On June 18, I read an SA article on Trovagene (TROV). I normally scan articles on nano cap medical companies very quickly because the odds are overwhelming that their commercial prospects are minimal at best. This article, however, was authored by a Contributor who picked several big winners in the recent past so I decided to read it more carefully. I expected the usual bullish optimism but he was almost fanatical about the growth prospects of transrenal nucleic acid testing. In one of his replies to a commenter, he stated that he believed TROV could be a multi-billion dollar company. This was a bold statement considering TROV's $51M market cap and precarious financial condition. Could the market be this inefficient? I decided to take a shot at analyzing the company in an effort to add more clarity to the situation.
My analysis assumes that the reader has prior knowledge of TROV's business on the basis of reading the company's website, SEC documents (prospectus) and the two previously published SA articles (#1)(#2). I will try my best to minimize redundancies.
TROV has an unusual pedigree. The company began life in 2002 as an on-line marketplace for used auto parts called "Used Kar Parts, Inc." The business failed to gain traction so the CEO and principal shareholder sold most of the stock to Panetta Partners in 2004. A few months later, the company acquired Xenomics, a nano cap company attempting to commercialize transrenal DNA (Tr-DNA) testing. In 2007, the name was changed to Trovagene (prospectus).
This is a superb start to the TROV story. A struggling internet marketplace for auto parts transforms itself into a bleeding edge nucleic acid diagnostics firm that is poised to redefine cancer and infectious disease testing on a global basis. I challenge Hollywood's best scriptwriters to top this one. The businesspeople who can pull off a move like this have to be part P.T. Barnum, Mordecai Jones and Titanic Thompson. This takes talent, folks. Only in America do you see this phenomenon. I love it.
Additional information from the recent prospectus is as follows:
TROV is barely past the concept stage. I would categorize it as a "very early development stage company". It only has four (three scientists) employees and miniscule sales. Its FY11 revenue was only $258,000.
Trovagene's value proposition is its patent position on transrenal nucleic acid testing (Tr-NC). It currently own six U.S. patents that will expire between 2018 and 2027. It intends to generate the majority of its income from licensing deals and royalties.
It also intends to generate service revenue by offering Tr-NC's from the reference laboratory it acquired from MultiGEN Diagnostics in February of this year. These laboratory-developed tests (LDT's) do not have to undergo the FDA review process as long as the procedures are compliant with CLIA standards. The company believes that it can earn the higher reimbursement rates accorded to "nucleic acid testing" rather than the lower rates for urine testing.
TROV specifies four sectors for the development of Tr-NC tests: Prenatal testing, cancer, detection of pathogens and transplantation. Only two, cancer and pathogens offer any medium term opportunity. Pancreatic cancer seems to offer reasonable numbers for a viable test. The KRAS mutation appears in 59% - 90% of these patients. This mutation represents a potential method to screen for the disease, monitor disease progression or recurrence and to determine appropriate drug therapy (personalized medicine).
TROV has completed the development of digital PCR assays for the detection of the most prevalent KRAS mutations and wild type KRAS DNA sequences. It has established protocols for the procedures using 100ml urine samples. This was done using other commercially available products. The only custom components Trovagene uses are specific synthetic sequences of DNA and RNA.
Key Milestone: Launch a urine-based KRAS test from its CLIA lab for pancreatic cancer in Q4.
On July 3, TROV announced a collaboration with MD Anderson Cancer Center on KRAS detection in urine versus biopsy. No financial terms were disclosed but I assume that MDACC will purchase the KRAS tests from TROV's CLIA lab.
The other area where the numbers look good pertain to a urine-based HPV screening test. The company states that their assay is 93% sensitive and 96% specific. This is based on an in-house study conducted in 2008. 320 cervical swab and urine samples were obtained from high and low risk populations in India. The way TROV summarized the results in the prospectus (p49) was confusing, but I managed to back into the numbers with a bit of effort.
|In-House HPV Study|
|Cervical Swab (PAP)||176||73%||137||81%||313|
The concordance of the Tr-DNA test with PCR on PAP false positives was 71% (24/34) and 82% (31/38) for PAP false negatives.
If these numbers can be repeated scientifically, then TROV has a viable product.
Key Milestone: Finalize a clinical study protocol (HPV in women), recruit study sites (India) and begin the study by Q4.
On June 7, TROV announced a collaboration with Strand Life Sciences to license and validate the HPV urine test and High Risk HPV DNA assay for clinical diagnostic and carrier screening use in India.
Even with good numbers, though, Strand will be restricted from charging too much of a premium for the urine test. PAP smears only cost ~250 rupees (US$5). There is also an ultra low cost visual approach using vinegar and iodine that costs less than 50 rupees (US$1) that can be performed by non-technical staff. This represents the real market price for HPV screening in the rural and poor areas. Either way, it does not appear that substantial revenue will be coming TROV's way in the near term.
The India project is TROV's first step in their pursuit of CE Mark approval so eventually it may have access to less price sensitive markets. This is probably several years away, though.
Beyond KRAS and HPV, however, things look a bit dicey. I reviewed the twenty-seven proof-of-concept papers on its website. Most have little or no data, miniscule sample sizes and/or the percentage occurrence of the cited mutations is too low to be useful (at least by today's standards). All the papers say is that there may be measurable mutations in urine. I guess it does prove the concept, but there will be a colossal amount of work required going forward to determine if there is anything of commercial value in any of this.
The next area I want to address is TROV's website. All companies have a bit of puffery contained therein, but TROV's contains several statements that make it look amateurish. For example, it refers to Tr-NA's as a "science platform" and a "technology". This goes beyond puffery into pure BS. Tr-NA's are just components or analytes in a body fluid sample. Cell-free snippets of DNA can be detected in serum, plasma, saliva, cerebrospinal fluid, tears, stool, etc. It is just a type of sample.
It emphasizes the "noninvasive" nature of Tr-NA testing. Strictly speaking, this is true, but it is such a minor issue that it hardly warrants any emphasis at all. Blood sampling is so ubiquitous that it is hardly a differentiator to avoid it. The benefits of urine sampling are cost, speed and convenience. Anyone involved in handling patient specimens, including cervical swabs, will be sensitive and receptive to improvements in these three areas, but they are not prioritized.
In the "Infection" section, there is a summary table of the same study that I reviewed earlier. The numbers are fairly close, but the false positives/false negatives designations are backwards. The seven false positives in the table are actually false negatives and the ten false negatives are actually false positives.
In the "Our Science Platform" section, it states "Tr-DNA is stable at room temperature for extended periods. DNA in blood samples and many other traditional samples are not". This statement seems a bit suspect considering the acidic ammonia-filled environment that the nucleic acids have to endure. In my research, I failed to find one source that documents longer RT stability for urine DNA. Both specimen types appear to have approximately the same RT shelf life (~1 day).
Factual errors, typos and dubious statements in a firm's website are serious mistakes for a nano cap company trying to raise capital and ramp up its business. This is the principal source that potential investors will use to get a first impression of the company and its management. As I stated previously, I perceive it be a bit amateurish and therefore see it as undermining their expertise and credibility.
So what does the revenue situation look like going forward? It looks sparse to me. Q1, 2012, revenues were only $34,000. License revenue from the NPM1 biomarker will at best be $200,000/year (prospectus). CLIA lab revenue for KRAS testing does not look overly bullish due to the niche nature of pancreatic cancer and HPV will not contribute much until late 2013 or beyond (although TROV may earn an upfront license fee from Strand). I think it will be a stretch for TROV to generate $1M in revenues by the end of 2013. It will remain a tiny company for quite a while.
Trovagene distills down to a classic hype story. How can miniscule revenue, no proprietary products and only four employees translate into a multi-billion dollar market innovator? Xenomics was incorporated in 1999 (Form 10KSB/A) and they still have yet to commercialize one product. It all boils down to how successful they can be in generating credibility for urine-based nucleic acid testing. Considering how long it has been, there is still a long way to go.
Is TROV worthy of an investment? I do not dabble in nano caps but for those of you who really want to gamble, I believe that the price behavior will be bullish through 2013 because of the alluring "castle in the air" story of Tr-NC testing confirmed by their successful $10M offering. Hype has staying power for 12 - 24 months. They will need another $5 - $10M in 2013 (prospectus) but they will get it. I will wager that if TROV's market cap reaches $200M, the major shareholders will cash out and move on. Retail investors should follow suit.
The major drawback to taking a stake is the illiquidity considering only 27,000 shares trade each day. Assuming a maximum position of 3% of the average daily volume (my policy), only 810 shares could be acquired. Individual investors, though, would be well advised to avoid buying any stocks that trade less than 500k shares/day.
I love this story, though. I am going to stand aside, watch the gamblers make their bets and enjoy the show.