Biomedical Devices and Services | Research Alert
Highlights from the 2017 CG Global Growth Conference
TSO3 Inc. (TOS-TSX: C$2.88) Buy; C$5.25 Target
Neil Maruoka, MSc, MBA | Canaccord Genuity Corp. (Canada) | nmaruoka@canaccordgenuity.com | 1.416.869.3073
TSO3 presented at the 2017 CG Global Growth conference, with CEO Ric Rumble and CFO Glen
Kayll in attendance. Management highlighted the advantages of their VP4 low temperature sterilizer,
in particular the economic advantages to the hospital related to larger loads and a single cycle,
which significantly lower the risk of operator error. More important, however, is VP4’s ability to future- proof hospitals against potential regulatory changes and the possible requirements to end-sterilize flexible endoscopes. TSO3 reiterated its plans to pursue FDA clearance for the sterile reprocessing of duodenoscopes. We believe that seeking additional expanded claims for individual duodenoscopes has the potential to significantly expand the market opportunity for VP4. We expect these claims could be granted before the end of the year, which would provide two significant potential catalysts for the stock.
We continue to believe that VP4 has the potential to dominate the low-temperature sterilizer market. For those with a 2-3 year time horizon, we believe fundamentals remain intact and we would recommend investors accumulate the stock at these levels.
Investment Highlights
• Potential for additional expanded claims in 2017. The company believes it is prudent to seek additional expanded claims for individual duodenoscopes, and is working with a leading OEM to gain FDA approval for a specific device.
• The potential to be the dominant low-temperature sterilizer on the market. As a larger proportion of medical devices needs to be processed using low-temperature sterilization, we believe TSO3 is best positioned to ultimately replace legacy technologies like steam sterilization. This advantage is due, in our view, to VP4’s larger capacity and ability to process mixed loads relative to competitors.
• VP4 launch should be steady, but extended claims drive upside to our peak forecasts. Given the long sales cycle for low-temperature sterilizers, we do not expect the impact of broad extended claims to be felt for a few quarters. However, we believe the upside potential from this market opportunity is immense.
Valuation
We value TSO3 based on a DCF model, using a 13.5% discount rate and 3.0% terminal growth. Based on this analysis, we arrive at a target price of C$5.25, which represents an annualized return of 82.3% and continues to support our BUY recommendation.