RBC starts TSO3 at OP

RBC Capital Markets initiated coverage of TSO3 (TSX:TOS) with an “outperform, speculative risk” rating and $4.25 (Canadian) price target. The stock closed at $3.09 on May 2.

TSO3 recently commercialized a highly differentiated device for the sterilization of medical devices, particularly endoscopes, in healthcare settings.

“TSO3 is therefore uniquely positioned with its marketing partner, Getinge (a world leader in infection control sales), and we expect greater than 40% returns over the next 12-months,” writes analyst Doug Miehm.

He estimates the installed base replacement value for low temperature sterilization devices is $4-billion to $5-billion (U.S.), growing at 9% to 10% annually.

“We assume 10% of the device base, or approximately $500-million, is likely replaced per year and also calculate there are at least 25 million consumable cycles run annually, equating to potential total recurring revenue market of more than $500-million."

Mr. Miehm said endoscope contamination remains a significant, potentially lethal, risk. “This issue remains a top 10 health technology hazard (eight consecutive years) and an FDA Advisory Committee concluded that duodenoscope and automated endoscope reprocessors do not provide a reasonable assurance of safety.”

Based on these recommendations, he said that hospitals may eventually be mandated to sterilize most endoscopes and “TSO3 would be well-positioned to see further upside to our forecasts.”