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:
2 comments:
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.
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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