TSO3 Inc has an 87 per cent upside: Canaccord Genuity

There’s been some positive news as of late for medical instrument sterilization company TSO3 Inc. (TSO3 Stock Quote, Chart, News: TSX:TOS), says Canaccord Genuity’s Neil Maruoka. Nevertheless, in a Thursday research report to clients, the analyst maintains his “Speculative Buy” rating and $2.00 price target.

Last month, the United States FDA approved TSO3’s 501(k) submission for the terminal sterilization of flexible endoscopes using the company’s VP4 Sterilizer, giving clearance for their use. That led to the announcement this week of a deal with North Dakota’s Alru Health System, which now becomes the first facility to perform terminal sterilization of endoscopes in the US using the VP4.

“Our mission, to provide a sterile device for every patient, is what TSO3 works toward every day,” said R.M. (Ric) Rumble, TSO3’s President and CEO, in a press release. “The recent and highly publicized infection outbreaks associated with use of flexible endoscopes have highlighted the need for innovative approaches to reprocessing of these complex devices. We are pleased to celebrate this major milestone with Altru and are working with customers in the US and across the world that will soon be sterilizing their endoscopes using our advanced technology.”

Maruoka says that the purchase agreement “further validates” TSO3’s VP4 technology, while the FDA approval should be noted particularly, since it may pave the way to a broader market.

“While TSO3’s 510(k) submission was for a specific duodenoscope, we believe that the FDA has approved claims for all duodenoscopes, providing an exceptional marketing hook, in our view,” the analyst says.

At the same time, Maruoka argues that TSO3’s partnership with Swedish medical tech company Getinge Infection Control AB to distribute the VP4 needs significant work in order to build up revenue momentum.

“We expect the revised partnership with Getinge could impact the sales ramp and peak penetration for VP4. While low-temperature sterilizer sales could eventually benefit from TSO3’s product detailing efforts, we believe internal problems at Getinge are likely to provide near-term headwinds for product installations,” he says.

Maruoka also adds that TSO3’s management decision to purchase company stock is a itself a good start in rebuilding investor confidence and aligning management and shareholder interests.

The analyst’s $2.00 target price represents an 86.9 per cent return at the time of publication.