Rosetta Genomics (ROSG) has been one of the most volatile stocks in the world over the last week, leaving investors either exhilarated or sick to their stomach, depending on where they got on. The company is up 450% from May 14th, but down almost 50% from its intraday high of $23.43 of May 24th. What makes it even more amazing is that the company has executed a 1 for 15 reverse stock split and doubled the number of shares outstanding over the same period, neither of which usually good news for investors.
Because of a combination of the share issuance and the price movement, the market cap volatility is like no stock I have ever seen. On May 14th, the company had a market cap of $2.6 million. At the close on May 25th the market cap was $33 million, and at its peak Rosetta was worth $57 million.
So what are investors buying and why did the buyer at $23.43 think it's worth almost 21 times what it was two weeks ago? Rosetta Genomics makes a number of diagnostic tests based on micro RNA (miRNA). miRNAs are short sequences of nucleotides that play a critical role in gene expression and regulation. They have also been shown to be sensitive and highly reliable biomarkers for various pathologies, most notably cancers. The advantage to using miRNA is that there are over 1500 known miRNAs and specific ones are expressed depending on the pathology. Distinguishing between miRNAs being expressed in specific tissues allows for high levels of sensitivity and specificity not available through other technologies. For example, Rosetta's main product, the miRview mets^2 scan test, which is used in metastatic cancers where it the origin of the cancer is unknown, can identify 42 primary origins by measuring the expression level of 64 microRNAs.
The information provided by Rosetta's tests can make a major impact in the way cancers are treated because of the information they provide. They currently have 5 marketed tests, the mets/mets^2 test which can determine cancer origin, the miRview lung and miRview squamous tests which can determine types of lung cancers, miRview meso which is used to differentiate mesothelioma from other lung cancers, and the just launched miRview kidney which can differentiate between four times of kidney cancers. When an oncologist knows exactly what cancer they are dealing with, they can better target the treatment, increasing effectiveness.
The news that started all of this volatility was the announcement that the mets^2 test will now be covered by Medicare. This removes an important barrier to doctor use because they no longer have to worry about reimbursability, making it much more likely that Rosetta's products are used in the 70,000 annual U.S. cases of metastatic cancer where the origin of the cancer is unknown. The company, which produced just $103,000 in revenue last year, is counting on it. Additionally, billing approval for one of their products likely opens the door for others. However, just because it's paid for doesn't mean doctors will automatically prescribe it. One recent example is Dendreon (DNDN) and its troubles getting doctors to prescribe Provenge. While this test is a very different price point, and used for diagnosis rather than treatment, it still may face some challenges in raising awareness and getting doctor buy in.
One other thing to consider is that further dilution is likely coming. Even though the company appears to have shored up its cash position, there are over 210,000 shares that could be issued in conjunction with a convertible debt offering at an exercise price of $1.416/share and maturing January 26th, 2013. (Note: the price in the linked press release is pre reverse split). The company also has about 375,000 outstanding warrants and options, but all are out of the money with weighted average exercise prices ranging from $14.37 to $83.13.
As the volatility fades, the day traders move on, sanity should soon return to Rosetta's shares. With over $10 million in cash raised within the last month the company should be in a position to operate comfortably, while also spending on marketing to drive product adoption. If they can successfully do so, a $30 million market cap isn't unreasonable, and may be cheap.
Additional disclosure: I am currently employed by the University City Science Center in Philadelphia where Rosetta Genomics is a tenant. However, I have no direct relationship with Rosetta, and have had no discussions with them or anyone with direct knowledge of the company.