Hi rogerbush,

You've obviously been reading up and it's a fair point that you make regarding the need for eliminating TB worldwide,it should also be noted in a balanced arguement that Catanzaro is a non-executive director of Cellestis.From what I've read about him is a very well respected and experienced professor.

A few posts back I was replying to Bergolts question "what the problems for this stock could be." He's some more in that theme

CST is a one product company. QFT-TB is the 'flagship' product but the QFT platform can be adapted for other diagnosic purposes.This came up the company newsletter published yesterday which gives details of $250,000 grant they have received for developing a test for use in transplant patients.


TST/PPD distributors/manufactures will not just step aside for QFT. This was a concern of mine and I asked about this at the AGM.The reply that I got was more or less as follows( but it is not an exact quote) ' there is no single manufacturer/distributor and it was therefore unlikely that a cohesive campaign to distrupt QFT would be mounted and also most (mature) companies have a long trailing tail of products that are not at the forefront of profit revenue and so when a rival product that is oviously better comes along there isn't usually any point in a company trying to defend it's position.It is better for that company to spend resources on it's own or other new 'flagship' products that will generate greater profit.'

To be honest I was I bit sceptical of this but it does seem increasingly to be correct.CST have made a few announcements in recent months of distribution deals with the very companies that were also distributing TST/PPD,this would seem to confirm that rather than defending the former product it is more profitable for them to switch to the new product.


Can anyone think of others that need consideration?

Martin

G'day Martin,

Thanks for that, you've covered everything I can think of (and much more), very well too. Nice work. I like the sound of the company, and I think the product is strong. I hope it goes well for you, as you've obviously done your homework on this one.

Personally, before I jump in two-footed, I need to do some numbers work, to try to decide what a fair price for the stock actually is based on projected numbers, as I would hold for the long term.

Bergholt.

Hi again Bergholt,

I was going to suggest that you looked at ForrestGumps spreadsheet but for some reason it seems to have been deleted,maybe it was because he mentioned another forum.Does anyone know if this is the case?

It would be very helpful to have the link here as it's a great place to start with projections.

Martin

eG,

You asked the other day for evidence of 25 million tests. The article below was the one I would have preferred to have posted but couldn't find it at the time as it is in amongst a plethora of others that I have.As you can see the actual number is more than double the one I suggested but 25 million is the figure that CST given,I'm fairly sure that this(25mil) is employee (compulsory)screening so doesn't include children,elderly and some other groups.

This article makes for very interesting reading not only from a point of view of confirming the scale of screening for TB in Japan but also the limitation of using X-ray for detection.Also covered is the ineffectiveness of X-ray from an economic viewpoint.

Martin


(Vol.77 No.4 April 2002)

<1>Kekkaku Vol.77, No.4:329-339, 2002

Original Article

DISCUSSING THE CURRENT SITUATION OF TUBERCULOSIS CASE-FINDING
BY MASS MINIATURE RADIOGRAPHY IN JAPAN

1Masako OHMORI, 1Masako WADA, 1Kazuhiro UCHIMURA, 2Kenji NISHII,
3Yoshinobu SHIRAI, and 4Masakazu AOKI

Abstract
The system of tuberculosis(TB) case-finding by mass miniature radiography(MMR) was
established and expanded for almost all Japanese citizens in the 1950s. And, as
stipulated by the TB Prevention Law, periodic mass screenings for schools,
inhabitants, employees and institutions have been carried out. Among those aged
over 25 years, the proportion of people screened by MMR was estimated to be 60.3%.
This means that about 54 million people aged over 25 years are receiving medical
service with MMR every year.
However, the detection rates of TB cases by MMR have declined markedly compared with
those in 1950s. As of 1998, the detection rate was 0.03 per 1,000 for school children
and students, 0.06 per 1,000 for employees, and 0.16 per 1,000 for inhabitants.
The proportion of cases detected by MMR among newly notified TB cases was 12.8% in
1998, and this ratio has been almost constant for the last 10 years. This ratio was
greater among young adult TB cases. Approximately 20% of notified TB cases aged 20-39
years were detected by MMR for employees.
Although the purpose of MMR is to find the cases before discharging TB bacilli, 35.1%
of the cases were bacteriologically confirmed, and this proportion was greater among
elderly TB cases.
The Japan Anti-Tuberculosis Association (JATA) has been carrying out MMR for a long
time, Eight selected branches of JATA that has been doing high quality case-finding
reported 228 TB cases out of 965,440 inhabitants aged over 40 years examined by MMR
in 1996. Based on these results, the cost per TB case detected by MMR was calculated.
The cost was 4.4 millions yen (\) per case for all of TB, \2.3 millions for male,
\8.4 millions for female, \7.3 millions for those aged 40-49 years and \1.8 millions
for those aged over 80 years.
TB detection rate by MMR for inhabitants was correlated with TB incidence rate in
various areas, and based on this correlation, the cost was calculated for various
incidence rates. For all forms of TB, the cost was \4.0 millions per case for an
incidence rate of 30 per 100,000, and \6.7 millions for an incidence rate of 20 per
100,000.
MMR is not economically cost-effective even among elderly people and in areas with
incidence rate less than 50 per 100,000, because the medical expense for a TB patient
treated under hospitalization for 2 months and outpatient's clinic for 4 months is
approximately \0.9 millions in 1996.
The decision making in continuation or abolition or limitation of MMR should be
discussed from a wide range of cost-effectiveness analyses as well as from the view
of public health service and willingness of people. For the purpose of decision
making, this study provides the detection rates; the costs stratified by hug, age
and incidence; and the proportion of cases detected by MMR among newly notified TB
cases by age-group and bacteriological status.

Key words:Tuberculosis, Notification rate, Incidence rate, Case-finding,
Mass miniature radiography (MMR), Detection rate, Cost-effectiveness analysis

1Research Institute of Tuberculosis,
2Department of Respiratory Medicine, Okayama Institute of Health and Prevention,
3Chiba Anti-Tuberculosis Association, 4Japan Anti-Tuberculosis Association

Correspondence to:Masako Ohmori, Research Institute of Tuberculosis,
Japan Anti-Tuberculosis Association, 3-1-24, Matsuyama, Kiyose-shi,
Tokyo 204-8533 Japan. (E-mail:ohmori@jata.or.jp)

G'day Martin and friends,

I am also confused as to why my previous post was removed. Like you, I can only assume it was because I happened to mention another forum. Mr moderator, if it is something else that I am doing wrong then perhaps you might email me to let me know.

Anyway, some fantastic posts Martin. Below are the links to my CST stuff that may (or may not) be of interest.

1. A CST summary sheet. This was done a couple of months back and so is a little out of date but hopefully provides some usefull information:

http://members.optusnet.com.au/~omni1/cst.doc

2. A spreadsheet tool that enables you to play around with values of the share for various sales scenarios. It provides both a PE style valuation and a DCF style valuation.

http://members.optusnet.com.au/~omni1/CSTVAL0104.xls

4. And finally, some notes to go with the spreadsheet. I suggest that it is very important that you read these notes.

http://members.optusnet.com.au/~omni1/CSTVAL0104.txt

Peace
Fforrest

Found this in the minutes of the San Francisco Public Health Dept. which supports my earlier assertion in a previous post that although it seems to take forever the tide is turning towards the use of QFT.It's only a small reference but I believe a significant one. I've given a link(below) to the article that I took this from but as this is the only mention of TB I didn't post the whole article.

TB Program News

Beginning November 3, 2003, the San Francisco TB Control program in collaboration with the Department of Public Health Laboratory will begin using the QuantiFERON-TB Test (QFT) to screen selected patients for TB, in place of the tuberculin skin test (TST). The QFT is an FDA approved blood test for use as a diagnostic aid in the detection of latent tuberculosis infection (LTBI). The QFT test will initially be available through the TB control program, and DPH is planning expansion of availability to all Health Department clinics in San Francisco currently providing TB testing.


http://www.dph.sf.ca.us/HCMinutes/HCMin03/HCMin11182003.shtml

Thanks for re-posting your links ForrestGump

Martin

CST gave a presentation in Sydney yesterday,here are some of the salient points that I've reproduced with permission,thanks to ForrestGump.

1)2nd generation QFT-Gold will sell for US$15 with a gross margin of between 60% and 90%

2)The US FDA 100 day questions have been asked and answered

3)Uptake in Japan will happen quickly after approval,uptake in the US will be slower.

My thoughts:

The 'pent up demand' can be explained by the fact that Japan currently uses X-Ray to routinely screen for TB(20+million employee screenings per annum) and between 5 and 10 million TST tests.X-ray cannot detect latent TB and TST results are confounded by the widespread use of BCG vaccination.Until QFT-Gold Japan has not had a cost effective,reliable and safe method of mass screening.

Approval in the US is expected in the next few months,my guess would be most likely July/August possibly June.Approval in Japan is most likely July/ August.

Martin

Someone,a friend(!), said to me that the reason for the CST thread not being popular is that it's not 'sexy' enough,so here's a 'sexy' argument.


Here are some worst case figures

The total world market is only 30 million units (Japan alone conducts over 20million compulsory annual tests)

CST only capture 10% of the market(I consider 40% conservative)

Gross margin is only 50% (CST have stated that, in line with other similar companies, gross margin will be between 60% and 90%)

Unfavourable exchange rate gives only AUS$15 per unit (the selling price is US$15)

Thats a turnover of $45million and a gross margin of $22.5 million

Sexy enough?

CST has “sucker tradeâ€

G'day Martin.

It's certainly sexy enough for me. From your conservative forecast, profit of $22.5m, at a PE of 10 gives a market cap of $225m. Considering there's currently about 65m shares, that's a share price of $3.44. That's only 80% higher than the current price, so it's not great. (Presumably being less conservative you could deduce more like $6.)

Looks like there's been about a 30% increase in sales in the last quarter. (The previous six months is $0.534m, this quarter $0.353m.) If that trend continues, you'd be looking at about $0.458m in the last quarter, to give a whole year of $1.35m. Market cap now is about $123m. So that's a PSR of about 90ish.

If sales then stayed fairly solid (small growth) next year, they'd get to about $2m. At the current prices, that's a PSR of 60ish still.

To get to parity, a PSR of 1, sales would have to reach about $30m a quarter, as compared to currently about $0.35m. That's a 100 times growth in sales. I would think that there's a lot than can go wrong between selling 35k units a quarter, and selling 3.5m.

I don't think it's impossible, but there will be challenges along the way, that's all. Does this analysis sound realistic to you, Martin?

Bergholt.

Hi G and Bergholt,

First the sexy stuff.

G,not sure about the 'sucker trade' as approval could come through any day and the 'suckers' may well look smart then but equally it could take a few months.I've given up trying to guess which way the sp is going to go I just try to 'buy the dips'.Easier said than done of course.

Bergholt,CSTs distribution agreement in Japan guarantees receipts in the two years after approval in that country of $2 million.Approval is expected(US also) anytime over the next two or three months.$2 million is the minimum,this amounts to around 100,000 tests which, in a country that performs millions of tests annually, is a very small percentage.

Of course the problem with all of this is not about if approval will be received or the size of the market(I have researched enough to know that these are not an issue) but rather how long will it take to achieve the 14 million you suggest because as I see it this,i.e.time,is the biggest risk factor for CST.You alluded to this by saying that a ' lot can go wrong between .35million and 3.5million' While this is true of any company/product,CST included,I have come to the conclusion that the nature of the product/disease and the particular market reduces this risk.

What I mean by this is that QFT-Gold is a unique product that accurately detects a disease that previously has been very difficult to detect and the nature of the market is such that in countries like Japan QFT-Gold will have no rival for latent TB detection.

Unsexy stuff.

Sorry Bergholt I'm not familar with PSR (price to sales ratio?)and so don't really understand your figures but 3.5million unit sales would amount to $70,000,000 per quarter or $280,000,000 pa not the $30,000,000per quarter or $120,000,000p.a you suggest.Maybe you've factored in margins and I haven't? Also the number of shares is around 90million the 'missing' 25million are in voluntary escrow ,from memory, I think they will come out of escrow April 05.

For simplicity here's how I look at CSTs figures.I've used 60% as gross margin ,it may well be higher than this

5million unit sales = $100million

Say Gross margin 60% = $60million

Say Profit after Tax 15% = $9million

Profit
Number of shares(90mil) = 10cents= EPS

At current share price ($1.90) thats a P/E of 19

14million sales =$280million

GM 60% = $168million

Profit after tax 15%= $25.2 million

Profit
Number of shares =28cents =EPS

A share price of $6 gives a P/E of 21.4



Do those figures seem reasonable?

Martin

G'day Martin.

The PSR is the Price-to-Sales Ratio = Market Cap / Sales Revenue. My assumption is that generally a company will deserve to be priced at about one dollar for every dollar of sales. So this means that market cap approximately equals sales revenue. This is a fairly vague assumption which could well be wrong, but that's what I'm working with at the moment, just as a guide.

(At some point when I get some time I might work out PSRs for COH and CSL, as they are the most established biotechs.)

So in order to justify the current market cap, I would expect that CST would need sales of about (90m shares * $1.85 = ) $166.5m. This is then almost $42m a quarter. Which is about 125 times current sales. (Because I'm using your updated market cap.)

Looks like I used the wrong unit price, so let's try it with the correct one - A$20 per unit, I think you're saying? That's US$15 at an exchange rate of 0.75 - sounds OK but not really conservative. But let's go with that.

So last quarter they sold about 18k units (= $325k / $20). To get to $42m a quarter, they need to sell just over 2m units. So I guess my figures still hold - they would really need a 100x growth in sales to justify the _current_ price, based on this PSR analysis.

Now, I'm not saying that this is impossible, just that there are a lot of things that can go wrong, as I said earlier. Also, I'm not sure if the PSR is appropriate for a biotech, with great growth prospects.

If I look at your figures, you're conservatively projecting 5m units per year, which is still below the 8m the PSR would need to justify the current price. Redoing my reasoning using PE, NPAT of $25.2m (from your post using perfectly reasonable numbers) at PE of 10 gives market cap of $252m. If there's 90m shares, that's a price of $2.80 - still well above where we are now.

I think the disparity comes from the big gross margin which you can acheive in this industry, but I'll have to think about that some more.

When I have time, I will try comparing PSRs across Aussie biotechs. Do you see anyone more appropriate than COH and CSL?

Bergholt.