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  • philphillyguy philphillyguy Aug 16, 2013 7:04 AM Flag

    Great Cytomedix read 8-16-13

    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.

    Sentiment: Strong Buy

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