By Anita Dushyanth, PhD

NASDAQ:CTSO

READ THE FULL CTSO RESEARCH REPORT

Recent Highlights

‣ Record Revenue, Margins: Q1 set records on product revenue. Achieved guidance on product margins which widened to 80% by Q4 2019, are benefitting from growth in direct sales (proportionally as well as in aggregate) and achieved more product efficiencies.

‣ CE Mark Renewal: on August 15th, 2019 CytoSorbents (NASDAQ:CTSO) announced that they received renewal of its European Union CE Mark through May 2024 and ISO 13485 to September 2022, ensuring no interruptions to international commercialization.

‣ REFRESH 2-AKI: Guiding to reach 50% mark (i.e. 200 patients) by Q4 2020-Q1 2021 and, if all goes to plan, make PMA filing by ~mid-2022. Continued progress in REFRESH 2-AKI is what represents the most significant potential pipeline-related value enhancement in our opinion.

‣ REMOVE: rapid enrollment pace continues with 288 patients (of planned 250) through. Data analysis to follow. Guiding for topline data by mid-2020 which we think will represent a potential value-inflection event in CTSO’s share price.

‣ Commercialization Footprint Expanding: CTSO’s footprint continues to grow and now encompasses 58 countries and counting. Regulatory clearances anticipated in S. Korea, a substantial market. CTSO’s direct territories recently increased to 10. Direct sales bring enhanced margins, as well as other benefits.

‣ HemoDefend U.S. Clinical Trial: CTSO expects to seek U.S. regulatory approval to commence a pivotal study for HemoDefend. Study could begin and finish by mid-next year and, if all goes smoothly, HemoDefend could be on the U.S. market shortly afterwards. Progress on this pursuit also holds value-inflection opportunity in our opinion.

‣ Extended CytoSorb distribution to 58 countries: In addition to selling through distributors, the company extended its sales using direct sales force in 10 countries.

Q1’2020: CTSO Nabs FDA breakthrough designation and European approval for ticagrelor removal, Q1 Product revenue sets new record, Moving PT to $15/share.

COVID-19: A new opportunity for CytoSorb

The company operates in several countries, including Italy, Iran, Germany, France, Spain, Hong Kong, that are affected by COVID-19. As a reminder, COVID-19 is caused by SARS-CoV-2, the novel coronavirus. SARS-CoV-2 causes cytokine storm, where the immune system releases an excess of cytokines that cause systemic inflammatory response syndrome which results in organ failure and eventually death. This feature is typical in patients having respiratory illness, sepsis, burn injury, trauma, liver failure, complications in cardiac surgery, etc. Initially, CytoSorb was specifically added to coronavirus treatment guidelines in Italy and Panama.

In February 2020, Cytosorbents inked an agreement with China Medical System Holdings Limited (CMS), a well-established, specialty pharma, to treat critically-ill patients in China with COVID-19 infection using CytoSorb. CytoSorb was introduced to four hospitals in Wuhan, China. The therapy was evaluated in 17 severe COVID-19 coronavirus patients with a systemic inflammatory response who were treated with either continuous renal replacement therapy (CRRT) or extracorporeal membrane oxygenation (ECMO).

Subsequently, in April 2020, the FDA has granted Emergency Use Authorization (EUA) of CytoSorb for use in patients with COVID-19 infection. The EUA allows CytoSorb to be sold commercially to hospitals in the U.S. and used on patients that have acute lung injury or acute respiratory distress syndrome (ARDS) or life-threatening illness resulting in respiratory failure, septic shock, and/or multiple organ dysfunction or failure. The company has recommended the use of four cartridges per patient and tailor the need as necessary. The treatment was terminated if specific clinical outcomes, such as reduction in inflammatory mediators, reversal of shock or removing mechanical ventilators, were achieved. Initial feedback from the physicians, based on preliminary clinical evidence, seem to indicate that CytoSorb may be beneficial if utilized in the early acute phase of the COVID-19 infection.

To date, CytoSorb has been used in more than 750 patients infected with COVID-19 in Italy, China, Germany and France, of which, 25 patients are from the U.S. (EUA authorization). Preliminary feedback from physicians point to the fact that CytoSorb use has generally been associated with a marked reduction in cytokine storm and inflammation, improved lung function, weaning from mechanical ventilation and a reversal of shock. Also based on these preliminary reports, CytoSorb has been specifically recommended in the Italy Brescia Renal COVID Task Force Guidelines to treat patients with severe COVID-19 infection and Stage 3 renal failure on continuous renal replacement therapy. CytoSorb has also been recommended in the National Treatment Guidelines from Panama for Adult COVID-19 patients if they have either refractory shock or severe/refractory respiratory failure requiring either high ventilator support or ECMO.

One of the benefits that emerged from the COVID crisis is that it has thrust the company into the spotlight. In a fairly short period of time CytoSorb has garnered meaningful interest from several geographies to treat COVID-19. CytoSorb’s apparent early success in treating COVID-19 patients is encouraging, particularly as it may relate to CytoSorb’s effective utility in other critical care illnesses that are associated with cytokine storm. Future recommendations and potentially published manuscripts from some of these investigator-initiated studies, could wield meaningful influence - the fruits of which we think may be seen in the short-to-mid term. This growing interest in CytoSorb to treat “cytokine storm” is what we think will be pivotal in accelerating uptake and interest of CytoSorb for clinical use as well as providing support for initiation of U.S. clinical studies. We view FDA’s EUA authorization of CytoSorb as a meaningful milestone towards eventual approval and commencement of larger U.S. studies in support of a regulatory filing.

While the initial positive results seen with the use of CytoSorb in COVID-19 patients worldwide are very encouraging, we continue to see other catalysts either having an initial influence on sales or making a more significant impact. This includes assignment of reimbursement amount in Switzerland (possibly within the next 12 months), and adoption driven by case studies, investigator-initiated studies, KOL interest and (potentially positive results of) the ongoing REMOVE and REFRESH 2-AKI studies. HemoDefend, a U.S. pivotal study for which could begin in the coming months, represents another potential near-term catalyst.

As before, Germany continues to account for the majority of sales. Germany accounted for about 60% of sales during Q1, and is a very important country as the largest medical device market in the European Union and the third largest in the world. Sales from Germany grew 59% yoy and were up 18% on a sequential basis through Q1 2020. Q1 also set a record on direct sales, which were $6.4M. Direct sales have climbed as a proportion of total product sales increasing from 74.3% in Q4 2019 to 78.6% in Q1 2020. With the new direct territories coming online, we could see direct sales growth steepen even further.

Much of the recent growth has been attributed to improved reimbursement in Germany and expanding use and utility of CytoSorb to address a growing list of critical care conditions. 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 aided by strong support by certain KOLs. At least 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. Switzerland could soon provide another catalyst to product sales as a dedicated procedure code for cytokine reduction went into effect on January 1, 2019. Assignment of a reimbursement amount is next, which could happen by the end of 2020. While Switzerland is only about 10% of the size of Germany (in population), if CTSO’s direct-sales successes can be replicated there, we estimate incremental annual product revenue could be as much $1.2M.

With the new direct territories coming online, we could see direct sales growth steepen even further. Another catalyst that drives revenue upwards would be Fresenius Medical Care (FMC) launching in Mexico and eventually entering S.Korea. In March 2020, CytoSorb received marketing approval from COFEPRIS, the Federal Committee for Protection from Sanitary Risks (Comisión Federal para la Protección contra Riesgos Sanitarios), who are the regulatory authority in that country. Mexico is the second largest medical device market in Latin America after Brazil. Further, Mexico has reported approximately 1,100 COVID-19 infections to date and this statistic is expected to increase in the coming months as the pandemic spreads across the region. Fresenius has brought in a new head to lead the sales team in Mexico. He has extensive commercial experience and network connections, which is expected to spark strong interest and excitement in the therapy, helping to drive adoption in Mexico and meet/exceed growth objectives.

The eventual entry into Mexico and South Korea via the Fresenius co-marketing agreement will bring the total distribution footprint to about 58 countries, compared to 45 countries two years prior. Expansion of the geographic and distribution footprint as well as increasing commercial use in a growing number of indications have also benefitted product revenue. CytoSorb has been used in a host of conditions throughout much of the world. To-date CytoSorb has been used in more than 88k human treatments, up from 61k a year ago.

We expect that both aggregate and rate of utilization will continue to climb. The recent indication in COVID-19 could have the effect of further expanding use. Further label expansion and approval for use in the U.S. could follow. More importantly, there is little doubt in our minds that utilization is begetting more utilization and the reasons likely almost universally relate to the ever-growing amount of evidence supporting the utility (i.e. safety and effectiveness) of CytoSorb in various critical care applications. As many more of these experiences from single-patient case studies to relatively large, formal, randomized controlled studies are now making their way into published manuscripts in leading industry journals, we think this will bode exceptionally well for generating additional awareness of CytoSorb and translating into greater adoption and utilization.

On the earnings call, management noted that their manufacturing facility is currently running near capacity and that they could supply $80M worth of business. The single-use cartridge is selling at a unit price of about $1000, which translates to producing 80k devices. Recently, there has been a sudden surge in demand for the CytoSorb device as it demonstrated its utility in COVID-19 patients. As of Q1, the company had backorders for roughly 3000 devices. While the company had established the production capacity to supply the near-term demand for the device, we think they will likely need to scale up and increase manufacturing capabilities in order to meet the growing demand in commercial and clinical testing. To meet this growing demand, we think management is likely to expand manufacturing capabilities by hiring additional staff to increase the hours of operation each day. In order to meet future demands, we think the company is likely to begin exploring new manufacturing sites that will help scale up their operations.

Financial Update:

CytoSorbents reported financial results for their first quarter ending March 31st 2020 and provided a business update.

Total revenue from product sales was $8.2M for Q1 which increased 78% yoy and 22% qoq. Sales growth was fueled by strength in core critical care and cardiac surgery markets. As the company had previously guided, Q1 2020 product sales exceeded Q1 2019 product sales driven by strength in direct sales from increased product demand. The record increase in product sales was also fueled by demand for CytoSorb in response to the coronavirus pandemic. ​In the earnings call, CEO Phillip Chan said the company has ramped up the production of CytoSorb and the manufacturing facility is running at near full capacity. The company had sales back order of approximately $2.7M. The company has rapidly scaled-up manufacturing with a goal to fulfill backorders by the end of Q2 2020. The ~$1.5M incremental revenue related to the surge in CytoSorb demand from the COVID-19 pandemic represents about 20% of the overall $8.2M revenue for Q1. Based on the estimate given by the company, we think that roughly 20-30% of the Q2 revenues could be directly related to the sales of CytoSorb to treat COVID-19 patients. While CytoSorb demand is likely to remain strong in the second quarter, we think the demand would likely weaken, extending through the rest of 2020, as the pandemic subsides resulting in lower revenues during this time. However, if there is a second and third resurgence from this virus, we could witness demand shooting up again for CytoSorb. Also, noteworthy as it relates to product sales reaching a new record, is that this a foreign exchange headwind negatively affected sales by $237k (or ~3% of product sales). Meanwhile, grant income was $551k in Q1. While we expect additional (and near-term) opportunities to score future grants, we expect overall revenues to soften a bit by decreasing grant revenues as grant-related activities have been suspended temporarily due to quarantine and physical distancing requirements because of COVID-19.

Product gross margins for Q1 were 76%, higher from 74% in Q1 2019 but lower from 80% in Q4 2019 due to increased costs required to rapidly scale-up CytoSorb production. We expect gross margins to widen to 80% and beyond as production efficiencies improve and once the initial costs associated with the increases in production capacity are met with. We currently model full year 2020 product margin of nearly 80%, or ~300 basis points better than 2019.

Meanwhile, grant income continues to help subsidize R&D as well as providing additional validation of CTSO’s technology (particularly given the list of contracts has continually grown). We think CTSO will continue to look to monetize the successes of these grant-funded studies with further label extensions and in the development of new technologies (such as HemoDefend). That could provide additional optionality in terms of commercial programs that CTSO could pursue. As we explain below, we think HemoDefend may be a dark horse that is mostly being overlook by investors and the significance of continued development progress should not be underestimated.

Operating expenses increased slightly on a yoy basis as compared to Q1 2019. Operating expenses, which included about $150k worth of non-cash stock compensation, were $8.8M (including ~$0.8M in stock comp) in Q1 2020, compared to $7.7M (including ~$2M in stock comp) in Q1 2019. R&D spend decreased by ~$1M as compared to Q1 2019 due to the temporary pause in the REFRESH 2-AKI study that resulted in lower clinical trial costs. This decrease was offset by an increase in expenses related to increase in headcount of the sales and marketing staff. The direct sales force (including support staff) now stands at 79 people. While operating expenses have increased, these investments are expected to result in steepening of the revenue and, eventual, earnings curve.

Cash used in operating activities was $3.2M in Q1 2020 as compared to $4.2M in the comparable prior year period. The company exited the quarter with a strong cash position of approximately $26M. Of this amount, approximately $13M was raised by utilizing the ATM facility. The company also received approximately $1M in cash from the approved sale of NOLs and R&D credits from the State of New Jersey in the Q1 2020. Management has guided that the cash runway is likely to extend well into 2021. As of May 1, 2020, the company had about 41M common shares o/s on a diluted basis.

Operational Update:

CytoSorb has received multiple label expansions till date…

In 2018, CytoSorb received two label expansions, including increasing treatment time from six hours to 24 hours and use of the device for the removal of bilirubin and myoglobin in the treatment of liver failure and trauma, respectively. The indication for removal of bilirubin and myoglobin have further expanded its use. While CE Mark meant that clinicians had wide discretion in what conditions to employ CytoSorb, this label expansion adds credence for use in these specific indications. Additionally, it can provide a reimbursement benefit related to on-label (as opposed to, previous, off-label) use for these conditions.

CytoSorb approved in Europe for removal of anti-platelet drugs…

Earlier this year, CytoSorb was approved in the E.U. to remove ticagrelor, a blockbuster anti-platelet drug, during cardiopulmonary bypass in cardiothoracic surgery, with the goal of reducing the risk of costly and potentially fatal perioperative bleeding.

Adenosine diphosphate (ADP) receptor inhibitors (also known as P2Y₁₂ receptor inhibitors) are recommended either as monotherapy or as part of anti-platelet therapy for the prevention of cardiovascular events after cardiac surgery. The literature indicates that undergoing cardiac surgery while taking antiplatelet agents is associated with increased bleeding and other adverse events. Ticagrelor (Astra Zeneca - Brilinta®, Brilique®) is one of the most commonly used anti-platelet drugs used in patients with acute coronary syndrome or in those who have stents. Ticagrelor is preferred in surgeries as it has a favorable safety profile and less response variability compared to other types of ADP inhibitors. Ticagrelor, marketed by Astra Zeneca and sold as Brilique® in the E.U. and Brilinta® in the U.S., with projected worldwide sales of more than $1.5 billion in 2019, with more than half of sales coming from Europe, emerging markets, and rest of world. Recently, CytoSorb was approved in the E.U for removal of rivaroxaban (Xarelto®- Bayer, Jansenn/Johnson & Johnson), a widely-used Factor Xa inhibitor and novel oral anticoagulant (NOAC), during cardiothoracic surgery requiring cardiopulmonary bypass. Cumulatively, more than 40 million people worldwide have been prescribed the drug. Rivaroxaban is used globally, with approximately $4.5 billion in 2019 sales outside the U.S. driven by Europe and Asia, and 2019 U.S. sales of $2.3 billion.

Apixaban and rivaroxaban are in the class of antibiotics called factor Xa inhibitors. CytoSorb can remove that too. Portola Pharma's Andexxa is only effective during the time of infusion. It also has a blackbox warning of being pro thrombotic, which is negative in patients undergoing cardiac surgery and also is a very expensive drug. we've demonstrated in a study that came out last year, showing that even taking into consideration the cost of the device that use of the device per patient would save hospitals a projected $5,000.

The patients requiring an emergent cardiac surgery such as coronary artery bypass graft surgery (CABG) are at high risk of bleeding and associated complications, and patients who could wait for the physiologic elimination of ticagrelor but would be at risk of ischemic complications are ideal candidates for CytoSorb device. The major risk of ADP receptor inhibitor use is bleeding; timely discontinuation of which is necessary when patients are undergoing cardiac surgery. There are no approved or cleared therapies in the U.S. to rapidly reverse the effects of, or remove ticagrelor in these patients. Of the three major P2Y₁₂ platelet inhibitors – clopidogrel (Plavix®, Bristol-Myers Squibb Co. and Sanofi SA), ticagrelor, and prasugrel - it is currently believed that only the effect of ticagrelor is theoretically reversible. Though Plavix is more frequently prescribed and inexpensive, it is inferior in working. However, because of the absence of an effective reversal agent, this safety advantage has never been realized. The company reported the results of an observational study that further supported this proposition with a compelling case that showed the potential for a significant reduction in bleeding risk, and another study highlighting an approximate $5,000 projected costs savings, when CytoSorb is used with patients on ticagrelor undergoing emergent cardiac surgery, in comparison to patient outcomes when CytoSorb was not used. CytoSorb makes for a compelling proposition in reducing bleeding risk and improving patient outcomes.

CytoSorb can rapidly reduce rivaroxaban during a typical CABG surgical procedure, so that waiting 2-3 days off the drug to allow the anticoagulant to be eliminated from the body is no longer necessary. According to the literature, an estimated 8-10% of patients on anticoagulant therapy will require emergent surgery at some point in their lifetime. Historically, in the case of cardiac surgery where the risk of postoperative bleeding is high, a 48-hour washout period is recommended for elective surgery. By reducing rivaroxaban during surgery, CytoSorb has the potential to eliminate the need for this delay, while decreasing the pro-thrombotic risks of being off of these agents, while also reducing bleeding complications. For example, in a retrospective case series of patients (n=12) who required emergency cardiac surgery on rivaroxaban and could not delay surgery, the incidence of bleeding events (e.g. need for blood transfusions, re-thoracotomy rate, surgical drainage volume) and ICU and hospital time were all lower in those treated with CytoSorb compared to those that were not.

Since CytoSorb is being used in several cardiac surgery procedures, we believe this is another reason for health centers to have it stocked. Further, CytoSorb is the only device that reduces both ticagrelor and rivaroxaban, with a shelf life of 3 years at room temperature. Integration of CytoSorb into a cardiopulmonary bypass circuit for intraoperative use is seamless. We believe CytoSorb has the potential to replace expensive, and rapidly expiring biologic antidotes. Therefore, incorporating it into the standard practice of care for different classes of anti-thrombotics is likely to be cost effective. We believe this approval will serve as a springboard for CTSO to expand across the E.U. and to other important markets.

In April 2020, CytoSorb received the Breakthrough Designation from the FDA for the use of the device to reduce ticagrelor during urgent or emergent cardiac surgery. We think the approval decision from the European authorities will pave the way for entry into the U.S. market. CTSO is currently working on a plan to explore a path forward in the U.S. The additional supportive data from investigator-initiated studies from Europe could help bolster the approval process. Management is seeking advice from the FDA.

Valuation

We expect to see continued strength in product sales growth through 2020. We see several catalysts that begin to make an initial impact such as new product launches, product label expansion (including recently for S use in anti-thrombotic agent removal), Switzerland dedicated reimbursement, launch in new direct sales and FMC co-marketing territories, and potential new partnerships and government grants. The greater impact over the next 12 - 18 months could come from accelerating adoption in Germany, greater contribution from Fresenius (including from co-marketing agreement), maturation of existing distribution relationships and expansion of the overall sales footprint, and the release of additional clinical data supporting the utility of CytoSorb in a several indications.

We assume increased awareness and visibility of CytoSorb results in a greater rate of burgeoning interest materializing during the year. Assuming positive results from company-sponsored and investigator-led studies as well as supportive feedback from hospitals and critical care professionals, we think 2020 could mark the beginning of a significantly greater ramp in commercial sales. Given the steeper than anticipated growth rate and several new catalysts coming online, we have made upward revisions to our financial forecasts.

We show CTSO nearly reaching GAAP full-year operating profitability in our out-year (2021). Based on our updates to our 10-year DCF model, which uses a 10% discount rate and a 2% terminal growth rate, the shares are valued at approximately $15. Our model and assumptions will be updated commensurate with news flow which could also influence the valuation. As it is now, we value the company at $15/share, implying upside to the current share price.

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