Cytomedix: Reimbursement Coverage Opens the Door
Report Date: 1/22/13
Ticker: CMXI (OTC)
Current Price: $0.70
Target Price: $5-10 in 12-18 months
Shares outstanding: 92M approx.
Watchtower Research would like to welcome you to our inaugural report. We hope it is the first of many highlighting a stock that is on the verge of tremendous price appreciation. We were reluctant to have the first Watchtower stock trading below $1/share and our service labeled a “penny stock” service. However, the opportunity with Cytomedix is just too great to pass up. The 70 cent current price is allowing for a possible 7-14 fold return in our opinion. Unlike many “penny stocks”, Cytomedix is a legitimate company that has a credible management team and a strong business plan that will pay off for shareholders in 2013 and beyond. Now let’s get into the thesis.
Cytomedix has three business lines- AutoloGel, Angel and Aldagen. AutoloGel is the driver of our thesis and the reason why we see the stock getting to at least $5 in the next 18 months. This product is what the bulk of our report will focus on. Angel is a nice potential business, but will be a slow grower for the time being and currently not worth a whole lot. Aldagen is a lottery ticket. By early 2014, we should know whether Aladagen is worth $400-500 million by itself or very little. If their drug trial is successful, it can take the stock to $10, but if not, AutoloGel alone will drive the stock over $5.
AutoloGel is a platelet-rich plasma (PRP) treatment for chronic non-healing wounds. The vast majority of these wounds are diabetic foot and leg ulcers and pressure uclers. The AutoloGel PRP treatment works by taking the patient’s own blood and putting it in a centrifuge to concentrate certain growth factors; then combining these with other growth factors (e.g. cytokines, chemokines) to deliver a platelet gel. This gel is then placed on a chronic wound to encourage cell growth and tissue formation so that a non-healing wound can be transformed into a wound that heals naturally. The FDA approved AutoloGel as a treatment for chronic wounds in September 2007 and is the only PRP treatment approved for this purpose. Interestingly, Cytomedix stock traded at $5.25/share shortly after this FDA approval. However, CMS (Centers for Medicare and Medicaid) declined reimbursement coverage for the Autologel treatment in December 2007 and the stock plunged below $1/share.
Before we get into what has developed with CMS reimbursement since the end of 2007, let’s look at this chronic wound care market. First off, it’s HUGE. Frost & Sullivan estimated this market was $2.3 billion in 2010 with 6 million wounds treated annually. Here is a breakdown:
Second, the chronic wound care market is only going to get larger because of diabetes. If you google “diabetes growth rate” there is plenty of evidence that suggests diabetes is the fastest growing disease in the world with no end in sight. It is a worldwide epidemic now. Diabetic ulcers are the fall-out of long-term diabetes. Doctors are pressed for treatment of these ulcers and other non-healing wounds. Otherwise, amputation is necessary.
So why does this chronic wound care market need AutoloGel’s PRP system? Because it WORKS MUCH BETTER and COSTS MUCH LESS than any other treatment available. Look at the chart below at the percentage of chronic wounds the AutoloGel system heals versus competing treatments. Then look at the cost over 5 years of the various treatments.
The case for using AutoloGel as the preferred treatment is very strong. If you really want to pore over the scientific data on the efficacy of AutoloGel then start here:
And in case you need a stronger grasp on how serious these ulcers are, here is an example of one healed by AutoloGel.
In slide A, we have a diabetic heel ucler. In B, the wound is debrided and started on NPWT (negative pressure wound treatment). In slide C, NPWT is discontinued and AutoloGel PRP is initiated. In D, we see AutoloGel healed the wound after 63 days of treatment.
So with AutoloGel being better and less costly than other treatments, why did CMS deny coverage in 2007? Well, the FDA is concerned with safety and efficacy and CMS is concerned with saving the Medicare/Medicaid system money. Cytomedix was just not prepared back then to present a case on how AutoloGel was cost effective for CMS. That all changed when Cytomedix brought its case back to CMS in 2011 after years of gathering data and running trials. On August 2, 2012, CMS issued a memo that gave full coverage for AutoloGel in its CED (coverage with evidence) program. The CED program essentially means that Cytomedix will have to keep a registry of treated patients and track their progress so that CMS can monitor the cost effectiveness of AutoloGel to the Medicare/Medicaid population for a set period of time. It also means that Medicare/Medicaid providers will soon start receiving reimbursement for AutoloGel use and that will make all the difference in their willingness to use it on patients. This is also huge for Cytomedix as it will open the door for reimbursement from private insurance companies as they tend to follow CMS’ lead.
The Dermagraft Comparison and Valuation
Scroll back up and look again at a previous table at the 81.3% vs. 30 % effectiveness of AutoloGel vs. Dermagraft. Then also consider the cost over 5 years of $15K for AutoloGel and $40k for Dermagraft. Now think about this- Dermagraft is only approved for foot ulcers and not leg ulcers and yet, after CMS reimbursement, Dermagraft sales soared to about $125M in 2010 and then $195M in 2011. Shire Pharmaceuticals bought out Dermagraft for $750M in June of 2011!
So a product that costs more than double of AutoloGel, is less than half as effective, and can only be used for foot ulcers, is doing a few hundred million dollars in sales very quickly in this chronic wound market. Now imagine what is going to happen to AutoloGel sales now that CMS coverage has been given and the reimbursement rates will be set very shortly.
Once the final CMS protocol and reimbursement rate is set in the next several weeks, Cytomedix plans to dedicate more of its own sales staff to support this product. However, the company has been very clear that it is in negotiations with multiple dedicated wound care companies that have much larger sales forces to distribute AutoloGel. Watchtower expects Cytomedix to complete a distribution deal in the first half of 2013 with a major wound care company that will enable AutoloGel to ramp up to $350-$500M in sales over the next few years. Considering typical royalty rates Cytomedix would receive in that type of deal, a $500M valuation or over $5/share should be achieved in the next 12-18 months just based on the AutoloGel product. Remember, Dermagraft got bought out for $750M and is more costly, much less effective, and can only be used on foot ulcers.
The Angel product is also PRP system, but designed for orthopedic and other niche applications like hair restoration. Many professional athletes have used PRP to treat knee and shoulder injuries to rave reviews (Tiger Woods, Alex Rodriguez, Kobe Bryant and Hines Ward to name a few). However, at well over $500 per injection and insurance coverage not on the horizon, this is not a product we see having a major impact on Cytomedix valuation in the next few years. Nevertheless, with Angel now approaching $2M in sales per quarter with modest growth, it is a great source of cash flow to the company.
In February 2012, Cytomedix acquired privately–held Aldagen, a biotech company developing stem cell therapies. Aldagen has a pipeline of opportunities based on its ALDH bright cell technology, but ALD-401 for ischemic stroke is the big potential valuation driver for Cytomedix in the next year.
Currently, a stroke victim needs to be treated within 3 hours of onset with tissue plasminogen activator (tPA) to help dissolve a clot. A high percentage of stroke victims are not diagnosed early enough to receive this treatment. After this three-hour period there are no approved treatments for ischemic stroke other than to eventually send the patient to physical therapy. ALD-401 is in phase II trials and is administered 13-19 days after an ischemic stroke. This would allow for all ischemic stroke patients to receive this treatment. The pre-clinical data was very promising and the top line data for the 100 patient phase II trial should be available in early 2014.
Aldagen shareholders took a large part of their acquisition price in the form of Cytomedix stock (approximately 20M shares) contingent on the success of the ALD-401 trial. They obviously have a lot of confidence in this therapy. Watchtower believes this is a potential multi-billion dollar treatment if FDA-approved due to approximately 700,000 ischemic strokes per year in the U.S. and the lack of stroke therapies available. However, Aldagen remains a wildcard as drug trials are binary events and it is difficult to handicap the outcome of a phase II trial. If this trial is successful though, the interest by large pharmaceutical companies would be tremendous and easily add $400-$500M in valuation to Cytomedix stock. This would be a huge bonus for CMXI shareholders.
AutoloGel is why Watchtower sees Cytomedix stock as a huge winner over the next 12-18 months. The CMS hurdle has finally been cleared and there is a very large chronic wound market in need of effective therapies. AutoloGel is arguably the best therapy available. A large wound care distribution partner will only accelerate their market penetration and this event seems highly likely. Aldagen is a lottery ticket, but if the ALD-401 phase II trial is successful, that should double CMXI stock price to $10 from the $5 target based on AutoloGel alone.