T2 Biosystems Inc (TTOO)

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I see this as a buying opportunity for once, others still don't. Anyone else have an opinion to add to this analysis on Seeking Alpha story?

T2 Biosystems: Encouraging Q1 Report, Concerns Remain

https://seekingalpha.com/article/4260827-t2-biosystems-encouraging-q1-report-concerns-remain?v=1557243405&comments=show


Summary
The company is in possession of a breakthrough technology for the detection of sepsis (can detect pathogens including candida auris in under 4 hours).

Q1 revenue exceeded the high end of guidance and management reiterated that full year revenue should double as compared to 2018.

A possible near-term catalyst for upside is results of the T2Bacteria Panel pivotal FDA clinical trial to be published in a peer-reviewed medical journal.

T2Lyme Panel is currently in a pivotal Phase 3 trial with very encouraging results so far and a $700 million market being targeted.

Concerns remain, including cash burn, near-term financing, CRG loan (and its terms) and difficulty with getting hospitals and labs to adopt the technology in a timely manner.

Shares of T2 Biosystems (TTOO) have fallen by roughly 75% since the company's IPO was priced at $11 in 2014. Over the past 3 years, the share price has lost roughly two-thirds of its value and so far in 2019 performance is slightly in the red as well (-6%).

While I've been vaguely aware of the company and its intention to commercialize diagnostic products to speed up treatment of patients, previously I didn't find it attractive enough to do more research. However, ROTY member Osmium Research (a veteran of the medical device space) shared some interesting commentary on the name (highlighted revenue growth and what it would take for the company to become a success story). I found these remarks even more interesting considering that when discussing most medical device companies (especially on the diagnostic side), Osmium often tends to fall into the skeptic camp due to his vast experience in the field.

Let's take a closer look at the current situation to determine if recent quarterly highlights and other news warrant taking a position in this small cap concern.

Chart

Figure 1: TTOO daily advanced chart (Source: Finviz)

Figure 2: TTOO 15-minute chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the first chart (daily advanced), we can observe a sickening decline in the stock price in the second half of the year with multiple short-lived bounce attempts. In the second chart (15-minute), we can observe volume coming into the stock after a promising earnings report (potentially indicative of a good entry point).

Overview
In the presentation at Needham Healthcare Conference, management provided a solid overview of the core business, mission and future prospects. T2 is described as being in possession of a breakthrough technology for the detection of sepsis. The company's technology allows them to detect pathogens including candida auris in under 4 hours (C. auris making headlines again recently as Senator Charles Schumer urges federal government to declare public health emergency as it spreads across New York). T2Candida is already on the market, while T2Bacteria panel tests for blood-borne bacteria pathogens (cleared by FDA in late May of 2018 and now on the market as well).

Management states the company has the only system that detects pathogens direct from a blood draw (competition requires blood culture which could require days or weeks). The company projects 40,000 deaths preventable in the United States with T2 and management forecasts double-digit revenue growth (doubled revenue from 2017 to 2018, looking to do the same in 2019 and beyond).

Figure 3: Current empiric protocol versus T2 proposed protocol, time is of the essence (Source: corporate presentation)

Delays in treatment are a critical issue, as successful treatment of sepsis is dependent on the time it takes to get the patient appropriate therapy and thus save their lives. For every hour that goes by, the mortality rate goes up by 7 or 8%. To put this into context of our current healthcare system, sepsis costs U.S. healthcare around $27 billion (claims more lives than breast cancer, prostate cancer and AIDS combined). 1 in 5 surviving sepsis patients die within 2 years due to sepsis.

In addition to an important advantage in speed, T2 also boasts an impressive edge in accuracy (for bacteria 98% specificity/95% sensitivity, for Candida 99% specificity/91% sensitivity). Growing number of success stories for Candida panel are encouraging (health systems and hospitals reducing median stay by 7 days, avoiding unnecessary antifungal therapy in high % of patients, patients receiving the appropriate therapy in much smaller window of time).

As for the Bacteria Panel, studies (1400 patient samples across 11 hospitals) showed that T2 test was 2.5 times faster than blood culture (detected four more results than blood culture did). Management believes that target addressable market is in excess of $1.2 billion. An interesting fact is that one T2 instrument has the potential to generate $300,000 of revenue annually for the company (T2Dx platform placed in 175 hospitals with 89 contracts as of year-end 2018).

Figure 4: Reimbursement established across multiple care environments, economics attractive as adoption drives revenue (Source: corporate presentation)

As for the company's commercial strategy, management has chosen to focus on the United States, Europe and Middle East (30% international/70% US split so far). Commercial footprint is focused on the US with 16 sales representatives and 6 medical affairs liaisons, while internationally the company utilizes distributors.

Let's take a look at a few recent events to determine how they affect the bullish thesis.

Select Recent Developments
In late September, the company announced new data suggesting that its T2Lyme Panel is more accurate than other diagnostics identifying Borrelia infections in patients suspected of having early Lyme disease. A 2017 pre-clinical study in 21 patients with erythema migrans rash with suspected early Lyme disease assessed with multiple Lyme diagnostic devices. T2Lyme Panel was the most accurate compared to tissue culture with 78% positive percent agreement (PPA) and 100% negative percent agreement (NPA), which contrasts well to currently recommended diagnostic with 56% PPA and 92% NPA. Use of T2Lyme Panel resulted in less incidence of false positive results (in total has been evaluated against 558 negative samples with no false-positive result).

On February 27th, the company announced that the FDA granted Breakthrough Device designation for the T2Resistance Panel, which can detect 13 resistance genes from both gram-positive and gram-negative pathogens from a single blood sample without waiting for blood culture. Several genes detected by the panel have been identified by the Center for Disease Control as "Urgent Threat" for antibiotic resistance. One would hope that as a result of this designation and regular feedback from the FDA T2Resistance makes it to market in an accelerated fashion.

Lastly, on March 21st a regulatory filing from the company disclosed a catalog supply agreement with GE Healthcare Bio-Sciences for manufacture and supply by GE Healthcare of its proprietary superparamagnetic particles to be used in connection with the company's products. T2 Biosystems in turn was appointed non-exclusive reseller of said particles for life sciences research globally.

Other Information
At the end of 2018, the company reported cash and equivalents of $50.8 million and management guided for operational runway through March 2020. For the first quarter of 2019, the company reported total revenue of $1.8 million (exceeded high end of guidance by 20%) and product revenue rose 30% year over year to $1.3 million (reflecting an increase in testing volume and stable capital sales as more new customers selected the reagent rental model). The company also exceeded guidance with 11 T2Dx Instruments contracted as compared to prior guidance of 8 to 10 (more than double the 5 instruments for Q1 2018).

Despite the encouraging news, keep in mind that the company continues to burn cash at an alarming rate (operating margin was loss of $13.6 million and costs and expenses were $11 million). Weighted average shares outstanding rose by 23% to 44.3 million as a result of continued dilution.

Management reiterated full year guidance, with total revenue expected to double in 2019 as compared to $10.5 million in 2018 (Q2 revenue in the range of $1.5 million to $1.8 million reflecting continuing adoption of T2Bacteria and T2Candida Panel test sales and expanding T2Dx Instruments reagent rentals and sales in the U.S. and internationally). Management is guiding for securing of 70 to 80 T2Dx Instruments contracts in 2019 (12 to 14 in Q2). Operating expenses for Q2 are expected to be in the range of $10.5 million to $11.5 million. Based on these numbers I'd expect dilution via financing in the near term.

On the conference call, President and CEO John McDonough stated that as more customers who entered contracts in 2H 2018 come online during or after Q2, management expects T2bacteria panel volume and recurring revenue to ramp up (and that reagent rental program will account for the majority of new business in the US).

A possible near-term catalyst is results of the T2Bacteria Panel pivotal FDA clinical trial to be published in a peer-reviewed medical journal soon (currently accepted by top tier journal but embargo has yet to be lifted). Progression of the T2Lyme Panel (currently in pivotal Phase 3 trial) is also a significant growth driver considering the $700 million market being targeted. Also, keep in mind the company is partnered up with CARB-X to focus on drug-resistant bacteria and progress is ahead of schedule (expanding to include additional bacterial species and resistance markers).

As for institutional investors of note, Adage Capital Partners owns a small stake. Polaris Venture Partners disclosed a 4.2% stake and Goldman Sachs owns a 9.2% stake. History of some insider selling is not encouraging.

As for leadership, CEO John McDonough previously served as President at Cytyc Development Corporation (aided in expanding corporate revenue from $300 million to $750 million until it was acquired by Hologic for over $6 billion).

Final Thoughts
To conclude, T2 Biosystems is operating in an interesting space and truly creating value across the entire spectrum of healthcare (for patients, hospitals and system on the whole). From anecdotal information and clinical study data it appears the company is executing on its mission of getting patients on the right targeted therapy quicker, thereby reducing hospital stay, resistance and mortality. As a result, patient care is improving and this will be a fascinating story to continue following.

On the other hand, hospitals are very slow to change and the company likely has a difficult road ahead trying to convince them (and enough labs) to buy into this technology. As ROTY member Qj4714 put it, "T2 is better than blood culture, but is that enough for it to be game changer?" That's the big question at this point.

Given the current burn rate and low cash balance, not to mention the stock trading at a normal to rich valuation (11x price to sales TTM, 6 times price to forward sales), I cannot currently recommend a pilot position. The company still has a ways to go and a likely financing in the near term (break-even could be achieved in 2 years or so).

On the other hand, there should be a significant ramp-up in the second half of the year with revenues and near-term publishing of results of the T2Bacteria Panel pivotal FDA clinical trial in a peer-reviewed medical journal could provide a significant boost. The stock also has potential to be a "news runner" (see recent piece on more infections appearing in New York), as fear surrounding Candida auris and increasing rates of infection could make headlines and bring in momentum traders (as was observed with the Ebola stock bubble in 2014).

I look forward to revisiting after another quarter's progress and especially as the company gets a near-term financing out of the way.

Risks include dilution, slowing sales growth (unlikely in the near to medium term), disappointing data (i.e. for pivotal T2Lyme study, again unlikely) and drawn out timeline until the company can achieve break-even cash flow. Consider that the company also has a loan to CRG of $39 million or so (loan agreement requires certain annual revenue targets where the company is required to pay double the amount of any shortfall as an acceleration of principal payments and maintain a minimum liquidity amount). Competition in certain instances, such as from Accelerate Diagnostics' Pheno system, and the difficulty in getting hospitals to adopt the technology in a timely manner is also a factor to consider.

For our purposes in ROTY, I hope to revisit after a financing has taken place and we've seen a quarter or two of progress.