Vericel Corporation 2018 Q1 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on patient-specific cell therapies. It markets MACI for knee cartilage repair and Epicel for severe burn care in the United States, operating as one reportable segment. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017.
MACI replaced Carticel during the second quarter of 2017. Vericel is also developing ixmyelocel-T for advanced heart failure but stated that it does not currently plan to fund an additional Phase 3 trial independently and is seeking a development partner.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Product revenue | $18.0 million | $9.4 million | 92.6% increase |
| Gross profit | $10.4 million | $2.3 million | Increase |
| Gross margin | 57% | 24% | 33 percentage-point increase |
| Operating expenses | $14.7 million | $11.9 million | 23.7% increase |
| Loss from operations | $4.3 million | $9.6 million | Improvement |
| Net loss | $7.7 million | $9.8 million | Improvement |
| Basic and diluted loss per share | $0.21 | $0.31 | Improvement |
| Cash provided by operating activities | $0.4 million | $(3.1) million | Improvement |
MACI and Carticel revenue was $12.1 million, compared with $5.0 million in the prior-year quarter. Epicel revenue was $6.0 million, compared with $4.4 million. Revenue benefited from increased product volume and from a $2.8 million prior-year revenue-reserve adjustment related to potential out-of-network reimbursement.
Research and development expense increased to $3.7 million from $3.5 million, primarily due to MACI pediatric-study preparation and expanded regulatory resources, partly offset by lower ixCELL-DCM trial spending. Selling, general and administrative expense increased to $11.0 million from $8.4 million because of a larger MACI sales force, higher reimbursement and case-management costs, and increased stock compensation.
Cash was $29.8 million at March 31, 2018, compared with $26.9 million at December 31, 2017. Cash flow included $0.2 million of capital expenditures and $2.7 million of financing inflows, including $1.7 million from warrant exercises and $1.0 million from common-stock issuance, primarily option exercises.
Debt, liquidity and capital resources
- Debt outstanding consisted of a $15.0 million term loan and $2.5 million drawn under a revolving facility; the balance was $17.2 million net of deferred costs.
- The SVB-MidCap facility provides access to up to $25.0 million, including a $15.0 million term loan and up to $10.0 million of revolving capacity.
- Available revolving capacity was $3.8 million at March 31, 2018. The weighted average interest rate was 8.6%, plus a 3.6% final payment on the term loan at maturity.
- The company was in compliance with its financial and nonfinancial covenants, including the minimum trailing-twelve-month revenue covenant.
- The company expected cash, debt facilities and available resources to support current operations through at least May 2019, based on its projections.
- The company had approximately $16.7 million of remaining capacity under its $25.0 million at-the-market equity program and made no ATM sales during the quarter.
Material changes versus the prior comparable period
- Revenue nearly doubled, driven by the commercial ramp of MACI and higher Epicel sales.
- Gross margin expanded substantially because higher sales leveraged the company’s largely fixed manufacturing cost structure.
- Operating loss and net loss narrowed despite increased commercial, regulatory and support spending.
- Operating cash flow improved from a $3.1 million use of cash to $0.4 million of cash generation, aided by collections of prior-quarter receivables and noncash charges.
- Other expense increased to $3.3 million from $0.2 million, primarily because of a $2.9 million noncash increase in the fair value of warrant liabilities caused by the higher stock price and reduced time to maturity.
- Noncash stock-based compensation increased to $1.3 million from $0.5 million.
- The company granted 1.36 million service-based stock options during the quarter.
Guidance, outlook, risks and unusual items
Management’s stated priority is to invest in the existing commercial business, grow MACI and Epicel revenue, and move toward profitability. No specific revenue, earnings or margin guidance was provided in the filing.
- Revenue is seasonal: MACI generally benefits from stronger second and fourth quarters, while Epicel is affected by winter-related burn incidence and can vary substantially between periods.
- Liquidity depends on continued commercial growth, collections and compliance with minimum-revenue debt covenants. A covenant breach or a lender determination of a material adverse change could permit immediate debt acceleration.
- The company has an accumulated deficit of $368.5 million and remains loss-making. If cash needs exceed projections or financing is unavailable, it may need to curtail operations, including research and development.
- MACI revenue and receivables are concentrated among a limited number of customers and reimbursement channels. The filing reports 43% of first-quarter revenue from one MACI and Carticel customer concentration category and 41% of March 31 accounts receivable from that category.
- Future ICT license milestones and royalties are uncertain. The company does not expect milestone payments in 2018 or the near term and may never receive them, depending on technology transfer, clinical development, regulatory approval and commercialization.
- The FDA indicated that at least one additional Phase 3 trial is required to support an ixmyelocel-T biologics license application; Vericel is seeking a partner to fund further development.
- On May 2, 2018, after quarter-end, Vericel amended and restated its quality service agreement with Matricel relating to supplied final packaged products.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether MACI volume, reimbursement and payer coverage continue to support the reported revenue growth and 57% gross margin.
- Whether the company maintains compliance with the SVB-MidCap minimum-revenue covenant and retains access to the revolving facility.
- Actual cash burn and liquidity runway relative to management’s projection through May 2019.
- The magnitude and cash impact, if any, of future warrant fair-value changes; the Q1 charge was noncash.
- Progress and funding responsibility for the required ixmyelocel-T Phase 3 development.
- Timing and probability of any ICT technology-transfer, regulatory, commercial milestone or royalty payments.
- Potential dilution from outstanding warrants, stock options and future equity financing.