Zacks Small Cap Research – CTSO: CytoSorbents Expects Significant Gross Margin Expansion in 2024. – Technologist

By Thomas Kerr, CFA

NASDAQ:CTSO

READ THE FULL CTSO RESEARCH REPORT

For the full year 2023, total revenues increased approximately 5.0% to $36.3 million. Total product sales were $31.1 million, an increase of 6.0% from 2022. 2022 sales benefitted from $0.7 million in other non-CytoSorb sales and $0.3 million in COVID-19 related sales that did not recur in 2023. Core (non-Covid-19 related) CytoSorb sales grew 10% in 2023. Grant income was approximately $5,2 million in 2023 compared to approximately $5.3 million in 2022, a decrease of 1.0%.

Product gross margins increased to 72% from approximately 70% in 2022. The net loss in 2023 was ($28.5) million, or ($0.64) per share.

In the 4th quarter of 2023, total revenue was $8.7 million compared to $9.4 million in the prior year period, a decrease of approximately 8%. Total product sales were $7.3 million in 2023 versus $7.6 million in the the 4th quarter of 2022, a decrease of approximately $0.3 million or 4%. Core CytoSorb sales in the 4th quarter of 2023 were $7.3 million compared to $7.4 million in the 4th quarter of 2022, a decrease of approximately $0.1 million or 1.0%.

CytoSorbents (NASDAQ:CTSO) provided additional color on its three main areas of sales and distribution:

International Direct – This sales division, which represents 14 countries excluding Germany, showed strong sales growth increasing 27% to approximately $6.0 million. This represented 19% of total product sales in 2023.

Distributor and Partner – This sales division, which represents more than 60 countries, grew 18% (excluding U.S. distributor sales in 2022) in the first three quarters of 2023. Based on a stand-alone pump initiative that is expected to catalyze sales of CytoSorb in countries with less developed dialysis capabilities, the company had budgeted higher growth in the 4th quarter for this division. For a number of different reasons, it became clear that Nikkiso’s PureAdjust® hemoperfusion machine was not the long-term solution for the company’s stand-alone pump initiative and it was mutually agreed upon to not renew the distributor agreement in September 2023. The company pivoted to an alternative strategy, focused on the launch of its own hemoperfusion machine called PuriFi which is expected to launch later in 2024. Anticipation of this machine led to some order slippage from distributors to the new year, resulting in lower than expected 4th quarter sales. For the year, Distributor and Partner sales grew 9% (excluding U.S. distributor sales in 2022) to $12.1 million, which was 39% of 2023 product sales.

Direct Sales Germany – This is the company’s own direct salesforce to healthcare facilities in Germany.

Sales grew 3% to $13.0 million for the year, which represented 42% of 2023 product sales. German hospitals are still working through the effects of the COVID-19 pandemic with staff shortages, decreased hospital beds, fewer patients, and fewer elective revenue generating procedures. Notwithstanding this market backdrop, the costs and challenges that physicians and healthcare workers continue to face in the management of critical illness and cardiac surgery still exist. Given the numerous applications, both old and new, that the company’s products can help to address, and other initiatives such as its preferred supplier agreement with the largest private hospital networks in Germany, there is believed to be many opportunities to return to significant growth in the country.

The company pointed out that In July 2023, Germany’s federal and state governments issued a consensus white paper that could result in new laws that change how hospitals are funded. Government payments to hospitals would de-emphasize the DRG (diagnosis-related group) “lump sum” payment system that incentivizes revenue generation through more patients treated and procedures performed, and instead emphasize base payments focused on quality measures and appropriate patient care.

This is expected to favor a shift of routine operations and procedures to outpatient centers, consolidation of smaller hospitals into larger ones, and importantly, an increased focus of remaining hospitals on sicker patients, more complex operations such as cardiothoracic surgery and organ transplant, and on therapies that help reduce the severity of illness and help patients recover faster. This potential reform may favor CytoSorbents business over the long term.

The company announced that the pivotal STAR-T trial was selected for a Breakout Presentation at the American Association for Thoracic Surgery (AATS) Annual Meeting being held April 27-30, 2024 in Toronto, Canada. The conference is one of the world’s most prestigious cardiothoracic surgery events.

This year, the meeting will be in collaboration with the Society of Cardiovascular Anesthesiologists (SCA), who are often managing blood product usage due to intraoperative bleeding during surgical procedures. The conference is targeted towards cardiothoracic surgeons and physicians in related specialties; perfusionists; non-physician health care providers involved in the care of cardiothoracic surgical patients; as well as fellows, residents, and medical students in cardiothoracic surgery. These are the stakeholders who directly witness and need to manage the perioperative bleeding complications of their patients on blood thinners and who would use DrugSorb-ATR in clinical practice.

We now estimate 2024 revenues to be $39.5 million and our 2024 EPS estimate is a loss of ($0.34) 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 and the company expects CytoSorb product gross margins to be 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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