Sorry I rather listen to...
Martin Rosendale CEO
Ken Fields COO
National Heart, Lung, and Blood Institute (NHLBI)
183 testimonials to Congress
A letter from the Congressional Black Caucus praising PRP
Duke University Medical Center
Johns Hopkins University Center
University of Miami/Jackson Memorial Hospital
Dileep Yavagal, M.D
Joshua M. Hare, M.D., Director of the Interdisciplinary Stem Cell Institute
Frost & Sullivan
Life Science Advisors
John Paul DeJoria 4,021,726(2012) John Paul DeJoria
Increased his position to (2013) 7,125,974
Intersouth Partners 2,737,580 4.93
CNF Investments II, LLC 634,679 1.14
HARBERT VENTURE PARTNERS LLC 423,119 0.76
Aurora Funds Limited 253,872 0.46
TULLIS DICKERSON CAPITAL FOCUS III, L.P. 126,936 0.23
New Markets Growth Fund, LLC 42,312 0.08 Less
Sentiment: Strong Buy
Sentiment: Strong Buy
by your posting history you have a very strange way of protecting your investment or is that your true agenda? Bythe way did youand Vermillion have the same English teacher inthe third grade?
On August 7, 2013, Cytomedix (CMXI.OB) reported financial results for the second quarter 2013 and announced a commercial partnership for Angel. Financial results for the second quarter were largely in-line with our expectations. In fact, Angel sales were dead-on with our forecast, coming in around $2.25 million in sales, up 38% year-over-year. Below we discuss the big news on the Angel commercial partner, reiterate the key points behind why we believe AutoloGel may finally be ready to takeoff, and conclude with some brief remarks on Aldagen and valuation.
Angel Licensed To Arthrex, Inc. For Cash & Royalties
Cytomedix announced that it had signed a five-year exclusive worldwide licensing agreement with Arthrex, Inc., for the commercialization of the Angel Concentrated PRP System. Under the terms of the agreement, Cytomedix will retain ownership of Angel, but has granted Arthrex an exclusive worldwide right to develop, manufacture, and commercialize the product. Arthrex paid Cytomedix an upfront payment of $5 million, and will make royalty payments on future sales in the low teen range (we model 13.5%). The term of the agreement is five years, with a three year renewal option.
…A Little Background On Angel…
Angel is the company's concentrated PRP device and associated disposable products used in surgical settings for the separation of concentrated platelets from whole blood or bone marrow aspirates. Angel has been the main bright spot for Cytomedix over the past year. In fact, sales have continued their impressive march upwards ever since the company acquired the product from Sorin in April 2010. Angel sales in the second quarter 2013 totaled $2.25 million, up 38% year-over-year and 7% sequentially from the first quarter 2013. Below is a graph depicting the impressive recovery and solid growth Cytomedix has been able to achieve with Angel.
Cytomedix has placed nearly 600 units into the market to date, that's up nicely from the 500-525 placed at the end of 2012. What's more impressive is that the company has been doing this with only a handful of sales representatives. The company exited 2012 with 8 full-time sales reps, and only recently increased the number to 10 as of May 2013.
Much of the growth is coming from orthopedics (sports medicine). In November 2012, Cytomedix announced U.S. FDA approval for the use of Angel for processing a small sample of blood or a mixture of blood and bone marrow aspirate (BMAC). The 510(k) approval now allows for PRP produced from either blood or a mixture of bone marrow aspirate to be combined with bone graft material and used in appropriate orthopedic procedures such as spinal fusion, healing of nonunion bone fractures and other bone grafting applications. Concentrated PRP produced from blood and bone marrow may be used in up to 90% of spinal fusion procedures. In the U.S., approximately 400,000 spinal fusion procedures are performed each year and the application of bone marrow or bone marrow concentrates has been the historical gold standard. The U.S. biologics market associated with spinal fusion procedures is approximately $700 million annually. We think an equal opportunity exists in Europe.
…A Little Background On Arthrex…
Arthrex is a global medical device company and leader in new product development and medical education in orthopedics. The company pioneered the field of arthroscopy and developed more than 6,000 innovative products and surgical procedures to advance minimally invasive orthopedics. Arthrex has twenty locations worldwide, with over 60 international distribution locations, shipping products to over 100 countries. As of year-end 2012, Arthrex had more than 1,500 employees in Southwest Florida, 700 national and international employees and about 2,000 sales associates around the world (source: company spokeswoman Lisa Gardiner).
Arthrex, Inc. - National & International Locations
Arthrex has a large commercial infrastructure supporting sales throughout the world and will immediately take responsibility for all sales and marketing activities for Angel. Angel is currently approved in the U.S., and various countries in Europe and in the Middle East, as well as in Canada and Australia.
…Why This Makes Sense For Cytomedix…
Above we noted that Cytomedix was able to generate roughly $10 million in annualized revenues from Angel with only 10 full-time sales representatives. Arthrex has 2,000 sales representatives. The company has a core focus on orthopedic products, with a strong emphasis on orthobiologics. A quick trip to the Arthrex website shows key product groups in autologous blood products, bone grafting, cartilage, cellular products, and soft tissue repair. Angel fits right in with this core focus. We can see Arthrex promoting Angel alongside its existing bone marrow aspirate cell suspension products, its BioCartilage® matrix, its Autograft osteochondral repair system, or its existing PRP autologous systems.
There are several things we believe Arthrex can do to drive Angel sales. The first is increase the Angel average selling price. To date, Cytomedix has been focusing on cardiovascular surgery and only just starting to penetrate the orthopedic market. Arthrex, with a strong foothold in orthopedics can co-mingle Angel with existing products to create kits or solutions for orthopedic surgeons. Secondly, we expect Arthrex to dramatically ramp-up the marketing and promotion on Angel - something cash-strapped Cytomedix has been unable to do. Previously, Cytomedix was relying on PRP workshops and peer-to-peer networking to get the word out about Angel. Arthrex can throw significant marketing dollars at the product to drive uptake, both in and outside the U.S. Finally, Arthrex scale dwarfs what Cytomedix had. Even if only 10% of the Arthrex sales force carries Angel, that's still a 200% increase over what Cytomedix was doing.
Angel held about 10% market share in the concentrated PRP market. With sales annualizing around $10 million, that puts the entire market at around $100 million in size. However, this is a market that is growing rapidly. Cytomedix estimates the market was only $40 million in size in 2009. Sales of concentrated PRP devices have been soaring as more data becomes available in orthopedics and sport-related injuries. Evidence that using PRP to shorten and improve healing with knee, ankle, elbow, or an ACL or MCL sprains is growing rapidly. We have seen clinical data demonstrating PRP is effective at treating chronic tennis elbow, severe Achilles tendonitis and osteoarthritis of the knee. Tiger Woods was reported to use PRP to shorten his recovery time after his ACL tear in 2008. Pittsburgh Steelers' Hines Ward and Troy Polamalu both used PRP to recover from an injury during the 2008 NFL season in which the team won the Super Bowl. New York Mets all-star center fielder Carlos Beltran used PRP to aid in his recovery from a bone bruise on his right knee. The LA Dodgers, Seattle Mariners, Denver Nuggets, and Dallas Cowboys have all embraced the use of PRP.
…How PRP Works In Sports Injuries…
Source: Jenny Vrentas & Michael Guillen, NJ Star Ledger
From a forecasting standpoint, we previously believed that Cytomedix could drive Angel sales to $12.5 million in 2015. We believe Arthrex can double that number. We suspect that Arthrex will eventually take over the manufacturing of Angel as well, reducing overhead cost at Cytomedix. We believe many of the existing 10 sales representatives at Cytomedix previously promoting Angel will be swapped over to AutoloGel. At Cytomedix, Angel was a peak $15 million product. In the hands of Arthrex, sales could easily hit $40 million in five years. Thus, our estimated 13.5% royalty payment on top-line sales from Arthrex to Cytomedix actually equates to greater net cash flow to the company starting in 2015. And finally, it allows Cytomedix to focus on increased promotion of AutoloGel, a product set for a significant re-launch into the market later this year.
AutoloGel Finally Ready For Takeoff
We note that the long-waited finish line for gaining the Centers for Medicare and Medicaid Services (CMS) reimbursement on AutoloGel seems to be in sight. This has been a long and somewhat convoluted process for investors to follow, but it is obvious that the company is making progress based on the history to date:
- On August 2, 2012, CMS issued a National Coverage Determination (NCD) for autologous blood-derived products for the treatment of chronic non-healing wounds. The decision reversed nearly 20 years of non-coverage for autologous platelet rich plasma (PRP) treatments, including Cytomedix's AutoloGel - the only FDA approved PRP treatment option for wound care.
- On March 4, 2013, CMS approved the clinical outcomes in the Coverage with Evidence Development (CED) protocols submitted by the company. This approval allowed Cytomedix to begin promoting and rolling out the protocols to physicians and patients for AutoloGel when used to treat Medicare beneficiaries.
- On March 18, 2013, CMS issued temporary reimbursement coding and claims payment instructions to its regional contractors for the use of AutoloGel in chronic non-healing wounds. The assignment of a Healthcare Common Procedure Coding System (HCPCS) code establishes the reimbursement mechanism for physicians and other providers submitting claims for services provided to Medicare beneficiaries.
- On July 10, 2013, Cytomedix, Inc. announced that CMS has issued proposed payment regulations under the Physician Fee Schedule (PFS) and the Hospital Outpatient Prospective Payment System (HOPPS) that include proposed guidelines covering Medicare reimbursement for AutoloGel.
With respect to physicians' offices, CMS has proposed that Medicare Administrative Contractors (MACs) determine the payment amount for AutoloGel for claims as they are submitted. Historically, Medicare contractors have paid these types of claims based on product invoices presented by the healthcare provider. Cytomedix will essentially get paid under the Physician Fee Schedule for what they bill - around $450 per single use. This took effect July 1, 2013. As a result, Cytomedix can immediately now go out and promote AutoloGel to physicians, mostly podiatrists and wound-care specialists, for in-office use of AutoloGel and get reimbursed full price for each sales.
For hospital outpatient services, CMS has placed the reimbursement code for AutoloGel in an Ambulatory Payment Classification (APC) that provides limited reimbursement for use of the product. Under the HOPPS guideline, AutoloGel will be reimbursed only comparable to a Level-2 debridement product, the reimbursement of which is less than $100 per use. That puts Cytomedix at a significant disadvantage trying to charge $450 for a product hospitals are only authorized to reimburse at around $100 per use. Cytomedix tells us that they are already in communication with CMS on revising the APC listing to authorize reimbursement of AutoloGel similar to a skin substitute, which would put the reimbursement for the product and associated application service in the area of $875 to $1375 per use.
Net-net, the decision in July was a positive for Cytomedix. Prior to that decision, there was virtually no government business for AutoloGel. CMS-NCD provides a pathway for reimbursement of AutoloGel to Medicare and Medicaid beneficiaries, which make up over half of the approximate 2.0 million pressure ulcers, 1.5 million diabetic foot ulcers, and 1.7 million venous leg ulcers treated in the U.S. each year. AutoloGel is the only PRP product FDA-approved for the treatment of these types of chronic wounds.
The market for products addressing chronic wounds in the U.S. is estimated to be $2.3 billion annually. Prior to CMS reimbursement, AutoloGel was significantly disadvantaged compared to competing products with full coverage, including Dermagraft (~$153M in sales in 2012) and Apligraf (~$125M in sales in 2011). Instead of going after CMS beneficiaries, management had been focusing on private pay procedures, long-term acute care hospitals (LTAC), veteran's administration (VA) 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. So the CMS coverage decision not only kicks open the door to Medicare and Medicaid, it also meaningfully expands private pay coverage as well as many private insurance companies follow the CMS's lead. The assigning of a reimbursement code for AutoloGel is important because the "G" code facilitates reimbursement in the hospital outpatient setting, skilled nursing facilities, rural health clinics, comprehensive outpatient rehabilitation facilities, federally qualified health centers, and critical access hospitals for non-healing chronic wounds.
If this can be accomplished by January 1, 2014, which Cytomedix management thinks it can, then AutoloGel immediately jumps from "extremely disadvantaged" on a reimbursement standpoint to "extremely advantaged" given the cost of only $450 per use and the potential for reimbursement at 2-3x that level. Products like Dermagraft and Apligraf cost $1500 or more per use, so wide-scale implementation of these new procedural codes could have a profound impact on the chronic wound market in 2014.
…Registry Program Underway…
Cytomedix has already announced they are working with wound care centers around the country to build the registry program. The company will be using Intellicure to 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.
Back in May 2013, when Cytomedix held its first quarter 2013 conference call, CEO Martin Rosendale said he expects to be able to treat 1,000 patients with AutoloGel in 2013. That's a significant acceleration from the approximate 300 patients treated in 2012. We wouldn't be surprised to see Cytomedix either expand their sales force to start actively promoting AutoloGel, something they have not been doing prior to this year, or strike a co-promotional agreement with a larger organization in the chronic-wound market.
…Final Thoughts On AutoloGel…
We estimate greater than 50% of the market is Medicare beneficiaries. But besides missing out on these patients, private payors were also disadvantaging AutoloGel. With CMS now on board, we expect private payors to follow suit. The economics around AutoloGel should be dramatically improved by the second half of 2013. For example, the company tells us it treated roughly 300 patients to generate $0.55 million of sales in 2012. That came with little marketing and promotional effort by the company. With CED now in place, the company expects to dramatically step-up the marketing efforts. Above we noted that some of the 10 sales representatives previously promoting Angel will be moved over to AutoloGel. On the second quarter call, management noted they would like to see 8-10 sales reps in-house by the end of the year, and then perhaps double that number again in 2014.
In the meantime, Cytomedix is focusing on driving enrollment and treating patients in one of the four CMS-approved trials to collect the data necessary under the CED pathway. These four trials include one randomized efficacy program with Grade 1 or 2 diabetic foot ulcer (DFU) patients vs. a standardized (usually and customary) care and three outcome assessment studies in broader patient populations, such as DFU patients with Grade 3 and 4, venous leg ulcers, and pressure ulcers. The primary efficacy study will seek to enroll 260 patients. In total, the company plans to enroll and treat over 2,400 patients between all four studies to compile data for CMS under the CED pathway.
The goal for 2013 is to exit the year with over 1,000 patients enrolled. This would be a three to four fold increase in sales from 2012, or to around $1.5 million. It's been a rocky-road for AutoloGel, but the potential for significant acceleration in sales in 2013 and beyond is clearly one of the company's biggest opportunities.
The company continues to look for distribution partners for AutoloGel. After the "Big Pharma" partner walked away earlier in 2012 the company immediately began conversations with new potential partners. The timing of a deal remains a wildcard, but any transaction that provides increased sales and promotion, upfront cash, royalties on sales, and the potential for backend milestones would be a big win for management. A partnership remains another, albeit more difficult to forecast, potential opportunity for Cytomedix.
What To Do With Aldagen
Enrollment in company's phase 2 RECOVER-Stroke program continues to languish along at a pace of roughly 2 patients per month. As of early August 2013, enrollment is only up to 36 patients - six higher than when the company held its first quarter call in early May 2013. At that pace, it will take 30+ months to complete enrollment at 100 patients.
It looks as though the changes made to the study earlier in the year (increasing the age and easing the inclusion / exclusion criteria based on location of the stroke in the brain) have had little impact on the enrollment pace. At this pace, we believe it might be wise for management to adjust the size of the trial down from 100 patients to 50-60 patients.
RECOVER-Stroke is a phase 2 study with a primary focus on demonstrating proof-of-concept and safety. We believe this can be effectively accomplished at 50-60 patients, albeit with meaningfully less power, than the planned 100 patients. Nevertheless, 100 patients seem unobtainable at this point so a change needs to be made.
Back in May 2013, we wrote an article posing the question, "Does Cell Therapy Hold The Key To Treating Stroke?" Cytomedix needs to get proof-of-concept and safety data from RECOVER-Stroke into the hands of potential large pharmaceutical partners with a desire to drive ALD-401 forward into registration studies. Above we noted that management is focusing on growing the commercial business with AutoloGel. We understood the impetus for the Aldagen acquistion back in February 2012, but to date there has been no validation of this expense - and it is hurting the stock.
In the end, ALD-401 may be a breakthrough cell therapy candidate for stroke. I don't know. The company is also studying ALD-301 in intermittent claudication. This phase 2 study is being funded by NHLBI/NIH and managed by the Cardiovascular Cell Therapy Research Network (CCTRN). But until management show that the either ALD-401 or ALD-301 are viable cell therapy candidates, we believe the market will continue to assign little to no value - and potentially even negative value - to the Aldagen subsidiary.
From a go-forward standpoint, the deal to partner Angel makes sense. Although Angel was the primary driver of the top-line over the past two years, we believe that Arthrex can take the product to levels far beyond what Cytomedix can obtain in-house. The sales force promoting Angel at Arthrex will be, at a minimum, ten-fold to where it was prior to the deal. Thus, although Cytomedix will only collect low-teens royalties on gross sales, by 2015 we believe the net cash flows from the deal will be positive compared to if Cytomedix continued to promote Angel alone.
The light at the end of the tunnel seems to have finally emerged for AutoloGel, so much so that management feels confident enough to monetize Angel and focus all commercial resources on product. With favorable reimbursement, AutoloGel goes from near zero sales to potentially tens of millions.
The Angel partnership deal provides Cytomedix with much-needed cash. The company reported $7.0 million on hand (pro-forma) as of August 8, 2013 thanks to the upfront payment from Arthrex. With a market value of only $45 million, we believe the shares are cheap. We are an update or two away from visibility on RECOVER, and look to see an acceleration in AutoloGel sales in 2014.
Sentiment: Strong Buy
Since you started "protecting " your investment, the stock is consistently going down.... I am from Bulgaria and English was not a language of choice in 3rd grade...... One pattern has stood out: as long as you and your other names of yours post, there is( and will not) upwards moving. Evth that the educated investors( incl verm) have said in this board has come to fruition. There will be no movement in the stock price for another 5-6 months. Regardless of your protection
You call 340k short interest...LMAO! Did you sell yet!
Q2/13 CC enjoy and GLTA!
Thank you, Michael. Good morning everyone and thank you for joining us. I’m Martin Rosendale, Chief Executive Officer of Cytomedix, and joining me on the call today is Steve Shallcross, our Chief Financial Officer who will update you on our financial results for the quarter. But before that I want to spend a few minutes and take you through the partnership with Arthrex that we just announced, the impact it will have on the company’s operations; and provide an update on the company overall.
Over the past several months our management team has undergone a thorough evaluation of Cytomedix’s assets and an in-depth review of our existing business capabilities. Based on this evaluation we are repositioning ourselves to focus all commercial resources and activities in the $3 billion US wound care market. This realignment will allow us to leverage our existing sales and marketing capabilities and build on the significant gains we have made in reimbursement while permitting expansion into new and important markets.
Based on the market access gained by the national coverage decision by CMS, we expect that AutoloGel offers the most substantial opportunity for long-term, meaningful sales growth for the company. We continue to be pleased with the sales we have been able to achieve with the Angel system, which we see as a best-in-class device, but at this point we think a partnership with an established company will result in accelerated growth – and consequently we are announcing a deal with Arthrex who already has a strong presence in orthopedics.
Let me go into some more detail relating to the Angel partnership. We are very excited to have Arthrex as a partner. This is a privately held company with an excellent track record and they are an acknowledged leader in orthopedics. We are retaining ownership of Angel but granting Arthrex exclusive worldwide rights to market the product. They have a large commercial infrastructure supporting sales throughout the world and will immediately take responsibility for all sales and marketing activities for Angel. In exchange, Cytomedix will receive an upfront payment of $5 million plus royalties on sales. The royalties are in the low teen range.
Over the past few years we established market acceptance of the Angel system and a solid growth pattern for sales of the product. The decision to partner Angel was driven by our conviction and observation that there is an opportunity for faster sales growth in the hands of a larger established company. We are confident that the extensive experience Arthrex has in this area makes them the ideal partner for Angel.
Before we signed this deal we carefully evaluated various options for Angel. Our analysis indicates that the royalty stream provided by the Arthrex agreement will ultimately result in net cash flow that is the same or higher than what we could have expected if we had continued to market the product ourselves. This deal provides further validation for Cytomedix’s products and we see it as a significant milestone. But just as important, the agreement will permit our sales and marketing functions to concentrate on what is now our primary commercial objective – AutoloGel.
Before we get into the details of the plans for the AutoloGel launch I think it would be helpful to give an update on where we stand with Medicare reimbursement. The Center for Medicare and Medicaid Services, CMS, has agreed to provide coverage for AutoloGel initially through what is known as the CED program – coverage with evidence development. This program allows for reimbursement for items and services while at the same time generating additional clinical data to demonstrate the impact on health outcomes.
As a reminder, in 2008 CMS reaffirmed the national coverage decision, or NPD, dating back to 1992 which prevented payment for autologous blood products used in wound care and effectively closed access to the market for AutoloGel. After collecting and publishing a significant and robust body of evidence, Cytomedix successfully convinced CMS to reverse that longstanding non-coverage decision in August of last year, providing access for AutoloGel never before realized. Following this decision, Cytomedix and CMS agreed to the registry-based protocols that will be used to collect patient data as evidence of effectiveness.
We announced early in July that CMS issued proposed payment regulations under the physician fee schedule and the hospital outpatient prospective payment system. I want to emphasize that this is an initial proposal made by CMS. The final regulations will not be announced until November and will take effect January 1, 2014. The release of the final regulations will be following a review and revision period that allows interested parties to make public comments. These proposed regulations will determine the reimbursed payment amount for AutoloGel in these two distinct segments of the market – the physician’s office and hospital outpatient settings.
In the first of these proposed payment rules, the physician’s office, CMS has proposed that Medicare administrative contractors determine the payment amount for AutoloGel based on the claims and invoices submitted by healthcare providers. This effectively allows the individual contractors to determine the level of reimbursement. For Cytomedix this means that we can immediately start charging a price that is economically viable. As a result, Medicare beneficiaries suffering with chronic wounds will have access to AutoloGel treatments in their doctors’ offices.
In an analysis of a 5% sample of the Medicare claims database we were able to show that 46% of all wound debridement procedures were performed in the physician’s office. So at nearly half of the available market and newly acquired access to physicians’ offices through CED represents a significant opportunity for AutoloGel.
The situation in the hospital outpatient setting is a little more complicated. For claims submitted from July 1st through December 31st this year, CMS has placed a reimbursement code for AutoloGel in an ambulatory payment classification or APC that initially provides only limited reimbursement.
While the immediate effect is that some patients who would benefit from treatment with AutoloGel may not yet have access, we remain optimistic that CMS does want the national coverage termination to be implemented successfully and will therefore ultimately arrive at a reasonable APC assignment following the public comment review and process. CMS is expected to make a final ruling in November and changes made in that final rule will become effective on January 1, 2014.
In the same Medicare claims database I mentioned a minute ago, it showed that 47% of wound debridement procedures are performed in the outpatient setting. We anticipate improved access to this market after the final HOPs payment decision, allowing us to expand quickly into the outpatient care setting.
The commercial launch of AutoloGel will proceed in a stepwise fashion beginning immediately with wound care physicians in the community and with the Veterans Health Administration hospitals. The VHA is the largest integrated healthcare system in the country, serving more than 8 million veterans a year through its 1700 facilities. We are also targeting other government health organizations to fully leverage our current position on the federal supply schedule.
By focusing on these important and underserved markets we expect to be able to meaningfully expand the number of patients treated with AutoloGel. In the meantime we will continue to lay the groundwork for launch in the hospital outpatient market and plan to undertake a major launch in wound clinics beginning in January, 2014. We expect to double the size of our experienced device and biologic sales force during 2014 to accommodate the growing number of AutoloGel treatment sites.
To summarize, the current national coverage decision provides market access for AutoloGel never available previously. We have a robust body of published clinical evidence to drive acceptance, and the evidence collection from the CED process will be valuable in expanding sales and driving future claims. Access to the federal supply schedule will facilitate acceptance in government markets such as the Veterans Administration, and initiatives to reduce healthcare expenses across all points of service will further increase the value of AutoloGel.
We are expanding our wound care sales organization today and plan to double it again in 2014. We continue to seek specialized partners to support our sales and promotion plans and anticipate that demonstration of market acceptance will drive those partnership discussions.
Now for an update on the Bright Cell technology. In May, the Data Safety Monitoring Board for the RECOVER-Stroke Trial reviewed the first 30 patients in the study and concluded that the trial could proceed, further establishing a strong safety record for the technology. The PACE Study, which is being funded by the NIH, has begun and the RECOVER-Stroke Trial continues to enroll.
While we’ve been able to attract additional sites to the RECOVER-Stroke Trial the pace of enrollment continues to be slower than anticipated. A total of 36 patients have been enrolled to date. We have begun pursuing strategic opportunities that could help us better align our R&D expense with the study enrollment and help us manage these programs with an eye to improve shareholder value.
I am confident that the plans I have just described will get us to a point where we can achieve sustainable long-term growth for Cytomedix. I believe we have set out on the right path for the company to be commercially successful, and I’m also confident that our people have the talent, drive and focus to deliver for our patients, our customers in the medical community, as well as our shareholders. Now I’d like to turn the call over to Steve for an overview of the quarter.
Thanks, Martin. Total revenues for the quarter ended June 30, 2013, were $2.4 million, a $1.3 million decrease compared to the June quarter 2012. The decrease is primarily due to nonrecurring license fee revenue of $1.8 million, recognized in Q2 2012 with respect to an option agreement we had signed with a top 20 global pharmaceutical company. Product sales however increased 30% to $2.4 million compared to the same period last year.
Overall gross margin in Q2 decreased to 44% from 73% in the same June quarter 2012. The license fee recorded in Q2 2012 had no associated cost of revenue and was a primary reason for the difference in overall gross margin year-over-year. Gross margin on product sales decreased to 43% in Q2 2013 from 46% in the June quarter of 2012. The decrease is attributable to Angel machine refurbishment costs, the medical device excise tax which took effect in 2013, and a non-cash patent amortization charge related to the AutoloGel product.
Q2 cash margins on product sales decreased to 50% from 54%. Cash margin is a non-GAAP financial measure we use as we believe it is a significant performance metric to indicate cash profitability on product sales. It is directly comparable to US GAAP measures of gross margin. We define cash margin as gross margin exclusive of patient amortization and depreciation expense which was $163,000 and $137,000 in Q2 2013 and 2012 respectively.
Total operating expenses in Q2 were $5.7 million, an increase of $0.7 million or 13% compared to the June 2012 quarter. Salary and wages expenses increased during Q2 2013 to $2 million compared with $1.8 million in the June 2012 quarter. The increase was primarily due to additional operational headcount. Total consulting and professional fees in the quarter were $1 million compared to $0.7 million in the June 2012 quarter. The increase was primarily due to CMS reimbursement-related consulting fees and higher legal fees.
Research and development expenses in Q2 were $1.2 million compared with $1.1 million in the June 2012 quarter. The difference is primarily due to one-time manufacturing charges related to the sourcing and testing of Angel centrifuge replacement components. General and administrative expenses were $1.5 million, essentially even with the June 2012 quarter. Cytomedix recorded a net loss of $5.0 million or $0.05 per share for Q2 compared to a net loss of $7.5 million or $0.09 per share last year.
Turning briefly to the results for the six-month period ended June 30, 2013, total revenues in the first half of 2013 were $4.7 million compared with $6.7 million in the first half of 2012. The decrease is primarily due to the license fee of $3.2 million recognized in 2012. Product sales for the first half of 2013 were $4.6 million, an increase of 32% year-over-year.
Total operating expenses in the first six months of 2013 were $11.8 million, up 18% from the $9.9 million reported in the same period of 2012. We recorded a net loss of $10.4 million or $0.10 per share for the six-month period ended June 30, 2013, compared to a net loss of $12.2 million or $0.17 per share for the same period last year.
Cash used in operations for the six months ended June 30, 2013, was $7.9 million. There were approximately 104.8 million shares of common stock issued and outstanding as of June 30, 2013. Cash and cash equivalents were approximately $3.4 million at June 30, 2013, up from $2.6 million at December 31, 2012. Upon receipt of the Arthrex upfront payment of $5.0 million, the company will have cash and cash equivalents of approximately $7.0 million at or about August 8, 2013.
I would now like to turn the call back to Martin for some additional comments.
Thank you, Steve. At Cytomedix we are highly motivated to drive value for our patients, customers, and shareholders. We are excited about the new partnership with Arthrex. Throughout our discussions with the Arthrex team they have consistently demonstrated the deeply ingrained values that have resulted in their exemplary record of success, and that success has allowed them to grow to become a market leader.
Cytomedix has shown that the Angel system is a best-in-class device and that double digit year-over-year sales growth can be achieved with only a modest sales effort. We believe that by applying the Arthrex talent for commercial execution and extensive resources, the market penetration for Angel will expand significantly.
By applying the same values and drive to AutoloGel that resulted in the success of Angel and taking advantage of the market access provided by the CMS national coverage decision we believe AutoloGel will capture a significant share of the wound care market and drive value for Cytomedix.
So before I open the call up to questions I would like to address a couple of questions that I get or have gotten on a fairly regular basis when investors have called me here in the office. First of all, before I do that I just wanted to make sure that I stress something with respect to the partnership announcement that we’ve just announced.
Last night after our announcement I received an email from a friend, someone who helped us with the analysis on this deal who reminded me that Arthrex is a private company and the market may not understand very well at this point exactly who they are and what they’re capable of. And I just can’t emphasize enough that Arthrex has a tremendous record of success. They’ve been able to grow their company significantly since the early ‘90s to become a market leader and they were able to demonstrate significant sales growth and growth overall during a time when we were all experiencing a global recession. So we’re very excited about this partnership and we’re expecting it to work out very well for Cytomedix and drive value for our shareholders.
One question that I get regularly is “What’s the status of discussions around an AutoloGel partnership?” Today I can say that the partners or potential partners we’ve been talking to still have not walked away from the table, but obviously the discussions have been moving at a slow pace over the last couple of months. This is mostly due to questions and clarity around CMS and the CED decision.
What we’re finding is technically based on the fact that our government tends to move slowly and has at times in the past made decisions that appeared unreasonable there is lack of comfort or lack of confidence in the AutoloGel product and the reimbursement going forward. So the follow-up question that I get to that is why am I confident? Why do I believe that CMS is going to be successful? Why do I believe that our coverage is going to be successful? So I’ll answer both of these questions together.
First of all, with respect to the partnerships what it’s going to take to move those along is evidence that we can succeed and that we will achieve what we’re claiming we’ll achieve with AutoloGel in this marketplace given our reimbursement. My confidence in that comes from a couple of areas. First of all I acknowledge that the government often makes decisions or takes actions that appear unreasonable such as providing a national coverage decision and then authorizing a payment that is limited or not sufficient to support the coverage decision.
On the other hand, the people within the government, particularly within CMS that we’ve been dealing with are very reasonable and rational. The coverage group that gave us the national coverage decision has been helping us by walking us through the contacts we need to make in order to facilitate the changes that’s required to get an approved payment in the hospital outpatient setting. The clinical data that supports the technology that’s keeping our potential partners at the table by the way is very robust, and CMS wants this national coverage decision to be successful.
So while the government doesn’t move quickly and we do have to go through the public process that’s been initiated we remain in contact with them. The contacts that we have within CMS are reasonable and rational. They’re helping us make sure that we get to everybody we need to get to to get the proper decision and that gives me the confidence that the process is going to go well for us.
So with that, Operator, I’d like to open the call to questions.
Okay, thank you. (Operator instructions.) The first question comes from the line of Jason Napodano from Zacks. Please go ahead.
Jason Napodano - Zacks Investment Research
Good morning, guys. So first question on the Arthrex deal, Marty, you mentioned that you expect cash flows to be equal if not greater based on what Arthrex can do. Can you give me a sense of the costs that you’ll be able to receive by passing Angel off to Arthrex? I’ve got to believe that your operating margin on Angel was higher than the royalty rate which you noted as the low teens. So can you give us a sense of the cost there? And then kind of the second question that builds off that, how many sales reps did you have promoting Angel as of let’s say yesterday and where are those people going to be moved to? Are all those people going to be moved to AutoloGel? Let’s just start there.
Sure. So there’s a couple of questions in there, Jason, so I’ll try to remember them and answer each of them. First of all let’s start with the salespeople. We had approximately ten salespeople in the field that were driving the success and the progress with Angel going forward. A handful of them are being asked to stay with us and join the AutoloGel sales team as we continue to drive in the wound care marketplace, and the others – Arthrex has acknowledged that our small sales team has done quite well given the market, the competition and the growth that we’ve seen with the Angel system. And so there’s interest on their part to talk with them and potentially some of them will have opportunities within the Arthrex team to continue to represent the Angel system.
So there’s cost savings for us related to the commercial infrastructure that was in place supporting the Angel system going forward. And while we’re not publicly stating what the royalty rates are at this point really suffice it to say that the overhead savings, the taking over the costs of manufacturing, other aspects of this deal – our modeling indicates that we will in fact at the bottom line see the same cash flows if you will as we would have if it were in our own hands.
Jason Napodano - Zacks Investment Research
Can you give us a sense, and I know they’re a private company so they may be a little protective, but can you give us a sense of how many salespeople they have just to try to get a sense of the difference in promotion between what you guys are doing and what they kind of plan to throw at it?
Well that’s an area specifically that they’ve asked us to shy away from – numbers of salespeople – but I’ll give you some magnitude just to give you a sense. So I told you we had about ten. The sales organization between direct and affiliated salespeople is going to be a hundredfold or better.
Jason Napodano - Zacks Investment Research
Okay, that’s helpful. And then just a little housekeeping question in terms of how you guys will recognize that $5 million – is that going to be all in Q3 here or will you recognize that over the five-year term of the deal?
Jason, this is Steve. Part of that $5 million will be allocated to assets that are going to be transferred to Arthrex, and then what remains will be amortized over the initial period of the license, the five years. And then what we’ll do is next quarter that’ll be clearly disclosed in our next filing.
Jason Napodano - Zacks Investment Research
Okay. Let’s move to AutoloGel. So Marty, I want to discuss the press release that you guys had in July on the PFS and the HOPs – I’ll use the acronyms because I can’t remember what everything stands for. But as far as the potential reimbursement codes for specific types of chronic wounds, I’m hearing that there may be kind of an all-encompassing code for DFUs or VLUs that takes place next year that could dramatically lower the reimbursement and significantly impact some of these products.
So I guess my first question is can you give us any color on the potential for a broad scale kind of reimbursement coding for things like diabetic foot ulcers or venous leg ulcers in 2014 and then give us a sense of how that might impact a product like AutoloGel which would probably fall within that range; and then what you guys can kind of do to maybe influence that decision or what other companies are doing to influence that decision? Because I’m sure there’s products out there that may fall outside of that level if kind of a broad-scale reimbursement comes through.
Right. So a couple of things: first of all, unfortunately the healthcare payment and reimbursement system in the US is extraordinarily complex and so I’ll do my best to explain these and we’ll encourage you to ask follow-on questions because I think it’s important for our shareholders to understand what’s happening here.
So HOPs and PFS that you referred to, HOPs is the hospital outpatient payment group and PFS is the physicians’ schedule, the physicians’ fee schedule basically. And what happens is that every year the payment groups within CMS issue proposed rules, and those proposed rules come out in July and those proposed rules contain every change that CMS would like to make to payments on every product, every service that they reimburse for in the following year.
And so those proposed rules that came out were each approximately about 750 pages long, and the section that pertains to Cytomedix was one line in those documents to basically identify either how the payment would be managed or what the payment classification would be.
So with respect to that in the physicians’ fee schedule they did exactly what we expected them to do, which was to make the payment carrier determined which puts us in a good position going forward. We expect the carriers to pay against our invoices. And in the outpatient setting as I’ve said they gave us a payment classification that is limited and makes it very challenging if not impossible to go into that market until it’s fixed. And so there’s a process that we go through and we get that fixed.
Now interestingly enough when we were going through this process, Jason, we ran into some significant resistance from CMS to give AutoloGel a separate and distinct product code, or a Q code like you see with some of the skin substitutes. And we didn’t understand because they didn’t share it with us why that was happening until we saw the proposed rules come out, and when the proposed rules came out CMS is proposing another rule, regulation that will potentially have a profound effect on other wound care technologies in the market.
CMS wants to do what they call “packaging,” and packaging means just as you described that the product and the service provided with the product are consolidated and packaged under a single payment classification. So in other words, with a product like AutoloGel under our G code, when a claim is made against G0460 which is our code and the physician will submit with that claim the time that was spent with the patient, the service that was provided and the product invoice then it will get paid as a package. That’s what CMS is referring to with “packaging.”
What they’ve proposed is that they intend to do the same thing with the skin substitutes such as Dermagraft, Apligraf and the other skin substitutes that are in the marketplace today and in essence package them under a single payment classification as well. Now the reason that CMS does this or wants to do this is because they attempt to package products that they view as similar if not identical products into a single payment classification and then it essentially drives cost competition, right? So if you believe that each of the products in that payment classification are the same then you would use the lowest priced or the lowest cost product, right?
Now, we’re not opposed to packaging and we believe for AutoloGel it’ll work well and we’re comfortable with the G code that we have, but it only works if the quality measures and the evidence that CMS look at in order to make decisions about which products are packaged in which payment classifications is good, solid, robust data, right? So we are preparing our comments for CMS today and those comments will be public, and we will comment both on AutoloGel and the payment classification and lay out the argument to why CMS should change that payment classification so that we can get into the payment level that we need.
But you will also see when it comes out that we’re going to comment on this overall concept of packaging, and our comment is going to reflect what I just said – that it will work and it will work fine as long as the quality data that CMS is using to assess these products is robust and they can draw real conclusions about these products relative one to the other.
And so again, how does AutoloGel fall out in that situation? We have excellent data, Jason. Again, that’s what’s keeping potential partners at the table while they’re waiting to see what happens with CED and to see if we can execute against the CED decision. It’s the data that convinced CMS to reverse a 20-year non-coverage decision in the first place. So we’re confident in that scenario, in that situation that we will be a winner. And you couple that with the fact that using AutoloGel is less costly than the other products that I’ve been talking about – this places us in a very good position going forward.
Jason Napodano - Zacks Investment Research
Yeah, so this is pretty interesting, Marty. I mean it could really have a significant impact on how wounds are treated, because it seems like under packaging there could be some products, whether they’re skin substitute products or what that will be reimbursed far below what they’re charging right now. Am I kind of understanding that correctly?
Yeah, it’s possible but I want to caution you about drawing those conclusions before the November final rule because I can tell you, first of all I explained what our comments are going to look like but obviously other companies in the wound care space and key opinion leaders as well are all going to weigh in on this. I believe that packaging is inevitable. It’s a smart and rational way to go to control costs but again, all the pieces have to be in place and there is going to be I believe a significant marketplace debate around this.
Jason Napodano - Zacks Investment Research
Gotcha, yeah, so there’s going to be lobbying on both sides. I can understand that. Just kind of a final question on your ability to kind of go out now and promote into the physicians’ offices. I assume you’re talking about podiatrists or wound care specialists and you mentioned that you’d like to expand the sales force, you’d like to maybe double it again in 2014. So just can you kind of give us a sense of… I know in terms of wounds how many wounds are out there, but can you give us a sense of how many podiatrists or how many wound care specialists, maybe talk in terms of decile that you think that you can target with your existing sales force? What are you at right now? Where would you kind of like to be to really get effective promotion of AutoloGel?
Sure. So as you can imagine we’re just making this transition, right? Our commercial focus has been on Angel while we’ve been working through the CED decision with CMS and so we’re just now facilitating this transition. And so our sales organization for AutoloGel remains relatively small at four to five people. We expect to go into 2014 with about double that and then as I pointed out double it again throughout 2014.
In my experience in specialty sales, a sales organization in the range of 25 to 30 people is a good, effective sales organization so that’s ultimately where we’d like to get to. Again, that would also be impacted by potential partnerships that we could develop along the way.
With respect to the physicians’ office market itself, obviously that’s a large market right because there are a lot of physicians out there. Some of them may treat one or two wounds; some of them likely treat a lot of wounds. You mentioned podiatrists. Podiatrists, because of diabetic foot ulcers have a tendency to treat more wounds. What we are doing right now in establishing and preparing to move forward is we’re looking to do primary research that will identify those physicians’ offices that are treating large numbers of wounds.
Now that said, I will tell you that we’ve already signed up one physician’s office network, a small office network that will be treating Medicare patients as soon as we get them trained within the next week or two. But essentially by selecting IMS data – I don’t know if you’re familiar with the IMS data system, but by selecting IMS data and looking for surrogate measures such as debridement we can determine which offices are high-volume treaters and then obviously those will become our targets. And by doing that we can improve the efficiency and effectiveness of our salespeople quite dramatically.
Jason Napodano - Zacks Investment Research
Thanks a lot, guys, I’ll jump back in queue.
Alright, thanks Jason.
(Operator instructions.) We have Jason back after rejoining the queue.
Jason Napodano - Zacks Investment Research
Hey guys, thanks for entertaining a follow-up. I guess it’s a busy morning in earnings season and lots of analysts must be on other calls. But give us a sense of the RECOVER program. I did want to talk a little bit about Aldagen. It seems like the changes that were instituted earlier in the year, kind of the protocol change to age and the ability to kind of target different areas of stroke or different locations of stroke in the brain I should say – you know, that doesn’t look like it has had the meaningful impact that maybe we thought it would have. You’re only at 36 patients.
So you mentioned that there are some things you can try to do to try and accelerate the program. I guess so the first question is can you kind of talk a little bit about where you are now with 36 patients, what you can really do to accelerate that and then the second question, do you have to get to 100 patients for this trial to complete? I mean can you wrap it up at 60 or 75 patients with the powering that you’ve built in just to try to get some data to get some proof of concept so that you can maybe bring it to partners or whatever the kind of next level is? Because it seems like trying to get to 100 patients, unless you really have a meaningful acceleration, could be kind of a long process.
Yeah, so first of all, Jason, we are exploring all the possibilities including the ones that you just mentioned. And I don’t have conclusions for you today but please understand that we’re very aware of the cash expense of this study and so we are exploring all of those possibilities. Your observation is accurate – the changes that we talked about with respect to changing the protocol, allowing us to treat a broader variety of strokes, allowing us to expand the inclusion and exclusion criteria, even with those changes that we expected to have an impact on the enrollment rates, our enrollment rates have been pretty consistent and unchanging since about November of last year.
So we haven’t had a lot of impact on our ability to enroll the study any faster. So that’s what’s driving our current analysis of the situation and as I said we’re looking at all those possibilities, including the ones that you mentioned specifically.
Jason Napodano - Zacks Investment Research
Is there a lot of competition in terms of trying to get these patients? I know of a couple other stroke trials going on but nothing seems massive out there and it seems like there’s obviously a large number of stroke patients. So what do you think are the one or two main reasons for the slow enrollment?
Well, I have to be a little careful that I don’t get too much into conjecture here but we haven’t seen a lot of direct competition over sites. Most of the sites that we’ve contacted and that have expressed interest are sites that aren’t doing one of the other studies that you mentioned you’ve seen out there. So we’ve not seen a lot of competition directly for the sites. And you’re right – there are a lot of stroke patients out there.
I think in analyzing it retrospectively we’ve seen a couple of things. One, we’re catching these patients and their families at a time when they’re just dealing with something that has a profound effect on them and their lifestyle, right? And they’re having to make a lot of decisions about how to care for their loved one, the impact it’s going to have on their life and it becomes challenging for them to make another decision such as one around whether or not they should consent to a clinical trial. So we’ve seen that.
We’ve also talked to others in the industry and we’re finding that we consistently hear that cell therapy studies can be difficult to enroll. And this is something that I hope we can address as an industry, and I’ve had some conversations with others in this space and it’s because of a perception by the layperson of what a cell therapy is and what a stem cell is and frankly what it is not. And so I hope through organizations like [AARM] and others we can as an industry address that and better educate the population so that they’re not nervous or afraid of cell therapies in the context of stem cells.
Jason Napodano - Zacks Investment Research
Thanks for answering all my questions, guys, and congrats on the Arthrex deal.
Thank you. And now I’d like to turn the call back over to Martin Rosendale for closing remarks.
Thank you, Operator. So once again I would like to thank everybody for joining us this morning. I realize that for many of you especially out on the West Coast it’s quite early. Just to reemphasize we are very excited about our announcement last night with respect to the Arthrex partnership and I’ll look forward to reporting on our progress next time. Thank you very much. Less
Sentiment: Strong Buy
Sentiment: Strong Buy
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