Vericel Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on cell therapies for sports medicine and severe burn care. Its marketed products are MACI for knee cartilage repair and Epicel for extensive burns. The company also holds North American rights to NexoBrid, a registration-stage burn debridement product. The filing covers the unaudited quarter ended March 31, 2022, compared with the quarter ended March 31, 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $36.1 million | $34.6 million | +4.4% |
| Gross profit | $23.5 million | $23.0 million | +2.0% |
| Gross margin | 65.0% | 66.5% | Down 150 bps |
| Operating loss | $(7.3) million | $(3.3) million | Loss increased $4.0 million |
| Operating margin | (20.2%) | (9.6%) | Down 10.6 percentage points |
| Net loss | $(7.1) million | $(3.3) million | Loss increased $3.8 million |
| Net loss per diluted share | $(0.15) | $(0.07) | Lower |
| Operating cash flow | $3.5 million | $10.1 million | Down $6.6 million |
MACI revenue was $26.0 million, up 9.2%, driven by volume and price growth. Epicel revenue was $9.9 million, essentially flat. NexoBrid revenue declined 76.4% to $0.2 million because of lower deliveries to BARDA.
Research and development expense increased 33.9% to $4.9 million, primarily from higher stock-based compensation and additional spending on arthroscopic MACI delivery instrument design. Selling, general and administrative expense increased 14.1% to $25.9 million. Stock-based compensation rose 35.8% to $9.5 million and represented a significant non-cash expense.
At March 31, 2022, cash and cash equivalents were $55.7 million, restricted cash was $6.2 million, and investments totaled $67.7 million, for approximately $129.5 million of cash, restricted cash and investments. Current assets were $151.9 million versus current liabilities of $21.7 million. The filing reports no debt financing; lease liabilities totaled approximately $49.2 million, including current and long-term operating and finance lease liabilities.
The company generated $3.5 million of operating cash flow but used $10.7 million in investing activities, including $12.6 million of investment purchases and $3.1 million of capital expenditures. Management believes existing cash, cash equivalents, investments and product-sale cash flows will support current operations for at least 12 months from issuance of the financial statements.
Material changes versus the prior comparable period
- Revenue increased $1.5 million, or 4.4%, led by MACI growth.
- Gross profit increased only 2.0%, causing gross margin to decline from 66.5% to 65.0%.
- Operating expenses increased 16.9%, substantially faster than revenue, resulting in more than double the operating loss.
- Net loss increased from $3.3 million to $7.1 million.
- Operating cash flow declined from $10.1 million to $3.5 million, while investing cash flow shifted from a $12.2 million inflow to a $10.7 million outflow.
- Unrealized investment losses increased to $0.5 million from $0.1 million, reducing accumulated other comprehensive equity.
- In January 2022, Vericel entered a lease for a planned approximately 126,000-square-foot manufacturing, laboratory and office facility in Burlington, Massachusetts. Expected monthly contractual payments are approximately $0.6 million to $0.8 million, and the lease includes an approximately $25.1 million tenant improvement allowance.
- Vericel issued approximately $6.0 million of cash-collateralized restricted funds for a letter of credit related to the Burlington lease.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects ongoing COVID-19 effects to remain uncertain. MACI procedures and orders slowed during late 2021 and the first months of 2022 because of elective-procedure restrictions, healthcare staffing constraints, physician prioritization and patient delays. Future COVID-19 surges or new variants could further reduce elective procedures and revenue. Epicel, which is generally used in emergency burn care, has been less affected but remains subject to variability in burn admissions.
Management states that current supply-chain interruptions are not expected to materially affect manufacturing and that safety stock of key raw materials is being maintained. However, disruption to commercial or charter air transportation could prevent timely delivery of MACI or Epicel, whose products have short shelf lives.
NexoBrid remains subject to regulatory uncertainty. The FDA issued a complete response letter on June 29, 2021, stating that the BLA could not be approved in its present form. Vericel and MediWound are working with the FDA and BARDA on a potential resubmission, but the filing provides no definitive approval or resubmission timing. Contingent payments to MediWound include $7.5 million upon regulatory approval and up to $125.0 million based on sales milestones; none were recorded as liabilities because the payments were not yet probable.
The company maintains an up-to-$200.0 million at-the-market equity facility, but had sold no shares under it as of March 31, 2022. If revenue declines for a sustained period, management may need additional capital, and financing may be unavailable or dilutive. No material litigation, material regulatory proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether MACI procedure volumes recover from the COVID-19-related slowdown and whether the product can sustain its reported growth.
- The effect of higher operating expenses, stock-based compensation and manufacturing investment on the path to profitability.
- Future operating cash burn and the sufficiency of cash and investments relative to the Burlington facility commitments.
- The timing and outcome of the NexoBrid BLA resubmission and any related BARDA procurement activity.
- Potential changes in MACI reimbursement estimates and collections; a 50-basis-point change in the estimated uncollectible percentage could have changed Q1 2022 revenue by approximately $0.3 million.
- Exposure to elective-surgery restrictions, healthcare staffing, short product shelf lives and transportation disruptions.
- Future use of the $200.0 million ATM facility and the resulting potential shareholder dilution.