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CTSO Scores DARPA Contract

Brian Marckx, CFA

This morning (8/6/2012) CytoSorbents Corp announced they were awarded a contract from DARPA worth up to $3.8 million over the next five years under the agency's Dialysis-Like Theraputics (DLT) program.  As a reminder, CytoSorbents had been in contract negotiations with DARPA for use of the company's technology as part of the U.S. government agency's DLT program to develop a blood purification device in the treatment of sepsis (for reference on the DARPA proposal see our initiation report here).  The negotiations centered around the scope of work and contract value.   The milestone-based contract is expected to pay $1.5 million in the first year and the remainder over the next four years, assuming all milestones are hit.  

As DLT is a collaboration with several different companies and universities being awarded contracts related to the project, CytoSorbents is one piece of this puzzle.  CytoSorbents contribution is developing their next-generation porous polymers which have already demonstrated efficacy in removing cytokines from the blood with targeted applications in sepsis as well as a variety of other acute care illnesses.  Under the DLT program CytoSorb expects to broaden the scope of targeted substances to include a wide range of toxins in addition to cytokines.  In addition, as the DARPA DLT Broad Agency Announcement strongly encourages technologies that do not require anticoagulation, CytoSorbents expects to incorporate that capability into its polymer technology.

We view the DARPA award as a significant positive not only from a near-to-mid term revenue perspective but perhaps more importantly as additional validation of CytoSorbent's technology and expanded opportunity in the commercial marketplace.  Advanced development of CytoSorbent's polymer beads under this contract to include the targeting of a wider menu of toxins could potentially expand the targeted applications beyond what is already a very significant potential market for CytoSorbents.   

We note that, prior to this morning's announcement, we had incorporated an assumed $2.8 million in total from an expected DARPA contract (which was our best-guess at the time), payable over 12-months beginning in Q4 2012.  The potential $3.8 million contract over five years (assumed milestones are met), could provide some slight upside to our model.  We now think CTSO could begin generating revenue under the awarded contract in Q3 of this year.  CytoSorbents also indicates in the press release that they could be eligible for a separately funded DARPA DLT proposal -  which we have yet to model and could provide further revenue upside.               

We cover CTSO with an Outperform rating a $0.50/share price target.  Please visit scr.zacks.com to access a free copy of the CTSO research report.
 

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