We are initiating coverage of Cytomedix (GTF) with an ‘Outperform’ rating and near-term price target of $1.50 per share. At this 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 completed on April 9, 2010.

Management acquired these two key assets for a price of $7 million in cash, with $2.0 million upfront and $5.0 million in the form of a promissory note payable in installments over the next 2.5 years.

The Angel whole blood separation device reported sales in 2009 of approximately $4.8 million, up 7% from 2008, and generated profits of approximately $1.7 million. Cytomedix exited 2009 with $2.1 million in cash and investments, and in April 2010 raised approximately $3.65 million through the issuance of convertible preferred stock and warrants. Therefore, we see little concern at this point on management’s ability to meets its future obligations to Sorin. In fact, with assuming only modest growth in Angel, the acquisition should be accretive almost immediately.

With Angel, Cytomedix now enters the rapidly growing platelet rich plasma 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 (PRP). 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 200 units in place at 150 customers, and 90% of the revenues are from the high margin single-use disposable sets sold along with the system.

We are excited about this acquisition and believe it creates a clear path to profitability for the company. Management will largely use the existing infrastructure currently in place with AutoloGel and should be able to ramp sales of Angel through expanding the distribution network and use of independent representatives in 2011 and 2012.

Outside of the recent Sorin asset purchase, the core business in AutoloGel remains an exciting opportunity for management. 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.

Stock Far Undervalued

With a current capitalization of only $21 million, we believe the market is far undervaluing Cytomedix. We estimate the company should generate revenues in 2010 near $5 million thanks to the recent acquisition of The Angel System and growing sales of AutoloGel. The current value of only 4x revenues is far below the peer-group average of roughly 6-7x revenues.

We believe the company is on a clear path toward profitability in 2012 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 accurately values Cytomedix and the future earnings potential for the company with AutoloGel and Angel.

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