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CTSO: Revenue Acceleration Expected 2H. REFRESH Efficacy Compelling

By Brian Marckx, CFA


Q1 Financials / Operating Update: Slight Miss But Revenue Remains Robust. Expect Acceleration 2H … 

CytoSorbents (NASDAQ:CTSO) reported financial results for the first quarter ending March 31st and provided a business update.  Product sales again posted very strong double-digit yoy growth, although dipped very slightly from Q4 – breaking the streak of sequential revenue growth which had endured for the last seven consecutive quarters.  And while mildly disappointing and about 5% shy of our forecast, product sales still managed to come in at the second highest in company history.  Management pointed to the likelihood of some German hospitals delaying purchasing as they awaited notification regarding reimbursement amounts under the new reimbursement code as a headwind.  Importantly, this issue is expected to dissipate given that, per management’s comments on the call, many of the hospitals in Germany have now received this information.

And while product sales just barely missed hitting a new high, total product sales, aided by initial contribution from the recently (January 2017) scored phase II (follow-on) mycotoxin grant ($1M over two years), did manage to set a new record.  While product sales garner almost all of the attention as it relates to the top-line, government grants have been an important and non-dilutive funding source for CTSO over the last several years – helping to reduce cash burn and at the same time broaden development programs as well as potential applications for CytoSorb. 

And there were other highlights in the financials – including 68% gross margin, which is near the all-time high, and an almost 50% drop in operating expenses – partly due to lower stock comp but also from a big decline in R&D, the latter related to the lull between REFRESH I & II. 

Total revenue was $3.1M, up 72% yoy, up about 1% sequentially and dead-on with our $3.1M estimate.  Product revenue came in at $2.6M, up 63% yoy and down less than 1% sequentially.  Grant income was $517k – which is the highest of any quarter since Q4 2013 (i.e. when the DARPA grant was highly active).   

While Germany continues to account for the majority of product sales, that company’s proportional contribution slipped slightly to 58.9% in the most recent quarter – that compares to 61.5% in Q1 2016 and 61% for the full year 2016.  This may be explained by the aforementioned reimbursement-related headwind.  And while Germany has been a significant contributor to revenue, that market may still remain relatively untapped given their significant population and large hospital network.  Management has indicated that adoption in that country has been brisk and is aided by strong support by certain KOLs. One hospital in Germany already generates over $1M in product sales for CTSO.  With over 400 mid-to-large hospitals in the country, we think there is considerable near-term upside from that market.  

So, as Germany represents what we believe to be CTSO’s single-most important territory as it relates to both near-term sales as well as opportunity for growth, it will be important that any issues from the establishment of the new reimbursement code do not result in a long-term hangover.  Based on management’s comments on the call indicating that they expect sales to pick up (particularly in 2H), this may have been just a short-term and very mild case of heartburn.

Gross margin:  Product margin, at 68%, remained relatively very healthy in Q1.  This compares to 62% in the comparable prior-year period and approximately 67% for the full year 2016.  We continue to model incremental widening through the course of the out-years in our model from a combination of opportunistic pricing power and volume-related production efficiencies.  

Operating expenses, at $3.4M were up slightly from $3.1M in Q1 2016 but down about 46% from Q4.  The $2.9M sequential drop mostly related to ~$1.8M lower stock compensation and $1.1M decrease in R&D expense.  At $470k, R&D expense was at the lowest level since Q2 2014 and reflects reduced activity related to the conclusion of REFRESH I.  Preparations for REFRESH II could begin before year-end – significant expenses related to which will likely not be incurred until following a pretrial meeting with FDA.  As it relates to SG&A – we continue to model this line to grow at a lower than historical rate as compared to revenue given leverage of certain fixed costs which should also help to improve profitability.  

Cash used in operating activities was $2.0M ($1.5M ex-changes in working capital) in Q1.  Pro forma for the $11.5M gross ($10.3M net) equity raise (2.56M shares @ $4.50/share, no warrants) in early April, cash balance at Q1 quarter-end was approximately $13.5M.  Along with $5M available under their existing debt facility, management believes their cash needs are satisfied into 2H 2018. 

Operational Update:  REFRESH I Efficacy Data, Thoughts on REFRESH II Design Including Endpoints…

Given the importance of the REFRESH studies/program in terms of CTSO’s most near-term opportunity to enter the U.S. market, the outsized significance of the U.S. market relative to opportunity for growth and the recent read-out of REFRESH I and management’s comments on the Q1 call as it relates to their additional thoughts on design of REFRESH II, this is where the bulk of our operational update is focused.  

As a reminder, REFRESH I was a multi-site 40+-patient randomized study comparing CytoSorb plus standard-of-care (SOC) to SOC alone (1:1) in the reduction of free hemoglobin in patients undergoing elective complex cardiac surgery requiring cardiopulmonary bypass with anticipated duration of more than 180 minutes.  46 patients (23 each arm) were assessed in the safety population while 38 (18 CytoSorb, 20 control) were assessed in the efficacy population.  

In October 2016 CTSO announced positive safety-related information and released additional information on the Q1 call.  Both the number of total adverse events as well as number of serious adverse events was similar between the treatment and control arms.  While there were two deaths in the CytoSorb group (8.7%), this was not statistically different than the one (4.3%) in the control group.  Of the 121 adverse events in the CytoSorb arm, two were related to the device – with both related to a drop in platelets. 

Of the 121 adverse events in the CytoSorb arm, two were related to the device – with both related to a drop in platelets.  As management explained on the Q1 call, decrease in platelets (i.e. cells that help blood clot) is not unexpected given that patients undergoing these procedures must be highly anticoagulated and CPB in itself causes a drop in platelets.  The chart below illustrates a drop in platelets in both cohorts even prior to introduction of the CytoSorb therapy in the treatment group.  Nonetheless, the platelet level in the CytoSorb arm continues to drop with introduction of that therapy while the control group exhibits more of a leveling off.  While the decrease in platelets, per management, was not associated with any serious device-related events and post-op coagulation and bleeding parameters as well as transfusions were not different between the two groups, the greater decrease in platelets among the treatment cohort is something that investigators will look at in more detail.  

REFRESH I Efficacy: CytoSorb More Effectively Reduces PfHB Which Is Associated With Kidney Injury….
A clinical study by Windsant, et al. indicated that hemolysis (including plasma free hemoglobin) during cardiac surgery is a contributor to postoperative kidney injury.   Plasma free hemoglobin can be dangerous, particularly at relatively high levels.  While levels at or below 60 mg/dL have been found to be generally safe, levels over 120 mg/dL have been associated with acute kidney injury (AKI).  As it relates to efficacy, there appears to be an association between the type of cardiac surgery and how much plasma free hemoglobin is generated.  Specifically, valve replacement surgery (either in isolation or in combination with other cardiac surgery procedures) appears to be associated with higher levels of plasma free hemoglobin.  

The average peak plasma free hemoglobin level of the nine patients in the control group (efficacy population) in REFRESH I that underwent valve replacement surgery was 121 mg/dL (median was 123 mg/dL) – or, at potentially dangerously-high levels.

Valve replacement patients in the CytoSorb group fared better as it relates to PfHb levels.  Among those patients in REFRESH I that underwent valve replacement surgery that lasted between 3 and 4.5 hours, CytoSorb demonstrated a statistically significant reduction in plasma free hemoglobin as compared to control.  

Interestingly, these findings are similar to an earlier pre-clinical study which found CytoSorb was more effective than standard bypass circuit in reducing free hemoglobin from bovine blood.  In fact, the charts from REFRESH (left) and the in vitro bovine-blood study (right) have very similar patterns.  

We cover CTSO with a $12/share price target.  See below for free access to our updated report on the company.


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