PropThink: Expecting Significant AutoloGel Ramp In 2013

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By Jason Napodano, CFA

Shares of Cytomedix, Inc. (OTC:CMXI - News) have been under heavy pressure the past six months. The stock is off 67% from the highs in May 2012 and 57% from the August 2012 decision by the Center for Medicare and Medicaid Services (CMS) to grant Coverage with Evidence Development (CED) for AutoloGel (companypress release). We've spoken to a number of investors on the subject over the past few weeks and we believe there is significant misconception of what exactly CED is, and what it means for Cytomedix almost immediately.

...A Little Background...

On August 2, 2012, the CMS issued a National Coverage Determination (NCD) for autologous blood-derived products for the treatment of chronic non-healing wounds. The decision reverses nearly 20 years for non-coverage for autologous platelet rich plasma (PRP) treatments, including Cytomedix' AutoloGel - the only FDA approved treatment option. We encourage investors to read theCMS memofor an explanation of the rational behind the decision to grant CED for AutoloGel.

What Is CED?

CED, or Coverage with Evidence Development, is full coverage by the government to Medicare / Medicaid beneficiaries seeking to use AutoloGel for the treatment of chronic non-healing wounds - more specially, diabetic foot ulcers, venous leg ulcers, and pressure ulcers. Frost & Sullivanestimatesthe U.S. chronic wound care market is $2.3 billion in size, with more than 6 million wounds treated annually.

PRP products like AutoloGel represent only a small fraction of the market share. There are dozens of alternative therapies that compete with AutoloGel, some of them commodity types of products that have established habitual use patterns or set provider contracts to encourage standardized use. There is virtually no government business for AutoloGel now. Instead, management has been focusing on private pay procedures, long-term acute care hospitals (LTAC), veterans administration facilities, and certain state medicaid agencies. However, the lack of a national coverage decision on the product has limited uptake in this area as well. CMS coverage not only kicks open the door to Medicare/Medicaid, it also meaningfully expands private pay coverage as well, as many private insurance companies follow the CMS' lead.

AutoloGel, in our view, is a potential significant leap forward in the treatment paradigm. Not only is the product more effective than the more commonly used Dermagraft (~$195M in sales in 2011) and Aligraf (~$125M in sales in 2011), but it costs less. The data below was complied by B&D Consulting in September 2007. B&D is an independent advisory and advocacy firm located in Washington. The firm completed a cost effectiveness analysis of AutoloGel compared to alternative therapies for patients with diabetic foot ulcers. Results of this study demonstrate AutoloGel offers a lower cost and better healing outcomes than the other therapies analyzed. This study waspublishedin the Journal of Advances in Skin and Wound Care in December 2008.

Cytomedix has conducted its own market research and clinical studies to assess the cost and effectiveness of AutoloGel when compared to readily available, and fully-covered, alternative therapies. For example, included in the company's dossier requesting reconsideration on NCD in May 2011 (companypress release) was a number ofcase studiescollected over the previous seven years.

Prior to filing the reconsideration application, Cytomedix published a comprehensive systematic review and meta-analysis (statistical pooling) of the use of PRP gel in wound healing in ePlasty, the open access journal of the Journal of Plastic Surgery.Data at SAWC in April 2011highlighted comparing the use of PRP gel (AutoloGel) and negative pressure wound therapy (NPWT) in the long-term acute care setting. Results demonstrate that PRP greatly improved the wound healing outcomes while also cutting costs associated with the overall treatment. The study was conducted at the Asheville Specialty Hospital, in Asheville, NC.

...Market Misconception...

Despite the significant advantages of the product on both cost and effectiveness, and massive market opportunity that lies before Cytomedix with AutoloGel, we believe that investors may be misinterpreting the CED decision. CED is not a road-block or hurdle to coverage, nor is it a stepping stone to coverage. CED is coverage. The only difference between CED and final coverage is that CMS would like to monitor the ongoing use of AutoloGel - for a certain period of time - in order to collect additional data to support its decision. This isn't an FDA clinical trial where CMS is asking Cytomedix for an outcome or a primary endpoint. Instead, CMS and Cytomedix will use a registry to monitor patients post use.

The FDA establishes hurdles, guidelines and regulations to protect patients from potentially dangerous experimental drugs and devices. Remember, the FDA already approved AutoloGel. That's not what's happening here. On the contrary, CMS recognizes the potential for the use of PRP in the treatment of chronic non-healing wounds. However, use of PRP to date has been limited due to a lack of coverage. For years, Cytomedix has been stuck in the, "How do we generate data without coverage/how do we obtain coverage without data?" conundrum  As a result, the data available is limited. CED provides the pathway from CMS to provide the coverage in order for Cytomedix to collect additional data. Perfect.

Investors unfamiliar or skeptical of CED might want to view a similar example to what Cytomedix is doing with AutoloGel to Medtronic's (NYSE:MDT - News) efforts to gain CMS coverage for its Transcatheter Aortic Value Replacement (TAVR) procedure. CMS granted CED to Medtronic for TAVR in May 2012 (seeCMS memo). The decision came with similar post-coverage stipulations as the CMS CED decision on AutoloGel. Medtronic has full coverage for the TAVR procedure, but must collect additional data for CMS at qualified hospitals via a patient registry.

Yesterday we learned that Medtronic (NYSE:MDT - News) created (and apparently CMS cleared) theTVT Registry, a benchmarking tool developed to track patient safety and real-world outcomes related to the TAVR procedure. Medtronic got the Society of Thoracic Surgeons (STS) and the American College of Cardiology (ACC) to participate in the program, which is designed to monitor the safety and efficacy of this new procedure for the treatment of aortic stenosis. Nicely done Medtronic. We have also heard, anecdotally, that Medtronic is charging centers up to $25,000 to participate in the registry. So not only are they driving uptake and collecting data thanks to some key partnerships and CED, they are selling the catheter and charging the centers to use it. And they accomplished all this in five months following the CED memo. Very nicely done Medtronic!

Cytomedix is not Medtronic, so we are not expecting management to pull off that type of a feat by January 2013. However, Cytomedix will be working with wound care centers around the country to build its registry just as Medtronic did with leading cardiac centers. The company will be usingIntellicureto aid in the collection and analysis of the data as it is being generated. Management tells us that each use of AutoloGel will generate a profit to the company. That's important for investors to understand. CED allows Cytomedix to earn a profit as it collects the data and funnels that back to CMS for review. That's different from a traditional clinical trial which normally cost companies money. Cytomedix will be selling AutoloGel with CMS coverage, and booking revenues as it ramps.

Conclusion

Above we've outlined why CED is so important to AutoloGel. There is virtually no government business for AutoloGel right now, and the lack of government business is impeding uptake in the private pay market. CED is coverage. And not only is it coverage, it's coverage at a profit to the company. AutoloGel is a superior product. Data from both independent and company sponsored studies shows that AutoloGel works better and costs less than products like Dermagraft and Apligraf. Both these products have CMS coverage and will do over $150 million in revenues in 2012. Based on conversations that we are having with investors, there is significant misconception on CED.

Cytomedix will do $0.6 million in AutoloGel sales in 2011. That's a rounding error for most companies and just a small part of Cytomedix $10 million business. It's a non-factor in the company's valuation at this point. The stock is all Angel and Aldagen; AutoloGel has been written off at this level. We loveAngel. The sales trajectory on Angel has been great and the upside is meaningful.Aldagenis a wildcard, but if just one of those trials hits, you're looking at a potential blockbuster drug. But buying into AutoloGel is where we really think investors can make money in Cytomedix. Expectations are low due to the previous sales and misconceptions on CED. That will change in 2013. AutoloGel is a $25 million product. In the hands of a big pharma partner, once that can complete with Shire (NASDAQ:SHPG - News) on Dermagraft or Organogenesis on Apligraf, and it might be a $50 million product. We're expecting a significant ramp in AutoloGel sales in 2013. The stock should retake the highs from earlier this year as that becomes more evident over the next few months.

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