Why Rosetta Genomics Is Deeply Undervalued

Sep. 6.12 | About: Rosetta Genomics (ROSG)

Rosetta Genomics Ltd. (NASDAQ:ROSG) is a leading developer and provider of microRNA-based molecular diagnostics. Rosetta is an Israeli based company that was founded in the year 2000. After looking through Rosetta's company reports I have come to the conclusion that Rosetta Genomics is deeply undervalued.

Before we get into the details, please keep in mind that this article is based on the information provided by Rosetta Genomics. I am using the information provided from its corporate overview, which was updated in August 2012. You can find this information (pdf) on Rosetta's website. Click on the link that says corporate overview. Here is the information I came across.

  • Rosetta currently has 8.2 million shares of common stock.
  • Rosetta's current stock price is $5.48 per share, giving ROSG a market cap of roughly $45 million.
  • Their operating expenses are approximately $1.5 million per quarter or $6 million annually.
  • Rosetta currently has zero debt on their balance sheet and enough cash to finance operations for the next 24 months.
  • Rosetta is partnered with Precision Therapeutics to market its leading product miRview® mets2 / mets.
  • Rosetta received Medicare coverage for miRview® mets2 / mets in May 2012, giving them a $600 million market opportunity.

Based on the information provided, I will now explain why I think Rosetta Genomics is deeply undervalued. I will use three different scenarios for what may happen for Rosetta Genomics in the future.

The Conservative Scenario

In this scenario I will assume that ROSG only captures twenty percent of its market from their lead product.

  • .20 x $600 million (Market for miRview® mets2) = $120 million in revenue

I'm also going to assume that ROSG will split half of its revenue with Precision Therapeutics.

  • $120 million x .50= $60 million in revenue

I know Rosetta has zero debt, and the current cost of operations is 6 million a year.

  • $60 million - $6 million= $54 million (estimated profit)

This would leave Rosetta with $54 million in annual profits.

To find the company's value I will multiply estimated profit times five years, I'm using five years because I'm trying to be conservative.

  • 5 x $54 million = 270 million market cap/value.

With 8.82 million shares outstanding that would gives Rosetta a stock price of $30 per share.

That scenario was the conservative scenario. It assumes Rosetta can only capture twenty percent of the market, a market for a product that is covered by Medicare.

The Moderate Scenario

In this scenario I'll assume Rosetta can capture fifty percent of their market. That would put revenue at 300 million.

  • .50 x 600 million = 300 million (revenue)

Assuming Precision Therapeutics gets fifty percent of revenue, Rosetta would receive $150 million. After operating costs are subtracted ($6 million) ROSG is left with $144 million in profit. To find estimated value I'll multiply $144 million (profit) times five years. ROSG would be valued at $720 million. By dividing $720 million by the number of shares outstanding (8.82 million) that would give Rosetta a PPS of $81.

The (Overly) Optimistic Scenario

Now I'll get crazy optimistic and assume Rosetta captures eighty percent of its market for its lead product. That would give them $480 million in revenue. After precision gets their cut Rosetta would be left with $240 million. After the operating expenses of $6 million annually is subtracted, Rosetta is left with 234 million in profit. Using a 5x multiplier to get the company's value would give Rosetta a value of $1.17 billion giving them a stock price of $132.

The flip side to these super awesome scenarios is that it's all conjecture. In the past ten years Rosetta has not been able to turn significant profits. They've had to raise money by diluting shares, which they did three times in the past five months. The Medicare reimbursement rate for their lead product is still unknown. These factors weigh heavily on Rosetta's current stock price.

What to Expect From Upcoming Earnings

For the past three months, financial websites have incorrectly predicted when Rosetta Genomics earnings will be reported.

Today I spoke with Ken Berlin, CEO, and asked him why there hasn't been an earnings report for the past six months. He explained that Rosetta Genomics is a foreign issuer and are only required to report earnings every six months. He also said the deadline for filing is September 30th, and that they had the full intention of meeting that deadline. With that being said, there is still no definitive date on when earnings will be reported. I wouldn't be too concerned with ROSG's upcoming sales report because it will not reflect Medicare reimbursement. I would look for any upcoming revenue guidance or projections for FY 2013.

Conclusion

I am under the impression that Rosetta Genomics is a good speculative play for the long term. They have enough money to finance operations for the next two years, which makes share dilution unlikely; they have a sales force in place for their lead product; and their lead product is covered by Medicare.

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.

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