Biotech IPO: Highlights from Rosetta Genomics' F1 Filing

Israeli MicroRNA specialist Rosetta Genomics filed an F1 with the SEC recently. Highlights from the company's filing are excerpted below:

Proposed Ticker: (ROSG)

Underwriters: Unterberg Towbin, Oppenheimer, Maxim Group

Offering Size: The company is offering 3 million shares at $11-13 per share. At mid range, net proceeds would be $32.1 million. If the underwriters exercise their option, the net raise would be $37.1 million.

Company Overview:

We are seeking to develop and commercialize new diagnostic and therapeutic products based on a recently discovered group of genes known as microRNAs. MicroRNAs are naturally expressed, or produced, using instructions encoded in DNA and are believed to play an important role in regulating protein production. Because proteins control most biological processes, we believe that microRNAs have the potential to form the basis of a novel class of diagnostic tests and therapies for many serious illnesses, including cancer and infectious diseases. We have decided to focus our initial efforts on cancer, as research has indicated that microRNAs play a role in various types of tumors. We developed a discovery process that utilizes proprietary computer-based algorithms, which are procedures for solving complex problems, to scan the entire genome for microRNA candidates. Once microRNA candidates are identified, we conduct one or more biological experiments using tissue or body fluid samples to prove their existence, or expression, a process known as biological validation. To date, we have filed patent applications with claims potentially covering approximately 350 biologically validated human microRNAs and 35 biologically validated viral microRNAs, which constitute more than half of all biologically validated human and viral microRNAs of which we are aware. In addition, our patent applications cover thousands of genomic sequences that we have identified using our discovery process and believe are potential microRNA candidates. [...]

Using our intellectual property, collaborative relationships and expertise in the field of microRNAs, we have initiated programs to develop microRNA-based diagnostic and therapeutic products for various cancers and infectious diseases. We believe that diagnostic tests based on microRNAs can provide patients and physicians more accurate and comprehensive information about a patient’s condition, allowing for earlier detection and diagnosis of diseases and the ability to make more individualized treatment decisions. Our current programs to develop microRNA-based diagnostic tests are focused on prostate, lung, colorectal, breast and bladder cancers. We are also developing a diagnostic test to identify the origin of the primary tumor in metastatic cancers of unknown primary site, or CUP. In addition, we are collaborating with others on the development of microRNA-based therapeutic products for the treatment of liver cancer and infectious diseases, such as HIV and hepatitis C virus, or HCV. We are currently in the process of identifying the appropriate microRNAs that would be the basis of various diagnostic tests and therapeutic products and have not, as of yet, conducted any clinical studies to determine their effectiveness. Accordingly, our programs are in the early stages of development.

Financial Highlights: The company expects that revenues will originate from three sources: research consumables, diagnostic products and therapeutic products. There have been no revenues to date, and the company expects revenues from the first category only in the course of 2006. For the first six months of the year, the company recorded an operating loss of $3.45 million, up from $2.26 million in H1 05. R&D is the most significant contributor to opex comprising 57% of total opex in H1 of 05 and 05, and scaling down from 82% to 62% of opex between 03 and 05.

To date, the company has been funded by private investment totaling just over $30 million. At the end of June, ROSG had cash and equivalents of $15.5 million, and capital obligations (primarily lease) of approximately $1 million.

Use of Proceeds: $17 million is earmarked for R&D activities, $12.6 million for business development and general corporate, and $2.5 million for IP licensing.

Competition: Other companies (including some of ROSG's partners) that are developing microRNA diagnostic and therapeutic products, include Alnylam Pharamceuticals (ALNY), Asuragen (subsidiary of Applied Biosystems Group (ABI)), Celera (CRA), Invitrogen (IVGN), Isis Pharmaceuticals (ISIS), Merck (MRK), Santaris (privately held).

Management: Amir Avniel (33) is the company's CEO:

Amir Avniel has served as our Chief Executive Officer since April 2006 and as President since May 2005. Mr. Avniel joined us in May 2001 and previously held other senior management positions, including Chief Technology Officer and Chief Operating Officer. Mr. Avniel is responsible for the overall planning and execution of our operations, business development, technology and research and development efforts. He also coordinates the development of agreements and collaborations between us and other industry leaders. He has been named co-author of 20 patent applications. Mr. Avniel studied computer science at the Academic College of Tel Aviv – Jaffa, Israel. Prior to his academic studies, he served as an officer in the Israel Defense Force, where he was awarded four commendations for excellence.

Post-Offering Ownership: After the IPO, founder Isaac Bentwich will hold 21% of the company; Israeli investor Kadima High Tech will own 17%, and a group called Harmony representing Bentwich, members of his family, the CEO and others will hold 6.1%.

Worth Asking:

The gold at the end of the rainbow here would come from therapeutic products. While the company has developed a platform technology, and is not dependent on a single drug for commercial success, these are in very early stages of development. It is unclear if and when that gold would be reached. Added to this risk is the high level of exposure resulting from dependence on third party licenses of the technology.

Management and board: The CEO of the company has limited experience (actually, none) in management of public companies; in fact most of the experienced management has joined in the last year. The board is primarily from non-biotech backgrounds (finance, semiconductors, print industry).