Fundamentals Look Good at Cytomedix - Analyst Blog

Written by Jason Napodano, CFA.

Excited About Angel

With the Angel Whole Blood Separation System, Cytomedix (GTF) has entered the rapidly growing platelet rich plasma (PRP) market for both orthopedic and cardiovascular applications. The Angel system consists of a blood processing device and disposable products used for separation of whole blood into red cells, platelet poor plasma and platelet rich plasma.

We estimate this is approximately a $50 million market growing at 10% to 15% annually, with Angel holding roughly 10% share. Use of PRP has been on the rise significantly over the past several years thanks to applications in sports medicine.

Recent data presented at the American Academy of Orthopaedic Surgeons in March 2010 demonstrated that PRP was effective at treating chronic tennis elbow, severe Achilles tendonitis and osteoarthritis of the knee. That being said, the bulk of the Angel business in 2009 was from perfusionist groups in the cardiovascular setting.

We note that there are an estimated 210 units in place at 160 customers, and 90% of the revenues are from the high margin single-use disposable sets sold along with the system. In our view, the Angel acquisition put Cytomedix on a clear path to profitability.

So far, Cytomedix management has largely used the existing infrastructure currently in place with AutoloGel, and plans to ramp sales of Angel through expanding the distribution network and use of independent representatives in 2011 and 2012. Sales of $1.2 million were in-line with our expectations for the third quarter 2010.

AutoloGel Poised for Solid Growth

Outside of the recent Sorin asset purchase, the core business in AutoloGel remains an exciting opportunity for Cytomedix. Sales of AutoloGel hit a quarterly high in the third quarter 2010. The AutoloGel system is a unique technology that enables rapid isolation and activation of platelet rich plasma from a patient's own blood specifically for the treatment of chronic wounds, including leg ulcers, pressure ulcers, and diabetic ulcers and for the management of mechanically and surgically debrided wounds.

Besides being the only approved PRP product for chronic wounds, AutoloGel has certain key advantages that we believe make it a share gainer over the next several years. These include a simple and rapid processing time and a thoughtfully designed reagent formulation and concentration that are optimal for the wound healing process.

The prospective case study evaluating the AutoloGel system and published in the June 2010 issue of Ostomy Wound Management (OWM) (Chronic Wounds Treated With a Physiologically Relevant Concentration of Plateletrich Plasma (PRP) Gel: A Prospective Case Series) clearly show the power and effectiveness of the product. The study enrolled 49 patients with 65 chronic wounds.

The average duration of these wounds before the first treatment with AutoloGel was an astonishing 48 weeks. The AutoloGel System produced a favorable clinical response in 97% of the wounds treated, resulting in a mean reduction in wound volume of 62% in less than three weeks of treatment on average.

The data also demonstrated reductions in area, undermining and sinus tracts / tunneling in a mean of 2.8 weeks with 3.2 treatments. This is powerful data that should help Cytomedix drive uptake of AutoloGel in the coming quarters, including in Europe where management is greatly expanding its distribution network.

The 65 chronic wounds mentioned above are part of an on-going wound registry maintained by Cytomedix. Since those first 65 wounds, the company has gathered data on an additional 215 wounds and is in the process of analyzing the data. These data include an update from the 65 chronic wounds presented at OWM in April 2010, 60 to 70 new chronic wounds from AutoloGel sales, and 70+ patients that have completed treatment in the TAPS study.

Cytomedix' intention to continue to support the publishing of results from this ongoing study in peer reviewed journals, as appropriate. The company plans to use this data described above, and the data from other publications / presentations help build a compelling case for a reconsideration of Medicare Part B reimbursement by the Centers for Medicare and Medicaid Services (CMS).

Cytomedix plans to meet with CMS in early 2011 to discuss plans for the filing. Management's goal is to have the filing ready to submit and then make whatever minor changes are necessary immediately after the meeting. We anticipate that Cytomedix will file the reconsideration package with CMS during the first quarter 2010. Six months after the filing, CMS will open a public dialogue prior to making a final decision three months later. Therefore, we are looking at September / October 2011 for a file decision from CMS.

Presenting clinical data on AutoloGel at medical conferences and publishing in peer reviewed journals remains a key focus for Cytomedix' marketing and promotion. Below we highlight some very impressive data presented by management in September 2010 at the Academy of Spinal Cord Injury Professionals Annual Meeting.

Spinal cord injury (SCI) represents a significant market opportunity for Cytomedix. Patients with SCI exhibit various challenges, such as decreased fibronectin activity, abnormal vascular reactions, deceased blood flow and blood supply, decreased blood pressure and poor collagen synthesis. In September, we saw very impressive data from 10 SCI patients (13 wounds). The mean wound duration prior to treatment with AutoloGel was an astonishing 58 weeks, with one wound persisting for 106 weeks. After an average of 3.2 weeks (4.4 treatments with AutoloGel), Cytomedix saw 100% response.

AutoloGel In Patients With SCI (n=10)

62% Improvement in Volume

51% Improvement in Area

69% Improvement in Undermining

30% Improvement in Sinus Tract / Tunneling

Cytomedix is working to bring an enhanced next-generation AutoloGel, which we call AutoloGel 2.0, to the market in 2011. The company is working with bioengineers to develop a simplified and more cost-effective product.

AutoloGel 2.0 employs optimized technology through changes to the centrifuge and the design of a new separation device that operates in a semi-closed system where the blood will be drawn directly into the device, removing any margin for error and providing for much better management of the waste material. This streamlines the process making the clinical procedure more efficient.

We expect a U.S. 510(k) application for the next-generation AutoloGel late 2010 or early 2011. The new version should improve the company s intellectual property protection around AutoloGel and deliver enhanced profitability for the future.

In the meantime, Cytomedix is work on commercial lots of the new packaging concept for AutoloGel have been manufactured and are on track to rollout in the fourth quarter of 2010. We anticipate the new design and component enhancements will improve the customer experience, reduce process steps and simplify the preparation of AutoloGel.

Far Undervalued

At today's price, we do not believe the market has come to grips with the transformation underway at Cytomedix thanks to the recent acquisition of the Angel Whole Blood Separation System and ActivAT Autologous Thrombin Processing Kit from the Sorin Group. Between the pent-up demand for the product and meaningful synergies with AutoloGel, investors should be excited about this opportunity. In fact, even with only modest growth in Angel, the acquisition should be accretive almost immediately.

With a current capitalization of only $20 million, we believe the market is far undervaluing Cytomedix. We estimate the company should generate revenues in 2010 above $4 million thanks to the recent acquisition of The Angel System and growing sales of AutoloGel. The current value of only 5x revenues is below the peer-group average of roughly 6 - 7x revenues, and revenues in 2011 should double.

We believe the company is on a clear path toward profitability thanks to growing revenues, high margin products, and a low-cost structure. Based on our NPV analysis, a market capitalization closer to $60 million, or approximately $1.50 per share, more fairly values Cytomedix.