IPO Report: NanoString Technologies

Francis Gaskins |

Based in Seattle, WA, NanoString Technologies (NTSG) scheduled a $76 million IPO with a market capitalization of $204 million, at a price range mid-point of $14 for Wednesday, June 26, 2013.

10 new IPOs were scheduled for the week of June 24th.  The full IPO calendar is at IPOpremium. Trial and paid & trial subscribers get early, complete financial analysis.

NTSG S-1 filed June 13, 2013

Manager; Joint Managers:  J.P. Morgan; Morgan Stanley
Co-Managers:  Leerink Swann; Baird

Summary

NTSG makes diagnostic machines and consumables users by researchers to learn about cancer to publish papers.

NTSG is in the process of introducing a proprietary diagnostic machine, which is based on research fed back to NTSG by its research customers.  The first molecular diagnostic product, the Prosigna Breast Cancer Assay, was introduced in Europe in September 2012.

Q1 ’13 revenue vs Q1 ’12 rose 24% to $5.6 million.  Gross profit increased to 49% from 41%.  Adjusted losses increased to $6.8 million from $3.5 million.

U.S. Supreme Court decision about human genes

The court ruled recenlty that human genes can’t be patented, but that synthetic genes can be protected.

One of NTSG’s main areas of intellectual property, namely patents NTSG licenses directed to the use of gene expression markers as part of genomic diagnostic tests, may be affected by these decisions.

Valuation

As of March 31, 2013 NTSG’s accumulated deficit was $102.8 million.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing Q1 ’13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

NanoString Technologies (NSTG)

$204

9.1

-7.5

2.8

2.8

37%

Conclusion

It’s always difficult for companies to introduce new, medical diagnostic products.  However, it seems NTSG’s business model has found a sweet spot:  a molecular diagnostic product for breast cancer, with a good chance of more diagnostic products to follow.

At a price of 2.8 times book value, NTSG would look good in a more solid market.  In this market, however, it may be best to wait on the sidelines for now.

Business

NTSG makes diagnostic machines and consumables users by researchers to learn about cancer to publish papers.

NTSG has an installed base of more than 140 systems, which customers have used to publish more than 220 peer-reviewed papers.

As researchers discover how genomic information can be used to improve clinical decision-making, NTSG will seek to selectively translate their discoveries into molecular diagnostic products.

Prosigna – first product

In September 2012, NTSG received European Union regulatory clearance for its first molecular diagnostic product, the Prosigna Breast Cancer Assay, or Prosigna, an assay providing an assessment of a patient’s risk of recurrence for breast cancer and the intrinsic subtype of the patient’s tumor.

In February 2013, NTSG commercially launched Prosigna in Europe and Israel. In December 2012, NTSG  submitted an application, known as a 510(k), to the FDA seeking clearance in the United States for a version of Prosigna providing an assessment of a patient’s risk of recurrence for breast cancer.

Also, NTSG has secured an option from a customer to acquire an exclusive worldwide license for a gene signature that could be used, after appropriate regulatory authorization, for a molecular diagnostic product focused on hepatocellular carcinoma, or HCC.

Revenue

ESPR derives a substantial majority of revenue from the sale of products, which consist of the nCounter instruments and related proprietary consumables, which NTSG calls CodeSets and Master Kits.

NTSG also sells two types of CodeSets: custom orders and standard sets, called panels. NTSG also derives revenue from processing fees related to proof-of-principle studies conducted for potential customers and extended service contracts for nCounter Analysis Systems.

The nCounter Analysis System is currently available for research use only in the United States.

Prosigna FDA clearance

In May 2013, NTSG submitted an initial response to the FDA’s request for additional information and met with the FDA to discuss the response. If the FDA clears Prosigna, NTSG intends to launch Prosigna in the United States promptly following receipt of such clearance.

NTSG is currently planning for this commercial launch in the first quarter of 2014. The commercial launch of Prosigna requires NTSG to establish a dedicated oncology diagnostics sales force. As a result, NTSG expects sales and marketing expenses and operating losses to increase as NTSG markets the product in Europe and other countries outside of the United States, and to increase further upon the launch in the United States following clearance from the FDA.

Intellectual property

As of May 31, 2013, NTSG owned or exclusively licensed five issued U.S. patents and approximately 24 pending U.S. patent applications, including provisional and non-provisional filings. NTSG also owned or licensed approximately 64 pending and granted counterpart applications worldwide.

Court Decisions

The patent positions of companies engaged in development and commercialization of genomic diagnostic tests, like Prosigna, are particularly uncertain. Various courts, including the U.S. Supreme Court, have recently rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to genomic diagnostics. 

Specifically these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable — unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself.

What constitutes a “sufficient” additional feature is uncertain. Accordingly, this evolving case law in the United States may adversely impact NTSG’s ability to obtain new patents and may facilitate third-party challenges to NTSG’s existing owned and licensed patents.

One of NTSG’s main areas of intellectual property, namely patents NTSG licenses directed to the use of gene expression markers as part of genomic diagnostic tests, may be affected by these decisions.

For example, NTSG licensed the rights to intellectual property that forms the basis of Prosigna from Bioclassifier, LLC, which was founded by several of NTSG’s life sciences research customers engaged in translational research. 

In addition, in February 2013, NTSG secured an option from The Broad Institute, a leading non-profit molecular medicine institute in Cambridge, Massachusetts, to acquire an exclusive worldwide license for a gene signature that could be used, after appropriate regulatory authorization, for a second molecular diagnostic product focused on hepatocellular carcinoma, or HCC.

5% stockholders pre-IPO

Entities affiliated with Clarus Funds, 36%
Entities affiliated with DFJ Funds, 20%
Entities affiliated with OVP Funds, 23%

Use of proceeds

NTSG expects to net $67 million from its IPO.  Proceeds are allocated as follows:

• $25 million to commercialize Prosigna after obtaining regulatory authorization, including establishing a dedicated oncology sales force;

       • $15 million to expand the clinical utility of Prosigna and to develop other potential diagnostic product opportunities; 

       • $15 million to expand life sciences commercial operations to grow and support the installed base of nCounter Analysis Systems among life sciences research customers in the United States and internationally;

       • $10 million to develop new life sciences applications, chemistry and instrumentation for the nCounter technology platform; and

       • for working capital and other general corporate purposes.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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