RAJ DENHOY
MEDICAL DEVICE ANALYST
PIPER JAFFRAY

COMPANY: LifeCell Corporation
TICKER: LIFC (Nasdaq)
PRICE: $22.01 (as of 4 p.m. yesterday)
52-WEEK RANGE: $8.20 – $25.57
MARKET CAPITALIZATION: $720.39 million

Raj Denhoy is a vice president and senior research analyst at Piper Jaffray in New York. LifeCell develops and markets human-derived tissue-based products for use in reconstructive surgical procedures. Mr. Denhoy believes LifeCell has huge growth potential and explains to David Dalley of The New York Sun why now is the time to buy.

What does LifeCell do?

Their main line of business involves a product called AlloDerm. They take donated human skin and process it into what can best be described as a very versatile patching material. The main use for the material so far is to help repair ventral hernias, which is where the abdomen is split open. It’s a very tough procedure for surgeons.

One of the risks is that the material used to patch the opening becomes infected. Historically the ‘patch’ has been animal-derived or artificial. If it becomes infected, it’s a nightmare. The patient needs to be cut back open and the whole process requires months in the hospital and can cost hundreds of thousands of dollars.

LifeCell’s product, as opposed to nonhuman materials, becomes biologically active quickly and actually fights the infection itself. It doesn’t break down or deteriorate. It’s human skin, and it’s human tissue, so it reincorporates in the body within a couple weeks. Blood cells grow in it, blood flows through it, and it bleeds like normal tissue.

Why is LIFC a good buy?

Right now, AlloDerm has penetrated less than 20% of the market for ventral hernia repair. Revenue from AlloDerm grew by about 74% in 2005. In 2006 we’re looking for growth of 50%. And that’s just the one product. It’s the best material for complex hernia repairs and it should continue to penetrate the market more each year. Our forecasts only assume 24 % market share in 2006, so there’s still considerable upside.

The other exciting thing is the other potential uses for the material which haven’t yet been fully exploited. One we think will take off is in breast reconstruction postmastectomy. There is something on the order of 55,000 reconstructions each year. When tissue is removed, an implant is placed behind the pectoralis muscle. Historically, to keep that implant in place, another muscle is stretched up and sewn across. Surgeons are now finding they can use AlloDerm as a patch between the muscles so that the lower muscle doesn’t need to be stretched as much. It’s less painful and it’s a better procedure. And because the material becomes biologically active, it becomes supple and looks just like normal skin.

AlloDerm currently services less than 3% of the market and could well become the standard of care within the next couple years.

Has the potential already been priced into the stock?

Not fully. As information about the various applications of AlloDerm emerges, especially in the breast reconstruction market, it’ll become more widely used by surgeons. It takes time for the medical community to learn about it and get comfortable with it. Our numbers right now only assume 8% penetration in 2006 in the breast reconstruction market. That leaves a huge upside.