IPO Report: Roka Bioscience (ROKA)

Roka Bioscience ($ROKA) is a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens headquartered in Warren, N.J.

Eleven other companies are scheduled for the week of July 14, 2014. The full IPO calendar is available at IPOpremium.

The manager and co-managers are BofA Merrill Lynch/Leerink Partners, Cowen and Company, and Wedbush PacGrow Life Sciences.

ROKA scheduled a $75 million IPO with a market capitalization of $265 million at a price range midpoint of $15 for Thursday, July 17, 2014 on the Nasdaq.  SEC filings

Roka Bioscience IPO Report

Overview

ROKA is a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens, which is projected to be the fastest growing segment of the $2 billion food safety testing market.

ROKA is in the early stages of introducing its product, with sales of $864,000 for Q1 '14.

The selling cycle is lengthy, on the order of 12 months.

Valuation

Glossary

Conclusion

The rating on ROKA is neutral.

Business

ROKA is a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens, which is projected to be the fastest growing segment of the $2 billion food safety testing market.

The proprietary molecular technology used in ROKA’s assays enables it to offer accurate and rapid testing solutions while its fully automated instrument helps its customers reduce labor costs and minimize operator error.

ROKA recently launched its proprietary Atlas Detection Assays and Atlas instrument in the North American food safety testing market and have worldwide rights to develop and commercialize its advanced molecular testing solutions for a wide range of other industrial applications.

ROKA believes its Atlas solution addresses the significant performance gaps that traditional pathogen detection methods have with respect to accuracy, time to results and automation.

ROKA’s Atlas Detection Assays incorporate its advanced molecular technologies and are performed on its “sample-in-result-out” Atlas instrument that automates all aspects of molecular diagnostic testing on a single, integrated platform, which is designed to provide its customers with accurate and rapid test results with reduced labor costs and improved laboratory efficiencies.

Revenue

Although ROKA is in the early stages of commercialization and rely on a limited number of customers, its initial customers include key opinion leaders in food safety testing, such as leading contract testing labs, well-known food processors and government agencies.

Through June 30, 2014, ROKA has installed 36 Atlas instruments pursuant to commercial agreements.

The sales cycle is lengthy, often lasting longer than 12 months, which makes it difficult for ROKA  to accurately forecast revenue and other operating results.

Additionally, this lengthy sales cycle may cause revenue and operating results to vary significantly from period to period. For the three months ended March 31, 2014, ROKA generated approximately $828,000 in revenue which was derived from a small number of customers.

Market

ROKA expects the food safety testing market to grow due to enactment of new government regulations to improve food safety, quality improvement initiatives by food processors and consumer demand for safe food.

Competitive advantages

ROKA believes it is uniquely positioned to gain share in the food safety testing market given its key strengths:

— innovative molecular-based assays, designed to deliver accurate and rapid test results;

— fully automated instrument, designed to reduce labor costs and operator error;

— dedicated sales force, customer service organization and customer applications laboratory;

— highly scalable business model with significant operating leverage potential;

— significant technical expertise and extensive understanding of food safety customers; and

— experienced management team with a proven track record of performance.

Dividend Policy

No dividends are planned.

Intellectual Property

Through its license agreement with Gen-Probe, ROKA has worldwide rights, except for certain rights retained by Gen-Probe, to Gen-Probe’s molecular diagnostic technology patent portfolio (including patents relating to assays and instrument platforms) for use in instruments and certain industrial application markets.

In addition, ROKA is seeking to obtain patent protection for certain compositions and methods of using or related to the technology used in its products, as well as other inventions that are important to its business.

ROKA does not currently own any issued patents.

ROKA’s patent portfolio includes pending U.S. provisional applications and strategically focused corresponding international applications filed via the Patent Cooperation Treaty, or PCT. ROKA will be filing foreign national or regional counterpart applications, where ROKA deems commercially appropriate, with the first such filing beginning in February 2014. ROKA owns three PCT applications relating to detection probes and detection methodology.

Competition

ROKA faces competition from companies that offer molecular, immunochemical, and/or culture-based testing products.

Key competitors offering molecular pathogen testing solutions include E.I. du Pont de Nemours and Company (DD) , Bio-Rad Laboratories, Inc. (BIO) , BioControl Systems, Inc., Life Technologies Corporation (LIFE) , and 3M Food Safety (MMM) .

Key competitors offering immunochemical testing solutions include bioMérieux, S.A. (BMXMF) and Neogen Corporation (NEOG) . Key competitors offering culture testing solutions include 3M, bioMérieux and Neogen.

These companies compete with ROKA primarily on the basis of technology, quality, reputation, accuracy, ease of use, price, reliability, range of product offerings, including the ability to offer a broader range of testing methods than ROKA can offer, the timing of new product introductions and product line offerings.

ROKA believes its success will be driven by the robustness and accuracy of its proprietary sample preparation and assay chemistries, the simplified, efficient work flow that is enabled by its proprietary Roka transfer tube and advanced Atlas instrument, and its sole focus on the industrial application markets.

5% stockholders

Aisling Capital III, LP                  7.8%

Entities Affiliated with Fidelity Investments         8.9%

Entities Affiliated with New Enterprise Associates           22.5%

Entities Affiliated with OrbiMed 23.8%

TPG Biotechnology Partners III, L.P.       20.9%

M. James Barrett           22.5%

Paul G. Thomas            6.2%

Use of proceeds

ROKA expects to net $67.4 million from its IPO. Proceeds are allocated as follows:

$8 million as partial payment for a reduction in the royalty rate payable by ROKA pursuant to the amendment to its license agreement with Gen-Probe;

$6 million in payments to Gen-Probe upon achievement of certain revenue milestones;

$24 million for the commercialization of its Atlas Detection Assays; and

$16 million for research and development activities, including the continued development and enhancement of its molecular assay portfolio and the development of the mini Atlas instrument.