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Investment Thesis
Accelerate Diagnostics (NASDAQ:AXDX) and T2 Biosystems (NASDAQ:TTOO) are two companies focused on the same space - the diagnosis of serious blood infections, and most notably sepsis, which is a bacterial infection that is the number one cause of death in hospitals in the US (~270k per annum) and claims ~11m deaths per annum globally.
Detecting sepsis - which is caused by an extreme response to another bacterial infection - is a race against time, if the patient is to be treated effectively, and both T2 and Accelerate have developed technology that works faster than existing standards of care at identifying sepsis and other bacterial diseases.
Accelerate currently markets and sells its Accelerate Pheno system, which the company claims can speed up the process of antibiotic susceptibility testing ("AST") by 4.5x, or 53 hours - I discussed the company and its products in some detail in a Seeking Alpha post back in April.
T2's products, which include its T2Dx Instrument, which uses proprietary T2MR technology, performs a similar task to Pheno, but without the requirement for a blood culture sample, which can take >12 hours, making T2DX the potentially faster solution.
Sepsis detection has been estimated to become a $1.2bn market by 2027, growing at a CAGR of 9.5%, and both Accelerate and T2 can direct its products at other antibiotic conditions, and branch out into new sectors, as T2 has recently done with detection of SARS-Cov-2.
As such, investors might expect there to be a compelling case for investment into either company, but both companies' stock prices have suffered in 2021, falling by 33% in the case of Accelerate, and 64% in the case if T2, over the past 12 months.
The key question to answer in each case is therefore whether the current traded prices of Accelerate and T2 - respectively $5.4 (market cap of $335m), and $0.5 (market cap of $85m) represents an opportunity to buy into promising companies and products at a substantial discount to prior highs - $17 in July 2020, and $3.8 in February 2021 - or whether the problems that have contributed to both companies recent loss of value may be too difficult to overcome, creating further downside.
Unfortunately, I believe the latter may be true - that both companies face a tricky 2022, with Accelerate having more to lose given its 4x higher valuation, even while generating less revenues than T2, and T2 an outside shot for a turnaround and return to a share price >$1 per annum, although delisting and perhaps even bankruptcy remain very real prospects, based on my research.
The Bacterial Infection Market Overview
As discussed briefly above, and in my prior note on Accelerate, there is nothing much wrong with either company's flagship products, which "do exactly what they say on the tin", by providing faster detection of bacterial diseases such as sepsis.
For example, a 2021 report published online and titled "New Microbiological Techniques for the Diagnosis of Bacterial Infections and Sepsis in ICU Including Point of Care" describes the Accelerate Pheno system as follows:
The FDA-approved Accelerate Pheno system (Accelerate Diagnostics) can detect 16 microorganisms from positive BC based on FISH technology as well as perform phenotypic AST by morphokinetic cellular analysis, with over 96% categorical agreement in comparison to standard methods. Studies showed this test improves achievement of and time to optimal therapy in patients with bacteraemia.
The report's conclusion is less promising however:
It is likely that a number of new microbiological methods will enhance our capacity to rapidly and accurately identify pathogens in critically unwell patients. However, well-designed studies assessing key clinical outcomes are needed to define their role in improving the management of severe infections.
The key issue centres around the fact that faster diagnosis of bacterial conditions is important, but "is not sufficient to indicate the improved utility of a test", the report suggests.
Most hospitals already have systems in place to detect bacterial infections, bought from diagnostics giants such as $71bn market cap Becton, Dickinson (BDX), or $15bn market cap Biomerieux (OTCPK:BMXMF) (BIM), and although they may be slower, budget constraints in hospitals dictate that legacy systems - which carry out multiple other functions, are preferable to specialist platforms such as Pheno or T2Dx, which are faster but not necessarily more effective, and lack the multipurpose functionality required by hospitals.
Performance In 2021
Both Accelerate and T2 may have had high hopes for 2021, but both have experienced difficulties.
As of Q321, Accelerate had earned $8.44m from sales of its products, compared to $8.01m over the same period in 2020 - a 5% uplift. the company ended Q3 with:
304 U.S. clinically live and revenue-generating instruments, with another 86 U.S. contracted instruments in the process of being implemented and not yet revenue-generating. (Source: Q321 earnings press release.)
By contrast, T2 reported revenues of $12.6m to and including Q321 - up 116% year-on-year - and has forecast for FY21 revenues of $25 - $27m - $11m of which will come in the form of research grants. The company revealed that it had achieved a run rate of $115k per legacy sepsis instrument - a 55% year-on-year improvement.
Additionally, T2 has a contract in place with the Biomedical Advanced Research and Development Authority, a government agency, which has exercised a $10.5m and a $6m contract option to date, and could pay out up to $69m if all current and future contract milestones are met.
That is the good news in relation to T2, but unfortunately, it is probably outweighed by bad news, which explains the failing share price. If T2 cannot bring its share price back above $1 to comply with Nasdaq listing laws soon, the company may well face being delisted.
T2 reported a cash position of $22m and total current assets of $54.5m as of Q321, and a cash burn of $37.1m across the 2021 to the end of Q3, which implies an urgent need for fresh financing.
In June, T2 held a shareholder meeting to approve an increase in the number of its authorised shares from 200m, to 400m, which duly took place, although not before the company's CEO, John McDonough, tendered his resignation, becoming a non-executive director, and being replaced by John Sperzel, formerly CEO of Chembio Diagnostics (CEMI).
These types of boardroom shenanigans rarely add up to good news for investors - T2's current deficit is $460m, which seems a worryingly high figure for a company earning ~$26m revenues per annum, and losing significantly more.
There are some glimmers of hope however for the optimistic investor. There is a new CEO on board with an ambitious three-pronged plan to "accelerate our sales, and enhance our operations and advance our pipeline". CEO Sperzel has appointed an ex colleague, Brett Griffin, as Chief Commercial Officer, consolidating his authority.
There is the work with BARDA, and T2 has its own COVID-19 molecular diagnostic test, T2SARS-CoV-2 Panel, which was given an Emergency Use Authorisation ("EUA") in August last year, and which contributed 56% of revenues in Q321, and is capable of detecting the Omicron variant, the company recently revealed.
Still, with COVID testing generating a similar, or larger proportion of revenues than its core product, T2Dx, which earned just $0.9m of revenues in Q321, and its other key products - T2Bacteria and T2Candida Panels - failing to provide meaningful support, T2 appears to be under serious pressure.
Accelerate on the other hand has total current assets of $71.5m, but also has $110m of convertible notes outstanding, and has made a $55m loss across the first 9 months of 2021.
The worrying thing for Accelerate shareholders is that Accelerate's stock has significantly further to fall than T2's, which could hardly sink much lower. Accelerate's market cap is 4x higher than T2's, but the company's revenues are much lower, and there do not appear to be many reasons for optimism that revenues will pick up substantially next year.
Accelerate management - led by President and CEO Jack Philips - has tended to blame pandemic headwinds for its stagnant sales performance, arguing that hospitals are in no position to invest in bacterial diagnostics when they are overburdened with COVIS concerns.
Looking Ahead In 2022
It seems clear that neither Accelerate nor T2 plan to radically change their approaches this year. I have already mentioned T2's strategic priorities, and Accelerate's CEO sounded a similar note on the company's Q321 earnings call.
Our 2021 priorities are fourfold: one, increased adoption of our Pheno platform through new contracts and bringing customers clinically live; two, launch an AST-only kit to give customers greater options; three, launch Arc, formerly PhenoPrep, a workflow automation tool to enable rapid identification with MALDI, and four, advance our next-generation platform, Pheno 2.0.
Yes, there are new products in the pipeline, and nobody is questioning that Pheno can speed up bacterial diagnostics, but Accelerate has been promising new products for some time that could transform its sales - targeting a market worth ~$3.7bn, according to a 2019 investor presentation - and promising revenues of ~$16m-$18m in 2020, a figure it failed to meet by a distance, earning $11.2m in that year.
There doesn't appear to be much prospect of pandemic headwinds fading in 2022 - certainly in the first half of this year - which means that Accelerate will continue to have problems finding its way onto hospital's budgetary requirement lists, and will likely continue to have to burn significant amounts of cash to fund further R&D in an attempt to make the market believe its products are indispensable.
In short, at the end of 2022, Accelerate could find itself in a similarly dire position to T2, with its funds exhausted, its share price falling, and its core products failing to sell.
In the case of T2, the fact that the share price is trading as low as it is probably the only strong buy signal the company is emitting.
A new management team could execute a bold turnaround plan, its COVID testing platform could continue to earn the lion's share of the company's revenues, and its technology - which in my view appears to have a competitive advantage given the non-requirement for blood culture sampling - could become a frontrunner for standard of care status.
These are all highly speculative outcomes, however, and T2's financial position looks perilous.
And finally, although T2's and Accelerate's technologies both offer reasons for excitement, the competition in their fields is intense, as this extract from an April 2019 Swiss research paper reveals.
The paper identified no fewer than 26 technologies dedicated to diagnosing bacterial infections, as shown below:
companies and technologies dedicated to simplified and accelerated identification of blood stream infections. Source: FIND research paper April 2019
Conclusion - Outlook Looks Bleak For Accelerate And T2, Although T2 Has Comeback Potential
Back when I last covered Accelerate Diagnostics, I believe the hype, and felt that, once pandemic headwinds had eased, the company's technology - proven to reduce time to diagnosis of sepsis and other bacterial conditions - would become increasingly attractive to hospitals and the company's revenues and share price would grow.
I also felt that the company's management team - many of whom worked together at Ventana Medical Systems - acquired by Roche (OTCQX:RHHBY) in a $3.4bn deal in 2008 - could potentially guide the company through a lucrative M&A deal.
That probably remains Accelerate's best hope of reversing its recent fortunes, given the prolongation of COVID headwinds, the intense competition in the bacterial disease diagnostics space, and mounting financial losses, which are not being eased by growing sales.
The problem is that lightning rarely strikes twice and that is why I think the company could be in for a tricky year in 2022, and why its share price may suffer accordingly - it is hard to see where material progress is coming from on any front.
Regarding T2, probably the more troubled of the 2 companies, the positive is that most of the worst things that could happen to the company have already happened, and the share price reflects that.
Even so, it would take a brave investor to back T2 stock to grow in 2022, with delisting perhaps an equally likely possibility.
The company's COVID revenues could even dry up in 2022, if pandemic headwinds ease, and the market for its diagnostic testing products stubbornly refuses to grow, primarily because speed of detection is not the only yardstick with which to measure patient management of sepsis.
Sepsis remains a deadly killer, and a $62bn per annum cost burden to hospitals in the US (according to T2's CEO), and it would be excellent news if the technologies developed by T2 and Accelerate provided a "one and done" solution to the problem.
Unfortunately, they are only a part of the overall solution, it seems, and that is not presently enough to persuade hospitals to make substantial investments in their technology.
Both companies made a major bet that it would be enough, and that bet has not paid off to date. I am expecting more of the same share price issues in 2022, with the outlook worse for Accelerate, whose valuation has further to fall than T2. That company's perilous position may attract a risk-on investor who believes a new management team can execute a successful turnaround.
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