Sunday, January 21, 2018

Say 'No' to Rosetta Genomics Take-Under by Genoptix

The first wave of efforts to commercialize microRNAs, the close molecular cousin to RNAi, either for diagnostic or therapeutic purposes is about to fizzle out.  With Regulus Therapeutics getting a last chance to prove its worth with clinical data on its Alport's microRNA therapeutic program pending, today's post symbolizes the end of commercial efforts to establish microRNAs as a broadly applied diagnostic platform.  

Rosetta Genomics Surrenders Despite Promising Products

Last month, the Board of Rosetta Genomics, the main torch-bearer of microRNA diagnostics for close to two decades, announced that it was recommending a take-under by Genoptix.  Genoptix is a larger molecular diagnostics player for which Novartis had paid $470M in 2011 and then was acquired by Ampersand last year.  Under the proposed terms as detailed in this proxy statement, the Board has been recommending shareholders to accept what constituted at the time of the announcement a new all-time low price of between $0.6-0.7 per share, that is  ~1/2000, 1/100, or 1/10 of its value 10, 5, and 1 year ago, respectively. 

Please somebody call the Guiness Books of Records.  

Unsurprisingly, instead of admitting their commercial and financial ineptitude, this surrender is blamed on a financial market that would provide no more support microcap molecular diagnostic companies.

Well, if the company had executed properly, it wouldn’t be a microcap company, would it?  And last time I checked, complex molecular black-box diagnostics was the way the industry was going, although I admit that the Wild West culture of this industry with hardly any market entry barriers has been harmful to the industry and burned many an investor. 

There have been at least two products by Rosetta that I thought had real commercial potential.  The first one was a test to determine the tissue origin of a cancer to better inform treatment (RosettaGX Cancer Origin).  Given the trend towards drug regimen that are increasingly aimed at the molecular changes that have occurred during oncogenesis regardless of tissue origin and immuno-oncology approaches that couldn't care any less, the medical relevance of this test might be waning.  This can happen, but doesn’t subtract from the value of quantifying microRNAs for diagnostic purposes per se.

The other test, RosettaGX Reveal, got me (and apparently Genoptix) excited enough to invest in Rosetta, in my case amounting to a ~3% stake of the company (which curiously I had no problem acquiring in a heart-beat since my bids were hit with volume).  

RosettaGX Reveal is intended to prevent the many unnecessary, and medically harmful thyroid gland surgeries performed today on nodules of uncertain cancer potential based on cytology.  The test appears to be conservatively at least as good as the currently leading test by Veracyte in this ~$350M molecular test market (of which 2/3 remain to be tapped) in terms of making a solid recommendation against performing a surgery without missing the malignant ones.  Importantly, Reveal has the advantage of not requiring fresh tissue and can thus be performed on the same cytology sample that the original indeterminate diagnosis had been made.  This is due to the remarkable stability of microRNAs, in contrast to the longer and thus more fragile mRNAs.

The test has shown solid growth since start of commercialization in early 2016, now running at roughly $1M in quarterly sales with lots more room to grow by increasing reimbursement rates (yes, the test is frequently performed without the company getting paid), tapping the 2/3 untapped market, and converting users of competing tests.

Unacceptable Terms to Holders of Ordinary Shares

The reason why I will not vote my 3% of shares in favor of the merger at the upcoming Meeting of Shareholders (note: the 3% should weigh heavier since related parties in the transaction are apparently barred from voting) is that the proposed $0.6-0.7 per share is at a 25% discount from when merger discussions began, at a time when shares were already tumbling daily to new all-time lows.

While letting shareholders feel the pain, convertible debt holders get $2.5M of the $10M pie, obviously worthless warrants get attributed $1.2M, the two key executives get a combined $0.5M good-bye present (in addition to the windfall from the warrants that they will likely be beneficiaries thereof and insurance benefits), and to add insult to injury the transaction cost of the take-under is estimated at $3.3M, about as much as ordinary shareholders would get!

So unless Genoptix sweetens its offer to at least $13.3M, meaning a decent premium and doubling of the consideration to shareholders, I would rather go down with this ship and let this Lipdub clip by Rosetta on Youtube be their lasting memory:


Josh Angell said...

It a shame that you are not voting your shares in favor of this transaction and potentially causing other shareholders to suffer significant losses as a result.

S Kmetz said...

I have to agree with the poster above. Dirk, you seem to know this industry well, and I wouldn't be surprised if you have a better handle on the business than the executives running this company. Unfortunately, I can only vote a small part of the 2% stake of this company my family and I own since we purchased most after the record date. Otherwise, there would be 100k more votes in the yes column. I don't now the industry well, but in my M&A experience, it's possible that Genoptix may increase the offer but far from a sure thing. How badly do they want it? Would it be easier to pick up in bankruptcy? Would Genoptix's private equity owners support a higher price? I get that everyone is pissed and have taken huge losses and the heart may say to vote no, but it's hard to argue against the logic of taking the money. Ken already got his. He's gotten it the whole time he's been CEO. The last bit won't make much of a difference to him, but it could potentially cost shareholders millions. It's unfortunate that the approx. 681,000 no votes can hold the almost 2M yes votes hostage, but that's the way it works when not enough people vote (I also don't think the way the 2nd question was worded helped the company's cause, so that may be reason there aren't more yes votes). I'd rather have something than nothing. So here's hoping this goes through or Genoptix suddenly finds some charity in their souls for the common holders this weekend.

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