Vericel Corporation: Q3 2016 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on patient-specific cell therapies. It markets Carticel for knee cartilage defects and Epicel for severe burns, while developing MACI and ixmyelocel-T. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Effective July 1, 2016, Vericel transitioned substantially all Carticel sales from an exclusive distributor to a direct sales model supported by Dohmen Life Science Services. The transition shifted credit, collection, reimbursement, and payer risks to Vericel.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $10.9 million | $11.3 million | $37.9 million | $35.7 million |
| Gross profit | $4.1 million | $4.5 million | $17.1 million | $16.5 million |
| Gross margin | 37% | 40% | 45% | 46% |
| Operating loss | $(6.4) million | $(4.9) million | $(13.4) million | $(11.7) million |
| Net loss | $(6.7) million | $(4.4) million | $(13.4) million | $(11.4) million |
| Net loss per common share | $(0.38) | $(0.26) | $(0.84) | $(0.69) |
Q3 revenue declined approximately 3.4% year over year, while nine-month revenue increased approximately 5.9%. Q3 Carticel revenue was $8.3 million, compared with $7.7 million, and Q3 Epicel revenue was $2.6 million, compared with $3.2 million. Nine-month Carticel revenue increased to $26.1 million from $23.9 million, and Epicel revenue increased to $11.7 million from $11.2 million.
The Q3 gross-margin decline primarily reflected lower average Epicel order size, higher material usage, and increased facility expense. Nine-month gross margin remained broadly consistent with the prior year.
Research and development expense decreased to $3.4 million in Q3 and $11.0 million for the nine months, compared with $3.7 million and $11.5 million, respectively. Selling, general and administrative expense increased to $7.0 million in Q3 and $19.5 million for the nine months, driven by Carticel reimbursement and patient-support start-up costs, MACI launch preparation, professional services, legal fees, shared facility costs, and personnel expense.
Non-cash warrant valuation expense was $0.2 million in Q3; the nine-month period included a $0.1 million non-cash benefit. Nine-month stock-based compensation expense was $2.0 million.
Cash flow, liquidity, debt, and balance sheet
- Cash was $8.9 million at September 30, 2016, down from $14.6 million at December 31, 2015.
- Cash used in operating activities was $10.6 million for the nine months, compared with $9.3 million in the prior-year period.
- Cash used in investing activities was $1.3 million, primarily for property and equipment, versus $2.3 million in 2015.
- Financing activities provided $6.2 million, including $8.4 million of debt borrowings, partially offset by $2.4 million of repayments and $0.2 million of deferred financing costs.
- Inventory increased to $3.6 million from $1.4 million, while accounts receivable declined to $7.9 million from $10.9 million.
- Current liabilities were $15.4 million and total liabilities were $16.6 million at September 30, 2016.
- Under the September 2016 financing, $4.0 million was outstanding under a term loan and $2.0 million under a revolving line. The company reported $4.3 million of remaining revolving capacity and compliance with all financial and non-financial covenants.
- The debt facility provides access to up to $20 million, including additional term-loan commitments and up to $10 million of revolving credit. Term loans bear interest at WSJ Prime plus 5.00%; the revolving facility bears interest at WSJ Prime plus 1.25%.
Material changes versus the prior comparable period
- Revenue increased for the first nine months but declined in Q3, primarily because of weaker Epicel order volume; Carticel benefited from a 2016 price increase.
- Operating and net losses widened in both the quarter and nine-month period, despite lower research and development spending, because of higher SG&A and lower Q3 gross margin.
- Vericel replaced its prior Carticel distribution arrangement with a direct sales and reimbursement model, increasing exposure to payer reimbursement and collections.
- The company entered into an expanded secured debt facility and issued 117,074 warrants with a $2.48 exercise price.
- Epicel received FDA approval in February 2016 to add pediatric labeling, removing prior HDE profit restrictions, subject to the applicable annual distribution number.
- Management disclosed a material weakness in internal control over financial reporting related to segregation-of-duties conflicts in the financial management/ERP system. Remediation actions were completed by June 30, 2016, but operating effectiveness was still being evaluated through year-end.
Guidance, outlook, commentary, and risks
Management stated that cash on hand and available debt capacity were expected to support operations for twelve months beyond September 30, 2016, based on current projections. Management also stated that additional capital would likely be required for ixmyelocel-T development, other strategic opportunities, and potentially the U.S. launch of MACI. The filing does not provide formal revenue or earnings guidance.
MACI’s BLA was accepted by the FDA, with a January 3, 2017 PDUFA goal date. Management indicated that the FDA was not then planning an advisory committee meeting. Future ixmyelocel-T development depended on regulatory input and financing availability. The Phase 2b ixCELL-DCM study met its primary endpoint, but several secondary analyses were not statistically significant.
Key risks include continued operating losses and cash use, dependence on additional financing, FDA approval and commercialization of MACI, reimbursement and collection risk under the direct Carticel model, seasonal and highly variable Epicel revenue, debt covenants and secured claims on company assets, clinical and regulatory uncertainty for ixmyelocel-T, and the unresolved material weakness in internal controls.
Future contractual commitments totaled $29.4 million as of September 30, 2016, including $24.7 million of operating leases, $4.6 million of purchase commitments, and $0.1 million of capital leases. On October 10, 2016, Vericel entered into a $25.0 million at-the-market equity sales agreement; no shares had been sold under that agreement as of the filing.
Most important facts for investors to verify
- Whether the direct Carticel reimbursement model improves revenue, collections, margins, and payer coverage.
- The FDA decision and commercial launch timing for MACI following the January 3, 2017 PDUFA goal date.
- Cash burn, remaining debt capacity, compliance with the minimum net revenue covenant, and the timing of any additional financing.
- Whether the material weakness in internal control is fully remediated after year-end testing.
- Progress, funding requirements, and regulatory strategy for ixmyelocel-T following the Phase 2b results.
- The effect of Epicel’s low patient volume and seasonal order variability on quarterly revenue and gross margin.
- The dilution and financing impact of the ATM facility, outstanding warrants, stock options, and convertible preferred stock.