By Jason Napodano, CFA
We are initiating coverage of ULURU, Inc. (ULUR) with a Buy rating. We believe the company’s wound care product, Altrazeal®, has the potential to dramatically change the way physicians treat chronic wounds. Altrazeal® is a Transforming Powder Dressing built on the company’s Nanoflex® technology.
When applied to the wound surface, the fine powder dressing hydrates and transforms by mixing with exudate to form a flexible film over the surface of the open wound that provides an ideal moist wound environment supporting cellular function and tissue repair.
Specifically, the aggregation of the polymer particles creates a dressing with a porosity that enables moisture vapor transport and the transport of oxygen to the wound surface, but which is too small for exogenous bacteria to penetrate. The film matrix is strong but flexible and elastic which prevents cracking or flaking under normal movement. The outflow of exudate and moisture vapor creates capillary action against the wound surface and a low-pressure environment believed to stimulate cell growth and fibroblast mobility, thus promoting the formation of healthy granulation tissue. As the wound heals, Altrazeal® will dry up and flake off, similar to a scab.
Altrazeal® is U.S. FDA / EU CE Mark approved for sale. The product is supplied as a sterile dressing suitable for the covering and protection of exuding wounds such as burns, abrasions, skin graft donor sites, surgical wounds, and chronic wounds including venous leg ulcers and diabetic foot ulcers. The global chronic wound market exceeds $10 billion and is growing rapidly given an aging population and the accelerating rate of obesity and diabetes.
…Data To Date Supports Uptake…
An Uluru, Inc. funded randomized clinical study and several investigator sponsored case studies have demonstrated clinical utility in treating serious chronic non-healing wounds such as diabetic foot ulcers and venous legs ulcers. Data shows Altrazeal® is comparable to carboxymethylcellulose-silver (CMC-Ag) dressing with reduced pain and higher patient and physician satisfaction. The product can be used in combination with standard of care, including additional dressings, off-loading, and negative-pressure wound therapy. Case studies clearly demonstrate that Altrazeal® is complementary to living and synthetic skin substitutes, extracellular matrix growth factors, can aid in the anchoring of split-thickness skin grafts, and can be used with contact casting.
…Changes To Reimbursement Should Favor Altrazeal…
We believe a significant change in how chronic wounds are treated in the U.S. is coming in 2014 on the backs of CMS proposal for packaging skin substitutes with their associated surgeries, similar to how implantable biologics were packaged with surgery in 2009. Packaging payment for skin substitutes into the APC payment for the related surgical procedures would result in a total prospective payment that is more reflective of the average resource costs of the procedures because prices for these products vary significantly from product to product. Packaging these products also would promote more efficient resource use by hospitals and would be more consistent with the treatment of similar products under the OPPS. The total reimbursement for skin substitutes and the procedure has been proposed at $874.
Under CMS’ proposal for packaging in 2014, products like Dermagraft, Apligraf, and new products like Osiris’ Grafix, will become significantly disadvantaged, as all these products cost $1,500 or more. Reimbursement for the procedure is typically in the area of $250 to $500. Therefore, what hospitals previously submitted $2,000 for Dermagraft or $2,250 for Apligraf will be capped at $874. Altrazeal® costs only around $25 per application. As we see it, that’s going to create a very challenging sales environment for these two market leading products, and a major shift toward cheaper (and similar efficacy) products like Uluru’s Altrazeal®.
…A Sizable Market Opportunity…
We think Altrazeal® provides certain advantages in terms of ease of use, cost-effectiveness, improved compliance, and accelerated healing that the product can become a significant player in the global wound care market. We particularly think Altrazeal® is well-positioned given a changing reimbursement environment in the U.S. and a move toward packaging and potentially “pay-for-performance” in the near future. With just 3% of the DFU or VLU chronic wounds treated in the U.S. and EU each year, we see Altrazeal® as a $100 million product.
Altrazeal® is approved for over-the-counter use, but the company recommends use under the supervision of a health care professional. In Europe, Altrazeal® has CE Mark for sale as of July 2010. In March 2009, Uluru, Inc. was notified by the PDAC Medicare Pricing, Data Analysis and Coding, from the Centers for Medicare & Medicaid Services that the Medicare HCPCS code(s) to bill the four DME Medicare Administrative Contractors for Altrazeal. This allows for negotiated reimbursement but the product has yet to be covered under a fee schedule. To gain reimbursement under the physician’s fee schedule (PFS) the company believes it must conduct additional clinical studies.
In Europe, Uluru is currently conducting a trial studying Altrazeal® in approximately 100 patients with VLUs. Management believes data from this trial will be available during the first half of 2014. In the U.S., the company plans to initiate a pivotal DFU study in approximately 80 patients in the first quarter of 2014. We believe this trial will take approximately 6-9 months to report interim analysis and 12 months from initiation to report full analysis. Accordingly, we believe Uluru will be in position to present pivotal DFU and VLU data to CMS in 2015 for reimbursement under the PFS. We believe this will dramatically facilitate uptake of the product in both the U.S. and Europe.
There are three major catalysts coming that lead us to believe Altrazeal® will see a significant ramp in sales over the next few years. These include, launching the product around the world over the next one to two years, gaining reimbursement in the U.S. by CMS under the PFS in 2015, and a dramatic shift in how chronic wounds are treated and paid for by government and private insurance.
We have conducted a discounted cash flow (DCF) analysis on future revenues based on our $100 million sales forecast – peaking in 2020. We note the product is patent protected until 2029. Our DCF model calculates fair value at $2.50 per share. Accordingly, we are recommending purchase of the shares today at $0.38 because the stock is significantly under-valued and offers a very attractive return to investors over the next several years.
We encouraged investors to view the company’s YouTube Video on Altrazeal®.
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