Business Context and Reporting Period
Vericel Corporation filed this Form 10-K for the fiscal year ended December 31, 2018. The company is a U.S. commercial-stage cell-therapy business focused on sports medicine and severe burn care. Its marketed products are MACI, an autologous cartilage-repair product, and Epicel, a cultured epidermal autograft for severe burns. Carticel was discontinued in 2017. The filing includes unaudited quarterly information, including the fourth quarter of 2018.
Financial Performance and Liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $90.9 million | $63.9 million | 42.1% increase |
| MACI and Carticel revenue | $67.7 million | $43.9 million | 54.3% increase |
| Epicel revenue | $23.1 million | $18.9 million | 22.6% increase |
| Gross profit | $58.7 million | $33.6 million | 74.8% increase |
| Gross margin | 64.6% | 52.5% | Up 12.1 percentage points |
| Operating loss | $3.9 million | $15.0 million | Improved by $11.1 million |
| Net loss | $8.1 million | $17.3 million | Improved by $9.1 million |
| Basic and diluted loss per share | $0.20 | $0.52 | Improved |
| Cash flow from operations | $(0.4) million | $(13.2) million | Improved by $12.8 million |
Fourth-quarter revenue was $31.3 million, gross profit was $22.7 million, operating income was $6.0 million, and net income was $5.2 million, compared with fourth-quarter 2017 revenue of $23.4 million and net income of $0.3 million. The company remains seasonally weighted toward the fourth quarter.
At December 31, 2018, cash and cash equivalents were $18.3 million and short-term investments were $64.6 million, for total cash, cash equivalents and short-term investments of $82.9 million. Working capital was $98.0 million. Total assets were $118.7 million, total liabilities were $16.5 million, and shareholders’ equity was $102.2 million.
Vericel prepaid all outstanding debt on December 19, 2018, including $17.1 million of borrowings, a $0.2 million prepayment premium and a $0.5 million final payment. The company reported no outstanding debt at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by increased MACI implant volume in its second full year on the market and continued Epicel demand.
- Gross margin expanded materially because manufacturing costs are substantially fixed and volumes increased.
- SG&A increased to $49.0 million from $35.6 million, primarily due to sales-force expansion, higher selling and patient-support costs, and increased stock-based compensation.
- Research and development expense increased modestly to $13.6 million from $12.9 million. Spending on dilated cardiomyopathy declined, while MACI and Epicel activities increased.
- Vericel raised approximately $70.1 million net from a June 2018 public offering of 5.75 million shares, resulting in shareholder dilution.
- The company amended its MACI distribution arrangement with Orsini, eliminated Orsini’s broad exclusivity, and appointed AllCare as a non-exclusive specialty-pharmacy provider. Vericel assumed greater credit and collection risk for certain MACI implants.
- Vericel adopted ASC 606 revenue recognition on January 1, 2018 without a cumulative adjustment; management said the impact was not materially different from prior guidance.
- MACI’s European manufacturing authorization expired at the end of June 2018 after the company did not register a replacement European manufacturing facility.
Guidance, Outlook, Risks and Unusual Items
No formal numerical revenue or earnings guidance is provided in the filing. Management’s stated objectives are to increase MACI surgeon adoption and implants per surgeon, expand Epicel use among burn centers, lower marginal manufacturing costs through volume, and generate positive operating income by keeping commercial-expense growth below revenue growth.
Management stated that current cash, cash equivalents and short-term investments are expected to fund operations through at least February 2020. The company nevertheless expects that additional capital may be required in the future, and financing may be unavailable or dilutive.
- Vericel continues to incur losses, with an accumulated deficit of approximately $369.0 million at year-end, and may not achieve or sustain profitability.
- All U.S. commercial manufacturing occurs at a single Cambridge, Massachusetts facility, creating concentration and business-continuity risk.
- The company relies on single or limited-source suppliers, including Matricel for the MACI collagen membrane.
- MACI reimbursement and collection estimates are subject to payer decisions, and the company’s largest MACI customer represented 16% of total MACI revenue.
- Revenue and cash flow are highly seasonal, with MACI historically strongest in the fourth quarter and Epicel generally stronger during colder months.
- FDA, cGMP, HDE, reimbursement, product-liability, intellectual-property and healthcare fraud-and-abuse requirements could materially affect commercialization.
- Following the FDA’s indication that at least one additional Phase 3 study would be required for ixmyelocel-T, Vericel reported no current plans to fund such a trial independently.
- Unusual 2018 items included a $0.8 million loss on debt extinguishment, a $2.5 million non-cash increase in warrant fair value, and $7.2 million of non-cash stock-based compensation.
- There were no material legal proceedings reported. PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal controls over financial reporting were effective.
Most Important Facts for Investors to Verify
- Whether MACI growth and payer coverage continue to offset the substantial increase in sales, marketing and stock-based compensation expense.
- Whether the 64.6% gross margin is sustainable as manufacturing volumes and product mix evolve.
- The pace of operating-cash-flow improvement and whether the stated February 2020 liquidity runway remains adequate.
- MACI accounts receivable collection performance after the company assumed greater payer credit risk.
- Capacity, compliance and business-continuity plans for the single Cambridge manufacturing facility.
- Potential dilution from outstanding options, warrants and future equity financing.
- The status of the MACI pediatric study and any future development or partnering plans for ixmyelocel-T.