CTSO: Strong Buy

2020년 5월 19일

Summary

• 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.