T2 Biosystems (TTOO) is based in Lexington, MA. Its rapid pathogen diagnostic testing is based on magnetic resonance imaging and nanotechnology and originated in the labs of Harvard and MIT.
The scope of the problem:
- Sepsis costs approx. $27 billion annually in U.S. healthcare costs.
- Sepsis kills approximately 6 million people annually worldwide and approx. 250K people in the U.S. annually.
- Sepsis is the most common cause of inpatient death (1 in 2-3 hospital deaths).
- Approx. 20% of sepsis survivors die within 2 years due to sepsis, so there are high chances of a relapse.
- It is the most prevalent and costly cause of hospital re-admissions.
- Each hour of delayed treatment increases mortality rate by 8% in sepsis.
Where is the gap in current sepsis diagnosis and management?
When a patient with suspected sepsis presents in the emergency room, it is a standard of care to send the blood culture. Blood cultures may be positive in median of 50% of patients with sepsis ranging from 20% in mild sepsis to 80% in septic shock. In the absence of identification of the organism at initial clinical presentation, the clinicians usually start a combination of broad-spectrum antibiotics to cover the most common bacteria. Blood cultures can take at least 3 to 4 days for identification of the organism with the most rapid tests still taking 24 hours. This can lead to either under treatment or over treatment of the patient. In areas where bacterial resistance is highly prevalent like inner cities, the usual combination of broad-spectrum antibiotics tends to provide under treatment and further clinical deterioration of the patient in the absence of proper treatment. It is also possible that certain patients might mimic signs of sepsis and may be over treated with antibiotics, which increases the probability of bacterial resistance, adding the cost of care and also results in adverse effects like Clostridium difficile infection.
Some blood tests like serum procalcitonin have come into clinical practice but they can only support a diagnosis of sepsis based on clinical symptoms but cannot identify the type of pathogen. Blood cultures also have only 50% to 65% sensitivity to identify the bacterial pathogen. The sensitivity of blood culture is even lower in certain infections like Pseudomonas where only 60% of infections are identified by a single blood culture.
Certain infections like carbapenam resistant Enterobacteriaceae are increasing in incidence. These patients have high mortality since they do not respond well to the first line broad spectrum antibiotics and go into septic shock and multi-organ failure by the time blood culture results come back.
Lyme's disease is a big problem in certain geographical areas of the U.S. like Northeastern U.S. The current diagnosis of Lyme's disease is primarily clinical and the diagnostic tests can take up to 2 weeks to come back.
T2 Biosystems' solution:
The T2 bacterial panel is the first FDA cleared test to identify sepsis containing bacteria from the whole blood and has more than 90% accuracy in identifying the most common ESKAPE group of pathogens. It has a turnaround time of only 3-5 hours for these bacterial infections. The accuracy of a single T2 bacterial diagnostic test is as high as that from three consecutive blood culture samples which can take up to 24 hours to collect and then another at least 24-48 hours for the results to come back. T2 bacterial panel is the only diagnostic test that can detect as low as 1 to 10 CFU per ml range where other diagnostic tests from companies like Roche have failed. The cost of the test is also very affordable at $150/test. T2 bacterial panel has the opportunity to replace blood culture as one of the initial diagnostic tests during the workup of sepsis due to higher sensitivity and quicker turnaround time. Watch the 2018 video interview with two-time sepsis survivor Mary Millard, as she talks about how the T2 Bacteria Panel test could have helped improve her outcome in sepsis.
The company is already marketing T2 Candida Panel which detects the most common Candida sp. of fungal infections.
T2 Resistance panel provides rapid diagnosis of certain resistant infections like CRE and was awarded breakthrough therapy designation by FDA.
Another big potential opportunity for the company is T2 Lyme’s disease panel. Patients are being enrolled in the pivotal study. Data so far has been encouraging. The management estimates this to be a potential $700 million market opportunity. Approx. 3.4 million tests for Lyme disease are done in the US annually including PCR and Western blot.
The company is also developing a diagnostic test for C. auris, a potentially fatal fungal infection, which can diagnose this infection in two hours rather than the culture which can take two weeks. The test is for available for research use at present. This infection is increasing in incidence in the U.S. and is one of the focus areas for CDC.
Surviving sepsis guidelines are considered the Bible of sepsis treatment. Procalcitonin testing in suspected sepsis took off after it was included in these guidelines few years back. I anticipate that the use of T2 Bacterial panel will be included in these guidelines within next 2 to 3 years. Once this test is included in the initial diagnostic workup of sepsis in these guidelines, prescribing clinicians like emergency medicine physicians and critical care specialists will widely adopt the T2 Bacterial panel. Results of T2 bacterial panel pivotal trial are expected to be published in a peer-reviewed medical journal this year. Publication in a prominent peer-reviewed journal will provide more credibility to the diagnostic test and increases clinical adoption and accelerate its inclusion in sepsis treatment guidelines.
The management will present more clinical data from T2 Bacterial panel at the 29th European Congress of Clinical microbiology and infectious diseases from April 13-16. The company expects to present five scientific posters and one major symposium on T2 direct diagnostics with the US and European experts. The chief scientific officer Tom Lowery participated in the President's Advisory Council on combating antibiotic resistance bacteria in Washington DC earlier this year and provided information of T2 Direct diagnostics test and the support of identifying new priority areas for US governments 2020-25 national action plan for combating antibiotic resistance bacteria. T2 Biosystems was also named among top 10 of the most innovative biotechnology companies by Fast Company. Moreover, the company has a bigger global market to penetrate. There is an opportunity to expand beyond the US and top five European countries over the emerging economies like China, India and the Middle East.
Another huge opportunity for the company is a new product that will be marketed in next two years and will detect 20-30 more pathogens in partnership with Carb-X. The company has also expanded the panel to include the deduction of 13 resistance genes from gram-positive and gram-negative pathogens including carbapamase resistant genes. FDA has assigned breakthrough therapy designations for T2 Resistance Panel.
Why the stock is beaten down?
In spite of promising technology and large target market, the stock has fallen recently. One of the reasons is slow sales ramp for T2 Bacterial Panel. The company is negotiating contracts and also approaching new new hospitals as leads. Sales reps are approaching hospital lab directors who are sometimes also on antibiotics steward committees and can accelerate the adoption of the company’s products by the hospitals. However, the management estimates that it can take 6 to 12 months for the sales cycle starting from initial interest to closing the deal. Therefore, the current ongoing sales efforts will show results in the form of increased revenue in approximately next 9 to 12 months.
In Q4 last year, the company secured 14 new contacts with access to approximately 80,000 high-risk patients. In 2019 so far, 30 new contracts have been secured covering approximately 50,000 high-risk patients the management expects to double the revenue in 2019 and 70-80 new instrument contracts. The company’s sales reps had meetings in 250 hospitals in January who expressed an interest in one of the company’s products. Outside the US, six sales and marketing professionals are covering newer markets. The company expects that T2 Bacterial Panel can result in approx. $100M of cost savings per year per hospital. Read this whitepaper on how a hospital system is using the test in its antibiotic stewardship efforts.
The company's management is experienced. CEO John McDonough was ex-President of Cytyc Development Corp. which was acquired by Hologic for more than $6 billion. Co-founder and Board Director Michael Cima is a Professor of Engineering at MIT.
- April conference
- Journal publication of T2 Bacterial Test data.
- Quarterly sales data for T2 Bacterial Panel, however we have to keep in mind that the sales effort results will start showing by approximately end of Q1 next year.
Financials and valuation:
Q4 2018 revenue was $1.8 million, showing 6% year on year growth, and was within the range of guidance. Cash was approx. $51 million at the end of 2018 and I expect it to be enough for next 12 months. For the full year 2018, revenue was $10.5 million, showing 123% year-over-year growth versus FY 2017. The management expects the revenue to double in 2019 compared to 2018.
The cost of T2 diagnostic instrument is approx. $100K. The cost of T2 bacterial panel is $150 per test and $200 per test for T2 Candida panel. Each diagnostic instrument has a capacity of running up to 3000 tests per year.
There are approximately 6200 hospitals in the US. The total revenue opportunity could be more than $600 million from just the sales of instruments spread over 6-7 years. In the blue sky scenario, the revenue from the diagnostic tests could be up to $1.8 billion per year assuming one diagnostic instrument in each hospital. The management expects approximately $300,000 of revenue from each hospital per year from diagnostic tests. Even if the company's stock trades at a price to sales ratio of two, it could have $3.6 billion market cap. In a base case, at a conservative 20% peak market penetration, the annual revenue opportunity from tests could be $360M per year and the company's stock could trade at a market cap of $720M. On the other hand, the current market cap is just $162M, with $51M of cash on the balance sheet.
T2 bacterial panel can diagnose the bacterial pathogens in the bloodstream so it cannot identify the bacterial pathogen if there is no bloodstream infection. Still it can replace the blood culture as the one of the initial diagnostic tests during initial workup of sepsis. The company is not profitable and as net negative earnings. The sales ramp is slow.
Potential competition includes Vidas Brahm's PCT test, now licensed by Thermo Fisher which allows rapid 24/7 processing of blood culture specimens possible. However, its utility is more to exclude sepsis and discontinue antibiotics if normal levels.
I am bullish on the commercial potential of T2 Bacterial Panel, T2 Resistance Panel and T2 Lyme's disease. The company's technology has the potential to save millions of dollars for hospitals and save thousands of lives per year. I expect the sales ramp for T2 Bacterial Panel to start showing results in the form of increased sales by the end of Q1 2020 when the company could enter a hypergrowth phase. Publication of T2 Bacterial Panel data in a medical journal this year will further increase awareness and I expect the test to be included under the Surviving Sepsis treatment guidelines in 2-3 years, which would make it a standard of care in sepsis management. At its current rock bottom stock price, contrarian investors have an opportunity to get in early and wait patiently for a potential multibagger stock. The stock has options and investors can use the covered calls options strategy to collect premium while waiting for stock price appreciation.
This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.
Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. The clinical trials can fail and the entire capital invested can be wiped out.
While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed
I am/we are long TTOO.