Biotech IPO Watch: Rosetta Genomics Using MicroRNAs for Diagnostics

Rosetta Genomics (ROSG), an Israeli biotech, had the good fortune to price its IPO on Monday night, which is rather early in the week for any IPO.

By doing so, the Rosetta Genomics IPO was a done deal before Tuesday morning rolled around with its huge 3% downdraft caused by the Shanghai surprise. So the IPO investors, who remain a skittish bunch, never had a chance to rethink their decisions.

Of course, Rosetta did not have a particularly easy time of it either. Last year, Rosetta made its first attempt at an IPO, seeking to place 3 million shares in an $11-$13 range. When investors balked, Rosetta went into an extended holding period. This year it came back with a deal that would offer more shares - 3.75 million - but at a much reduced price: a range of $7.50-$8.50.

Even that didn’t hold, and Rosetta was forced to accept a price of $7. From there, events turned a little more toward the positive side, as Rosetta managed a 32 cent increase on its first day of open market trading, even though the rest of the stock market was falling apart, and it added another 23 cents in its second day of trading, for a net gain of 55 cents or 8% over its first two days.

At $7.55 per share, with 11.26 million shares outstanding, Rosetta has a market cap of just $85 million. Including the proceeds of the IPO, it has right around $28 million in cash, so the market is valuing the business at only $67 million. There is a reason for that. Rosetta is a fairly new company, based on very recent scientific discoveries, and it has not had much time to advance its program. In fact, it has generated only $18.7 million in accumulated losses to get to this point.

Rosetta is seeking to develop diagnostic and therapeutic products based on genes that are known as microRNAs. MicroRNAs are naturally expressed, using instructions coded in DNA. They are thought to be important in regulating protein production, and they seem to play a significant role in cancer, which is where Rosetta is focused. Using computers, Rosetta has scanned the human genome for microRNA candidates, which are validated using tissue samples or body fluids. So far, Rosetta has filed for patents on 350 biologically validated human microRNAs and 48 biologically validated viral microRNAs. Rosetta says this patent estate constitutes more than half of all validated microRNAs.

A discussion about Rosetta Genomics does not include any talk about clinical trials, because there are none, but there is a long list of partnerships and collaborations. These include:

a license agreement with Ambion, Inc. for use of our microRNAs in a variety of research products;

a collaboration with Asuragen, Inc. to co-develop diagnostic products for prostate cancer;

a collaboration with Isis Pharmaceuticals (ISIS) to co-develop therapeutics for liver cancer;

a license from The Rockefeller University to use its microRNAs, including approximately 80 biologically validated human microRNAs and approximately 30 biologically validated viral microRNAs, for diagnostic applications;

licenses from Max Planck Innovation GmbH to use its microRNAs, including approximately 110 biologically validated human microRNAs, for diagnostic and research applications;

a license from Johns Hopkins University to use approximately 130 biologically validated human microRNAs, which were discovered in collaboration with Rosetta, in any application; and

collaborations with the Sloan-Kettering Institute for Cancer Research and Hadassah Medical Organization, among others, to gain access to clinical samples and associated clinical data and to collaborate on the development of microRNA-based products and other applications.

Those partnerships explain, in part, how Rosetta got this far on so little money. Much of the IP was done at universities, and much of the development is being done through partnerships with other companies.

If microRNAs develop into a useful tool, they will most likely appear first as a diagnostic aid. Rosetta points out that current tests for cancer are not very satisfactory. The PSA test for prostate cancer, for example, has an unacceptably large number of false results - on both the positive and negative sides. A more accurate test would be a boon for patients, keeping them from worrying unnecessarily, while alerting them more quickly if there is a problem. Plus, of course, it would prevent treatments that are not needed.

Similarly, many people have some history of smoking, even if they are not smoking now, and they are at risk for lung cancer. Early detection is key, but there is no test available to diagnose lung cancer early. These are significant opportunities for Rosetta. That being said, the diagnostic market is not the financial equivalent of a therapeutic drug for any biotech, but in Rosetta’s case, any approvable drugs are a very long way off. Rosetta barely mentions any molecules in pre-clinical development. So the prospect of moving microRNAs into clinical trials is something that will happen only in the distant future.

If the underwriters’ overallotment is exercised, Rosetta expects to net $26.3 million from its IPO. Of that, $17 million will be spent on R&D, the bulk of it for diagnostic products. Rosetta will work on tests for prostate, lung, colorectal, and breast cancer, plus CUP, or cancer of unknown primary site. $4 million of the proceeds will go toward developing a liver cancer drug, and Rosetta thinks the $4 million will be enough to get a drug through its pre-clinical development.

Existing investors paid an average of $4.07 for their shares. There are options outstanding for another 1 million shares at a weighted average exercise price of $3.46 per share. In the first nine months of 2006, Rosetta lost $5.9 million or about $650,000 per month. With more money in the till and its science in-licensed, presumably the burn rate will go up as Rosetta seeks to validate its diagnostic tests.

Disclosure: none.