Brian Marckx, CFA
On February 4, 2011 we initiated coverage of Verisante Technology, Inc. (V.VRS) with an Outperform rating. The shares are up over 40% since our initiation but we continue to believe the stock remains significantly undervalued. We are moving our target price from $2.10 to $2.25 as a result of comp valuations moving higher since our initial report (see our below for free access to our full 21 page report on Verisante which includes our valuation methodology). Valuation is also supported by the recent add-on financing which reduces near-term liquidity risk.
RECENT DEVELOPMENTS
$5MM Private Placement
On April 18, 2011 Verisante announced they had completed a private placement of 12.5 million shares of common stock at a price of $0.40 per share for gross proceeds of $5 million. Each share of stock also included one warrant to purchase common stock at $0.50 per share for a period of two years. Verisante's press release noted that this financing should be sufficient to complete commercialization of Aura.
Verisante has raised $6.25 million through three private placements since November 2010 which we believe is an indication of the strong interest in the company.
Business Update
Included in the April 15th press release was a brief business update:
- Industrial space related to engineering and production has been tripled
- Verisante expects to have ISO 13485:2003 certification, Health Canada approval and CE Mark in Q4 2011. These timelines are commensurate with our initial assumptions.
- Statistical analysis of the 1,000+ lesion study “is now wrapping up.” Our current (and initial) assumption is the analysis will be available in Q2 2011.
INVESTMENT THESIS
Market Size
We estimate the combined “early adopter” (i.e. – low hanging fruit) markets in Europe, Canada and Australia could be worth over CDN $200 million in net device sales (~11k dermatologist practices x CDN $21k per device). The recurring revenue opportunity could conservatively be worth over CDN $100 million every year (this assumes only 4 scans per day for every 2-physician dermatology practice). Entry into the U.S., while likely years away, increases Verisante’s total dermatology practice market by another 50% (in device sales and recurring revenue).
And while the GP segment will likely be significantly more difficult to penetrate, at almost 30x the size of the dermatology practice market, it represents a multi-billion dollar opportunity.
Unmet Need
The current “ABCD” technique, while still considered the gold-standard in the diagnosis of skin cancer, is antiquated, unsophisticated, slow and been proven through numerous clinical studies to be fraught with error (especially with early stage skin cancer). Aura looks to be significantly more accurate and exponentially faster in the diagnosis of melanoma and has the potential to save lives, reduce the number of unnecessary biopsies and lower overall healthcare costs.
Sparse Competition
Analysts were smitten with the opportunity for MelaFind, based mostly on the size of its potential market and a clear need for a better tool in the diagnosis of skin cancer. MelaFind’s efficacy is now largely in doubt and even the most bullish of analysts seem to be hedging their bets.
Although there are other technologies that have either been recently introduced or are in late-stage development that would directly compete with Aura, the market still remains almost completely up for grabs. And based on the huge market size and what we expect to be certain competitive advantages (speed, versatility for all types of skin cancer, greater accuracy, smaller probe), we believe Aura will be very well received and expect sales to ramp very quickly following launch.
Technology
The basis for the technology incorporated into Aura was discovered by the winner of the 1930 Nobel Prize in Physics. An award-winning team from the BC Cancer Agency made improvements to the existing near-infrared Raman technology, making it feasible for incorporation into a portable device for the accurate and early detection of skin cancer. This patented technology is the backbone of Aura.
Business Behind The Technology
A great technology does not necessarily make a feasible business. We think Verisante has both. Verisante handles very little in-house and instead mostly in-licenses and outsources. This keeps fixed costs low, mitigates risk and maximizes expertise of major functions.
The company’s low-cost base, razor / razor blade business model and the opportunity afforded by the ex-U.S. markets alone should allow Verisante to turn cash flow positive in relatively short order. We model Verisante to post positive earnings by 2013. And while U.S. clinical trials (expected in 2012) will require significant capital, we think this is manageable from a combination of operating cash flow from sales to ex-U.S. markets and external financing.
Entry into the U.S. market (we look for late-2013) could help push revenue up to CDN $36 million in 2014.
For a free copy of the research report, please email scr@zacks.com with V.VRS as the subject.
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