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Int'l Sales Ramping Nicely. Maintaining Outperform

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By Brian Marckx, CFA

Q1 Results: In-Line with our estimates. Revenue growth continues with further overseas penetration….

PLC Systems (OTC: reported financial results for the first quarter ending March 31, 2013 on May 15th.  PLC extended their streak to three straight quarters with revenue beating our respective estimates.  Again, the top-line beat was mostly a result of console sales coming in ahead of our estimate, with disposables revenue remaining very much in-line with our number.  As indicated in our Initiation report (11/5/2012) on PLC, we forecast revenue to climb from here on out although there likely will continue to be some quarterly gyrations due in large part to stocking orders from new customers/distributors as PLC expands into new markets and territories - as an example, Q4 revenue, as noted in the company's earnings release, benefitted from an initial stocking order to Discomed, their distributor in Brazil.


Q1 revenue of $384k was up from just $20k (+1640%) in Q1 2012 and down from $485k (-21% sequentially) in Q4 2012.  Q1 revenue was about 18% better than our $294k estimate and consisted of $162k from consoles and $166k from consumables - compared to our $138k (consoles) and $156k (consumables) estimates.  Revenue continues to show a strong rate of yoy growth, which is being bolstered by new distribution agreements and expansion into other countries in Europe, Latin and South America.

We continue to project revenue from consoles to be roughly equal to that from consumables through the end of 2013 but then sales from consumables, which should be feeding an ever larger installed base, to begin to outpace that of consoles beginning in 2014. 

Q1 gross margin at 49% was mostly in-line with our 51% estimate.  Operating expenses at $1.24MM remained just about dead-on with our numbers ($1.23MM).  Operating income was exactly in-line with our $1.07MM estimate.  Net income and EPS were ($7.80MM) and ($0.19) - important to note, however is that this includes $5.3MM in non-cash expenses related to the revaluation of derivatives (warrants and embedded in convertibles) and $1.3MM non-cash loss on extinguishment of debt.  The revaluation expense resulted from the significant increase in the underlying stock price in the quarter.  Excluding these non-cash charges, net income and EPS would have been approximately ($1.21MM) and ($0.03) compared to our ($1.26MM) and ($0.03) estimates.

Cash balance was $1.9MM at Q1 quarter-end, up from $258k at the end of Q4 2012 quarter-end and was bolstered by the common stock sale in Q1.  PLC also has $500k in restricted cash that was part of the recent $4MM capital raise and is escrowed for investor relations purposes.


On the operational front, PLC continues to make progress with patient enrollment for their pivotal U.S. RenalGuard trial, expanding their international presence including entry into new territories (most recently in Brazil where PLC gained regulatory approval), capital raising (including $4.0MM raised during Q1 2013) and building greater awareness of RenalGuard and CIN through attendance / presentations at key industry conferences throughout the world.

PLC also further beefed up its IP and strengthened its patent protection.  In May the company announced it was granted its first European patent for RenalGuard.  The patent covers the core RenalGuard device and its redundant infusion rate monitoring which allows RenalGuard to safely infuse saline at very high and accurate rates. The patent has a term extending to April 2027. 

Specifically related to awareness-building efforts, RenalGuard data was presented at the International Conference of the Israel Heart Society in early May.  Two researchers from Israeli hospitals presented clinical results using RenalGuard which indicated lower incidence of CIN than what would be expected without use of RenalGuard.  One of the investigators, Fr. Eyal Ben-Assa of Tel Aviv Medical Center noted, Based on these results, RenalGuard has become the standard of care for at-risk patients at our center."  The other presentation at ICIHS was by Dr. Eyal Nacum of Sheeba Hospital in Petah Tikvah, titled "Incidence of Acute Kidney Injury in the Patients Undergoing Surgical TAVI". 

In addition to these presentations, other awareness-building efforts include a booth at the Transcatheter Cardiovascular Therapeutics meeting in Miami during Q4.  PLC also will be demonstrating RenalGuard at the European Association of Percutaneous Interventions (EuroPCR ) meeting in Paris next week (May 21 - 24).  At EuroPCR RenalGuard Therapy has been selected to be presented as part of the conference's session, "Interventions for Structure Heart Disease."  PLC's presentation is titled, "Minimizing Acute Kidney Injury during TAVI". 

Awareness-building, through event attendance / presentations as well as via investigator sponsored trials is expected to continue to be a key part of PLC's early marketing-related efforts. 

Maintaining Outlook / Recommendation /  Price Target

We have made only minor changes to our model following Q1 results and are maintaining our outlook, Outperform rating and $0.35 price target. 


International Status…

On the heels of the publication and presentation of the compelling data from the Italian clinical trials (MYTHOS and REMEDIAL II), in October 2011 PLC brought on ACIST Medical Systems as its exclusive distributor of RenalGuard in France and Germany, the two largest countries in the E.U.  A subsidiary of worldwide leader in diagnostic imaging and contrast agents the Bracco Group, ACIST brings wide distribution reach and along with RenalGuard's strong trial data, offers a potentially potent combination to grow sales in Europe.  PLC also sells RenalGuard in Italy through their distributor, Artech, which in 2011 accounted for over 50% of RenalGuard sales.  With the recent addition of other distributors in larger markets, the customer base will be much more diversified and reduce any customer concentration risk.   

In March 2012 PLC announced they received approval to sell RenalGuard in Brazil and, through their Brazilian distributor, DISCOMED, is in the midst of the initial roll-out in that country.  Initial stocking orders were sold to DISCOMED in Q4 2012.  Also in March 2012 PLC received approval for sale of RenalGuard in Israel and announced A.M.I. Technologies will distribute the product in the Middle East.  The Latin America market is serviced by RenalGuard's distributor, Girlow USA, which exhibited RenalGuard in August at SOLACI 2012, the annual meeting of the Latin America Society of Interventional Cardiology which is attended by over 2,000 clinicians and other industry professionals. 

A key near-term focus for PLC is to continue to increase the number of distributors selling RenalGuard and to expand their international reach.  This could include other countries in Europe, South and Latin America, the Middle East and Asia.     

Japan could be the next major international market launch but will likely not happen until at least late 2013 or sometime in 2014, following completion of the proposed 60-patient study and regulatory approval in that country.

U.S. Status…

While the recent capital infusions are a clear positive and allow PLC to get to the next step in the R&D process and maintain operations, as noted above, in order to complete the U.S. clinical study PLC will need to raise additional capital.  We assume they're able to successfully do so on an ongoing basis.  Our model assumes financing comes in the form of either convertible debt or common stock, although we have no particular insight into the source or type of potential future financing.

The U.S. strategy includes completing the U.S. clinical trial and, assuming positive results, an eventual PMA filing and U.S. launch.  As a placeholder and until the 163-patient re-estimation total enrollment decision-point (i.e. - either 326 or 652 patients) is attained, we assume total enrollment will be 326.  Our current modeled timelines relative to the U.S. trial and commercialization include completing trial enrollment in late 2013 followed by finalized data analysis, a peer-reviewed publication and PMA filing by mid-to-late 2014, and U.S launch in mid--to-late 2015.  We note, that if PLC/trial investigators decide enrollment needs to be 652 (in order to increase the chance of hitting efficacy endpoints), our projected timelines would be pushed back and our modeled expenses and assumed financing needs would materially increase. 

Our model assumes U.S. distribution is also handled by a third party - it's still early and management hasn't discussed their selling/marketing plans for the U.S market so this assumption is also a placeholder for now (3rd party distribution is reflected in our gross margins and SG&A expenses).


We expect to see revenue climb from here on out (although there will likely be some quarterly gyrations), initially benefitting from the addition of new international distribution agreements in new geographic territories, including the several penned since early 2012 covering large markets in Europe, South America and the Middle East.  Revenue has been, and will likely continue to be over the near-term, somewhat lumpy as a result of initial stocking orders from new distributors.  We expect to see this smooth over the longer term.  PLC's "razor/razor blade" business model affords the potential for revenue, cash flow and earnings to ramp relatively quickly assuming they can continue to grow the consoles ("razor") installed base and there's sufficient pull-through demand for the single-use consumables ("razor blade").  

Our modeled revenue through 2014 includes only sales outside of the U.S.  We project revenue from consoles to be roughly equal to that from consumables through the end of 2013 but then sales from consumables, which should be feeding an ever larger installed base, to begin to outpace that of consoles beginning in 2014.  We look for total revenue of $1.6 million in 2013 and $3.0 million in 2014.  We think RenalGuard could enter the U.S. market in mid-to-late 2015, a small contribution from which is reflected in our $5.7 million revenue figure for that year.   

Relative to domestic sales, we currently model somewhat of a measured ramp in revenue at the outset of entrance into the U.S. (2015) and over the following (approximately) five years as third-party reimbursement specific to RenalGuard or for the prevention of CIN may yet to be in existence.  We think that while lack of specific reimbursement could temper the ramp at outset of commercialization in the U.S., meaningful long-term demand              could be cultivated from economic incentives being borne from recent and ongoing domestic healthcare reform measures aimed at reducing unnecessary costs.  For instance, the move away from a "fee-for-service" to a "pay-for-performance" model should increase demand for lower-cost and more efficacious treatments and products - such as RenalGuard.  And while there may not be reimbursement specific to RenalGuard/CIN-prevention at the outset, PLC could (and likely would) initiate or support the process of applying for Medicare reimbursement shortly following FDA approval.       

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