Most biotech firms toil as obscure private companies for years to prove their ideas work in the clinic. They have to hustle non-stop for venture capital to keep the doors open just long enough to someday cash out with an IPO.
Steven Quay is betting he’s found a shortcut.
Quay, the veteran Seattle biotech CEO, is trying to cut straight to the IPO chase with his new gig. He’s the CEO and founder of Seattle-based Atossa Genetics, with his own patented invention and his own seed capital, which he’s now hoping to parlay into a $15 million initial public offering. If Quay can raise that money, Atossa will be able to start selling an FDA-approved diagnostic test which could be used along with mammograms to predict a woman’s future risk of getting breast cancer.
Atossa described its unusual origins in a March 30 investor prospectus that I, and pretty much everybody else in the media that I can see, missed. But Atossa’s IPO paperwork is clear that it is seeking to sell 5 million shares at $3 each. The filing doesn’t list any underwriters, although Quay says he is in discussions with several. It has a law firm (Cassidy & Associates of Newport Beach, CA) that I haven’t heard of, and an accounting firm, KCCW Accountancy, that also doesn’t ring any bells. Atossa plans to trade as an over-the-counter stock, which I must say isn’t the place most people look to find the next Genentech.
That said, Quay is a well-known character in the Seattle biotech scene and on the NASDAQ circuit. He was previously the CEO of Bothell, WA-based Sonus Pharmaceuticals in the 1990s, and was CEO of Bothell, WA-based Nastech Pharmaceutical (now MDRNA) for most of the last decade. Both of those companies made a lot of shareholders unhappy. Sonus flamed out under Quay’s successor a couple years ago, and was later absorbed by OncoGenex Pharmaceuticals (NASDAQ: OGXI). MDRNA is still alive, but has limited cash reserves, and a market capitalization of less than $50 million. Quay left that company in the fall of 2008 with a severance package worth $1.7 million.
The roots of Atossa Genetics go back to the late ’90s, during an interim stint Quay had between Sonus and Nastech. In 2000, Quay invented a technology which he says can be used to screen millions of women early for their future breast cancer risk, potentially saving lives, like the Pap Smear test has done for cervical cancer. Pap smears have helped bring the annual death rate from cervical cancer down by 90 percent over the past 50 years, and the same potential exists for early breast cancer screening today, Quay says. About 192,000 women in the U.S. are diagnosed with breast cancer every year, and about 40,000 die from it annually, according to the American Cancer Society.
“While we have this conversation, women are dying every minute from breast cancer,” Quay says.
The technology has had quite a few commercial twists and turns. Atossa’s test is designed to analyze nipple aspirate fluid, a sample of fluid from the milk ducts in the breast that’s filled with cells and molecular markers that are thought to be early signs of cancer. The technology was obtained by Nastech when Quay became CEO of the company in 2000. But it didn’t really go very far there. While at Nastech, Quay championed a strategy of creating nasal-spray delivery formulations of drugs which received support at various times from partners like Procter & Gamble, Novo Nordisk, and Merck. Those partnerships eventually dried up, and Nastech reinvented itself as a developer of RNA interference technology, and renamed itself MDRNA.
While most investors weren’t watching, the breast cancer diagnostic won FDA approval in 2003. The commercial rights were later held by Cytyc and Hologic, who did some patent and development work, but handed the product back under license terms to MDRNA in 2008, Quay says. While it’s been cleared for sale by the FDA for seven years, the test hasn’t yet been marketed.
Why didn’t those other companies commercialize the technology? One potential reason jumps out in the prospectus. Medicare and some other private insurers won’t reimburse healthcare providers who want to collect the fluid sample. “Lack of Medicare or insurance coverage will require patients to fully bear the costs of the [nipple aspirate fluid] sample acquisition process and may slow or limit adoption,” the company says in its prospectus. Medicare and insurers do pay for the actual lab test, just not the fluid collection, and the fluid collection costs about $60 per patient, Quay says. Atossa’s goal is to get Medicare to set up a standard reimbursement code for the fluid collection, Quay says.
None of the challenges seemed to deter Quay when we spoke this week. He took a license to the breast cancer test from MDRNA shortly after he left, and incorporated the new Atossa Genetics to commercialize it in April 2009. The strategy, Quay says, is for this test to be used as a companion diagnostic each time a woman gets a mammogram for breast cancer screening in the U.S. There were 37 million mammograms done in the U.S. last year, and an estimated 100 million worldwide, according to the company prospectus. The Atossa test, which takes about 10 minutes, would require a doctor to ship the sample to a central lab, at a cost of about $100 to $150 per test. By running this test, Atossa says it can detect precancerous cells as early as eight years ahead of tissue abnormalities that can be seen on a mammogram.
The company itself exists more on paper than anything else at this point. Quay, 59, personally owns a whopping 81 percent ownership stake in the company, and intends to still control 59 percent of the shares after the IPO. Quay and his wife, Shu-Chih Chen, the company’s chief scientific officer, are the first two employees, and investment banker Robert Kelly has recently as president. The company listed just $84,000 in cash on its balance sheet, and has an accumulated deficit of $123,000 through Dec. 31. Atossa plans to launch its diagnostic system initially in the nearby markets of Washington, Oregon, and Idaho, where there are 285 mammography clinics that perform more than 1 million mammograms a year. Once the company gets its clinical lab established for the Northwest, it plans to go national.
While Atossa’s website says the collection of nipple aspirate fluid is quick, efficient and painless. But that’s not how healthcare providers have traditionally seen it. Traditionally, a number of devices have been used to withdraw the fluid, but are only successful in obtaining the fluid from 20 percent to 65 percent of women, according to the filing. “The company believes it is this sample collection variability that has prevented routine adoption of nipple aspirate fluid cytology for screening,” according to the statement. The Atossa system, however, was specifically designed to overcome the limitations of other technologies in extracting the fluid, and clinical trials have shown that 97 percent of women using the new technology were able to produce a useful sample, Quay says.
The data to support the value of this sort of test doesn’t blow me away. One big study from UC San Francisco, cited in the Atossa filing, says that data was collected from 7,673 women over a 19-year period to see whether there was a connection between abnormal cells in fluid, and later development of breast cancer. Women classified as having normal fluid got breast cancer 3.7 percent of the time, while those with excess cell proliferation (hyperplasia) had an eventual 8.2 percent rate of getting cancer, and those with abnormal cells got cancer 11 percent of the time, according to the filing.
The sensitivity of the nipple aspirate fluid tests, is “not ideal” when considered by itself, Atossa says. But newer polymerase chain reaction technologies and other tools have improved it to make it comparable to a mammogram, the company says in its filing. That’s one reason why Atossa plans to market its test as a companion diagnostic for mammograms, not a replacement, Quay says.
Whether Atossa can pursue its business plan will depend on whether it can raise the $15 million, which, ordinarily in biotech, is about the size of a reasonable Series A venture round. Apparently Quay doesn’t consider that a necessary part of the startup experience.
“We think the company has a pretty straightforward plan once it’s set up,” Quay says. “We’ll be revenue generating, and profitable.”
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