PLCSF: Consumables Fueling Revenue, Beefy Gross Margins

Zacks Small Cap Research

By Brian Marckx, CFA

Q3 Results:
  Consumables Fueling Revenue Growth and Beefy Gross Margins…

PLC Systems (PLCSF) reported financial results for the third quarter ending September 30, 2013 on November 14th.  Revenue growth continued at a very strong pace with contribution from consumables driving the 64% yoy total revenue increase and offsetting a decline in console sales.  While consoles sales have lagged the last two quarters, consumables sales have been very strong throughout all of 2013, posting growth of 341% in the first nine months of the year.  As consumables are the long-term driver of the top line, are an indicator of pull through demand and utilization, and are higher margin, we view this consistent and ongoing strength as an obvious positive and potentially a harbinger of what to expect going into 2014.  We do ns are the long-term driver of the top line, are an indicator of pull through demand and utilization, and are higher margin, we view this consistent and ongoing strength as an obvious positive and potentially a harbinger of what to expect going into 2014.  We do note, however, that there may be some quarterly gyrations from things such as stocking orders.

Financials
Q3 revenue of $348k was an increase of 64% from Q3 2012 and was down 6% sequentially.  Through the first nine months of 2013, revenue is up 80% from the same period in 2012.  Q3 revenue was about 11% lower than our $393k estimate, with console sales coming in about 47% lower than our estimate ($106k A vs $199k E) and consumable sales about 23% better than our number ($239k A vs $194k E).  On a yoy basis, console sales fell 38% and consumables sales increased 479%.  But while console sales growth has been relatively weak the last two quarters, important to note is that the console installed base is still growing which provides more units in the field to feed consumables to.  And as both the installed base and utilization of the installed base grows, consumables sales could accelerate even more rapidly.

Q3 gross margin at 64% was significantly better than our 51% estimate which we also think benefitted from the bulk of revenue coming from consumables, which we estimate are higher margin than consoles.  Operating expenses of $1.5 million were slightly higher than out $1.3 million number - the 10-Q notes that additional investor relations expense was recorded in the quarter.  Operating income was ($1.3) million, compared to our ($1.1) million estimate.    Net income and EPS were ($609)k and ($0.01).  Excluding non-cash loss on extinguishment of debt and gain from change in fair value of derivatives, net income and EPS were ($1.3) million and ($0.02), compared to our ($1.2) million and ($0.02) estimates.

Cash balance stood at $1.4 million at Q3 quarter end, up from $1.1 million at the end of Q2.  Cash balance benefitted from a ~$1.6 million (net) raise from the sale of common shares w/ warrants during the quarter.  PLC also has $250k in restricted cash that is escrowed for investor relations purposes.  Cash used in operations was $1.3 million in Q3.  Excluding changes in working capital, cash used in operations was $1.2 million.  We continue to expect that PLC will look to raise additional operating capital in the near term to fund operations including their <_st13a_country-region _w3a_st="on">U.S. clinical trial.

Operations
On the operational front, PLC continues to make progress with patient enrollment for their pivotal U.S. RenalGuard trial, expanding their international presence including entry into new territories (most recently in Brazil where PLC gained regulatory approval), capital raising (including ~$5.8MM raised throughout 2013), building greater awareness of RenalGuard and CIN through attendance / presentations at key industry conferences throughout the world, and expanding potential indications for RenalGuard.  And in Q3 PLC finally got the green-light from the Japanese Ministry of Health to initiate a clinical trial in Japan using RenalGuard. 

Japanese Study…
In October PLC announced that the Japanese Ministry of Health, Labor and Welfare approved the clinical trial that PLCSF and Dr. Ichiro Michishita had previously requested approval of.

As a reminder, In January 2012 PLC announced that Dr. Ichiro Michishita had successfully used RenalGuard with two patients for prevention of CIN at Yokohama Sakae Kyosai Hospital in <_st13a_city _w3a_st="on">Yokohama, Japan, where Dr. Michishita serves as the Director of the Cardiovascular Division.  The plan forward was for Dr. Michishita to meet with the Japanese Ministry of Health (MHLW) and to use this two-patient data as support in outlining a process for regulatory approval of RenalGuard in that country - with the expectation that MHLW would grant approval to move forward on a ~60- patient Japan-based study.

While the recent news of approval to commence this 60-patient study comes later than initially anticipated (initially it was thought the trial could start as early as April 2012), it is a significant event as this Japan-based study is expected to provide the requisite proof of efficacy in order for PLC to sell the device in that country.

The study is single-arm and will enroll 60 patients at two sites.  It will evaluate RenalGuard in reducing the incidence of contrast induced nephropathy (CIN) in patients undergoing catheterization procedures (such as percutaneous coronary intervention) and compare these results to the expected rate of CIN.

PLC had previously noted that they expected the study could complete in about 8 - 10 months.  Assuming positive results, the company will use this to seek approval to sell the device in <_st13a_country-region _w3a_st="on">Japan, which would significantly expand the geographical target market for RenalGuard.

Expanding Potential Indications…
PLC also recently began exploring potential opportunities outside of PCI with RenalGuard to expand their target markets.  One such application is during transcatheter aortic valve implantation (TAVI), a minimally-invasive procedure where diseased aortic valves are replaced.  Similar to PCI (which is the initial targeted indication for RenalGuard), TAVI requires the use of a contrast agent.  Also similar is that patients that undergo both PCI and TAVI are often relatively sick and many times have impaired kidney function.  As such, contrast agents, which are processed through and can be toxic to the kidneys, can put these patients at particularly high risk of renal failure and contrast-induced nephropathy.

Earlier studies using RenalGuard during TAVI have culminated into a larger hospital-initiated study being conducted at <_st13a_placename _w3a_st="on">Tel Aviv <_st13a_placename _w3a_st="on">Sourasky Medical Center in Isreal by Dr. Yaron Arbel, the Director of the hospital's Cardio Vascular Research Center.  The trial, which PLC first announced in September, will enroll up to 200 patients.  The goal of the study, called The Effect of the Forced Diuresis With Matched Hydration in Reducing Acute Kidney Injury During TAVI (REDUCE-AKI), is to evaluate RenalGuard versus placebo in preventing acute kidney injury in patients undergoing TAVI.  Final data collection is anticipated in late 2015.  And while the number of TAVI procedures done worldwide is only a small fraction of the number of coronary angiograms/PCI (~75k TAVI vs. ~7 million PCI), TAVI is still a relatively new procedure will procedural volume expected to grow exponentially.

Another potential application, which PLC Systems had not previously talked much about, is following kidney transplant.  PLC's announced in October that RenalGuard was successfully used with a patient whom underwent kidney transplant in a hospital in Brazil.  There are roughly 70k kidney transplants performed worldwide every year. 

Awareness
Building….
PLC also continues with awareness-building efforts.  RenalGuard data was presented at the International Conference of the Israel Heart Society in early May.  Two researchers from Israeli hospitals presented clinical results using RenalGuard which indicated lower incidence of CIN than what would be expected without use of RenalGuard.  One of the investigators, Fr. Eyal Ben-Assa of Tel Aviv Medical Center noted, Based on these results, RenalGuard has become the standard of care for at-risk patients at our center."  The other presentation at ICIHS was by Dr. Eyal Nacum of Sheeba Hospital in Petah Tikvah, titled "Incidence of Acute Kidney Injury in the Patients Undergoing Surgical TAVI".

Then in late May data from RenalGuard therapy was presented at EuroPCR.  The presentation, titled, "Minimizing Acute Kidney Injury During TAVI (transcatheter aortic valve implantation) Procedures", detailed how RenalGuard can be safely used during a TAVI procedure, which oftentimes results in the development of acute kidney injury from contrast agents.  Dr. Vaikom Mahadevan, who is a Consultant Cardiologist at Manchester Royal Infirmary and made the presentation noted that, "RenalGuard has performed very nicely in this difficult patient population. My experiences so far lead me to believe that RenalGuard can be used effectively as a treatment for TAVI patients with renal impairment to reduce the risk of renal function deterioration."

In November the company announced that RenalGuard was successfully used in two live cases which were transmitted by satellite to "an audience of several hundred interventional cardiologists at the annual Transcatheter Cardiovascular Therapeutics (TCT) 2013 meeting in San Francisco."  One procedure was performed at <_st13a_placename _w3a_st="on">Tel Aviv <_st13a_placename _w3a_st="on">Sourasky Medical Center in Isreal where a patient was undergoing transcsatheter-aortic valve replacement.  The other was done in <_st13a_city _w3a_st="on">Massy, France in a stent procedure.

Finally in regards to recent awareness-building efforts, also at the TCT meeting, Professor Antonio Bartorelli, who was the principal investigator of the RenalGuard MYTHOS and REMEDIAL II trials, reported results of a survey he conducted among Italian cardiologists regarding use of RenalGuard.  The survey indicated that RenalGuard use is increasing in Italy for use in preventing contrast-induced nephropathy. 

Maintaining Outlook / Recommendation /  Price Target
We have made only minor changes to our model following Q3 results and are maintaining our outlook, Outperform rating and $0.30/ share price target.  See below for access to our full 20 page report on PLCSF.

A copy of the full research report can be downloaded here >> 
 PLC Systems Report

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