Bhavneesh Sharma

Top 20 Ranking (28.2% Avg Return) --TipRanks

T2 Biosystems: Breakthrough technology revolutionizing sepsis management, from the labs at Harvard/MIT

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.   

Further  opportunities: 

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.   

Near-term catalysts: 

- 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. 

Bear  case: 

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.   

Key  takeaways: 

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. 

TTOO common stock price chart


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.

Bhavneesh Sharma covers biotech as one of the original contributing analysts at FATRADER. A market expert with a medical degree and MBA, he is ranked among the top 15 financial bloggers and top 100 overall financial experts (including Wall Street analysts) on TipRanks.
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