|This company is or has gone private. Information about the company may be limited and outdated.|
LifeCell develops and markets products made from human (allograft) tissue for use in reconstructive, urogynecologic, and orthopedic surgical procedures. The company's patented tissue processing technology produces a unique regenerative tissue matrix a complex three-dimensional structure that contains proteins, growth factor binding sites, and vascular channels that provides a complete template for the regeneration of normal human tissue. LifeCell has developed its patented tissue matrix to eliminate the potential for transplant rejection while maintaining the natural structure and biochemical properties that promote cell growth. LifeCell's leading product is AlloDerm, a regenerative tissue matrix for plastic reconstructive, general surgical, burn, and periodontal procedures. Through exclusive third-party alliances, the company also markets Repliform, a regenerative tissue matrix for urogynecologic procedures GraftJacket, a regenerative tissue matrix for orthopedic applications and AlloCraft DBM, a regenerative tissue matrix for bone grafting procedures. LifeCell is planning to launch a new product, Strattice, later this year. The company is located in Branchburg, NJ and has nearly 350 employees.
A Breakthrough Product
AlloDerm (acellular dermis) is donated human cadaveric skin processed with LifeCell's patented technique to remove all epidermal and dermal cells while preserving the remaining biological dermal matrix. The removal of the cells significantly reduces the chances of tissue rejection from donor to receiver. LifeCell procures the skin through an accredited process outlined and guided by the American Association of Tissue Banks (AATB). There are approximately 50 tissue banks around the U.S. that LifeCell has formed a strategic relationship. Once the skin is processed through LifeCell s decellularization technology it is preserved through a freeze-drying process until it is ready for use. Once implanted, AlloDerm is revascularized (blood flow restored) and repopulated (grafted) with the patients own cells. LifeCell markets AlloDerm in a variety of different sizes (and costs) through a specialized sales force. The primary areas where AlloDerm is used are plastic and reconstructive surgery, including complicated and uncomplicated hernia surgery, and reconstructive breast surgery following partial or full mastectomy. The product is also used in ENT head & neck reconstruction such as rhinoplasty (nose), carotid overlay (neck), vestibuloplasty (jaw muscle), tympanoplasty (ear drum), and septal perforation repair (nasal). New areas of grow include trauma indications such as burns and scars, and periodontal applications including the gums and mouth.
The primary area of use for AlloDerm we estimate at over 50% of the current sales is in abdominal wall reconstruction. This consists of both complicated and un-complicated hernia surgery. In this segment AlloDerm competes against synthetic mesh products that are associated with a multitude of complications including infection, adhesion formation, erosion, extrusion, fistula formation, seroma / hematoma, foreign body reaction and hernia recurrence. These complications are a significant problem post-surgery and can lead to additional surgery or a lengthy hospital stay. The complications become greater when patients present with potential co-morbid conditions such as obesity, smoking, diabetes, and malnutrition. These also lead to higher rates of hernia recurrence. Through its clinical program, LifeCell was able to demonstrate significantly lower side-effects with AlloDerm vs. synthetic mesh products in complicated hernia surgery, including 12% vs. 28% lower seroma / hematoma, 7% vs. 10% lower infections, and 5% vs. 13% recurrence rates.
Hernia represents a significant opportunity for LifeCell. There are an estimated 1 million hernia procedures performed in the U.S. each year. We estimate that AlloDerm has roughly 10% market share in the un-complicated hernia surgery market and roughly 25% market share in the complicated hernia market. AlloDerm use in the un-complicated hernia surgery will probably remain at this level given the high cost of the product and low incidence of side-effects in patients without co-morbid challenges. Management estimates that approximately 25% of hernia surgeries are classified as complicated however. There are five levels of complicated hernia surgery Grade I, II, III, IV, V. Most of the AlloDerm use is in the more complicated II, III, and IV situation. Grade-V hernias involve open abdomen surgery. Although AlloDerm costs roughly 4x what synthetic mesh products cost, surgeons are beginning to use the product more and more because of the lower potential for side-effects such as infection and recurrence. We think market share in this category could get as high as 40%.
Application Plastic Reconstruction
Since its launch, AlloDerm has been slowly gaining significant traction in the plastic reconstruction market most notably postmastectomy breast reconstruction. A key issue with postmastectomy breast reconstruction is attaining adequate pectoralis major muscle coverage in order to hold the implant/expander in place. Muscle loss or damage during mastectomy could make this a difficult task. Current options are to supplement the muscle deficiency with autologous tissue transfer from the latissimus dorsi and external oblique muscle with its rectus abdominus fascia. This is a less than desirable option because it introduces further potential complications for the patient. LifeCell has demonstrated in its clinical program that AlloDerm offers enough strength and flexibility to work as a substitute for the above autologous transfer procedure. By supporting and holding the prosthesis in place, AlloDerm also helps to define the shape and contour of the reconstructed breast, thereby contributing to improved cosmetics. Additionally, AlloDerm provides reinforcement to the mastectomy skin envelope, thus avoiding direct contact of the mastectomy skin envelope with the implant/expander. Surgical procedures with AlloDerm are easier to perform and often lower potential morbidity side-effects.
AlloDerm is also used to augment large soft tissue and other challenging defects on the head and neck, such as carotidectomy (neck) and parotidectomy (neck), rhinoplasty (nose), carotid overlay (neck), vestibuloplasty (jaw muscle), tympanoplasty (ear drum), and septal perforation repair (nasal). New areas of grow include trauma indications such as burns and scars, and periodontal applications including the gums and mouth. LifeCell has licensed the U.S. rights to AlloDerm for periodontal applications to Bio Horizon in return for a royalty on sales.
Competitive threats to AlloDerm have been slow to materialize despite significant efforts by the peer group. Surgical / synthetic mesh products such as Ultrapro (J&J), TephaFlex (Tepha), Prolite (Atrium Medical), Composix (C.R. Bard), Dualmesh (W.L. Gore), Dermal RT (Integra) have scattered share but non offer a human-based tissue matrix comparable to LifeCell's AlloDerm.
AlloDerm sales came in at $42.0 million in the third quarter of 2007, dead-on with our forecast. The product accounted for about 88% of the company's total product revenues during the quarter. For the full year we see AlloDerm sales up 38% to $165 million. AlloDerm represents at $300-400 million opportunity for LifeCell in the U.S. alone. Outside the U.S. the market opportunity is limited due to heavy restrictions overseas on use of human tissue-based products. The company derives over 95% of its revenues in the U.S. To promote AlloDerm LifeCell has a highly specialized sales force of 73 representatives as of the end of the third quarter. Management outlined plans to increase that number by 15 reps to 88 by the end of the year. Adding these new reps should allow management to continue strong market share growth in the hernia segment while penetrating new areas such as reconstructive surgery and trauma.
Besides AlloDerm, LifeCell markets several other products through strategic relationships in the U.S.
Cymetra is a micronized particulate form of AlloDerm that contains all the elements needed to replace tissue (collagens, elastin, proteins, and proteoglycans) in a single minimally invasive dry powder injection. The product is primarily used when for the correction of soft-tissue defects requiring minimally invasive techniques, such as injection laryngoplasty (reparative surgery of the larynx).
GraftJacket is a similar tissue matrix product developed by LifeCell for the orthopedic market. LifeCell licensed the exclusive U.S. rights to Wright Medical Group for sale in 2002. GraftJacket offers a sizable market opportunity in various markets such as rotator cuff tendon reinforcement, diabetic foot ulcers, and hand surgery. The product is a three-dimensional structure that provides a means for the body to rebuild the area of missing tissue and promote healing. Another important aspect of GraftJacket is that it is revascularized very quickly, allowing for growth of new blood vessel channels and the transformation into living tissue. We expect royalties on GraftJacket to grow to about $10.1 million by the end of 2007.
AlloCraft DBM is a human tissue-based bone-grafting product that is composed of demineralized bone and micronized acellular tissue to form a spackle / putty-like material. LifeCell has licensed the rights to the product to Stryker Corp., a major player in the orthopedic market. Stryker primarily sells the product as a bone filler to be used in surgical procedures.
Repliform is an acellular tissue matrix surgically implanted for use in damaged or inadequate integumental tissue in urogynecologic procedures most specifically as a bladder sling for the treatment of stress urinary incontinence (SUI) and pelvic floor defects. LifeCell has licensed the worldwide rights to Repliform to Boston Scientific.
The Next Big Thing
Although AlloDerm has grown at an impressive 70% CAGR since 2002, the market for human-based tissue does have certain limitations. Sales of AlloDerm have not yet hit a level where supply limitations are impacting sales. As stated above, LifeCell has a strong strategic relationship with 50 U.S. AATS banking centers around the U.S. However, at some point LifeCell becomes dependent on donated human cadaveric skin for growth. This presents a problem in the long-run in the U.S. Outside the U.S., the market for AlloDerm is limited. European countries have heavy restrictions on human-based tissue products that significantly dampen the opportunity. AlloDerm is also rather expensive and time-consuming to product. We estimate that gross margin on AlloDerm is around 70%.
Enter Strattice, an animal (pig) derived tissue matrix that utilizes a similar technology to AlloDerm. Benefits of Strattice over AlloDerm are significant in our view. Firstly, the supply of porcine skin is vastly greater than human cadaveric skin, and can be easily obtained with less stringent regulation. This allows for use outside the U.S., mainly in Europe where animal-based xenograft products are already on the market. Secondly, Strattice will have a significantly lower manufacturing cost than AlloDerm. It will also be easier to store and ship. We estimate that gross margin on Strattice can approach 90% in time. The product has roughly all the same applications on AlloDerm: hernia, plastic reconstruction, trauma, etc , but the lower manufacturing cost opens up a significant market LifeCell has been slow to penetrate in "elective" cosmetic surgery.
Because of AlloDerm's expense and limited supply, LifeCell does not market the product for cosmetic breast augmentation. This is an enormous market with over 300,000 procedures done each year. Management will be able to market Strattice directly to plastic surgeons for cosmetic procedures once launched.
Specifically within the "elective" breast augmentation market, a significant concern / source of complication are capsular contractions a build-up of scar tissue around the implant. This can cause the breast to become tender or change shape, and in the most severe cases, even lead to hardening of the implant. Strattice can be used to wrap the implant during surgery in hopes to reduce the formation of scar tissue. We think this is an exciting opportunity for the firm, and because it represents a new area not currently being targeted, represents upside to the story.
Because Strattice has an opportunity to penetrate new markets, both overseas and in the U.S., LifeCell may seek to partner with another firm. We definitely see LifeCell seeking to partner up for the European launch. It remains to be seen what management will do inside the U.S. Strattice received 510k (pre-market approval) clearance from the U.S. FDA in June 2007. Management is currently conducting clinical trials with Strattice in order to show comparable revascularization characteristics to AlloDerm. Several studies are ongoing in hernia and breast reconstruction. We are expecting to see data on this in early 2008. In the mean time, management will conduct small product launch in the U.S. to start here in the fourth quarter of 2007. Manufacturing will take place at a pilot facility. We believe the current Strattice capacity is enough to supply the market in 2008. Longer-term management will expand manufacturing through alliances and build-outs.
From a fundamental standpoint we think things look very good at LifeCell. The current top- and bottom-line are being drive by AlloDerm, in our view clearly a superior product to synthetic mesh products offered by competitors. Peak sales of AlloDerm are $400 million in our view given new expanded opportunities into Trauma and reconstructive surgery. We believe that management still has significant potential to grow the core hernia business as well considering the market share in the complicated surgery setting is only around 20-25%. We estimate that share can approach 30-40% before penetration levels start to peak-out.
However, as bullish as we are on AlloDerm, human skin grafting does have its limitations. Strict regulatory oversight outside the U.S., a finite supply in the U.S., and costly manufacturing limit LifeCell's' ability to tap high growth markets like breast augmentation and cosmetic surgery. Enter Strattice, an animal (xenograft) based product with less regulation, greater supply, and lower costs to product. Key to our thesis is that Strattice offers similar bioequivalence characteristics to AlloDerm in several ongoing clinical programs. Should revascularization rates not look as impressive as AlloDerm our long-term forecasts may prove too optimistic. Assuming the data looks good and it has so far Strattice has the potential to drive LifeCell to the next level of profitability. We see earnings growing nearly four-fold, from $20.5 million in 2006 to nearly $75 million in 2011. This is a 5-year CAGE of 34% - among tops in our coverage universe. And, with a market capitalization of only $1.5 billion, LifeCell is an attractive acquisition target for several larger players in the medical device / surgical market.