By Jason Napodano, CFA
It's been a long road for Cytomedix (OTC BB:CMXI) On August 2, 2012, the Centers for Medicare & Medicaid Services (CMS) issued a National Coverage Determination (NCD) for autologous blood-derived products for the treatment of chronic non-healing wounds. The decision reverses nearly 20 years for non-coverage for autologous platelet rich plasma (PRP) treatments.
But the journey is not over. CMS granted coverage to AutoloGel under its Coverage with Evidence Development (CED) program. CMS noted in its decision to award NCD to autologous PRP, and with it the only FDA approved product, Cytomedix's AutoloGel, that in order to receive the benefits of coverage, patients must be enrolled in a clinical research study. Details and requirements for the study can be found in the final decision memo on CMS' website (Final MEMO).
...Key Changes From Preliminary Decision...
Investors will notice that the final decision memo contains some key changes from the preliminary decision issued by CMS in May 2012 (Preliminary MEMO). We discussed the preliminary decision back in May 2012 in this note to investors (CMS Proposes Coverage For AutoloGel).
The most obvious change from that preliminary decision is the term randomized clinical trial (RCT) is no longer used by CMS. Instead, CMS notes only requiring a clinical research study (CRS). This was key victory for Cytomedix, as the challenges of running a RCT in this indication, outlined by Cytomedix CEO Martin Rosendale in this public comment were numerous. Cytomedix even met with CMS in late June 2012 to lobby its case. The meeting seems to have been a successful endeavor for the company.
With the steep requirement for an RCT likely a thing of the past, we believe Cytomedix can now finally get back to serious negotiations with a distribution partner for AutoloGel. As a reminder, Cytomedix has been in exclusive negotiations with a "Top 20 global pharmaceutical company" for a year now. The key sticking point to finalizing the deal has been the CMS decision and the requirements of the CED pathway. We wrote about negotiation process in July 2012 in this report to investors (Negotiations Continue For Cytomedix).
...Finally, Some Visibility...
Finally, management, the prospective partner, and investors have some visibility on the process. The clinical study applications for coverage pursuant to NCD-CED must be received by August 2, 2014. After reviewing the data, CMS will make a final decision on coverage.
In the meantime, management has guided to finalizing a distribution agreement with its yet unnamed global pharmaceutical partner by the end of the month. This is expected to be a short-term agreement for the simple distribution of AutoloGel through the partner’s sales force. Under this initial distribution agreement, Cytomedix will retain control of AutoloGel and book all revenues. Cytomedix will pay the partner a royalty based on sales made using their hospital-based sales force of approximately 100 full-time representatives. This will be a significant step-up in promotion for AutoloGel, as Cytomedix currently promotes the product with six part-time representatives.
The sort of tier-1 promotion that the pharmaceutical partner could bring coupled with CMS reimbursement could cause AutoloGel sales to soar in the coming years. AutoloGel posts sales of only $390K in the 2011. With significant promotion and CMS coverage, peak sales could eclipse $50 million.
We expect this distribution period is only a prelude of a larger licensing deal to come later in 2012. This initial period will give Cytomedix a chance to continue working with CMS to finalize the design protocol for the CRS. It will also give Cytomedix and its partner time to introduce AutoloGel to the sales force and begin training them for the full-scale launch.
Once traction has been made, we expect that the deal will move to a full licensing and supply agreement, where the pharmaceutical partner will take over booking revenues of AutoloGel and pay Cytomedix a profit-share (royalty) on sales. We expect that this agreement will come with a modest upfront payment (we model $3 million), plus development milestones relating to the second-generation AutoloGel device (U.S. 510(k) application planned during the second half of 2012).
Coverage & Awareness Should Drive Sales
We believe CED could be a meaningful driver of AutoloGel sales. There are approximately 2.0 million pressure ulcers and 1.5 million diabetic foot ulcers each year in the U.S. where AutoloGel and its physiologically relevant concentration of platelet-rich plasma could be an effective product. However, approximately half of these are in patients covered by Medicare / Medicaid, and non-coverage has been a significant impediment for uptake.
The market for products addressing chronic wounds in the U.S. is estimated to be $2.3 billion annually. There are over 6 million wounds (primarily diabetic foot ulcers, venous leg ulcers, and pressure ulcers) treated each year. Platelet rich plasma (PRP) products like AutoloGel represent only a small fraction of the market share. There are dozens of alternative therapies that compete with AutoloGel, some of them commodity types of products that have established habitual use patterns or set provider contracts to encourage standardized use.
There is virtually no government business for AutoloGel now. Instead, management has been focusing on private pay procedures, but the lack of a national coverage decision on the product has limited uptake in this area as well. CMS coverage not only kicks open the door to Medicare / Medicaid, it also meaningfully expands private pay coverage as well.
We remain very positive on the Cytomedix story. The company is expected to report financial results for the second quarter on August 15, 2012. We are looking for $3.5 million in revenues, consisting of $1.6 million in sales of Angel and $0.1 million in AutoloGel, along with $1.8 million in recognition of amortized exclusivity payments from the potential pharmaceutical partner. We expect management to provide an update on the enrollment in the phase 2 RECOVER-Stroke trial as well.
We think Cytomedix is an attractive small-cap biotechnology stock for many reasons. Firstly, the company has two approved products in Angel and AutoloGel. The Angel business is growing nicely, with significant upside expected in the coming quarters as Cytomedix penetrates the rapidly growing and lucrative "sports medicine" market. AutoloGel, essentially a non-factor on the top-line since approved, is a coiled spring. The combination of coverage and a tier-1 promotion has the potential to drive AutoloGel sales to a similar trajectory of competing wound healing products like Dermagraft and Apligraf, both which do over $100 million annually.
Second, Cytomedix has a true biotech pipeline built on the company's ALDH-bright cell stem cell platform. ALD-401 is currently in a phase 2 clinical trial for the designed to study the the safety and efficacy of injection of ALDH-bright cells directly into the carotid artery following stroke. In May 2012, an independent data safety monitoring board (DSMB), after reviewing the safety data from the first 10 patients in the ongoing RECOVER-Stroke program, recommended that the phase 2 trial continue as designed. Enrollment of these 10 patients took place at three clinical sites in the U.S. Now that the DSMB has allowed the expansion of the trial to the remaining 90 patients we expect that management will open enrollment at an additional 12 sites around the U.S. Enrollment at 100 patients should be completed during the summer of 2013.
Finally, Cytomedix has a number of upcoming catalysts that should drive the shares higher. As noted, management expects to finalize a distribution agreement with a "Top 20 global pharmaceutical company" by the end of August 2012. We expect that this is only a stepping-stone to a larger licensing deal to come later in 2012. This deal is expected to include an upfront payment and a significant milestone for the filing for the next-generation AutoloGel 510(k) application expected in the fourth quarter 2012.
Cytomedix should report cash at $8.4 million on August 15th. We believe this is sufficient to fund operations well into 2013. Upfront and milestone payments from the signing of a full licensing deal later this year should further strengthen the financial position.
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By Jason Napodano, CFA