TSO3 Goes it Alone. But For How Long?

This week, Quebec City based, TSO3 (TSX:TOS), announced a $10 million bought deal financing co-led by Desjardins and Canaccord.

As I discussed in my December piece for Cantech, this financing shouldn’t really come as a surprise given TSO3’s plans to independently initiate commercial activities to support the U.S. launch of their recently FDA cleared Sterizone sterilizer. Initiating commercial activities requires time, people, and most importantly money.

On its January investor update call, TSO3 introduced two new senior managers brought on to support these commercial endeavours. So the people are falling into place, and now with an extra $10 million, to go along with their estimated $5-6 million on the balance sheet, the cash is in place as well.

Tired TSO3 investors reacted with frustration after the financing announcement, trading TSO3 down below the issue price. Remember, TSO3 investors have patiently waited four plus years to finally get Sterizone cleared by FDA. Many likely assumed that once FDA clearance occurred that a commercial partnership would follow in short order. TSO3 perhaps fuelled some of these expectations by announcing a LOI with Getinge Infection Control in 2012 and engaging Desjardins to evaluate the company’s strategic alternatives in 2013.

On its recent investor call, the company’s CEO Ric Rumble remained adamant that finding channel partners remains a top priority for the company. I don’t doubt that it is a priority, and that they have substantial interest, but clearly the offers they are seeing are not substantial enough to deter them from diluting to support their own independent commercial endeavours.

I don’t believe TSO3 has ambitions to become a global player in the sterilization market. I believe the end game is an exit.

This decision to dilute and press ahead with an independent commercial launch, while continuing partnership discussions, may frustrate investors but it could end up being the right decision. Time and money were working against TSO3. The company clearly knew that a deal was not imminent when it received its FDA 510(k) clearance and that its negotiating position would only be hurt by waiting for the right deal to come.

So in the press release announcing the FDA clearance thecompany stated, “With the clearance now in hand, the company will focus its energy on a ramp-up of operations and initiate targeted commercial activities in the U.S. As commercial discussions with potential partners are still under way, TSO3 expects to manage the initial product launch directly as a way to maximize shareholder value while it finalizes its strategic review.” In other words, “We aren’t satisfied with the deal(s) on the table, so rather than stand still and wait/hope for better offers, we will demonstrate the commercial value of our product independently.”

I don’t believe TSO3 has ambitions to become a global player in the sterilization market. I believe the end game is an exit. The company is going about building a modest marketing, sales, and training team to demonstrate the commercial worth of Sterizone. I suspect they will sign non-exclusive agreements with regional or smaller distributors in the U.S. to work alongside the TSO3 team for the launch. All the while, the big sterilization companies, 3M, Getinge, and Steris will be watching.

If the Sterizone launch is successful, I suspect they will pounce.