Downgrade, as reported by Globe and Mail Though he believes TSO3 Inc. (TOS-T) has more flexibility after its revised agreement with Getinge Infection Control AB to co-market its VP4 low-temperature sterilizers in North America, Desjardins Securities analyst Frederic Tremblay said he's moving to the sidelines on the stock, awaiting more visibility on its demand pipeline.
Mr. Tremblay downgraded the Quebec City-based company to "hold" from "buy."
On Thursday, TSO3 announced changes to its distribution deal with Sweden-based Getinge. Under the revised agreement, TS03 will sell directly in Canada and the United States. It will also repurchase at least 100 sterilizers for $3.3-million, with an initial order of 30 units. Getinge will continue to sell its inventory in North America and the rest of the world.
"With this new agreement, TSO3 can expand coverage (ie sell to hospitals which were not part of Getinge's targeted list)," said Mr. Tremblay. "Importantly, the company's direct sales team now has full control over the messaging and we expect marketing to emphasize themes that strongly resonate with end users. While the slower-than-anticipated product penetration had thus far been largely attributed to the distributor, the focus now turns to TSO3. Execution will be key."
"We have limited visibility on the pipeline of opportunities for TSO3's direct sales team at this point. In addition, TSO3 and Getinge continue to negotiate, and the agreement will terminate on Aug. 1, 2018 unless extended by mutual agreement."
With his downgrade, Mr. Tremblay lowered his target price for TSO3 shares to $2 from $4. The average among analysts is $3.04.
"We have increased the discount rate in our DCF [discounted cash flow] analysis to 15 per cent from 12 per cent to reflect limited visibility around the pipeline for direct sales and uncertainty around the relationship with Getinge post August 2018," he said. "Combined with our revised forecasts and updated FX rate, this results in a target decrease to $2.00 from $4.00. In the context of low visibility, we are moving to a Hold–Above-average Risk rating (was Buy–Above-average Risk) and would likely return to a more constructive view if we saw indications of early success of TSO3's direct sales efforts and FDA approval of TSO3's filing to sterilize duodenoscopes."