Vericel Corporation — Q1 2015 Form 10-Q Summary
Business context and reporting period
Vericel reported results for the three months ended March 31, 2015. The company is a commercial-stage cell-therapy and regenerative-medicine business focused on patient-specific therapies. Its marketed products included Carticel for knee cartilage defects and Epicel for severe burns; MACI and ixmyelocel-T remained development or commercialization opportunities.
Results reflect the Cell Therapy and Regenerative Medicine business acquired from Sanofi on May 30, 2014. Accordingly, prior-year revenue and gross-profit comparisons are not meaningful because the acquired business was not included in the first quarter of 2014.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $10.849 million | $0 |
| Gross profit | $5.281 million | Not applicable |
| Gross margin | Approximately 49% | Not applicable |
| Operating loss | $(4.572) million | $(4.645) million |
| Net loss | $(4.862) million | $(5.995) million |
| Net loss per common share | $(0.27) | $(1.26) |
| Cash used in operating activities | $(4.113) million | $(4.674) million |
- Revenue consisted of Carticel $7.118 million, Epicel $3.639 million and bone marrow revenue $0.092 million.
- Estimated operating margin was approximately negative 42% and estimated net margin was approximately negative 45%.
- Research and development expense increased to $4.377 million from $3.271 million, primarily because of ixCELL-DCM trial activity and expenses associated with the acquired products.
- Selling, general and administrative expense increased to $5.476 million from $1.374 million, reflecting acquired-business sales and marketing costs and additional integration, information technology, legal, consulting and personnel costs.
- Cash declined to $25.903 million at March 31, 2015 from $30.343 million at December 31, 2014. Accounts receivable increased to $9.166 million from $8.191 million.
- The company had $22.2 million in an Insured Cash Sweep program. It reported no material long-term debt, with $0.1 million of long-term debt outstanding, but had $1.398 million of warrant liabilities.
- Cash used in investing activities was $0.318 million, primarily for property and equipment. Financing activities used $0.009 million.
Material changes versus the prior comparable period
- The Sanofi acquisition added $10.849 million of product revenue and $5.281 million of gross profit, but also materially increased operating expenses.
- Net loss improved by $1.133 million year over year, largely because the non-cash increase in warrant fair value declined to $0.317 million from $1.352 million.
- Weighted-average common shares increased to 23.786 million from 5.868 million, principally reflecting the company’s post-acquisition capital structure and prior equity issuance activity.
- Stock-based compensation increased to $0.922 million from $0.270 million, and the company granted approximately 1.949 million service-based stock options during the quarter.
- Property and equipment increased to $3.446 million from $2.892 million, while intangible assets declined modestly because of amortization.
Guidance, outlook, risks and unusual items
- Management stated that it did not expect positive consolidated operating cash flow for at least a year and would need some combination of product-sales growth, improved margins and lower operating expenses to reach cash-flow positivity.
- Management believed existing cash would sustain operations until cash-flow positivity, but noted that additional capital could be required if actual results differ from projections. Available financing capacity included approximately $11.3 million under the Lincoln Park equity arrangement and approximately $7.8 million under the at-the-market agreement.
- The company completed enrollment in the Phase 2b ixCELL-DCM study in January 2015 and expected top-line efficacy results around the end of the first quarter of 2016.
- Management planned a Type B FDA meeting in the middle of the second quarter regarding U.S. approval requirements for MACI. MACI sales had been suspended in Europe because of low utilization and an unfavorable pricing environment.
- Epicel generated $3.6 million of revenue in the quarter but was being sold at a price reflecting research and development, fabrication and distribution costs. The company was evaluating whether to seek FDA permission to sell Epicel for profit under applicable humanitarian-device rules.
- Customer concentration was significant: one U.S. distributor represented approximately 63% of revenue and the next-largest customer approximately 16%.
- Revenue was subject to product seasonality, particularly stronger Carticel sales in the second and fourth quarters and variable Epicel demand.
- The company recorded a $0.317 million non-cash expense from the increase in warrant fair value. Future warrant remeasurement could produce material non-cash earnings volatility.
- The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management stated that a material weakness in internal control over financial reporting identified at December 31, 2014 had been remediated through additional finance and accounting hires; disclosure controls were deemed effective as of March 31, 2015.
- Future obligations included approximately $8.9 million of operating and capital lease payments, including $3.1 million due during 2015.
Facts investors should verify
- Whether Carticel and Epicel sales growth, product mix and gross margin can offset continuing operating losses.
- The company’s cash runway relative to quarterly operating cash burn and the timing or dilution associated with potential equity financing.
- Progress, regulatory requirements and results for MACI, including the outcome of the planned FDA meeting.
- Top-line results and subsequent regulatory strategy for the ixCELL-DCM program expected around the end of Q1 2016.
- Customer concentration, distributor dependence and the impact of seasonal variability on quarterly revenue.
- Whether the reported remediation of the prior material weakness remains effective in subsequent filings.
- Potential dilution from approximately 2.393 million outstanding options, approximately 0.967 million warrant shares, and preferred-stock conversion and accumulated dividend obligations.