In April 2010, we initiated coverage of Cytomedix (GTF) with an ‘Outperform’ rating and near-term price target of $1.50 per share. 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 Angel, Cytomedix has entered 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 a 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. In our view, the Angel acquisition put Cytomedix on a clear path to profitability. So far, 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.
Outside of the recent Sorin asset purchase, the core business in AutoloGel remains an exciting opportunity for management. Sales of AutoloGel hit a quarterly high in the second 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 Platelet-rich Plasma (PRP) Gel: A Prospective Case Series”) clearly show the power and effectiveness of the Cytomedix product. AutoloGel delivered a 97% wound response-rate in reductions in area, volume, undermining, and/or ST/T in a mean of 2.8 weeks with 3.2 treatments. This is powerful data that should help drive uptake of AutoloGel in the coming quarters, including in Europe where management is greatly expanding its distribution network.
Presenting clinical data on AutoloGel at medical conferences and publishing in peer reviewed journals remains a key focus for management’s marketing and promotion. In the coming months, management plans to present additional data on the use of AutoloGel at the Academy of Spinal Cord Injury Professionals in late September 2010 and at the Diabetic Food Ulcer conference in November 2010. Both conferences represent excellent opportunities to present impressive AutoloGel clinical data directly to the company’s target market.
Cytomedix is working to bring an enhanced next-generation AutoloGel – AutoloGel 2.0 – to the market in 2011. The company is working with bioengineers to develop a simplified and more cost-effective product. 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.
However, the biggest near-term opportunity with AutoloGel remains gaining CMS reimbursement. The company is in the process of preparing a reconsideration package to CMS that will include data from over 200 chronic wounds, up from the 40 previously submitted for authorization. This data includes an update from the 65 chronic wounds presented at OWM in April 2010, 60 to 70 new chronic wounds from AutoloGel sales, and 66+ patients that have completed treatment in the TAPS study. We expect management to file with CMS by the end of the year. We expect a response back in the third quarter of 2011.
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 above $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 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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