shares of ROSG to "soar."
Later in the summer, Benzinga's Paul Quinataro wrote two articles highlighting Rosetta's newest credentialing deals with two national healthcare provider networks, found here and here. The key takeaway from these announcements is that ROSG's potential customer base increased from 200,000 patients as of their October 2012 earnings report to 1 in 5 Americans - over 60 million patients.
Since that time they've been on the decline again as investors feared the cash position at the company was weakening due to low demand for their products and they may have to issue more stock to raise capital.
However, the most recent letter to shareholders from ROSG management published on 12/2/2013, CEO Kenneth Berlin specifically addressed this issue:
"...we will continue to make investments in commercial operations and in the further clinical development of our microRNA technology. We expect that our cash position at the end of 2013 of more than $20 million along with the projected revenue from our testing services will be sufficient to fund our operations well into 2015.
We are very pleased with the progress we have made to date and expect 2014 to be an exciting year of growth and accomplishments as we advance our strategic plan in pursuit of our mission to be the pioneering force in microRNA-based personalized medicine to the benefit of patients worldwide."
In addition to highlighting ROSG's stable cash position, he pointed out a number of other positive developments that point to a bright future for shareholders.
- Regarding Rosetta Genomics' patent and IP portfolio - "We continue to pursue patent protection for our intellectual property and are pleased to have added six U.S. patents to our growing portfolio during 2013. As a result we have 33 issued patents, including 30 in the U.S. In addition we have 43 patent applications pending, of which 23 are in the U.S."
- Regarding recent improvement in product demand/increasing growth - "Both October and November marked successive record-breaking months for Rosetta in terms of sample volume. Compared to October and November of 2012, we have experienced growth of approximately 2.5-fold and 5-fold, respectively, in terms of samples received in our CLIA lab in Philadelphia. Compared to the average of the first nine months in 2013, these past two months have seen sample volume almost double, a testament to the hard work of our expanded sales force as well as our marketing efforts. In terms of processed samples, November was by far the strongest month for our Cancer Origin Test, as we processed nearly 50% more samples in November than we had processed during our previous record month. Our year-to-date gross billings have grown by 100% compared to same period last year. We estimate our gross billings will pass the $1 million dollar mark by year-end."
11/20/2013: Rosetta Genomics announced it had expanded its miRNA testing services with GeneKor Medical S.A. granting them exclusive rights to ROSG's suite of diagnostic tests in Turkey, Greece, and Romania.
A Conservative Scenario
Placing a future valuation on Rosetta Genomics takes some speculation into account. First one must figure out the value of their market. This is a difficult undertaking as the genomics industry is only beginning to take shape and ROSG markets their products in a number of countries around the world. So for this scenario I'll conservatively base their target market only on Medicare patients and using the 4 tests which ROSG currently offers. Medicare has covered this miRNA tests since May 2012. I'm using numbers from their latest Medicare press release in August 2013.
- New cancer patients every year who may benefit from ROSG cancer miRNA tests: over 200,000
- Medicare covered cost/test: $3500
- Potential Medicare market: $700 Million
- Conservatively estimate that ROSG captures 20% of this market: $140 million in revenues
- ROSG splits the revenues with Precision Therapeutics (marketer of products in U.S.): $70 million in revenues
- Subtract operating expenses (currently $8 million/year): $62 million in profits
- Earnings per share (9.1 million shares): $6.85/share
- Assign ROSG a price/earnings multiple of 5: $34.25/share
As you can see, just doing this simple conservative analysis shows that ROSG may be substantially undervalued at the current share price. If you expand the above scenario to include their worldwide markets and use similar calculation methods (remember, they have marketing/licensing agreements with companies - all revenues won't come directly to ROSG) you can see how the share price would go up dramatically.
Chart Showing Momentum
Technically, shares of ROSG are looking very bullish right now. They just crosses the 50 day moving average last week and then higher volumes and momentum continued after today's headline, pushing them above their 200 day moving average. Any time a stock is trading above both the 50 and 200 day MA's it's a great sign for a breakout.
Also worth noting is that shares have a tendency to pop large amounts upon any good news breaking about ROSG. Every time a patent allowance is granted, shares have typically responded with gains of 20-30% in the following trading sessions. This is partly due to the fact that ROSG is a microcap stock and trades at typically slow volumes.
Another bullish indicator - Short interest has been steadily decreasing the past year, down from 1.8 million shares in January to the current total of 1 million shares (roughly 10% of float). At current trading volumes it would take 8 days for shorts to cover their positions. Continued buying of ROSG in the coming weeks should increase the amount of shorts covering and further aid in the price's boost from current levels.
ROSG Short Interest data by YCharts
First of all, the basic things that make Rosetta Genomics a potential breakout stock also make it a very risky stock:
- Very small market capitalization
- Trades on relatively low volumes
- Low share price
Because of these facts, share price can drop just as rapidly and extensively as they can "pop." Investors would be wise to set stop limit orders after purchasing shares to add a level of protection and limit their risk exposure.
Furthermore, Rosetta Genomics operates in a new, competitive segment where many companies are competing against each other for a leg up. Every headline or positive step that another company makes could send shares of ROSG down just by association. Like most newer small-cap biotech companies, ROSG is currently not profitable. Therefore the share price is currently based on speculation of future earnings and is very reactive to news regarding not only the company but the industry as well. A portion of the share price in these companies is directly attributable to their submissions of patent applications, of which ROSG has over 20 pending. Should some of these submissions be denied for any reason, the stock price would respond negatively as investors sell the shares they bought on speculation of patent approval.
Another "risk" is the lack of information and coverage pertaining to ROSG. They are an Israeli corporation and are considered a "foreign issuer" by the SEC. As such they are not held to the same reporting requirements as other companies that are incorporated in the US or ADRs. Rosetta's investor relations website has always provided me the best resource to find their earnings reports, press releases and other filings.
It is highly recommended that before making a decision to invest in ROSG or any company like it, that you do your own research and due diligence. Please do not take my article as your sole source of reasoning regarding ROSG.
Rosetta Genomics operates in an important market - developing tests that can accurately and objectively detect signs of cancer in extremely early cases. The potential market for products such as theirs, should they continue to be successful in their development and marketing strategies, is enormous. They could offer customers a much higher chance of detecting cancers earlier than ever before, leading to higher success rates of treatment and eventually survivor rates.
Investors have been waiting for years for ROSG to stop issuing shares and burning through cash. That wait appears to be over as ROSG is debt free and hasn't issued new shares in over a year - since August 2012. Furthermore, management projects their cash position to be stable through 2015, funding operations for the next 2 years. They also have pointed out the rapidly increasing interest in their products this year, resulting in rapid growth in sales the past few months. Look for these trends to continue into 2014 thanks to the key approval from the NY Dept. of Health today, enabling ROSG to offer one of its most vital products throughout the entire 50 U.S. states - expanding their market exponentially.
Disclosure: I am long ROSG. 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.