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CTSO: Initiating Coverage of CytoSorbents

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CTSO:  Initiating Coverage of CytoSorbents

Brian Marckx, CFA

We have initiated coverage of CytoSorbents Corporation with an Outperform rating.  See below for access to our full 20-page report on the company which includes our financial model and provides further discussion about the company, their products, target markets, and commercialization strategy.         

CytoSorbents Corporation is a development-stage, critical-care focused medical device company attempting to revolutionize the treatment of life-threatening illnesses in the intensive care unit (ICU) using blood purification.  Their goal is to prevent or treat multi-organ organ failure, the leading cause of death in the ICU, with an immunomodulatory approach that removes excessive cytokines, toxins and other inflammatory mediators that can damage vital organs.  The approach uses a unique biocompatible porous polymer bead technology to remove a broad range of toxins from the circulatory system and other bodily fluids that cannot be removed by standard hemodialysis or hemofiltration.    

In March 2011 CytoSorb, the company's flagship product, achieved CE Mark approval and can now be sold in the European Union as an extracorporeal (i.e. - outside the body) cytokine filter.  CytoSorb is designed to treat critical care illnesses where an excessive production of cytokines, or “cytokine storm”, leads to organ failure including in conditions such as sepsis (i.e. - blood poisoning) and infection, trauma, acute respiratory distress syndrome, severe burns, and acute pancreatitis.  Following its debut introduction at industry conferences in Europe during Q3 2011, the company began a test-market release of CytoSorb in Germany.  The device is being manufactured at the company's ISO 13485-certified facility in New Jersey and is now generating some initial modest revenue in Germany, where it is reimbursed by insurance.  CytoSorbents is in the midst of assembling a sales team and expects a broader market release in Germany later in 2012.  Until then, sales are expected to be nominal as they gear up to implement the bigger launch.  The company also expects to pursue distribution partnerships for sale of the device in Germany and other parts of Europe.  The initial roll-out will target European countries with favorable market dynamics and insurance reimbursement.    

A recently completed small multi-site European clinical trial showed CytoSorb treatment was safe and significantly reduced key cytokine levels in patients with both sepsis and respiratory failure - the company is currently in the manuscript preparation process.  The current game plan is to conduct further clinical studies in sepsis and foster investigator-led trials in other critical care diseases where inflammation and organ failure are common themes.  The aim is to generate additional clinical data and experience for marketing purposes, to increase the number of treated patients, and to support potential future publications.  The company has initiated dosing studies related to longer use of CytoSorb which will generate additional data points and is expected to assist in the design of an optimized pivotal sepsis trial protocol.  Assuming availability of adequate and timely funding, and continued positive results from clinical studies, the company intends to continue commercializing CytoSorb in Europe.  The company's U.S. development and regulatory approval strategy (which would ultimately require U.S.-based studies) is designed to leverage an already FDA-approved IDE (investigational device exemption) application to run a small sepsis trial in the U.S. but may depend in part on results of the dosing sepsis studies.    

CytoSorbents recently received a Small Business Innovation Research (SBIR) grant from the U.S. Army to develop their technology to help treat trauma patients with rhabdomyolysis, which could also eventually lead to other military projects.  The company is also in contract negotiations with the U.S. Defense Advanced Research Projects Agency (DARPA) to use the CytoSorb technology as part of its program to develop a blood purification device in the treatment of sepsis.  DARPA’s Dialysis Like Therapeutics program plans to develop an easy to use “smart” system to treat septic patients with a blood purification device that can sense cytokines, toxins, pathogens and activated cells in real time, and remove them from the body.   

Beyond CytoSorb, the company's R&D efforts include the development of their HemoDefend technology which is focused on removal of contaminants from the blood supply - with the intent of reducing risk of reactions from tainted blood in transfusion patients, to preserve the freshness of new blood, and increase blood shelf life.  CytoSorbents is looking to out-license their HemoDefend technology and noted they received encouraging interest following introduction of the platform at the October 2011 American Association of Blood Banks conference.

CytoSorbents is headquartered in Monmouth Junction, N.J.  The common stock is quoted on the OTC Bulletin Board under the ticker CTSO.  Conversions of preferred stock into common along with multiple rounds of financing to fund operations have resulted in the outstanding share count growing from about 123 million at the end of 2010 to 190 million at the most recently (3/31/2011) reported quarter end - the fully diluted share count is well over double this amount (although on a fully-diluted basis, the market cap is still under $50MM).  The company will need to raise additional capital to finance operations and to that end, in December 2011 they signed an agreement with an existing institutional investor to sell to them up to $8.5 million worth of common stock (at prevailing market prices) over the next 32 months.     

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