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Summary

  • Rosetta is an emerging molecular diagnostics company focused on molecular testing of cancer and other diseases using the company’s unique and proprietary microRNA platform technology.
  • Based on its microRNA platform technology, Rosetta currently markets four cancer tests: the cancer origin test, the lung cancer test, the kidney cancer test, and the mesothelioma test.
  • With a focused marketing strategy in place, revenue growth will be accelerated in 2014 and beyond. revenue will reach $125 million in 2020.
  • We think Rosetta’s shares are undervalued at current market price. our relative valuation model suggests a fair value of $10.50 per share.
  • Execution will be the key to the achievement of our price target. The fluctuation of the broader market will also impact the performance of the company’s shares.

Rosetta Genomics (NASDAQ:ROSG) is an Israel-based molecular diagnostic company focused on developing and commercializing molecular diagnostics for cancers.

Rosetta's diagnostic business is based on its unique and proprietary microRNA (miRNA) platform technology. MicroRNAs are naturally expressed in human body. Studies have shown that microRNAs play an important role in cancers. microRNAs are different among cancers from various tissue origins. There are also a couple of microRNAs that appear to be frequently deregulated in many cancers, suggesting that these microRNAs regulate fundamental processes such as cell proliferation or apoptosis. These form the basis of microRNA derived molecular diagnostics for cancers.

Rosetta Genomics Is the Leader in MicroRNA Platform for Molecular Diagnostics

As a pioneer in the development of microRNA-based diagnostics, Rosetta has the most validated and accurate microRNA biomarker platform.

The company has developed proprietary platform technologies for the identification, extraction, quantification, and analysis of microRNAs from a wide range of sample types including tissues and body fluids.

Once extracted, Rosetta's technology is capable of detecting and quantifying the microRNAs using two custom designed platform technologies:quantitative Real Time PCR (qRT-PCR) and microarrays.

The microarray platform covers approximately 2000 human microRNAs, including approximately 170 microRNAs that are Rosetta Genomics' proprietary microRNAs. In addition to its high sensitivity, the array's high specificity allows discriminating homologous family members.

The qRT-PCR platform offers unparalleled sensitivity and specificity, with the ability to detect microRNAs on the single molecule scale, and to discriminate homologous microRNA.

Rosetta Genomics also has developed a strong and diversified intellectual property portfolio in the field of microRNs which covers a large portion of known human and viral microRNAs.

The company has filed numerous patent applications protecting composition-of-matter for microRNAs, as well as applications protecting its microRNA extraction protocols and diagnostic methods using microRNAs. Rosetta has also in-licensed important composition-of-matter patents from the Max Planck Institute and Rockefeller University.

This broad IP position not only allows Rosetta Genomics to pursue internal product development opportunities, but also allows the company to monetize its technology by out-licensing in key areas not targeted by Rosetta for internal development.

Using its intellectual property, collaborative relationships with leading commercial enterprises and academic and medical institutions, and expertise in the field of microRNAs, Rosetta Genomics has initiated microRNA-based diagnostic programs for various cancers.

In summary, we think Rosetta Genomics has the following advantages over its peers.

  • Strong IP position provides access to hundreds of potential microRNA biomarkers.
  • Proprietary discovery, extraction, and quantification technologies enabling the company to rapidly expand its pipeline.
  • Extensive collaborations with leading research and knowledge centers providing the company with input from the forefront of clinical research as well as access to hundreds of sample types.

Rosetta Genomics' research and development center is based in Israel while it has established a College of American Pathologists (CAP) accredited, CLIA-certified laboratory in Philadelphia, USA, which enables the company to commercialize its miRNA-based diagnostic tests in the US and around the world.

Over the years, Rosetta has developed and launched six cancer diagnostics based on its proprietary microRNA technologies withfour currently marketed versions of these tests.

Rosetta Cancer Origin Test (miRview® mets2)

The Cancer Origin Test is the company's lead cancer test, which is the company's second-generation microRNA-based diagnostic for the identification of the primary site of metastatic cancer, specifically metastatic cancer of unknown or uncertain primary (CUP).

CUP is a heterogeneous group of cancers that constitutes 3-5% of all cancers with a poor median survival of six to ten months. Each year approximately 70,000 patients in the United States are diagnosed with CUP. Presently, the choice of treatment for metastatic cancer is largely dependent on the nature of the primary tumor. Patients with CUP pose a therapeutic dilemma and treatment is often empiric with a "one treatment fits all" approach. There are unmet medical needs for quicker and more accurate methods to identify the tissue of origin of CUP cancers, which would permit the use of targeted therapies.

Rosetta Cancer Origin Test utilizes custom-designed microarray technology to identify 49 possible cancer origins with very high accuracy using 64 microRNAs. These 49 origins include carcinomas, soft tissue tumors, lymphoma and other malignancies. This test is designed to help provide a diagnosis for cancer patients with unknown or uncertain primary origins.

The Cancer Origin Test performance was determined in an independent, blinded test set of 509 samples. In the vast-majority of cases, the Cancer Origin Test returned a single tissue prediction with 90% sensitivity, 99% specificity and overall sensitivity was 85%. The high level of accuracy of the Cancer Origin Test is better than published data from competitors.

Market potential is huge for the Cancer Origin Test. There are about 200,000 CUP and other metastatic disease patients who may benefit per year in the US. Rosetta Cancer Origin Test is covered by Medicare at a rate of about $3,500/test. Over 170 million lives are covered by both Medicare and commercial payors.

Rosetta Lung Cancer Test

The Lung Cancer Test is a molecular diagnostic test that uses 8 microRNAs to accurately differentiate four subtypes of lung cancer. It classifies neuroendocrine and non-small cell lung cancer (NSCLC); and then further subclassifies NSCLC to either squamous or non-squamous; and further subclassifies neuroendocrine to either small or carcinoid.

For patients with lung carcinoma, the accurate determination of tumor type significantly influences treatment decision. In general, SCLC, the main sub-type of neuroendocrine tumors, is much more responsive to chemotherapy and consequently this comprises the mainstay of treatment. This is in contrast to NSCLC which is relatively chemoresistant and thus primarily treated with surgical resection for local disease. In addition, the recent emergence of novel biological therapies that effectively target specific cellular alterations now demands the most precise classification possible for non-small cell carcinomas. Thus, the distinction of squamous from non-squamous carcinomas is becoming increasingly important.

However, current techniques and methods for lung cancer typing lack standardization, are difficult to reproduce and have an unacceptable level of variability between pathologists and laboratories. In particular, owing to limited tumor sample amounts and the poor quality of some samples, the classification of primary lung cancers using small preoperative biopsy specimens presents a diagnostic challenge using current tools.

Unlike current methods, The Lung Cancer Test is based on the expression levels of eight microRNAs, measured using a sensitive quantitative RT-PCR platform, and provides a differential diagnosis with fast, standardized and objective classification. A high level of accuracy was demonstrated in a validation study performed on 451 independent samples. This study determined the test's sensitivity and specificity to be 94% and 98%, respectively for the identification of the four main subtypes of lung tumors. The sensitivity for very small samples sizes (i.e., cytological samples) is 95% with a specificity of 98%.

Lung cancer is the second most common cancer in both men and women (not counting skin cancer) and is the leading cause of cancer-related death worldwide and in the United States. Lung cancer accounts for about 13% of all new cancers. The American Cancer Society estimates that there will be about 224,210 new cases of lung cancer, and 159,260 deaths from lung cancer in the US in 2014.

Rosetta Kidney Cancer Test

The Rosetta Kidney Cancer Test™ is a molecular diagnostic test that utilizes microRNA expression to accurately differentiate four main types of primary kidney tumors: clear cell, papillary, chromophobe, and benign oncocytoma.

Differential diagnosis between different types of kidney tumors can be challenging and can lead to unnecessary surgeries. There is a growing unmet medical need for kidney tumor classification. However, sometimes, it's difficult for pathologists to distinguish between tumor types on the basis of morphology and immunohistochemistry (IHC).

The Kidney Cancer Test uses the expression of 24 microRNAs to accurately identify the kidney tumor subtype. The test was developed using 181 samples with blinded validation performed on 201 samples yielding a test sensitivity of 95%.

Kidney cancers account for more than 3% of adult malignancies. Each year in the US, there are about 65,000 new cases of primary kidney tumors and about 13,000 die from kidney cancer. The Kidney Cancer Test provides a differential diagnosis with fast, standardized and subjective classification and therefore helps doctors make more informed patient care decisions.

Rosetta Mesothelioma Test

The Mesothelioma Test is a state-of-the-art molecular diagnostic test that uses microRNA to differentiate malignant pleural mesothelioma (MPM, often due to asbestos exposure) from carcinomas in the lung or pleura.

The mesothelioma test is a medically and legally important differential diagnosis.

The incidence of mesothelioma has clearly grown in recent years. Exposure to asbestos is still a major factor that contributes to the development of mesothelioma and continuing growth in number of cases. Since mesothelioma patients require specific treatment regimens, an accurate diagnosis is critical. However, the distinction between mesothelioma and carcinomas that involve the pleura can be challenging.

Over the past twenty years, immunohistochemistry has become the mainstay of the pathologic diagnosis of mesothelioma. However, because of the inter-observer variations between pathologists, and because of the absence of a single specific and reliable biomarker for the diagnosis of mesothelioma, the distinction between mesothelioma and carcinomas using immunohistochemistry can be difficult in some cases. There is a need for a reliable and objective assay that would help make this distinction with greater confidence.

Rosetta's Mesothelioma Test solves this problem by analyzing differential expression of microRNAs in mesothelioma and various carcinomas which generated high sensitivity and specificity. The test is conducted in a total of 243 samples (33 malignant pleural mesotheliomas, 210 carcinomas). Using microarrays, Rosetta identified microRNAs differentially expressed between MPM and various carcinomas. The assay reached a sensitivity of 100%, a specificity of 94% and a 100% negative predictive value in a blinded validation set of 68 samples from the lung and pleura.

This assay provides a standardized, quantitative alternative to the currently applied methods. The small number of microRNAs needed for classification, the high tissue specificity of these microRNAs and the ease of their determination from archival fixed tissues embedded in paraffin, makes this assay a practical option. The microRNA-based assay that Rosetta has developed, uses expression levels of only three microRNAs, and is able to accurately diagnose mesothelioma and distinguish it from lung adenocarcinoma and other malignancies involving the lung and pleura with very high sensitivity and specificity. This assay is simple to perform and highly reliable in its reproducibility.

In addition to clinical applications, the Mesothelioma Test has a unique opportunity in mesothelioma lawsuits, which allows the company to charge high price for the test due to private pay from plaintiffs and defendants.

Each year in the US, there are about 2000 new claims arising from mesothelioma cases, and over 8000 pending claims.

Long-term Pipeline Provides Sustainable Growth

In addition to its cancer tests, Rosetta Genomics is also developing a microRNA-based diagnostics for heart failure. This test will be a blood-based test using mircoRNA biomarkers.

Heart Failure (HF) is a complex clinical syndrome that can result from any structural or functional cardiac disorder that impairs the ability of the ventricles to fill with or eject blood. It is the most prevalent disease in the western world and its prevalence continues to rise. It is estimated that 5 million Americans are diagnosed with HF and each year there are approximately 500,000 new HF patients. Besides its high prevalence, HF is also the most expensive disease in western countries.

Rosetta Genomics has so far performed two studies. The first study was published in the European Journal of Heart Failure (Goren et. al., 2012), showing that elevated serum levels of specific microRNAs identify heart failure patients. The second one was published in Am J Cardiology (Goren et al., 2013), correlating miR-150 to atrial fibrillation in patients with chronic systolic heart failure.

In addition to diagnostics, Rosetta is also developing microRNA-based therapeutics.

In January 2011, Rosetta joined the Rimonim Consortium in Israel. The purpose of the consortium is to develop RNA interference (RNAi)-based therapeutics. As a member of the consortium, Rosetta is entitled to certain grants to support its research and development activities.

We believe the long term pipeline will provide sustainable growth for the company.

Collaboration Creates New Avenue for Revenue Growth

In addition to focusing on its own internal research and development, Rosetta Genomics is also monetizing its microRNA platform technology by collaborating with biotech and pharmaceutical companies to support its partners' development of microRNA therapeutics.

In January 2014, Rosetta Genomics announced that it signed a master service provider agreement with an undisclosed major global biopharmaceutical company. Under the agreement, Rosetta will provide its microRNA profiling and other services pursuant to a collaboration in important areas of unmet medical need utilizing a novel therapeutic approach.

This agreement leverages Rosetta's microRNA biomarker platform and expertise to assist one of the world's leading biopharmaceutical companies to advance their research and development efforts on this important, novel therapeutic approach.

In addition to the company's current cancer testing services and new products from its pipeline, this collaboration represents third major platform for revenue growth for the company.

Going forward, we believe Rosetta will enter into additional similar agreements as the company seeks to monetize its leading microRNA platform and expertise.

Valuation Is Attractive

We are initiating coverage of Rosetta Genomics with an Outperform rating. Our 12-month price target is $10.50 per share.

Rosetta is a revenue generating, emerging molecular diagnostics biotech company focused on molecular testing of cancers and other life threatening diseases. The company develops its diagnostic products based on the unique and proprietary microRNA platform technology.

Currently Rosetta is marketing four cancer tests with focus on its lead Cancer Origin Test. This Cancer Origin Test is covered by Medicare reimbursement and other payors covering over 170 million lives. The company is negotiating for expanded coverage for the Cancer Origin Test as well as for reimbursement for its three other marketed cancer tests.

In addition to currently marketed tests, Rosetta is also developing other tissue or body fluid-based molecular diagnostics using its microRNA technologies. Current focus is on the development of a test for heart failure. Furthermore, Rosetta is developing microRNA-based therapeutics. These long term pipeline will provide sustainable growth for the company in the years to come.

Rosetta is also collaborating with pharmaceutical/biotech companies to assist these companies to develop microRNA-based therapeutics. This collaboration creates the third avenue for revenue growth.

With a focused marketing strategy in place, revenue will be boosted in 2014 and beyond. Specifically, based on the marekted four products and the Medicare reimbursement rate of $3500/test for the cancer origin test, we model $1.5 million in revenue for fiscal 2014 and revenue will grow to $125 million in 2020, a tremendous compound annual growth rate (CAGR) of 123%. With accelerated revenue growth, Rosetta will become profitable in fiscal 2018 with earnings per share (EPS) of $0.32, based on total revenue of $50 million. EPS will grow to $1.31 per share in fiscal 2020, based on total revenue of $125 million, a 102% CAGR increase in the two-year period.

Rosetta has a relatively strong balance sheet. We estimate that there will be over $20 million in cash at the end of 2013 and current cash is sufficient to fund operations into 2015 according to our model.

With all these in mind, we think Rosetta's shares are undervalued at current market price. In the past three days, Rosetta share price shot up from $4 to current $5.5 per share as of this writing. This is the evidnce that investors have come to realize that Rosetta shares are undervalued, based on its growth potential. We still think Rosetta shares have a plenty of room for further appreciation. As we said, Rosetta is a revenue generating diagnostics company targeting the high growth market of molecular diagnostics. The company's microRNA platform technology has broad applications targeting both diagnostics and therapeutics. We don't think the Street has recognized the potential of high revenue growth in the coming years for Rosetta.

When looking at the valuation of Rosetta, we think the industry average P/E multiple of 25x is conservative for Rosetta considering its high growth in the next 5 years. If we apply this P/E coupled with EPS of $1.31 in 2020, discounted at 20% for 6 years, we come up with our price target of $10.50 per share. Our price target values Rosetta at $105 million in market cap, which we think is still conservative.

However, we remind investors there are risks associated with our price target. Since the company will only become profitable in 2018, cash burn will be a concern. Equity financing will dilute existing shareholder base. Execution is the key to achieve expected growth and will have a significant impact on the share price. The fluctuation of the broader market in the US will also have impact on the company's share price in the next 6 to 12 months. In general, we think the company has a favorable risk/award profile at this time with downside risk relatively low and high upside potential.

Source: Rosetta Genomics: The Leader In MicroRNA-Based Molecular Diagnostics