CTSO: CytoSorbents Potential for High Margin Revenue Growth Supports Price Target of $4.00

    Date:

    By Thomas Kerr, CFA

    NASDAQ:CTSO

    READ THE FULL CTSO RESEARCH REPORT

    1st Quarter 2024 Financial Results

    CytoSorbents (NASDAQ:CTSO) reported 1st quarter 2024 results on May 9th and results were broadly in line with expectations. For the 1st quarter of 2024, total revenues increased approximately 4.0% to $9.8 million. Total product sales were $9.0 million, an increase of 14.0% from the 1st quarter of 2023 and an increase of 22.0% from the 4th quarter of 2023. Grant income was $797,000 in the 1st quarter of 2024 compared to $1.5 million in the prior year period due to the completion of certain grant programs.

    Product gross margin in the 1st quarter increased to approximately 76% compared to 68% in the prior year period primarily due to greater efficiencies being realized at the new manufacturing facility in Princeton, New Jersey. This gross margin excludes a one-time, non-recurring inventory adjustment of approximately $304,000 which was recorded in the quarter.

    During the 1st quarter, research and development expenses were approximately $2,248,000 compared to approximately $4,214,000 for the 1st quarter of 2023. This decrease was due to a decrease in clinical trial costs of approximately $911,000 related to the completion of the STAR-T trial in 2023, a decrease of approximately $850,000 in start-up expenses related to the new facility that was incurred in the 1st quarter of 2023, a decrease in non-grant related salaries of approximately $127,000, and a decrease in other non-grant related research and development activities of approximately $78,000.

    Net loss for the 1st quarter was ($6.3) million which was an improvement from a net loss of ($7.3) million in the prior year period. Operating cash flow was a use of cash of ($4.8) million. The company’s burn rate is expected to improve throughout 2024 as cost saving measures take effect and the company’s product sales continue to increase total revenues.

    Update on STAR-T Trial

    Brilinta® (ticagrelor, AstraZeneca) is one of the leading anti-thrombotic drugs used as part of dual-antiplatelet therapy in patients with acute coronary syndrome. However, up to 10% of these patients will need to undergo CABG surgery and risk serious bleeding complications if the surgery is performed within the first few days from the last ticagrelor dose. Waiting in the hospital to washout the drug over the span of 3-5 days is the only acceptable alternative but comes with potential clinical risk for complications while waiting, and higher added hospital costs. The goal of DrugSorb-ATR is to allow patients to safely get the critical CABG surgery they need without requiring extensive drug washout. This was investigated in the U.S. and Canadian pivotal STAR-T (Safe and Timely Antithrombotic Removal of Ticagrelor) randomized controlled trial.

    April 2024 Cardiothoracic Surgery Conference STAR-T Presentation

    On April 28, 2024, the company announced that data from the pivotal STAR-T randomized controlled trial were presented for the first time publicly by Principal Investigator Dr. Michael Mack during a Breakout Presentation at the American Association for Thoracic Surgery (AATS) Annual Meeting. This event, held in collaboration with the Society of Cardiovascular Anesthesiologists (SCA), took place in Toronto, Canada. Previously, the data were under embargo, as required by AATS to be eligible for presentation at the conference, one of the world’s most prestigious cardiothoracic surgery events.

    Following the event, Principal Investigators Drs. Mack and C. Michael Gibson discussed the results of the study, stating that the results demonstrated a reduction in fatal and severe surgical bleeds and chest tube drainage in a WIN ratio analysis.

    The link to the interview can be found here.

    This follows the initial disclosure on December 28, 2023, when the company announced an update on the primary safety and effectiveness endpoints and the final independent Data and Safety Monitoring Board (DSMB) analysis of the study. The DSMB performed the final review of the full unblinded data on all 140 patients in the STAR-T trial and concluded there were no issues with device safety, thus meeting the primary safety endpoint of the study. The company also performed the initial data analysis on the primary efficacy endpoint of STAR-T, which was a hierarchical composite endpoint covering the full spectrum of perioperative bleeding including:

    • Fatal bleeding within 48 hours

    • Universal Definition of Perioperative Bleeding (UDPB ≥ 2)

    • Chest tube drainage in 24 hours

    Based on this analysis, the study did not meet the primary effectiveness endpoint in the overall patient population that underwent different types of cardiac surgeries. However, the study demonstrated reduced bleeding complications in patients in the prespecified isolated coronary artery bypass graft (CABG) surgery population, which represented more than 90% of the overall study population. Due to the conference data embargo, no data were presented at that time.

    New Data Presented for the First Time

    In the AATS presentation, the use of DrugSorb-ATR resulted in a statistically significant reduction (as calculated by the WIN ratio) in the severity of perioperative bleeding. This was measured by a prespecified alternative composite primary efficacy endpoint consisting of fatal bleeding, UDPB ≥ 3 (severe bleeding), and 24-hour chest tube drainage in the isolated CABG per protocol population.

    For CABG patients with moderate bleeding events (UDPB = 2), investigators noted that moderate bleeders in the DrugSorb arm were less serious than moderate bleeders in the control arm. Patients in the DrugSorb-ATR arm required 50% fewer units of blood transfusion products, with a total mean transfusion volume of 537 mL in the DrugSorb-ATR arm versus 1,066 mL in the control arm (p=0.025). In a post-hoc sensitivity analysis, Principal Investigators conducted a blinded re-adjudication of all CABG patients with at least moderate bleeding events, aiming to identify patients with real clinical evidence of bleeding versus those receiving prophylactic transfusions (reclassified to mild bleeding). When this analysis was performed, the data achieved statistical significance in the original composite endpoint including moderate to severe bleeding (UDPB ≥ 2) as well as the alternative composite endpoint including only severe bleeding (UDPB ≥ 3).

    Additionally, in an exploratory “major bleeding” analysis in patients with either severe UDPB events (UDPB ≥ 3) or 24-hour chest tube drainage > 1L, there was a 73% relative reduction, or 16% absolute reduction, in major bleeding in the DrugSorb-ATR arm (6%) versus control (22%).

    This indicates a Number Needed to Treat (NNT) of six patients, meaning that for every six patients treated, one severe bleed was prevented. This was noted to be a compelling number.

    The reason for the original missed primary endpoint was clarified with the definition of the “per protocol” population, which excluded patients undergoing “other surgeries” or with major protocol deviations. Despite being a randomized trial, there was an imbalance in the number of non-CABG “other surgeries” in the DrugSorb-ATR arm (10.6%) versus control (4.5%). Patients undergoing “other surgeries” had worse pre-operative risk scores, longer surgeries, longer cardiopulmonary bypass times, more chest tube drainage, more moderate to severe perioperative bleeding, and longer ICU and hospital stays. Additionally, there were more patients with major protocol deviations in the treatment arm (12.1%) versus control (4.5%), with the most common major protocol deviation being acute normovolemic hemodilution (ANH) in 8 of the 11 cases. According to Dr. Mack, ANH is an excluded practice in the study as it removes up to a liter of blood containing ticagrelor at the beginning of the procedure, then transfuses it back into the patient after surgery, circumventing DrugSorb-ATR’s removal of the drug and increasing the risk of perioperative bleeding.

    The investigators concluded:

    • Primary safety endpoint was met

    • Primary efficacy endpoint was not met in the all-comer surgery population

    • Severe bleeding efficacy endpoint was met in the I-CABG per protocol population

    • In isolated CABG patients, the intraoperative use of DrugSorb-ATR was associated with:

    o Reduced bleeding severity by either UDPB grade or chest tube drainage volume

    o NNT of 6 to prevent a major bleed (UDPB 3 event or >1 L chest tube drainage

    o Overall favorable benefit-to-risk profile

    Additional Commentary on FDA Approvals

    The U.S. Food and Drug Administration (FDA) has typically shown regulatory flexibility in approving novel therapies, encompassing medical devices, drugs, and biologics, particularly those that address significant unmet medical needs. This flexibility is evident in cases where pivotal trials have either missed primary endpoints or demonstrated marginal efficacy.

    In a retrospective cross-sectional analysis published in JAMA Internal Medicine in 2021, Johnston et al. scrutinized FDA approvals from 2016 to 2020 for high-risk therapeutic medical devices that did not meet the primary endpoints of pivotal studies. These devices underwent evaluation through the FDA’s premarket approval (PMA) regulatory pathway, known for its stringent requirements in assessing device safety and efficacy. The analysis revealed that, during this period, 13.1% of the 107 approved high-risk therapeutic devices did not meet at least one pivotal study primary endpoint. More than half of these cases were related to cardiovascular or cardiothoracic surgery applications. It is important to note the FDA’s tendency to justify approvals based on post hoc analyses, success in alternative primary endpoints, and positive trends in secondary outcome measures. In addition, the FDA mandated a post-approval clinical study for 11 of these device approvals. Recently, the FDA granted approval for Medtronic’s radiofrequency renal denervation system, Symplicity®, for the treatment of uncontrolled adult hypertension, despite a slim 7-6 majority vote against its risks and benefits by an FDA advisory panel.

    This pattern extends to drugs and biologics as well. In another publication in JAMA Internal Medicine in 2023, Johnston et al. reported that between 2018 and 2021, 10% of the 210 new FDA drug approvals missed one or more primary efficacy endpoints in pivotal trials. All these therapies were either first-in-class or designated orphan drugs (affecting < 200,000 patients per year in the U.S.). The FDA’s rationale for approval often included success in other pivotal studies, positive findings from secondary or exploratory endpoints, and favorable post hoc analyses. Similar to the medical device space, many approvals necessitated post-market studies to address lingering clinical uncertainties.

    Based on information released by CytoSorbents, the DrugSorb-ATR device appears to be safe and relatively low risk, showing clinical benefit in the majority of patients in the study (isolated CABG population), representing the typical expected use-case for DrugSorb-ATR. Considering its designation as an FDA Breakthrough Device for this application, its “first-in-class” status, its apparent favorable benefit-to-risk ratio, and its potential to address a major unmet medical need, we believe it aligns well with the profile of other FDA-approved therapies that have encountered challenges with pivotal trial primary endpoints.

    If CytoSorbents chooses to submit a regulatory application, and provided further data analyses from the study are corroborative of device efficacy, we anticipate a receptive FDA audience and the potential for approval, albeit with the requirement for a post-market confirmatory study. If approved, we believe the narrower label for use only in isolated CABG will not materially impact DrugSorb-ATR’s total addressable U.S. and Canadian market and will likely increase adoption of CytoSorb internationally for this E.U. approved indication.

    Valuation and Estimates

    Our 2024 revenue estimate is $39.5 million and our 2024 EPS estimate is a loss of ($0.38) per share. We believe 2025 revenues could reach $44.1 million.

    The company has implemented significant cost cutting measures to reduce the cash burn, including a 15% reduction of headcount, termination of non-core R&D programs, termination of the STAR-D trial to focus on STAR-T, and a third consecutive year of salary freezes for executive management. The benefit of these cost cuts on operating expenses, particularly the headcount reductions, will become more apparent going forward as notice periods and severance payments are completed. In addition, the company has worked diligently to optimize manufacturing efficiencies. In the 1st quarter of 2024, CytoSorb product gross margins were 76%, less a one-time inventory adjustment taken in the quarter. In the near-term, the company expects product gross margins to be more consistently in the 75-80% range on a quarterly basis in 2024 compared to an average of 72% in 2023.

    We are still confident the company can generate substantial levels of free cash flow over time, particularly if the approval and commercialization of DrugSorb-ATR is successful and we maintain our price target of $4.00 per share.

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