Vericel Corporation 2018 Q2 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 adult knee cartilage defects and Epicel for severe burns in the United States. The filing covers the unaudited quarter and six months ended June 30, 2018, filed August 6, 2018. Carticel was removed from the market at the end of the second quarter of 2017.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $19.0 million, versus $17.0 million | $37.0 million, versus $26.3 million |
| Gross profit | $11.3 million, versus $9.3 million | $21.6 million, versus $11.5 million |
| Gross margin | 59%, versus 55% | 58%, versus 44% |
| Operating loss | $4.2 million, versus $2.5 million | $8.6 million, versus $12.1 million |
| Net loss | $4.7 million, or $0.12 per share | $12.3 million, or $0.33 per share |
| Operating cash flow | Not separately provided | $(5.0) million, versus $(8.8) million |
MACI and Carticel revenue was $14.1 million in the quarter and $26.2 million year to date, compared with $12.9 million and $17.9 million, respectively, in the prior-year periods. Epicel revenue was $4.9 million in the quarter and $10.9 million year to date, compared with $4.0 million and $8.4 million.
Research and development expense increased to $3.7 million in the quarter and $7.5 million year to date, primarily because of MACI pediatric-study preparation and post-approval activities. Selling, general and administrative expense increased to $11.8 million and $22.7 million, driven by the expanded MACI sales force, reimbursement and case-management services, and higher stock compensation.
Cash and cash equivalents were $95.0 million at June 30, 2018, compared with $26.9 million at December 31, 2017. Financing cash flow of $74.1 million included $70.1 million of net proceeds from a June equity offering, $2.1 million from stock-option exercises and $2.0 million from warrant exercises. Capital expenditures were $1.0 million year to date.
Total debt was approximately $17.3 million net of deferred costs, comprising a $15.0 million term loan and $2.5 million revolving balance. Revolving availability was $6.8 million. The weighted-average interest rate was 8.82%, plus a 3.6% final term-loan payment due at maturity. The term loan is interest-only until December 1, 2018 and matures December 6, 2021.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased by $10.7 million, primarily from higher MACI and Epicel volumes.
- Gross margin improved by 14 percentage points year to date, reflecting increased product sales against substantially fixed manufacturing costs.
- Year-to-date operating loss narrowed by $3.6 million despite higher commercial and development spending.
- Net loss was broadly comparable year to date, but the 2018 result included $2.9 million of noncash expense from the increase in warrant fair value, versus $0.5 million of warrant-related income in 2017.
- Noncash stock compensation increased to $3.8 million year to date from $1.3 million.
- The June equity offering increased shares outstanding and substantially strengthened liquidity.
- The company adopted ASC 606 using the modified retrospective method with no cumulative adjustment; management stated that revenue timing and amounts were not materially different from prior guidance.
Outlook, Commentary, Risks and Unusual Items
Management stated that existing cash, together with the debt facility, is expected to support current operations through at least August 2019. The company may seek additional debt or equity financing, particularly if results differ from projections or it pursues strategic opportunities. No formal revenue or earnings guidance was provided.
The debt facility includes minimum trailing-twelve-month net-revenue covenants and subjective material-adverse-change acceleration provisions. Vericel was in compliance at June 30, 2018, but failure to meet revenue thresholds could allow the lender to call the debt immediately.
Revenue is seasonal: MACI has generally been stronger in the second and fourth quarters, while Epicel is affected by seasonal burn volumes and can vary substantially between periods. Revenue also depends on payer reimbursement, prior authorizations, collections and estimates of third-party payments. MACI and Carticel represented 39% of second-quarter revenue and 41% of year-to-date revenue; accounts receivable concentration for MACI and Carticel was 50% at June 30, 2018.
After quarter-end, Vericel amended its Orsini distribution agreement, moved toward a limited expanded distributor network, retained credit and collection risk on certain implants, and agreed to an incremental service fee of approximately $1.3 million tied to future MACI cases. It also entered a non-exclusive MACI dispensing agreement with AllCare Plus Pharmacy.
The company does not currently plan to fund an additional Phase 3 trial for ixmyelocel-T independently and is seeking a development partner. Future ICT license milestones and royalties were not included in revenue because their receipt was not considered sufficiently probable. The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether MACI volume growth and payer reimbursement remain sufficient to meet debt revenue covenants.
- The sustainability of the 58% year-to-date gross margin and the effect of fixed manufacturing costs at different production volumes.
- Cash burn, planned capital expenditures and whether the stated liquidity runway through August 2019 remains achievable.
- The timing of principal amortization beginning after December 1, 2018 and the lender’s acceleration rights.
- The financial and operational impact of the revised Orsini arrangement, the approximately $1.3 million service fee and the expanded distributor network.
- MACI reimbursement concentration, accounts receivable collection risk and the effect of seasonal Epicel demand.
- Potential dilution from equity compensation, warrants and future financing needs.
- Progress and costs associated with the MACI pediatric study and post-approval FDA commitments.