"On Wall Street, what is the difference between being early and being wrong?" Answer: "There is none."
There was NOTHING about this company 3, 4 and 5 years ago that would indicate it was time to invest in this company. But feel free to blame it all on Dr. Chan if that makes you feel better.
I found this on "matched pairs" experimental design:
"A matched pairs design is a special case of a randomized block design. It can be used when the experiment has only two treatment conditions; and subjects can be grouped into pairs, based on some blocking variable. Then, within each pair, subjects are randomly assigned to different treatments.
The table to the right shows a matched pairs design for a hypothetical medical experiment, in which 1000 subjects each receive one of two treatments - a placebo or a cold vaccine. The 1000 subjects are grouped into 500 matched pairs. Each pair is matched on gender and age. For example, Pair 1 might be two women, both age 21. Pair 2 might be two men, both age 21. Pair 3 might be two women, both age 22; and so on.
For this hypothetical example, the matched pairs design is an improvement over a completely randomized design. Like the completely randomized design, the matched pairs design uses randomization to control for confounding. However, unlike the other design, the matched pairs
design explicitly controls for two potential lurking variables - age and gender."
i don't have a feel for what the deal should be. The company would have to decide between upfront money vs. ongoing royalties or what the balance should be between the two. The company desperately needs cash. The future scenario for sales in the future is very bright. Cash right now is a problem. If it were me, I would negotiate a deal that maximizes current cash.
And they have a billion in cash. Their stock sells for $51 a share. They could let us have $15-25 million, and they would have a product that may become the world-wide standard in the blood business. We would get a tiny royalty per bag. Win-win.
Vitruvian, it looks like I erred! Let's try these gross profits for the 4 market penetrations assuming .33 gross margin:
CTSO signed a distributorship agreement June 13, 2013 with Hittit in Turkey. Population of Turkey is 75 million, and the total addressable market (TAM) is $750 million per the PR.
Similar to the earlier calculation, we will figure gross sales at 4 market penetrations, and then apply the 33 gross margin to get gross profit:
Turkey was the second distributorship announced, so sales should be ramping in 2014. An annualized market penetration of 5% for 2014 seems reasonable.
We really do not know what kind of margin CTSO has on these distributorship sales. I am going to assume out of every $1.00 of revenue, the distributor gets $.33, it costs $.33 to manufacture, and CTSO gets a gross profit of $.33. So at the various market penetrations, we can figure the gross profits:
Note that the UK/I agreement was announced last May 16, 2013. The agreement with WMC in Holland was announced more recently on Oct. 30, 2013. Hopefully, UK/I will be ramping up in early 2014. But Holland will require some time (9 mos.?) to negotiate the reimbursement and other regulatory issues. Thus, sales in Holland may not ramp up until July, 2014. If we are trying to determine the situation at the end of 2014, a market penetration of 2.5% may be fair.
Distributorship agreements have been signed for UK & Ireland and Holland. Population figures follow:
In the press release on 5/16/13 announcing the exclusive distributorship agreement with L.IN.C for UK/I, Dr. Chan is quoted as saying there are 200,000 hospitalized cases of sepsis annually, representing a total addressable market (TAM) of $750 million to $1 billion. Note that 200,000 x $3500 is $700 million. Is this Dr. Chan saying that he believes there will be more than 7 filters used per patient? I am going to use the lower end of his range of TAM, i.e. $750 million.
If we compare $750 million TAM and the populations of UK/I and Holland, we get a TAM of $934 million for UK/I/H. Let’s calculate 4 market penetrations:
Alternative Direct EU Countries Calculation
In the Sept. 2013 investor presentation slide 36, Dr. Chan says the Total Addressable Market for all critical care applications in Ger/Aust/Switz is $1.0 – 1.5 billion. Let’s use the lower end of the range-- $1 billion. If we calculate the various market penetrations, we get the following revenues
If we apply the 70% gross margins, we get the following gross profits
So if we assume a rate of 10% market penetration at the end of 2014, but an annualized market penetration of 5%, these numbers look very high. How could the company possibly do $50 million of gross sales in 2014. Somebody better get crackin’.
Also these numbers are 4 times the numbers using the “incidence of sepsis in the EU” method. “All critical care apps” is different from sepsis alone. Inquiring minds. . . .
Clarification--sepsis due to pancreatitis, burns, trauma, etc. WOULD be included in the above numbers. Cardiac surgery use of the filter WOULD NOT be included.
Discussion--the market penetration will be the highest in Germany, Aust, Switz due to the concentrated direct sales effort in this area. If we are targeting the end of 2014, 1% is too low and 25% is too high. A reasonable number may be 10% rate by the end of the year, or a 5% annualized rate.
Another source of error is that the incidence of sepsis used above is SEVERE sepsis. I would hope that CytoSorb will be found useful in all sepsis cases, which would be higher numbers. How high, I have no idea. But the calculation above is conservative because we are assuming severe cases only, and we are using 75 per 100,000 population instead of the published 90 per 100,000.
And this calculation does not include any uses of the filter in cardiac surgery, pancreatitis, burns, trauma, or the extensive list of other indications the filter is already being used for.
Expenses—note that higher SGA expenses due to increased sales force in Germany will be reflected in these numbers. Also, general corporate expenses will be included here, but will be omitted in later analyses of Indirect EU Countries and Russia/India.
Method—I looked at the most recent 3rd quarter expenses, multiplied by 4, increased that amount arbitrarily where appropriate, and then compared that total to the 2012 annual expenses, and tweaked where necessary. Note that taxes will not be an issue for several years, so taxes are not considered here. These are projected expenses for 2014.
Research and development--$3,000,000
Legal, financial, consulting--$640,000
Selling, general, administrative--$4,000,000
Preferred stock dividend--$3,500,000
Total Expenses--$11,740,000 or $12 million
We have been told the $500 per cartridge pricing is holding in Germany. There have been suggestions that each case may require more than 7 filters, but let's use 7 filters per case, or $3,500 per case. The following is gross revenue.
The direct EU countries have the highest margin, about 70%. Gross rev - cost of goods sold = gross profit. The following is gross profit.
CTSO has a direct sales force in Germany, Austria, and Switzerland. This is a high gross margin segment (about 70%) because the cost of the sales force is included further down on the income statement under "Selling, General, and Administrative" (SGA) expenses. Recall that the direct sales force in Germany is going from 4 to 7 per the last CC.
The population of these German-speaking countries is as follows"
I read where the incidence of severe sepsis is estimated to be 90.4 per 100,000 population in the Eurozone. Since Ger, Aust, and Switz are among the most advanced countries, perhaps we assume a lower incidence there, say 75 per 100,000 population, or 72,825 cases of SEVERE sepsis annually.
Let's calculate 4 market penetrations: 1%, 5%, 10%, and 25%
Vitruvian, thanks for your interest. This is a complicated problem--so much we don't know. Perhaps we tackle each of the 3 market segments separately and in a different thread.
I would include the UK and Ireland. Currently, we seem to have at least 3 market segments: EU distributor countries, EU direct countries, and Russia/India. The gross profits will differ tremendously; the revenue per patient will differ tremendously. In my calculation, I assumed revenue per patient in Russia/India was $1750 and gross profit was 35%.
You calculated gross profit. The company will have other expenses which must be subtracted before a PE is applied. A PE of 20 would be more appropriate for a high-growth company.
Interestingly, when France, Spain, and Italy come online, their combined population will be about 170 million or about half of the U.S. A statistic I read said the incidence of severe sepsis in Europe is 90.4 per 100,000 of population.
And of course sepsis is just one indication out of many that the filter could eventually be used for.
I am beginning to think nobody has ever done an elementary school science project. Science is hard. Establishing a new product is hard. Sepsis is really hard.
All that said, I am ready for some results too.