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CTSO: Product Sales Jump, Momentum Continues

By Brian Marckx, CFA

Q3 Financials: 
Strong Product Sales, Strong Gross Margin, Momentum Continues Into Q4….

CytoSorbents (OTC BB:CTSO) reported results for the third quarter ending September 30, 2013 on November 6th.  Total revenue was $881k, an all-time record and ahead of our $704k ($175k product sales, $529k grant revenue) estimate .  Of particular significance was that product sales, at $204k also set an all-time record, besting the previous record of $176k set in Q1 of this year.  On the earnings/update call management indicated that product sales are remaining relatively strong and are carrying momentum into Q4.  While we continue to expect that there's potential for some ongoing short-term volatility in product sales, we also believe that CytoSorbents' sales, education, and awareness building efforts have finally begun to lay at least the initial foundation for a certain level of base business.  Importantly, the recent product sales growth is not coming at the expense of margins with product margins at a beefy 71% in Q3, up from the mid 40% level in 2012 and the low 60% level in the first half of the current year.  Meanwhile, grant revenue was $677k which included receipts from both the DARPA grant as well as the U.S. Army Ph II SBIR grant.

Operating expenses were $1.1 million, compared to our $1.5 million estimate - although some of this difference is likely due to some R&D expense being captured in COGS related to the relatively substantial grant-funded activities.  Net income and EPS were ($1.5) million and ($0.01) compared to our ($1.9) million and ($0.01) estimates.

CTSO exited the quarter with $2.4 million in cash and equivalents.  Cash used in operating activities was $554k in Q3.

We think Q4 will be another relatively strong quarter with contribution from product sales (we ballpark $200k, which could be low given management's comments on the call) as well as from the DARPA grant, U.S. Army SBIR Ph II grant and the just scored NHLBI SBIR Ph I grant ($203k over 6 months) for HemoDefend.

We are maintaining our Outperform rating and $0.50/share price target.  See below for access to our full report on CTSO. 

Operational Update
Q3 was marked by several operational highlights including consummation of a distribution agreement with Biocon Ltd, India's largest biotech company with almost $470 million in annual sales.  On the call management talked about their visions for this partnership which gives Biocon exclusive distribution rights of CytoSorb in India and affords the opportunity to market their products together as a total treatment for sepsis (sort of a one-two punch) in that country.  Biocon's antibiotics, Imicelum and Penmer, can be used to target the primary infection and CytoSorb to treat the severe inflammation from cytokine storm.  Management noted on the call that Biocon's reps are now undergoing sales training related to CytoSorb, will be calling on key accounts shortly and that they expect a revenue contribution from Biocon starting in Q4 of this year.

CytoSorbents is also beefing up their own internal sales force, noting that they expect to have 7 reps detailing in Europe by the current year-end, up from 4 currently.  On the August business update call the company noted that their sales, penetration and utilization strategy had evolved from "casting a wide net" to one where they were now drilling down into different departments and to junior physicians within hospitals.  While management did not provide specifics into the early results of this strategy on Wednesday's call, they did indicate that this is showing promise, that more hospitals and departments within hospitals are using the device and that additions to the sales force will help facilitate these efforts.  The number of KOL's either interested in or actually using CytoSorb also continues to grow and now stands at over 100.

CytoSorbents also remains very active and focused on awareness building, which they view as a very important complement to their direct and distributor sales efforts.  The company attended and presented at several key industry conferences in Q3 in both the U.S. and throughout Europe (including Germany, France and Austria).  These have afforded both awareness building to potential customers as well as to potential partners - the latter which management noted continues to build momentum, for both CytoSorb and HemoDefend - and which they noted on the call they may have more to talk about towards the end of this year.

The company will be attending and sponsoring upcoming events as well and specifically noted that they will be holding "user meetings" - whereby they expect 15 or more speakers to present their experiences with using CytoSorb which will offer attendees first-hand feedback and should offer a compelling message about the utility of CytoSorb treatment.  In the same vein, CytoSorbents continues to build their case study database with additional success stories of how CytoSorb was introduced with critically ill patients with positive outcomes.

CytoSorbents also provided an update on the other pillars to driving the message about CytoSorb's utility through real-world use, that is the investigator initiated studies and the European dosing study.  There are now 26 investigator initiated studies in early stages, up from 18 a few months ago and three of these studies have begun enrollment.  These studies will run a wide gamut of medical complications including sepsis, trauma, surgery, pancreatitis, organ failure and acute respiratory failure.  The company expects to have initial data from some of these studies in the first half of 2014.  Management also indicated that the European dosing study is progressing on-track, that safety appears good and that they expect to have preliminary data available by the current year-end.

And from a broader perspective, we think validation of the technology continues to be reinforced through an aggregate of the various early successes (albeit a number of which are somewhat intangible in nature) that CytoSorbents has had.  These include growing the number of KOL's interested in the technology, growing the number of studies and physicians/hospitals using the device, case studies detailing successful intervention with CytoSorb, increasing product sales (although still insignificant this appears to be firming up), scoring more gov't grants including follow-on fundings, IRB approval for U.S. human pilot study, recent distribution agreements (including Biocon and WMC Medical) and presumed interest from potential partners for both CytoSorb as well as HemoDefend.  As novel technologies such as CytoSorb and HemoDefend often necessitate confidence from several and often unrelated sources to facilitate acceptance, we view these early, small successes as meaningful progress towards driving adoption on a broader scale.

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 CytoSorbents Report

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