RE:NB note TSO3 Inc TOS (TSX) C$2.86; Stock Rating: Outperform Target: C$5.50 Risk Rating: Above Average
FDA Requirement for Sterilization of New GI Endoscope Scope Models Sterilization of New or Modified GI Scopes Seeking FDA Clearance
The FDA has announced that as of August 2017, several new reusable medical devices, including new or modified existing GI endoscope models, are required to show sterilization data when seeking FDA clearance. This requirement is a step closer towards the wider adoption of sterilization for GI endoscopes and could, ultimately, lead to increased adoption of TSO3’s VP4 sterilizer.
The caveats are that 1) in-use GI scope models are currently grandfathered and not required to show sterilization data and 2) few new GI scopes models are introduced into the market. For example, in the last 6 years, we were able to identify only 2 new colonoscope models and one modified duodenoscope model. TSO3 – The Only Realistic Option for Sterilization of GI Endoscopes
TSO3’s VP4 Sterilizer is the only sterilizer that has been specifically cleared by the FDA for the sterilization of advanced GI endoscopes and stands an excellent chance to capture incremental market share from this new requirement. The only other acceptable, but not FDA-validated, alternative is ethylene oxide, a toxic gas with strict limitations on its use. Furthermore, an investigation of the US Senate described instances where ethylene oxide treatment of duodenoscopes did not achieve sterilization. TSO3 plans to seek and receive FDA clearance for the sterilization of duodenoscopes by July and December 2017, respectively. No change to outlook and forecasts
We re-iterate an Outperform rating and $5.50 target price derived via DCF analysis assuming a 12.5% cost of equity, terminal growth of 2% and 9x EV/EBITDA terminal multiple versus 2019e EV/EBITDA of ~10x for large cap low temperature sterilization companies (the discount multiple is on account of TSO3’s early growth stage).