Seeking Alpha: Sit Down Meeting in SF

Cytomedix, Inc. (OTCQX:CMXI): Meeting took place with Martin Rosendale, CEO, Steven Shallcross, CFO, and Dean Tozer, Corporate Development.

It was good to sit down with Cytomedix so recently after the final payment decisions have been put into law by the Center for Medicare & Medicaid Services (CMS), with regards to payment regulations for the Hospital Outpatient Prospective Payment System (HOPPS) and the Medicare Physician Fee Schedule (PFS). For reference, we provide a link to the full news publishes to the federal register below:

- CMS-1600-FC: Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule and Other Revisions to Part B (PDF: 3.6MB / 1369 pages).

- CMS-1601-FC: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment System (PDF: 2.6MB / 1281 pages).

We believe these new payment rules dramatically enhance the commercial viability of Cytomedix's AutoloGel (autologous platelet-rich plasma) for the treatment of chronic wounds, including diabetic foot ulcers, venous leg ulcers, and pressure ulcers. For example, under the new classification in 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 proposed $83 per treatment encounter under the proposed rules that came out earlier in the year that incorrectly classified AutoloGel as a Level-2 debridement product, and a greater-than five-fold increase over the average reimbursement under HOPPS of $74 in 2013. We believe this represents approximately 60% of the Medicare market for the treatment of chronic wounds.

What we learned at our meeting with management is that AutoloGel, reimbursed 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. Assuming Cytomedix looks to provide around $100 in profit per use to the facility or physician's office, that means they can wholesale AutoloGel around $311 and still capture 70% gross margin. Assuming roughly six treatments to heal a wound, along with two rounds of debridement, AutoloGel should provide over $1,300 in gross profit to Cytomedix and over $1,000 in gross profit to the facility or physician to heal a wound. It's a whole new ballgame for the company in 2014.

Management told us the registry programs required for Coverage with Evidence Development (CED) are also on track at Cytomedix. By the end of the year, management expects to have roughly 1,000 patients enrolled in all four programs combined. The company currently has nine sales representatives out in the field promoting the product, with a goal of 30 by the end of the year. We went back and looked at the magnitude of business that Advanced BioHealing (ABH) was doing with Dermagraft in 2011 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 30 reps in the field at year-end 2014, Cytomedix could be doing $15 million in revenue with AutoloGel in 2015. That's an incredible ramp!

In August 2013, Cytomedix partnered its Angel Concentrated PRP system by licensing the rights to Arthrex, Inc. in return for $5 million in cash and future low-teens royalties (we model 13%). We think this was a wonderful transaction for Cytomedix, and one where the market really hasn't come to grips with the potential upside Arthrex, Inc. brings to the table. For example, based on analysis of previous quarterly reports, we believe Angel delivered around 15-20% net margin to Cytomedix. On sales of around $8 million over the trailing twelve months, that's a net profit of $1.2 to $1.4 million. At 13% royalty, all that needs to happen for Cytomedix to have essentially made a good decision here is for Arthrex, Inc. to do around $10 million in Angel sales. That's only $2 million more than Cytomedix was doing itself, promoting with 10 contract sale representatives.

Arthrex, Inc. has over 1,500 sales representatives! Arthrex, Inc. also has the potential to package Angel with its existing bone marrow aspirate cell suspension products, its BioCartilage® matrix, its Autograft osteochondral repair system, or its existing PRP autologous systems. Arthrex, Inc. is going to turn Angel from an $8 million product to a $40-50 million product in our view. The royalties to Cytomedix are going to dwarf the previous sales in a few years. This was an amazing transaction by the company to reduce costs and drive the top-line, and investors have completely missed it.

Finally, we touched briefly on RECOVER, the company's Phase 2 clinical trial studying ALD-401 for the treatment of stroke in middle cerebral artery. Early in 2014, Cytomedix put out a press release noting that enrollment has been completed for the study and that data is expected in May 2014. The previous goal was to enroll 100 patients in the study, but management believes that with only 48 enrolled, the statistical powering assumptions still hold. RECOVER is 90% powered to detect a 0.8 drop in modified Rankin scale from baseline to recovery at 90 days.

Data from RECOVER in May is a major catalyst for Cytomedix. If it is positive -- meaning the primary endpoint hits and delivered a >0.8 reduction in mRS at 90 days post treatment - the shares skyrocket. We think they could hit $2.00 on the news. Any reduction vs. the same procedure and we think the stock still doubles in value. No reduction - a complete failure -- and we think the stock still goes up in value because that means Cytomedix will probably be done spending money on Aldagen. That's right; we think no matter what happens in May 2014, the stock goes up. The value for AutoloGel and Angel supports 100% of the current valuation. Investors are getting ALD-401 completely free. In fact, we think RECOVER has negative value because it costs money that Cytomedix could be spending on AutoloGel. It's a no-brainer in our view.