Summary
Background:
In April, Cytosorb received Emergency Use Authorization (EUA) from FDA for critical COVID-19 patients. This was followed up by a Breakthrough Designation for removal of ticagrelor in cardiac surgery patients. Later, it also received EU approval for removal of rivaroxaban during cardio-thoracic surgery.
Q1 was already turning out to be a strong quarter with a 80% yoy growth in product sales, and the ongoing COVID-19 pandemic has brought the company's flagship product to the forefront of attention within the medical community to treat cytokine storms and deadly inflammation in critically ill COVID-19. CTSO ended the quarter with their first-ever sales order backlog of $2.7 million (c.30% of Q2 expected revenue), and thus have ramped production to full capacity to fulfill that.
As physician awareness increases, Cytosorb could see a huge tail-wind in growth due to COVID-19
Financial highlights:
Even prior to 2020, the company had been seeing steady revenue growth rates of ~40% p.a. from 2016-2019. Q1 total sales came in at $8.7million (~80% yoy growth), which represents a roughly ~12x price to sales ratio.
Product gross margins of ~75% are healthy, and could potentially see a bump from economies of scale as product adoption increases. As mentioned above, company enters Q2 with a $2.7M backlog and have raised production to "near full capacity". Production capacity is $80M (i.e. $20M per quarter).
Working capital look solid. Company ended Q1 with $26.5M in cash, and have refinanced a $15M loan facility. (vs. net loss of $3.5M in Q1; gross profit of $6.3M)
Investment thesis:
1) Conservative case:
Revenue 2020E: ~$50M (conservatively, details below)Gross profit: $37.5M (75% margin)Assuming a 20x P/gross profit (where it's approx trading), that equates to $750M market cap, so ~85% potential
2) Aggressive case:
Revenue 2020E: ~$65MGross profit: $50M Assuming a 25x P/gross profit (multiples expansion due to higher growth, that equates to $1.2bn company, hence price-target of ~$30
Expect the company to surpass the 2018 high of 14.8 in Q2 and to continue growing
Underlying assumptions for revenue estimates:
Q2 should see a bump in revenues due to backlog, increased COVID-19 patients, and following new approvals for cardiac patients. Expect the company to see a decline in demand from non COVID patients, but don't expect it to be much given this is a therapy for critically ill patients (stroke, sepsis, trauma, ARDS shock and ICU admissions) rather than for elective surgery patients.
Q1: $9MQ2E: $15M conservatively ($12M new demand + $2.7M backlog) (Arrived via three routes:a: they've been running at close to full capacity of $20Mb: Q1 demand was already $11M if you include backlog (assumed a 10% bump)c: Q1 had $1.5M-$1.7M demand from COVID, which hit in March. Accounting for a full quarter and not adjusting for rise in cases, that equates to additional $3-$3.5M demand, but applying a haircut of )
Q3E and Q4E: $13M conservatively (though I would argue this would be closer to $20M as influenza season begins again and physician awareness increases)
For aggressive case, I believe we're looking at
Q2E: $20M ($17M new demand + $2.7M backlog) - given Q1 earnings call statement of operating at close to full capacity, and increasing COVID-19 cases that have transpired Q3E and Q4E: $18M
In the aggressive case, we will likely see the company looking to add production capacity in Q3/Q4 onwards, and revenue maybe more than that.
Disclosure: I am/we are long CTSO.
- Target $30, Stop $5. (Analyst price-targets around $14-$17).
- COVID-19 put spotlight on their flagship product Cytosorb, as it gained emergency FDA approval for treatment of severe COVID-19 patients.
- As further approvals for removal of ticagrelor and rivaroxaban have followed, Cytosorb can potentially become the "standard of care" alongside blood thinners.
- Headwinds have translated to record quarterly revenue, sales order backlog, operations running at full capacity.
- Not a COVID play, but this crisis has definitely been a tailwind for the company. Even after COVID goes away, those tailwinds and physician adoption will persist to create high growth
Background:
In April, Cytosorb received Emergency Use Authorization (EUA) from FDA for critical COVID-19 patients. This was followed up by a Breakthrough Designation for removal of ticagrelor in cardiac surgery patients. Later, it also received EU approval for removal of rivaroxaban during cardio-thoracic surgery.
Q1 was already turning out to be a strong quarter with a 80% yoy growth in product sales, and the ongoing COVID-19 pandemic has brought the company's flagship product to the forefront of attention within the medical community to treat cytokine storms and deadly inflammation in critically ill COVID-19. CTSO ended the quarter with their first-ever sales order backlog of $2.7 million (c.30% of Q2 expected revenue), and thus have ramped production to full capacity to fulfill that.
As physician awareness increases, Cytosorb could see a huge tail-wind in growth due to COVID-19
Financial highlights:
Even prior to 2020, the company had been seeing steady revenue growth rates of ~40% p.a. from 2016-2019. Q1 total sales came in at $8.7million (~80% yoy growth), which represents a roughly ~12x price to sales ratio.
Product gross margins of ~75% are healthy, and could potentially see a bump from economies of scale as product adoption increases. As mentioned above, company enters Q2 with a $2.7M backlog and have raised production to "near full capacity". Production capacity is $80M (i.e. $20M per quarter).
Working capital look solid. Company ended Q1 with $26.5M in cash, and have refinanced a $15M loan facility. (vs. net loss of $3.5M in Q1; gross profit of $6.3M)
Investment thesis:
1) Conservative case:
Revenue 2020E: ~$50M (conservatively, details below)Gross profit: $37.5M (75% margin)Assuming a 20x P/gross profit (where it's approx trading), that equates to $750M market cap, so ~85% potential
2) Aggressive case:
Revenue 2020E: ~$65MGross profit: $50M Assuming a 25x P/gross profit (multiples expansion due to higher growth, that equates to $1.2bn company, hence price-target of ~$30
Expect the company to surpass the 2018 high of 14.8 in Q2 and to continue growing
Underlying assumptions for revenue estimates:
Q2 should see a bump in revenues due to backlog, increased COVID-19 patients, and following new approvals for cardiac patients. Expect the company to see a decline in demand from non COVID patients, but don't expect it to be much given this is a therapy for critically ill patients (stroke, sepsis, trauma, ARDS shock and ICU admissions) rather than for elective surgery patients.
Q1: $9MQ2E: $15M conservatively ($12M new demand + $2.7M backlog) (Arrived via three routes:a: they've been running at close to full capacity of $20Mb: Q1 demand was already $11M if you include backlog (assumed a 10% bump)c: Q1 had $1.5M-$1.7M demand from COVID, which hit in March. Accounting for a full quarter and not adjusting for rise in cases, that equates to additional $3-$3.5M demand, but applying a haircut of )
Q3E and Q4E: $13M conservatively (though I would argue this would be closer to $20M as influenza season begins again and physician awareness increases)
For aggressive case, I believe we're looking at
Q2E: $20M ($17M new demand + $2.7M backlog) - given Q1 earnings call statement of operating at close to full capacity, and increasing COVID-19 cases that have transpired Q3E and Q4E: $18M
In the aggressive case, we will likely see the company looking to add production capacity in Q3/Q4 onwards, and revenue maybe more than that.
Disclosure: I am/we are long CTSO.