A frivolous lawsuit filed hoping to drive the price down. Someone’s naked shorts will be exposed soon. The boiler room law firm then takes their phone off the hook for 2 days. This couldn’t get funnier. Then the usual loser is jumping all over the news. Now the equity goes up over 4% today.
Sentiment: Strong Buy
Q1 2014 financial results were nothing to get excited about. We believe it may take 1-2 more quarters before real progress is demonstrated.
Despite being early on our call, we are confident that Cytomedix has a bright future based on sizable revenues opportunities for both Angel and AutoloGel.
Cytomedix' valuation is extremely attractive. We believe the shares are worth 3x the current value. We expect significant progress to be demonstrated by year end 2014.
On May 16, 2014, Cytomedix, Inc. (OTCQX:CMXI) reported financial results for the first quarter ending March 31, 2014. Total revenues in the quarter were $1.85 million, down 20% from the first quarter 2013. Revenues were driven by $1.42 million in product sales derived from both Angel and AutoloGel and $0.42 million in licensing fees, royalties, and other revenue related to the company's licensing agreement and commercial partnership with Arthrex, Inc. signed in August 2013. Product sales declined 37% from the first quarter 2013. Gross margin in the quarter was only 21%. It was ugly, and looks like a big concern for shareholders. But investors need to understand the dynamics of the new income statement at Cytomedix post the Arthrex, Inc. transaction.
…Let's Talk About Angel and The Gross Margin…
The primary reason for the significant decline in product sales in the first quarter 2014 is simple - Cytomedix no longer books product sales on Angel, they book the transfer price on Angel sold to Arthrex. Big difference! Based on historic gross margin, we believe this number is around 60% of the original product sales. That alone explains the year-over-year decline in revenues.
Below the top line, Cytomedix makes a small mark-up on the transfer price to Arthrex, and books its full cost of goods sold. For the purpose of our model, we assume the transfer price mark-up is 2.5%. This is the reason why gross margin in the first quarter looks so terrible. Until AutoloGel takes off or the royalties from Arthrex start rolling in, Cytomedix revenue line and cost of goods sold line are separated by a thin transfer price. The company then books "low-teens" royalties on end-user product sales of Angel at Arthrex. This number equated to $0.26 million in the quarter, up from $0 in the first quarter 2013. Using this number, we can then back-calculate the end-user product sales of Angel in the first quarter by using a best-guess royalty rate of 13%. This number equates to $2.1 million, or about what Cytomedix was doing before Arthrex showed up.
On the first quarter call, CEO Martin Rosendale noted that Arthrex just recently launched the product in April 2014 under its own banner. During the entire first quarter 2014, Arthrex was just maintaining the previous in-place business while they worked on developing new kits and new components, all which will include a higher selling price than what Cytomedix was selling Angel for in 2013. If one visits the Arthrex, Inc. website, several new products packaged with Angel can be seen. These include bone marrow aspirate cell suspension products, its BioCartilage® matrix, its Autograft osteochondral repair system, and its existing PRP autologous systems. None of these products were actively promoted in the first quarter 2014, but they are now.
So what we think is going to happen is a significant ramp in the end-user revenues associated with Angel in the very near future. Angel was a $10 million product at Cytomedix promoted by a handful of part-time representatives. Arthrex is going to turn it into a $75 million product thanks to higher ASPs, bundling with new products, and 1,500 full-time sales reps beating down the doors of orthopedic and cardiovascular surgeons. As a result, we believe that royalties to Cytomedix are going to dwarf the previous profits Cytomedix booked rather quickly. As royalties grow with 100% gross margin, the gross profit margin reported should also dramatically recover in the coming quarters.
…Focus Now On AutoloGel…
With Arthrex now handling Angel, and Aldagen shutting down (more on that later), Cytomedix is squarely focused on growing AutoloGel. AutoloGel sales in the first quarter 2014 totaled $0.165 million. Gross profit on AutoloGel in the quarter totaled $0.077 million. This is nothing to get terribly excited about. But similar to Angel, investors need to understand what's going on here. Cytomedix just received reimbursement under HOPPS and PFS effective January 1, 2014. These new payment rules are going to take a few quarters to funnel their way through the system. However, the important thing to understand is that these new payment rules have dramatically enhanced the commercial viability of the product.
For example, under the new classification in Hospital Outpatient Prospective Payment System (HOPPS) as a Level-2 skin substitute (APC-0327) AutoloGel will be reimbursed at an average rate of $411 per treatment encounter. This is roughly a five-fold increase from the average reimbursement under HOPPS for AutoloGel of $74 in 2013. We believe this represents approximately 65% of the Medicare market for the treatment of chronic wounds. Reimbursement under the Physician's Fee Schedule (PFS) is being directed by the Medicare Administrative Contractors (MAC) based on claims submitted by individual healthcare providers.
We believe that reimbursement at $411 average per treatment is a highly-profitable product to both Cytomedix and the hospital outpatient facility or physician's office. We believe Cytomedix was previously selling AutoloGel "at cost" in 2013, which was around $74. As such, Medicare business prior to 2014 was virtually nil. Instead, the company was focused primarily on the limited number of private payer and long-term acute care facilities that were paying for AutoloGel. In 2013, this business generated $0.6 million in revenues to the company. Today, with national coverage under CED and a dramatically leveled playing field in the wound care market, it's a whole new ballgame for Cytomedix. The focus over the next six to nine months is on execution.
Earlier in the year, the company noted that claims under PFS are getting kicked back from improper coding. It is clear that there are still bumps in the road under both PFS and HOPPS. As such, the company is holding off on hiring and expanding its sales force. Instead, management has brought in talented senior leadership to point the ship in the right direction before they put their foot on the gas pedal. We note two recent hires:
Dean Tozer: Mr. Tozer brings more than 25 years' experience in the global healthcare industry and has an established track record of successfully launching and marketing wound care products. From 2006 to 2011, he was Senior Vice President at Advanced BioHealing Inc. where he was responsible for the acquisition and reintroduction of Dermagraft into the U.S. market. Subsequently, Mr. Tozer became Vice President of Corporate Development at Shire Regenerative Medicine following the acquisition of Advanced BioHealing, where he led the business development efforts for that division including the 2012 acquisition of Pervasis Therapeutics. Mr. Tozer was also a founding executive and officer of the Alliance for Regenerative Medicine, where he served as Treasurer. He earned a Bachelor of Commerce degree from St. Mary's University in Halifax, Canada and is a Certified Management Accountant.
Jennifer Linsky: Ms. Linsky also joins Cytomedix from Shire Regenerative Medicine, where she was a National Accounts Manager and National Manager of Market and Business Development. At Shire, she launched a business development and comprehensive disease management program initiative that increased the diabetic wound market potential nationwide. Ms. Linsky also spent more than 7 years in positions of increasing responsibility at GlaxoSmithKline, culminating in her promotion to a four-year position as a District Sales Manager. Ms. Linsky earned a Bachelor of Science in Nutritional Science/Pre-Medicine and graduated cum laude from Auburn University.
These are great hires by Cytomedix to oversee the re-launch of AutoloGel in 2014. Dermagraft was a product that struggled for a period of time prior to CMS reimbursement. However, post national coverage by CMS, Dermagraft sales took off, ramping from under $10 million in 2007 to over $150 million in 2012. But now the wound care market share changed. Dermagraft is no longer advantaged. In fact, the changes instituted by CMS in late 2013 made Shire divest the product because the sales opportunity has been significantly impaired. Nevertheless, the economics for AutoloGel are attractive under the new payment schedules and we believe the experience of Mr. Tozer and Ms. Linsky will help Cytomedix realize the potential of the product once many of the remaining "kinks" with respect to coding and filing claims gets worked out.
As far as the required clinical programs under CED, all things look to be on track. By the end of the year, management expects to have over 1,000 patients enrolled in all four programs combined. We remind investors that the four CED programs include one randomized clinical trial (RCT) seeking to enroll 280 patients with varied wounds, and then three separate registry programs each seeking to enroll up to 750 patients with diabetic foot ulcers, venous legs ulcers, and pressure ulcers, respectively. Management expects the RCT program to fully enroll in 2014. The other three programs, as well as any new programs the company elects to initiate, will likely enroll and report data in 2015.
This means by 2015, Cytomedix will have one of the largest data sets in the entire wound care market. Last month we attended the Symposium on Advanced Wound Care (SAWC) in Orlando, FL. We spent over three hours on the massive exhibit hall floor, having conversations with various companies and wound care professionals. Almost every major advanced product for the treatment of chronic wounds was there on display, including Dermagraft®, Apligraf®, Epifix®, Grafix®, Oasis® Wound Matrix, Regranex®, MatriStem®, and AutoloGel®.
Exploring the exhibit hall floor, we observed the following:
1) The wound care market is highly fragmented, with no major player holding over 25% share. Prior to CMS packaging, which has taken effect January 2014, market share was driven by a combination of active and aggressive promotion from some of the industry's top players and economic incentives from physicians.
2) The changes instituted by CMS to wound care reimbursement in 2014 will have a dramatic and profound effect on new market share. Past leaders, Dermagraft and Apligraf, each having posted over $100 million in sales in 2013, will see their business struggle in 2014 (note that Shire has divested Dermagraft and privately held Organogenesis recently slashed its staff).
3) High quality data are lacking in the wound care market. Most data are retrospective and randomized controlled trials are small. Cytomedix is currently enrolling four clinical programs with a goal to have data on over 2,500 by the end of 2015. We believe additional programs are planned. This will help the company dramatically increase awareness for AutoloGel in the coming quarters. Data is the primary way for Cytomedix to distinguish AutoloGel from the dozens of generic bandages and skin-substitute products we saw at SAWC. The company already has nine peer-reviewed publications. Data from 1,000+ patients is going to arm the Cytomedix sales staff with the kind of ammunition to drive meaningful market share gains in 2015. But keep in mind, AutoloGel is already FDA approved, so while Cytomedix is collecting data from these four trials, they are also booking full revenues on the product.
4) Cost will play a much bigger role in the sustainability of wound care products than ever before thanks to CMS packaging. We believe AutoloGel has 70% gross margin under existing pay rules for HOPPS and PFS, and that should allow Cytomedix ample profitability for active promotion and favorable economics to the wound care professional. This is why we believe Cytomedix will gain sizable market share in the coming quarters.
At SAWC, Cytomedix presented at posted on Saturday, April 26, 2014, entitled, "Platelet Rich Plasma Gel Consistently Reduces Pressure Ulcer Size" (Poster No. CS058, Carelyn P. Fylling, RN, MSN, CWS, CLNC Vice President, Professional Services and Laurie Rappl, PT, DPT, CWS Clinical Specialist - Cytomedix, Inc.). The purpose of the poster was to demonstrate that AutoloGel (autologous platelet rich plasma) could provide an effective topical treatment for difficult to treat pressure ulcers.
The poster presented findings from 46 patients (58 pressure ulcers) treated at long-term acute care facilities in the U.S. with AutoloGel. The mean baseline wound for this study at an area of 27.6 cm2 and volume of 71.9 cm3, with an average duration of 45.9 weeks. We present the key findings from the analysis. Results show a consistent and impressive improvement in both wound area and volume following ~3.5 weeks and 4-5 treatments with AutoloGel.
The company currently has nine sales representatives out in the field promoting the product, with a goal of 20 by the end of the year. That's clearly not enough to target all 2,000 specialty wound care centers in the U.S., but it's a nice start. We went back and looked at the magnitude of business that Advanced BioHealing was doing with Dermagraft in 2012 prior to its acquisition by Shire Pharmaceuticals. ABH had Dermagraft sales near $150 million annualized at the time of the deal, with about 100 full-time representatives. That equates to around $1.5 million per rep. If Cytomedix can match even half that efficiency, with a goal of 20 reps in the field at year-end 2014, Cytomedix could be annualizing at $15 million in revenue with AutoloGel in 2015. That's an incredible ramp!
If we look at the base generated in 2013 of $0.6 million, we think CMS reimbursement kicks open significant opportunity for expanding sales with long-term acute care facilities, non-Medicare patients, and VA hospitals. Specifically, we believe Cytomedix can turn that $0.6 million base business in 2013 into $1.5 million in 2014. Additionally, by just enrolling the four CED programs in 2014, we expect the company to generate $3 to $5 million in revenues. Ultimately, $15 million in sales may be an aggressive assumption for 2015 given that the company does not plan to bring these new reps on until the second half of the year, but with 20 reps to enter 2015 and a long-term goal to get to 60 reps in a few years, AutoloGel sales should surge in 2015 and 2016.
As noted above, priority one is standardizing the policies and procedures under the new CMS payment rules, enrolling the CED trials, and working with PFS and HOPPS groups to iron out and kinks in the process so that when the reps do come on board, or a deal with a pharmaceutical company is struck, the ramp goes smoothly. Given the size of the wound care market at an estimated $3.4 billion, and the fact that AutoloGel has an FDA approved label for all three wound types - diabetic foot ulcers, pressure ulcers, and venous leg ulcers (note: Dermagraft and Apligraf has label indication only for diabetic foot ulcers) - and the favorable economics associated with AutoloGel, nine peer-reviewed publications, massive data to be in hang in 2015, CMS clearly on the company's side with respect to low-cost / effective pricing, we see Cytomedix as uniquely well-positioned in this market. In our view, AutoloGel is looking like it has peak sales in the $100 million range.
…Stroke Trial Fails, And We Shall Speak Of It No More…
On May 5, 2014, Cytomedix announced that the RECOVER-Stroke trial failed to meet the primary endpoint in a Phase 2 study. Management was obviously disappointed in this result, but it was something that we fully expected all along. We had previously assigned no valuation in our model for ALD-401 in stroke. As a result of the stroke trial failure, Cytomedix will cease operations at Aldagen and close its Durham, NC manufacturing and R&D facility. We expect cash charges of roughly $600,000 to be recorded in the second quarter 2014, an enormous non-cash write-off in the second quarter (note the balance sheet shows intangible assets at nearly $34 million), and yearly cash savings of around $4 million.
We remind investors that the PACE study with ALD-301 in peripheral arterial disease continues, with around 30% of the target population enrolled. This study is being fully-funded by the NIH and Cytomedix has no ongoing costs or responsibilities to the program. Full enrollment should take place in about 12 months. We are not expecting data from PACE until late 2015 or early 2016. At this point, it is an after-thought in our model.
…Not Profitable, Yet…
Net loss for the first quarter 2014 totaled $5.63 million, or $0.05 per share. Operating burn in the quarter totaled $3.99 million. Expenses were driven primarily by $0.95 million in R&D and $4.09 million in SG&A. We do not see the company obtaining profitability in 2014. We believe it will take until 2016 before the company reports positive EPS on a GAAP basis. We remind investors that we expect a fairly sizable GAAP loss to be reported in the second quarter 2014 resulting from closing down Aldagen - we estimate a non-cash write-down of around $20 million.
We think it is possible the company can achieve positive cash flow from an operating basis by the end of 2015, but 2016 is more likely. As a result, we acknowledge that our recent upgrade of our rating to 'Buy' in April 2014 is early. However, with the fundamental improvement we expect to occur over the next several quarters we believe downside is limited and upside is tremendous.
…Finally, The Cash To See Things Through…
On March 31, 2014, Cytomedix announced a tiered financing agreement with Deerfield Management Company and Anson Group. Under terms of the agreement, Deerfield has agreed to provide up to $35 million in capital to Cytomedix through a senior convertible note. The commitment will be funded in two separate tranches. Deerfield initially provided $9.0 million at the closing of the transaction (which took place on March 31, 2014). The senior note is convertible into Cytomedix common stock at $0.52 per share. This equates to 17.3 million shares. Deerfield also received 25.1 million warrants to purchase Cytomedix common stock at an exercise price of $0.52 per share; these warrants expire on March 31, 2021. Tranche two of the transaction will occur after Cytomedix obtains shareholder approval to increase the authorized share count. We note the current authorized share count is 200 million and as of March 24, 2014, Cytomedix had a basic count of 121.7 million plus another 82.7 million in stock options, warrants, and convertible notes. That puts the fully-diluted number at 203.9 million, slightly above the authorized amount, and thus not allowing tranche two to take place. Once the authorized amount has been increased, Cytomedix can collect tranche two of the Deerfield transaction, which includes expanding the senior convertible note by another $26 million. Under the same terms as the first tranche, this equates to 50.0 million shares of common stock when converted and 67.5 million warrants to purchase common stock at $0.52 with seven-year term.
The company also secured $2.0 million from Anson Group. Under terms of the agreement, Cytomedix issued 3.846 million shares of common stock at $0.52 per share to raise gross proceeds of $2.0 million. Anson also received 2.884 million warrants to purchase common stock at $0.52 per share. The warrants expire on March 31, 2019.
Once the authorized share count has been raised, we expect Cytomedix to seek shareholder approval to conduct a reverse split of the common stock. The company's goal is to seek uplisting of the common stock to the NASDAQ exchange. The share count and reverse split are separate transactions. Cytomedix authorized share count splits in the same ratio as the common stock outstanding, so both a split and increase of the authorized count is necessary for NASDAQ listing. NASDAQ listing during the second half of 2014 is the goal.
To value Cytomedix, we are doing a simple "sum-of-parts" valuation for the two drivers of the top line: AutoloGel sales and Angel royalties. We believe AutoloGel is a $100 million product for Cytomedix. We believe Angel is a $75 million product for Arthrex, Inc., of which Cytomedix gets low-teens royalty. We apply no value for ongoing clinical programs with ALD-301 in peripheral arterial disease or ALD-351 in glioblastoma.
The wound care market is $3.4 billion in sales, with a dramatic shift towards cheaper, easier to use, more effective products expected in 2014 thanks to a monumental CMS decision in November 2013. AutoloGel is a highly-effective product with favorable economics to both payers and providers. The AutoloGel label includes approval for use in all three major wound categories, providing a distinct competitive advantage over completing products looking to crack private formularies and gain use in VA hospitals and long-term acute care facilities. The four CED programs that Cytomedix plans to enroll in 2014 should generate a few million in sales alone in 2014. Assuming modest growth in the base business, AutoloGel sales should eclipse $3 million in 2014. Industry analysis of previous wound care products suggest that with 20 reps, AutoloGel could do $12.5 million in revenues in 2015 and $25 million in 2016. With peak sales in the $100 million range by 2018, a premium 5x price-to-sale multiple, and a 20% discount rate, AutoloGel alone is worth $235 million in market value.
Arthrex Inc. should be able to turn Angel into a $75 million product by 2018. They will accomplish this through a combination of dramatically increasing the sale and promotional effort, raising the price of the device, and coupling Angel with other Arthrex products and developing custom kits for things like bone marrow aspiration. Cytomedix received a low-teen royalty on sales of all Angel and Angel-coupled products at Arthrex, plus a small low-single digit mark-up on finished goods transfer (netting around 15% all-in economics). With $75 million in peak sales and 15% economics, applying the same valuation measures as noted above with AutoloGel, Angel is worth $30 million in market value.
Summing these parts two parts together and we believe Cytomedix shares are fairly-valued right now at a market value of $265 million, or around $1.50 per share. We fully understand the stock is in "show-me" mode and that the top line probably will not take off meaningfully until 2015. We expect financial results in the second-quarter 2014 to be ugly, hampered by an approximate $20 million non-cash impairment charge for closing the Aldagen Durham, NC facility. Nevertheless, we're sticking to our 'Buy' rating because we believe fundamentals bottomed in the first-quarter 2014 and are set to dramatically improve over the next 12 to 18 months. Less
Sentiment: Strong Buy
Sentiment: Strong Buy
IF I was a vindictive beech, I would say LMFAO when CMXI is back to 30 cents due to managment. BUT I am NOT so I WONT. It is NO laughing matter. That Jason guy should be investigated for his role in pumping. Martin needs to go bye bye. Retract bonuses and raises till profitable. Get serious about building shareholder value. Jorden has proven to be tooo weak as COB. he needs to go. Not sure why you would be laughing even though the share price did momentarily jump all the way up to 42 pennies. yippee. People thought Martin might have to behave in a shareholder friendly fashion. Maybe investors realize lawyers will get rich. Shareholders get milked. That reailzation sends price back to normal red zone day after day. Not sure what you are laughing at.