In my end of month recap I had mentioned that I had another little stock that I was taking a position in. Here’s what I wrote: Finally, two tiny companies, at about 0.5%. These are KRED and another that I’ll probably write more about at the beginning of next week. These are penny stocks, and are just for playing around. They are really tiny positions as you can see. Here’s the other one. It’s called CytoSorbents. It’s very small, but it’s growing VERY fast. I’m keeping my position under 1% size and, unless you are a real gambler, I suggest you do the same.
Here’s what their Product revenue looks like (in millions of dollars:
2012 - .01 .04 .01 .09 = .15
2013 - .18 .13 .20 .31 = .82
2014 - .57
What can you read from this? Well, 2013 product revenue was over five times 2012 product revenue. And first quarter 2014 revenue was over three times first quarter 2013, and was up 80% SEQUENTIALLY. But note that it’s still way under $1.0 million. This is still a tiny company.
They had a net loss of $1.0 million in the first quarter. Since their gross margin is over 60% that loss should get eaten up very quickly as revenue keeps growing.
Here’s Total Revenue (as opposed to Product Revenue). Total Revenue includes research grants, including from the government and military (DARPA).
2013 - .37 .29 .88 .88 = 2.42
2014 - 1.06
And here’s running 12-month trailing Product Revenue. I feel that it is Product Revenue that tells you what they are really doing, more than Total Revenue.
12 2012 .15
03 2013 .32
06 2013 .41
09 2013 .60
12 2013 .82
03 2014 1.21
Thus in five quarters it has increased trailing product revenue by a factor of 8 times (from 15 to 120 is eight times as much). Coming off a small base, though.
Here are my notes on CTSO, starting with their first quarter report.
May 2014 - CytoSorbents Reports Strong Growth in Q1 2014 ?
CytoSorbents (CTSO), a critical care immunotherapy company using blood purification to treat life-threatening illnesses, reports results for the quarter ended March 31, 2014.
Achieved record total revenue and CytoSorb sales of $1.1 million and $569,000, respectively, with continued strong momentum expected in the second quarter
Q1 2014 Financial Highlights:
• Record total revenue for the first quarter of 2014 of approximately $1.1M, driven by increases in both product and grant income.
• Record CytoSorb sales of $569K. This is up 81% sequentially from $314K, and up 223% from $176K year over year.
• Product gross margins for the quarter were over 60%.
• Grant income increased 152% to $491K, from $195K a year ago.
• Successfully raised $9.5 million cash in a March 2014 financing, strengthening the balance sheet and providing the company with significant growth capital. As of March 31, 2014, cash was approximately $11.2 million.
• Received $458K in non-dilutive funding from the New Jersey Technology Business Tax Certificate Transfer Program
Recent Operational Highlights:
• Expanded CytoSorb distribution to the Middle East, including Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, and Oman (the Gulf Cooperation Council or GCC) and Yemen, Iraq, and Jordan through an exclusive agreement with Techno Orbits. Recently visited Saudi Arabia to train the team at Techno Orbits and to introduce the technology to one of the major hospitals in Saudi Arabia treating patients infected with the deadly MERS coronavirus
• Continued to expand the key opinion leader base to more than 150 physicians supporting CytoSorb® usage, with now more than 3,000 human treatments safely performed
• Expanded our direct sales force to 7 direct sales representatives and 1 clinical support specialist, and will shortly add a dedicated distributor support representative
• Advanced the U.S. clinical trial strategy with recruitment of a world-class cardiac surgery advisory board, hiring of a clinical trial manager, and development of a draft protocol for a planned cardiac surgery trial in the U.S.
• Publication of a case report study describing the successful use of CytoSorb® in a near-fatal case of necrotizing fasciitis
• Announced a research collaboration with the University of Pennsylvania School of Veterinary Medicine focused on potential cancer immunotherapy applications as well as other critical care treatments
• Exhibited at or attended eight major international healthcare conferences,. Sponsored a well-attended CytoSorb® research symposium at one of the largest European critical care conferences,
?Dr. Phillip Chan, CEO commented, "As an emerging leader in critical care immunotherapy, our CytoSorb® cytokine reduction filter is being used internationally to treat a growing number of life-threatening conditions where uncontrolled inflammation plays a deadly role.
We believe that CytoSorb may have benefit in the treatment of patients infected with the deadly MERS coronavirus (Middle East Respiratory Syndrome), that has hospitalized 538 people to date in 17 countries, killing more than 25% of those afflicted, with now 2 documented cases in the United States. MERS coronavirus appears to be similar, but more deadly, than the SARS (Severe Acute Respiratory Syndrome) coronavirus that led to a global outbreak in 2003, which infected 8,098 people and killed 774 people.
Both MERS and SARS lead to a severe viral pneumonia and sepsis, with a significant elevation of cytokines documented in SARS patients. This ‘cytokine storm’ is believed to increase the risk of organ failure and death in many deadly viral infections, such as SARS and seasonal and avian flu.
There is currently no specific treatment, vaccine, or cure for MERS, and treatment has been predominantly supportive care to date. Although we have not yet treated patients infected with the MERS coronavirus and do not yet know if or how our products will benefit patients infected with MERS, with our distribution and recent users training in Saudi Arabia, we believe we are well-positioned to have a first treatment case soon.
Notwithstanding new potential applications, we are pleased with the increased adoption and usage that is translating into solid growth in sales, both direct and through distributors. With our recent successful financing, we believe we have the resources to continue to execute on our multi-faceted strategy to accelerate revenue growth and generation of clinical data that we outlined in our Fiscal 2013 year-end investor call. CytoSorb® is now being actively marketed in 18 countries around the world. We plan to continue our geographic expansion, via independent distributors and/or strategic partners, into many of the remaining 22 countries of the European Union where CytoSorb® is already approved, and into countries outside of the E.U. that will accept E.U. approval. These actions, and others, are expected to provide additional catalysts to increase shareholder value ahead of our goal to up-list to a national exchange later this year." ??
??Financial Results for the First Quarter.
??For the three months ended March 31, 2014, the Company generated total revenue of approximately $1,062,000 as compared to revenues of approximately $371,000 for the three month period ended March 31, 2013, an increase of 186%. Revenue from product sales was approximately $569,000 in the three months ended March 31, 2014, as compared to approximately $176,000 in the three months ended March 31, 2013, an increase of 223%. This increase in sales is the result of the efforts of our direct sales team in Germany, as well as sales to distributors in other parts of Europe, the Middle East, and Asia. ??Grant revenue was approximately $491,000 and $195,000 for the three months ended March 31, 2014 and 2013, respectively ??
Overall, first quarter 2014 product gross margins were in excess of 60%, with blended gross margins, including costs of grant income, of approximately 38%. ??In the first quarter of 2014, we received approximately $9,451,000 in net proceeds in connection with the registered offering of our common stock. In addition, we received approximately $300,000 in proceeds from the sale of 2,483,399 shares of Common Stock per the Purchase Agreement with Lincoln Park Capital in January 2014, and we received approximately $458,000 in non-dilutive cash from the sale of our net operating losses under the New Jersey Technology Business Tax Certificate Transfer Program. ??Since inception, our operations have been primarily financed through the private placement of our debt and equity securities.
At March 31, 2014, we had cash of approximately $11.2 million and current liabilities of approximately $3.3 million. We believe we have sufficient cash to fund our operations into 2016; however, we may need additional capital to fully fund Pivotal trials in the United States and/or Germany. These funds could potentially be obtained via multiple sources such as through strategic partnerships, government-sponsored studies, or traditional equity financings.
??Our net loss was approximately $1.0 million for the quarter, compared to a net loss of $1.6 million in the year ago period.
?? 2014 Second Quarter Outlook ??CytoSorbents has not historically given financial guidance on quarterly results until the quarter has been completed. With Q2 2014 still ongoing, we continue to see strong momentum in CytoSorb usage and sales and expect Q2 2014 CytoSorb sales to easily exceed those of Q2 2013.
And here’s the take from a free newsletter that happened to write it up:
Record Product Sales. MERS Opportunity Is Promising
CytoSorbents reported results for the first quarter ending March 31, 2014. Both product revenue and total revenue were at all-time highs and are reflective of the continued progress with the roll-out of CytoSorb. Product sales have now increased on a sequential basis every quarter except one since Q3 2012 (5 of the last 6 quarters).
Strong re-order volumes have been a catalyst to the product sales growth and, per management’s comments on the call, this trend has continued through to the current quarter. CTSO also had the best quarter in terms of adding new accounts in Q1 - as the account base continues to grow with expansion of the sales force, we would expect an even greater rate of re-order volume growth.
The company recently beefed-up its sales force, adding two more reps in February, and expects to grow this further throughout the current year. Management noted on the call that the majority of sales in Q1 2014 were direct sales - indicating that growth in the sales force is having a direct benefit on growth in product revenue.
??And while there’s still potential to see some quarterly volatility, we think it is now clear that
1 - follow-on orders from existing customers (where the majority of orders are coming from – which we view as particularly positive)
2 - use of CytoSorb in an expanded number of critical care applications
3 - broadening of the geographic commercialization footprint
are all contributing to the consistent sequential revenue growth.
Awareness-building, clinical data, and case studies outlining successful interventions have been at the heart of CTSO’s sales efforts, the fruits of which are being seen in the consistent product revenue growth. CTSO will continue to build on this throughout 2014 and with the launch of the patient registry documenting real-world successful interventions with CytoSorb, the bulk of clinical evidence will continue to grow which should further enable the marketing message.
??
Q1 total revenue was $1.06 million, up 186% yoy and 21% sequentially. Product revenue of $569k represented yoy and sequential growth of 223% and 81%, respectively. Grant revenue was $493k in Q1. We expect additional grant revenue to be booked during the year from the DAPRA grant and Phase II SBIR contract. CTSO also has yet to bill anything under the USAF funded rhabdomyolysis study, valued at about $3M, and which just recently commenced. ??
The company did not disclose the specific product gross margin but did note that it exceeded 60% - product gross margin was 61% in Q4 which was what we have modeled for most of the current year. Total gross margin, which is less reflective of the core business and is impacted by grant-related R&D expenses, was 38% in Q1 and was better than our 31% estimate.
Q1 operating expenses were $1.6M compared to our $1.4M estimate - the difference mostly related to headcount additions during the quarter as CTSO has added headcount in the expansion of their sales force and support functions with the expanded roll out of CytoSorb.
Clinical/scientific staff has also been recruited to oversee clinical trials in Europe and for development of a cardiac surgery trial in the U.S.??Q1.
Net income and EPS were ($2.1) million and ($0.01), compared to our ($1.7) million and ($0.01) estimates. Approximately $500k of the difference in net income is the result of an increase in non-cash preferred stock dividends (paid in-kind) - the increase a result of the recent significant increase in the value of the preferred shares.
Cash used in operating activities was $800k in Q1.
Cash balance, which stood at $6.4 million at the end of Q1, was bolstered by the $10.2M (gross) capital raise in March. ??
We are maintaining our Outperform rating and $0.50/share price target.
??MERS / Aggressive Flu Strains A Potential New Opportunity CTSO announced their latest distribution agreement, with Techno Orbits for the Middle East, in early April. Techno Orbits’ territory covers Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman (i.e. - the GCC territory).
While CytoSorb is still awaiting product registration for the Middle East, management hopes to have this in the near-term. ??Techno Orbits will distribute the device for any and all indications in which it is appropriate but CytoSorbents believes there is a somewhat unique opportunity for their product in this part of the world. Middle East Respiratory Syndrome Coronavirus, or MERS, is an aggressive and often deadly virus thought to be linked to camels and/or bats. MERS has only recently been discovered with the first reported case in 2012. And while there have only been less than 600 reported cases, contraction of the virus can be very serious and has a mortality rate of approximately 25%. The virus is aggressive and causes acute pneumonia, sepsis and organ failure.
Management noted on the call that discussions with Techno Orbits and a hospital in Saudi Arabia that is focused specifically on treating MERS, that the Middle East is taking this threat very seriously. ??CytoSorb has yet to be used on a MERS case, although it has been successfully used on a number of patients with viral sepsis and influenza - symptoms of which, including an immune response that results in rapid elevation in cytokines, is similar to that of MERS. On the call management detailed a case of a patient admitted to the ICU with severe swine flu and kidney failure as an example of the utility of CytoSorb in treatment of aggressive flu strains. CytoSorb was able to rapidly drop interlukin-6 cytokine levels over several days - the patient was discharged within two weeks and remained well at 60 days.??The potential opportunity could very well expand beyond MERS and springboard to include aggressive flu strains that can be increasingly difficult to treat and have relatively high mortality rates. Clearly, however, once product registration has been accomplished, MERS will almost certainly be of significant interest for the CytoSorb in the Middle East as there is currently no specific treatment for the virus. This could potentially open up an even broader use of the device in the near future.
??Putting The Cash To Work…??A key topic on the recent conference calls was that CTSO will be putting the recent cash raise to work in specific areas to add another layer of growth. This includes additions to the sales force (particularly for the German market), additional distribution agreements (up to 5 more distributors in 2014) and partnerships, hiring of support personnel to help communicate the clinical successes of CytoSorb, adding to their clinical support staff and generation of more clinical data. Repeated was the message that they will be discerning in expanding geographically and will focus on areas that accept the CE Mark and have good reimbursement.
Case reports of positive patient outcomes and additional clinical data is expected to help facilitate sales efforts within their existing footprint and will support efforts to establish reimbursement in countries that CTSO may look to enter. ??CTSO also will look to use the funding to initiate a U.S. study for CytoSorb – not in the previously expected application for sepsis, but instead for cardiac surgery. Dr. Chan laid out a compelling case for the reasons to pursue cardiac surgery (an application where CytoSorb has already had documented successes overseas) instead of sepsis in the U.S. – which we discuss further below.
??CTSO Expects a Busy 2014?? Beefed-up distribution: as of the end of Q1 2014 CTSO had six distributors (covering parts of the UK, Ireland, The Netherlands, Turkey, Russia and the Middle East) plus the partnership with Biocon covering India. CTSO expects to add up to five distributors in 2014 (including Techo Orbits which was added in April) in areas of the world (ex-Germany where they have a direct sales force) that accept the CE Mark (which is essentially all of Europe as well as other areas of the world).
??CTSO will also look for other partnership arrangements similar to the one with Biocon, a relationship that appears to be mutually beneficial. In fact Biocon noted on their Q3 2013 earnings call (Jan. 23, 2014) that, “Our recent launches Alzumab and CytoSorb have done extremely well, with strong uptake from both doctors and patients.” Biocon appears to be solidly behind promoting CytoSorb, both from the clinical evidence side as well as feet on the ground. CTSO noted that Biocon will create a dedicated sales force for CytoSorb which will be focused on building awareness and educating physicians on use of the device. Biocon will also be setting up a patient registry and use case studies in promotion of the device and to develop manuscripts. We think additional partnerships similar to the one with Biocon can add meaningfully to CTSO’s results.
??Beefed-up sales force: as of the end of 2013 CTSO had four sales people selling direct in Germany, Austria and Switzerland. With just this skeleton crew, CTSO was able to ramp product sales to more than $800k in 2013 and established a presence with more than 100 key opinion leaders. CTSO added three more reps (for a total of seven) through mid-May and expects to increase the sales force to 10 reps by the end of 2014. Management noted that the majority of sales in Q1 2014 were direct sales - indicating that growth in the sales force is having a direct benefit on growth in product revenue. The direct sales force will continue to have a majority focus on Germany. And with cardiac surgery now a major focus (as is sepsis), CTSO has recently hired reps with contacts specifically in the cardiac surgery space.
??Drive utilization: CTSO first outlined their general plans to increase adoption and drive utilization last summer. Noting that while their initial sales strategy had focused almost exclusively on “cast(ing) a wide net” to broaden awareness and get hospitals and doctors interested in the device, that they would now also place a greater emphasis on penetration within the critical departments which have already been introduced to the technology in order to increase adoption and utilization. CTSO has indicated that they have already had successes in this regard – where CytoSorb may have been introduced to a particular hospital by a KOL and used in his or her intensive care specialty, but is now being used by other intensive care units within the same hospital. In addition, they continue to see growth in re-orders, indicating that adoption has been “sticky.”??
Expanded Indications: CytoSorbents continues to look to expand the application of CytoSorb to additional indications. It has already been used successfully in sepsis, cardiac surgery, trauma, burn injuries, aggressive flu strains, trauma and others. The company is now investigating use in MERS, an aggressive and often fatal virus, most common in the Middle East. CytoSorbents also sees severe liver disease as a potentially attractive opportunity. As the more indications that the device is successful in treating, the potential applicable total target markets will continue to expand.
?Clinical data: clinical outcomes data has been a driving force in accelerating product sales. CTSO will dedicate more resources towards additional studies and expects to have a regular flow of outcomes data coming from the various investigator initiated studies. A patient registry, case studies (Dr. Chan has highlighted several successful outcomes when CytoSorb was introduced with critically ill patients) and additional support personnel to help communicate the successes of CytoSorb along with presentations and publications will all be major focuses in 2014 to build awareness, drive adoption, increase sales and to support reimbursement.
Approximately 30 investigator initiated studies are ongoing as is the sepsis dosing study. In late December CTSO announced preliminary results from the dosing study. Results showed no serious device-related adverse events and demonstrated removal of cytokines throughout the 24hr treatment period in the 28 patients enrolled in the 24hrs/7days treatment arm. The other treatment arm (6hrs/up to 14 days) is currently enrolling patients. Assuming positive results, CTSO game plan now is to move to a larger study in sepsis in Germany.
Among the 30 investigator initiated studies, 11 relate to cardiac surgery. CTSO expects two of these controlled studies to be completed by Q3 (or earlier) of this year. Six other studies are using the device in septic shock, severe sepsis and lung injury – one of which should also complete this year. The other studies include patients with liver disease, trauma, burn injuries and acute pancreatitis. Data from these studies offer potential catalysts that can positively impact the marketing message and rate of adoption and utilization of CytoSorb.
Presentations, conferences, user-meetings: another key to CTSO’s awareness-building efforts have been attendance and presentations at industry conferences. This will be an ongoing focus. Recently CTSO held its first Users Meeting at the DIVI conference in Germany which allows attendees to hear success stories directly from users the device. Comments at the Users Meeting included that physicians could “see the therapy turning the patient around”. CTSO noted that they have had impressive attendance at presentations at recent industry conferences and recently exhibited/attended at eight major international healthcare conferences.
U.S. study: CTSO previous game-plan relative to the U.S. market was to use the European sepsis dosing trial data as support for FDA approval to run a sepsis trial in the U.S. On the Q4 call, however, CTSO said that they are now focused on running a pivotal trial in the U.S. for cardiac surgery. The reasons for focusing on cardiac surgery include the demand (and clinical successes) that CytoSorb has had in that application in Europe and CTSO believes cardiac surgery represents a faster regulatory approval timeline and will be lower cost and have less risk of failure than a sepsis related trial. For one, CTSO noted that outcomes are more predictable with cardiac surgery than with sepsis. Also, mortality will not be an endpoint in cardiac surgery – whereby it is with sepsis and is a relatively high hurdle. The cardiac surgery focus for the U.S. makes sense in that it is a relatively lower-risk endeavor and can get CytoSorb’s foot in the domestic door – the company can then focus on expanding the label to encompass additional indications. It also likely puts the device on the U.S. market and generating revenue here earlier than would have been the case if CTSO had pursued sepsis as the initial indication.
In addition, while there are currently blood-filtration products on the market that are used during cardiac surgery to reduce inflammatory substances, they do not target cytokines – which offers CytoSorb a wide-open market opportunity. While cardiac surgery was barely mentioned just 18 months ago, this seems to have quickly become a major driver of demand and interest in CytoSorb – with CTSO noting that 22 cardiac surgery centers have either used the device or expressed interest in doing so – this is up from just 10 in 2013. CTSO also indicated that based on interest that they’ve seen for the cardiac surgery application that specifically changed some of their sales efforts to dedicate more focus on cardiac surgery.
And while the market for cardiac surgery, at approximately $500M in the U.S.(per CTSO estimates), is likely significantly smaller than for sepsis (potentially 1+billion dollars), it still represents a relatively large target market. And, again, the company would likely look to expand the label in the U.S. beyond just cardiac surgery. CTSO has yet to provide much in the way of specifics relative to the near-term game plan for a U.S. cardiac surgery trial, although did note that they will be hiring a Chief Scientific Officer to manage the U.S. trial (as well as European studies), just recently recruited a Cardiac Surgery Advisory Board and began drafting the protocol for the study. The cardiac surgery clinical data generated overseas might be used as support to petition U.S. regulators to initiate a clinical study in this country.
Partnering for other products: CTSO had mentioned on prior calls that they would look for partners for commercialization of some of their other products – these include
HemoDefend (blood purification and storage),
ContrastSorb (removal of contrast medium when patient is allergic, and thus prevention of CIN), and
DrugSorb,(drug detox and overdose)
as well as four or five other products that are in the pipeline.
This will be an ongoing focus in 2014. CTSO is focused on what they termed “de-risking” these products to make them even more attractive to potential commercialization partners – which includes making enhancements to the products. Further de-risking of HemoDefend may also come from the ABLE (Canada) and RECESS (U.S.) pivotal studies. The studies are attempting to determine whether aged blood may be potentially more toxic than new blood – data from these could be available during the year – and could potentially provide support for use HemoDefend to keep blood fresh. CTSO recently noted that they have confirmed the regulatory pathway in both the U.S. and E.U. (although mgmt. did not elaborate) for the in-line filter HemoDefend product.
To conclude, I took a bigger position in this than in KRED, but still under 1%.
Saul
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