Summary:
TSO3 Inc.
Commercializing Best-in-Class Sterilization Technology
OUR TAKE: We have initiated coverage on the common shares of TSO3 Inc. (TSO3) with a Sector Outperform rating and a one-year target price of C$4.50 per share ($3.50) (see report here). Our target price is based on a 2018E DCF valuation of our base case scenario of C$4.57 ($3.47) per share – rounded down to C$4.50 per share ($3.50).
KEY POINTS
We believe a number of factors make TSO3 an attractive investment: (1) its
STERIZONE VP4 (VP4) low-temperature sterilization system was approved by the U.S. Food and Drug Administration (FDA) in December 2014 after years of negotiation; (2) the VP4 offers best-in-class performance compared with other low-temperature sterilization systems; (3) our belief that the VP4 will be approved to sterilize duodenoscopes, devices that have come under increasing scrutiny from the FDA, CDC, and the U.S. Senate because of their role in the transmission of superbugs; and (4) its partnership with Getinge Group, the world’s leading infection control company, for the promotion, distribution, and sale of the VP4.
Low-temperature sterilization is an attractive large market. We believe the low- temperature sterilization market is worth around $1.5 billion annually including both equipment sales of about $450 million and consumables sales of more than $1 billion.
We think TSO3’s STERIZONE VP4 sterilization system offers best-in-class advantages over existing competitor systems, which should drive market demand. The VP4 uses both hydrogen peroxide (H2O2) and ozone (O3) to enhance its sterilization efficiency. TSO3’s unique technology allows the VP4 to sterilize larger loads of medical equipment than its competitors, which increases throughput and lowers costs for users. Additionally, the VP4 is the only system approved to sterilize multi-channel flexible endoscopes which we believe will become an important differentiating feature, particularly if TSO3 obtains FDA approval to sterilize duodenoscopes in the VP4.
Getinge is a world class partner. TSO3 signed an exclusive distribution agreement with Getinge AB, a leader in sterilization, which provides the global infrastructure to compete with established competitors.
Duodenoscope sterilization approval is a likely catalyst for upside to our outlook.
Although the VP4 currently has advantages over the competition that will likely create initial market demand for the product, we believe FDA approval to sterilize duodenoscopes could lead to material upside to our forecasts.