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Rodman & Renshaw Initiates Coverage of Nanosphere at Buy

NEW YORK (GenomeWeb) – Investment bank Rodman & Renshaw has initiated coverage of Nanosphere at a Buy rating and a 12-month price target of $2 per share.

The bank believes that Nanosphere's Verigene infectious disease identification system has the potential for significant sales growth. Rodman analyst Yi Chen wrote that the Verigene system and test panels are differentiated from competing systems because it's based on gold nanoparticle technology and doesn't use PCR.

"[Verigene] offers test and pricing flexibility while having multiplex capacity," Chen added. The system's FDA-approved test menu includes respiratory panels, blood stream infection panels, and gastrointestinal panels.

Chen also cited Nanosphere's strong fourth quarter and 2015 earnings report as another reason for the optimistic rating. The company recently reported fourth quarter revenues grew nearly 48 percent to $6.8 million from $4.6 million in Q4 2014, and credited sales of its infectious disease tests for the increase. For full-year 2015, the firm said revenues also increased 48 percent to $21.1 million from $14.3 million in 2014, above its 2015 revenue guidance of $18 million to $20 million.

Further, Chen wrote, the firm's expectation of submitting the next iteration of the Verigene platform for regulatory approval in Q3 2016, and its 2016 revenue guidance of $28 million to $30 million means it's likely to continue "record substantial revenue growth in the coming years, based on increasing hardware placement and expanded and flexible menu offerings." Rodman has estimated FY 2016 revenues of $29.8 million for Nanosphere.

The expanded test menu is most important in determining the company's future, according to Chen. "Nanosphere's expanded menu should lead to increased test volume per customer. As test consumables have a higher margin than the Verigene hardware, a larger percentage of revenue stream from consumables would result in an improvement in overall gross margin," he wrote in his note. "In addition, in contrast to a fixed panel size and pricing schedule, Nanosphere offers test and pricing flexibility on its system. … Therefore, lab technicians can perform both general panel testing and targeted panel testing on the same platform, thus achieving the best cost/benefit ratio perceived by doctors and patients."

Chen noted that Verigene is among several molecular systems that have had increased placements in the past several years as the healthcare industry has increasingly required tests that can detect pathogens rapidly and accurately. "Rapid detection capability should not only lead to cost savings for both hospitals and patients, in the wake of antibiotic stewardship, but also improvements in patient outcomes along with mortality reduction," Chen wrote. "In our view, this presents a large opportunity for capable multiplex molecular systems to be deployed in hospitals and clinical laboratories."

In light of these circumstances, Nanosphere is undervalued, according to Chen. He added, "Our valuation method yields a total firm value of approximately $70 million, or $2 per share."

Nanosphere's shares were up 7 percent to $.93 in afternoon trading on the Nasdaq.