The second diagnostic product the company expects to submit for regulatory approval this year is a test designed to differentiate mesothelioma from other types of cancers that may develop or spread to the lung and pleura. Mesothelioma is a unique type of lung cancer that typically develops as a result of exposure to asbestos. There is currently no individual marker that provides a reliable distinction between mesothelioma and other cancers, instead, a panel of 10-12 markers is used. Though these markers are generally efficient in identifying mesothelioma from the majority of lung cancers, their accuracy decreases when it comes to metastases from other tumor types such as ovarian and kidney cancers. Since mesothelioma is treated differently from other types of malignancies, it must be accurately identified. In addition, because mesothelioma is strongly associated with exposure to asbestos, other important legal and financial issues are at stake, as patients may wish to seek compensation from those considered to be liable. Researchers at Rosetta and NYU found that mesothelioma can be accurately identified by using only two miRNAs. This may be cheaper than the large amounts of markers currently used.

Mesothlioma is quite rare with only 2500 cases expected in the US annually, thus the market potential is limited. Nevertheless, Rosetta's product might be superior with respect to quality and price, which may lead to a high penetration rate. Assuming an average price of $3000 per kit, potential revenue from this market should be around $2 million per year in the US alone.

A third diagnostic product that should be submitted in the second half of the year is a test that identifies the origin of cancer of unknown primary (CUP). Typically, cancer is diagnosed at its primary source, making the classification relatively simple. If the primary tumor is in the lung, it's a lung cancer, if the primary tumor is in the prostate, it's a prostate cancer, etc. However, in 3-5% of cases, physicians discover metastases but cannot determine the place where the cancer began (the primary site). Identifying the origin of CUP is crucial in choosing the suitable treatment for these patients, who are, by definition, presented with very advanced stage disease. Following the initial diagnosis, a long and expensive classification process begins, in which doctors use every available means of diagnostic, from physical examinations to imaging studies and histological assays. Unfortunately, even after this enduring process, only 40% of patients can be categorized within subsets for which specific treatment has been defined. This is one of the reasons for the extremely poor prognosis of CUP patients ( median survival of 4-6 months), which is more a result of the inability to choose the right treatment rather than a lack of available therapies.

In comparison to the two previous assays, identifying CUP is much more challenging, as it calls for finding specific a miRNA signature for every type of tumor. Because miRNAs are considered very tissue-specific, they have been suggested to serve as excellent tumor classifiers. One of the first works in this area was published in 2005, in which a group from MIT and Harvard showed that many types of cancer have a unique miRNA profile, that can be used to distinguish between the different types. Even more impressive was the comparison of a miRNA-based classifier to a classifier based on conventional genes (mRNA classifier). To their astonishment, investigators discovered that the miRNA profile, which included only 217 miRNAs was superior to the mRNA profile, which included 16,000(!!!) mRNAs. This advantage was maintained in the case of poorly-differentiated tumors as well, which may be indicative for the utility of miRNA as markers in CUP.

Last month, a group of scientists from Rosetta published a scientific article that provided a powerful demonstration of the company's capabilities with respect to the CUP assay. For the development of this assay, Rosetta's scientists screened 253 tumor samples from 22 types of cancers, including metastatic tissues, and used machine learning capabilities to generate a panel of tissue specific miRNA biomarkers. The team then built a classifier with the goal of identifying tumors that belong to any of the 22 types. The result was a decision tree that can classify every major type of cancer based only on 48 miRNAs. The tree is composed of nodes, each one involves a binary decision, left or right, until a clear classification is made.

 Nature Biotechnology26, 462 - 469 (2008)  

In order to assess the classifier's accuracy, the company ran a blinded test of 83 tumor samples. This diagnostic test showed an impressive accuracy in a blinded test, as it got it right in 86% of the cases. It is important to note that these results are still preliminary and derived from a limited number of samples. Nevertheless, the impressive accuracy was based on a small number of markers and tumor samples, and is likely to improve with the screening of additional samples. Following the internal development of the CUP classifier, the company has been working with CUMC on validating and optimizing the CUP classifier, utilizing Columbia's huge and diverse inventory of tissues. The fact that the company still expects to have the CUP assay ready for regulatory approval in the second half of 2008 implies that the development of the assay is progressing according to plans ,and that the accuracy of the commercial product will be superior to that of the initial classifier.

The market of CUP diagnosis represents Rosetta's most promising market with respect to the unmet clinical need and the size of the market. In the US alone, there are more than 1.4 million cases of cancer, 55,000 of whom, on average are diagnosed with CUP. The immediate market opportunity lies within the 60% (33,000) of these patients that cannot be classified, but bearing in mind the amount of resources and time needed for identifying the remaining 40%, Rosetta's assay, if proven efficient, should be used for the majority of CUP cases. Assuming a 25% penetration rate in the US alone among the 33,000 patients that cannot be accurately diagnosed with the currently available methods, an average price of 3000$ per patient will result in sales of $25 million. This product alone has the potential to transform Rosetta from a small, cash burning company to a very profitable company already in 2010.

Rosetta will continue to burn cash at least for the next two years at a burn rate of $14 million per year. As of the end of 2007, the company had $24.3 mil in cash, excluding $5 million in Auction Rate Securities (ARS). This means that it will have to get some sort of cash infusion by mid 2009. Ideally, by that time, all three diagnostic tests will be commercially available, but their revenue contribution may be insignificant due to slower than expected penetration. Nevertheless, there are numerous events that may push Rosetta's shares substantially higher by that time.

Judging by the thin trading in the stock, Rosetta is still flying under the market's radar, but a company with three commercial products in the hot market of cancer diagnostics  cannot be ignored forever, especially given the increasing industry interest  in miRNA. Company's management indicated there are plans to compliment the company's ongoing activities with license agreements in areas that are currently not explored by the company. These agreements with larger pharmaceutical companies will help Rosetta get more attention from investors, not to mention the licensing and milestone payments. In addition, in 2009 Rosetta expects to become a clinical stage company after the IND filing for a liver cancer drug which is being co-developed with Isis Pharmaceuticals. Most importantly, by that year and perhaps even sooner, the company should have enough data and visibility which will enable it to provide some sort of revenue guidance. If approved, the three diagnostic products should generate more than $30 million already in 2010, not bad for a company with a $60 million market cap.

Author is long ROSG and ISIS