New FDA sterilization rules will push hospitals to TSO3, says Canaccord Genuity

Strict new FDA requirements are making TSO3 (TSO3 Stock Quote, Chart, News: TSX:TOS) look like a winner, says Canaccord Genuity analyst Neil Maruoka.

Earlier this month, in response to various superbug outbreaks it blamed on issues with reprocessing certain medical devices, the U.S. Food and Drug Administration released a list of devices that the agency will require validated instructions for use and also reported validation data regarding cleaning, disinfection and sterilization in premarket notification submissions.

“In recent years, FDA noted that there have been significant changes in the “knowledge and technology” involved in reprocessing reusable medical devices,” noted Zachary Brennan, in a piece covering the issue for the Regulatory Affairs Professionals Society. “But there’s also been a push toward more complex reusable medical device designs that are more difficult to clean, disinfect and sterilize.FDA said it believes that the devices included in its list “currently have the greatest risk of infection transmission and inadequate performance if not adequately reprocessed,” and the agency may reevaluate or revise the list In the future.”

Maruoka says this development paves a clearer path for the adoption of TSO3’s sterilization products.

“While not a near-term impact, we believe this means that the FDA has recognized advancements in reprocessing technologies and will now require clear validation of reprocessing data in an effort to raise safety standards when using these devices,” the analyst says, “In light of recent deadly outbreaks of antibiotic-resistant hospital-acquired infections, the sterilization of such devices is paramount, in our view, and could drive adoption for VP4 in the longer term. With the only technology proven to sterilize certain complex flexible endoscopes, we believe that hospitals will eventually need to adopt VP4, and TSO3 remains positioned to be a leader in the low-temperature sterilization market. This action by the FDA fits with our thesis that, eventually, hospital customers can’t afford not to use TSO3’s sterilizer. For investors with a two to three-year time horizon, we believe that these regulatory changes will be a key driver of longer-term market share growth.”

In a research update to clients today, Maruoka maintained his “Buy” rating and one-year price target of $5.25 on TSO3, implying a return of 86.2 per cent at the time of publication.

Maruoka thinks TSO3 will generate Adjusted EBITDA of negative $1.3-million on revenue of $25.4-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $15.8-million on a topline of $62.8-million the following year.

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