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Cantor Fitzgerald Initiates Coverage on Rosetta Genomics, Veracyte

NEW YORK (GenomeWeb) – Cantor Fitzgerald yesterday initiated coverage of molecular diagnostic firms Rosetta Genomics and Veracyte with ratings of speculative buy and buy, respectively.

Cantor analyst Brian Brokmeier set a $3 to $5 fair value on Rosetta's shares, citing the firm's shift over the last year from a "niche player in the cancer of unknown primary (CUP) market into a molecular diagnostics lab with a portfolio of tests targeting the oncology market."

Rosetta's shares were trading up more than 11 percent at $1.38 during early morning trading on the Nasdaq Friday.

Rosetta's April acquisition of PersonalizeDx provided it with a suite of complementary fluorescence in situ hybridization-based diagnostics in prostate, bladder, and lung cancer, as well as expanded commercial operations, Brokmeier wrote in a research note. "While PersonalizeDx growth recently slowed, we anticipate that it re-accelerates in 2016, driven by improved FISH reimbursement that was already put in place by Medicare," plus the portfolio effect from the combination of its products with Rosetta's own offerings, he added.

Brokmeier also views Rosetta's recently launched RosettaGx Reveal microRNA diagnostic for thyroid nodule classification as a potential source of future growth in a market estimated at $800 million.

He noted that Veracyte's Afirma Gene Expression Classifier (GEC) thyroid test is the current market leader with a strong first mover advantage and greater clinical validation, but that Rosetta's test can be run on cytology slides, which eliminates the need for and associated risks of additional fine-needle aspirations (FNAs) sometimes required with the GEC test.

"We estimate that the RosettaGX Reveal may be able to take a 4.2 percent market share of the thyroid nodule classification market by 2020, which translates into $9.8 million in revenues by 2020," Brokmeier wrote.

He further sees significant gross margin growth potential for Rosetta, which reported a 10.8 percent gross margin in the third quarter. "We anticipate the recently introduced FGFR3 bladder cancer test and the RosettaGx Reveal thyroid test will accelerate volume growth, which should drive gross margin expansion," Brokmeier concluded. Cantor expects Rosetta's gross margins to improve to the low- to mid-30s by the fourth quarter of next year and to this mid- to high-60s by 2020.

In addition to its products and services, Rosetta's broad miRNA patent portfolio may hold hidden value if the more than 400 biopharmaceutical companies developing therapeutics based on the molecules require licenses to the intellectual property, he noted.

For Veracyte, Brokmeier set a $13 per share 12-month target price, pointing to the company's success with Afirma and a product pipeline that is under-appreciated by Wall Street. With Afirma becoming the new standard of care, the test has provided Veracyte with "a strong industry reputation and a base business, which it can leverage to launch additional molecular diagnostic tests," he wrote in a separate research note.

Estimating 110,000 tests on indeterminate FNAs for thyroid nodule classification in 2016, Brokmeier expects the Afirma test to capture 400 to 600 basis points of this market in each of the next five years, including a 24 percent market share in 2016.

Importantly, Anthem — the last major payor not covering Afirma — may soon change its stance on the test amid growing clinical evidence of its benefits, he added. Meanwhile, Veracyte's Afirma co-promotion deal with Genzyme and exclusive pathology services agreement with Thyroid Cytopathology Partners continue to be a key competitive advantage.

Further driving clinical adoption of Afirma was the American Thyroid Association's recommendation of the test in October, which followed earlier recommendations by the National Comprehensive Cancer Network and the clinical decision support resource UpToDate.

Brokmeier sees Veracyte's Percepta — a test launched in April to resolve lung cancer diagnosis after ambiguous bronchoscopy  as contributing between $5 million and $10 million to the company's revenues by 2018, although this number could increase if the number of patients screened for lung cancer expands amid new screening programs, he noted. Meantime, Veracyte's Transbronchial Biopsy Genomic Classifier for idiopathic pulmonary fibrosis is poised to enter a market estimated at $250 million with its planned launch next year.

Veracyte's shares were up $.31 at $7.41 on the Nasdaq Friday morning.

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