October 23, 2017 - 4:05pm EST by
2017 2018
Price: 4.05 EPS NA NA
Shares Out. (in M): 31 P/E NA NA
Market Cap (in $M): 124 P/FCF NA NA
Net Debt (in $M): 5 EBIT -54 -44
TEV (in $M): 119 TEV/EBIT NA NA
Borrow Cost: Available 0-15% cost

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Company Background

T2 is a diagnostic company that markets a benchtop instrument that is able to assess blood samples to determine the presence of fungal infections for the detection of sepsis. Sepsis is a severe inflammatory response to a bacterial or fungal infection with mortality rate of ~30%. Accurate and rapid identification of sepsis is important as each hour of delay in initiation of treatment is associated with an average decrease in survival of 8%.

Historically, patients at risk of sepsis would have a blood sample cultured over the course of +48 hours in order to determine the infecting pathogen. T2 shortcuts this paradigm by allowing for diagnostics to be performed on actual blood samples, providing a turnaround time of approximately 4 hours. Its instrument is marketed for a list price of $150,000 and the individual tests are sold for ~$200.

Short Thesis

There are a number of shortcomings to the current T2 business. Firstly, the company's currently marketed diagnostic only tests for the presence of fungal infections, which only comprise 5% of severe sepsis and septic shock cases. Without a broad enough assay that can test for the majority of the causative pathogens (e.g. bateria), the diagnostic does not deliver much utility. T2 is in fact seeking 510(k) clearance from the FDA on a bacterial panel, which may be approved later this year. 

The more important issue however, is that while the company and the street all tout the fact that faster and more accurate treatment decreases mortality, T2's diagnostic does nothing to speed the time to administration of a therapeutic. In practice, once a patient is suspected of sepsis, the patient is usually immediately administered a bundle of broad spectrum antibiotics. Once the causative pathogen has been identified (typically through blood culture analysis), the antitbiotic regimen is peeled back so only the required therapies continued to be administered (http://www.survivingsepsis.org/SiteCollectionDocuments/Bundle-3-Hour-Sepsis-Step3-Antibiotics.pdf). 

There are theoretical concerns about drug-resistant superbugs and curtailing unnecessary antibiotic administration is one way to prevent the development of these surperbugs. In current practice, patients are weened off of antibiotic therapy after a couple of days when the blood culture results are received. T2 can help ween patients of the antibiotic bundle more quickly given its test turnaround time is 4 hours. Broad spectrum antibiotics are cheap however thus the value prop is not tremendous.

There are manifold other challenges to T2. The list price of $150,000 will require budget approval at most hospitals which is a slow and bureaucratic process that requires timing a sale with a hospital's budget cycle. Encouraging adoption will require a commitment from the field force. Utilization is currently sporadic at best and very few clients have incorporated T2 into their sepsis protocols.

Current Situation

Despite much fanfare at IPO in 2014, the launch has been lackluster and has significantly underperformed expectations. The company has generated $9mm in aggregate revenues since 2014 (sales were $2.8mm in 2015, $4.1mm in 2016, and expected to be $4.4mm in 2017), far short of the hockey stick projections that management and the street painted. Though the stock has fallen over 40% in the last year, there is still plenty of room to the downside.

The company currently has $46mm of cash and $41mm of debt. The debt is a six year note with three years of interest only payments. The more pressing issue is that the company has a current operating burn of $14mm and likely has less than a year of cash runway. Despite the recent drop in share price, the company still trades at +30x LTM revenues.

In order to finance the business going foward, the company will likely need to raise capital on terms that are onerous to existing shareholders, putting additional pressure on the stock.


The company has submitted a 510(k) application for approval of its bacterial assay, which if approved, could provide it with much broader coverage of relevant causative pathogens. The stock may increase in response to a positive decision from the FDA but the regardless, the deterioration of the business is likely to persist.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


- Continued lack of revenue traction

- Going concern risk as the company runs out of capital


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