Vericel Corporation 2015 Q3 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on patient-specific cell therapies and regenerative medicine. It markets Carticel and Epicel in the United States, while developing MACI and ixmyelocel-T. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods. The 2014 comparisons are affected by the May 2014 acquisition of Sanofi’s Cell Therapy and Regenerative Medicine business.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $11.3 million | $9.7 million | $35.7 million | $14.1 million |
| Gross profit | $4.5 million | $4.1 million | $16.5 million | $3.5 million |
| Gross margin | 40.1% | 42.7% | 46.2% | Not clearly provided |
| Operating loss | $4.9 million | $8.0 million | $11.7 million | $21.2 million |
| Net loss | $4.4 million | $6.9 million | $11.4 million | $17.6 million |
| Loss per common share | $0.26 | $0.82 | $0.69 | $2.90 |
| Cash flow from operations | Not separately provided | Not separately provided | $(9.3) million | $(19.2) million |
Q3 revenue consisted of Carticel revenue of $7.7 million, Epicel revenue of $3.2 million, and bone marrow revenue of $0.3 million; MACI revenue was zero. Nine-month revenue consisted of Carticel revenue of $23.9 million, Epicel revenue of $11.2 million, bone marrow revenue of $0.7 million, and no MACI revenue.
At September 30, 2015, cash was $18.7 million, compared with $30.3 million at December 31, 2014. Total current assets were $28.5 million and current liabilities were $9.3 million, implying current assets of approximately 3.1 times current liabilities. Total debt was limited to $0.1 million, consisting primarily of $81,000 of long-term debt. Warrant liabilities were $0.8 million.
Material changes versus the prior comparable period
- Q3 revenue increased 17% year over year, driven primarily by higher Epicel implants and product price increases. Nine-month revenue comparisons are not fully meaningful because the CTRM business was acquired in May 2014.
- Q3 gross margin declined to 40.1% from 42.7%. Management attributed the decline to approximately $0.6 million of software, equipment, and facility-modification costs related to CTRM integration and approximately $0.4 million of above-normal inventory write-offs, which were not expected to recur.
- Research and development expense declined to $3.7 million from $7.8 million in Q3 and to $11.5 million from $15.5 million for the nine-month period, primarily because ixCELL-DCM enrollment was completed in January 2015, the Critical Limb Ischemia study was canceled, and 2014 included MACI-related settlement costs.
- Selling, general and administrative expense increased to $5.7 million from $4.3 million in Q3 and to $16.7 million from $9.3 million for the nine-month period, reflecting higher sales and marketing, personnel, information technology, legal, consulting, and integration costs.
- Operating and net losses narrowed despite higher administrative spending. The nine-month 2014 results benefited from a $3.6 million bargain-purchase gain related to the CTRM acquisition; no comparable gain was recorded in 2015.
- Cash used in operations improved to $9.3 million from $19.2 million for the nine-month period, while 2015 investing cash use was $2.3 million, including $2.3 million of property and equipment expenditures.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that it believes current cash is sufficient to sustain operations until the business becomes cash-flow positive, but does not expect positive consolidated operating cash flow for at least a year. Achieving cash-flow positivity depends on product-sales growth, improved margins, and lower operating expenses.
- Management expects Carticel and Epicel to provide nearly all product revenue until MACI and ixmyelocel-T receive applicable regulatory approvals. Additional capital may be required, particularly if MACI receives FDA approval and requires a U.S. commercial launch.
- Management planned to submit a BLA for MACI to the FDA by the end of 2015. MACI sales in Europe had been suspended since August 2014 because of low utilization and unfavorable pricing.
- The Phase 2b ixCELL-DCM study enrolled 114 patients at 28 sites, completed enrollment in January 2015, and was expected to produce top-line efficacy results around the end of the first quarter of 2016.
- Vericel planned to submit an HDE supplement in Q4 2015 seeking permission for Epicel to be sold at a profit for eligible pediatric uses. At the reporting date, Epicel was priced to recover research and development, fabrication, and distribution costs.
- Revenue is concentrated: one U.S. distributor represented 67% of Q3 revenue and 66% of nine-month revenue, and 66% of accounts receivable at September 30, 2015. Carticel and Epicel revenue are also subject to seasonal and, for Epicel, significant patient-volume variability.
- On October 26, 2015, the company entered into a supply agreement for ACI-Maix membrane used in MACI manufacturing, committing to purchase $0.3 million of material in 2016 and approximately $0.6 million annually if MACI receives BLA approval. The agreement runs through December 31, 2022, subject to renewal provisions.
- Preferred-stock dividends accumulated but were undeclared, reducing income attributable to common shareholders by $1.7 million in Q3 and $5.0 million for the nine-month period. Approximately 4.2 million common-equivalent shares were excluded from diluted EPS because their effect would have been anti-dilutive.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Investor verification checklist
- Verify the timing and outcome of the planned MACI BLA submission, FDA review, reimbursement prospects, and potential U.S. launch costs.
- Track ixCELL-DCM top-line results and the related regulatory and commercialization path for ixmyelocel-T.
- Assess whether Epicel’s HDE supplement permits profitable pricing and whether the product’s low, volatile patient volume affects revenue forecasts.
- Monitor cash burn, capital expenditures, gross-margin recovery after integration costs and inventory write-offs, and potential use of the $11.3 million Lincoln Park equity-line capacity.
- Evaluate customer and distributor concentration, preferred-stock dividend obligations, warrant dilution, and the effect of approximately 2.5 million outstanding options at September 30, 2015.