T2 Biosytems: The Story Is Just Beginning

Truth without love is brutality, and love without truth is hypocrisy.” ― Warren W. Wiersbe

It was a big week for a ‘razor & razor blade’ company called T2 Biosystems (TTOO). On Tuesday, the FDA blessed its bacterial panel that will dramatically reduce the time needed to detect and treat sepsis.

Source: Company Presentation

This is a huge development. First, this panel will reduce the time to hours from days it currently takes to process a sample to determine if sepsis is present. This deadly infection that takes numerous forms kills more people in the United States than prostate cancer, AIDS and breast cancer combined yet gets little mention in the press. It is a continuing scourge made worse by the overuse of antibiotics resulting in more and more drug resistant forms of this type of infection. In trials, T2’s new panel provided 90% sensitivity (correctly identifying true positives) and 98% specificity (correctly identifying true negatives)

Second, this approval significantly increases the potential market for T2 Biosytems. This was nicely captured by an analyst over at Leerink Swann this morning which upgraded the stock to an Outperform and increased its price target from $5 before approval to a current $12.50 a share. Here is what Leerink’s analyst had to say about T2’s improved prospects post FDA approval.

This week’s T2bacteria FDA clearance expands the company’s market opportunity “dramatically” from $1.4 billion to over $3 billion. T2 is “highly underpenetrated” in its core markets, but feels it can now penetrate the broader $1.5 billion-$2.0 billion bacterial sepsis market with an immediate entry into the hospital emergency departments, which the analyst values at $300 million.”

On Wednesday, H.C. Wainwright reiterated its Buy rating and lifted its price target to $14.00 a share from $8.50 previously. I expect other analyst firms to follow suit in the coming weeks which should provide a nice tailwind for further price appreciation. The company also will be presenting at the Jefferies 2018 Global Healthcare Conference that runs from June 5th through June 8th which could generate additional analyze ‘buzz’ around this name.

Not surprisingly, the company used the positive news to raised some additional capital via a secondary offering priced at $7.50 a share this week. This added some $40 million to the company’s coffers. Combined with the almost $30 million it had on hand at the end of the first quarter, this provides an adequate cash cushion for the company probably into 2020. The company is burning through roughly $10 million a quarter currently.

The burn rate should start to lessen as the company’s installed base of T2DX machines grows and sales escalate significantly from the newly approved panel.

The stock has doubled over the past six months. However, the shares are still trading at less than 40% of the highs they reached soon after their debut in mid-2014. Given T2’s market opportunity, a market cap of under $300 million still makes the stock significantly undervalued from a long-term perspective in our opinion.

I won’t insult your intelligence by suggesting that you really believe what you just said.” ― William F. Buckley Jr.

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Disclosure: I am/we are long ttoo.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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Joan Guzman