Vericel Corporation 2017 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. Its marketed products during the period were MACI, which replaced Carticel in the U.S. during the second quarter of 2017, and Epicel. The company also has the development-stage ixmyelocel-T program.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Product sales | $14.3 million | $10.9 million | $40.6 million | $37.9 million |
| Gross profit | $7.1 million | $4.1 million | $18.6 million | $17.1 million |
| Gross margin | 50% | 37% | 46% | 45% |
| Operating loss | $4.0 million | $6.4 million | $16.2 million | $13.4 million |
| Net loss | $5.4 million | $6.7 million | $17.6 million | $13.4 million |
| Net loss per share | $0.16 | $0.38 | $0.54 | $0.84 |
| Cash used in operations | Not separately provided | Not separately provided | $14.0 million | $10.6 million |
Q3 revenue increased approximately 31% year over year, while nine-month revenue increased approximately 7%. Q3 operating margin improved to approximately negative 28% from negative 58%; the nine-month operating margin was approximately negative 40% versus negative 35% in the prior-year period.
Revenue by product for the nine months was $27.8 million from Carticel and MACI and $12.8 million from Epicel. The company reported fewer than 100 Epicel patients annually, making that revenue stream inherently volatile.
At September 30, 2017, cash was $15.5 million, compared with $23.0 million at December 31, 2016. Total current assets were $36.3 million and total current liabilities were $14.5 million. Accounts receivable were $15.4 million and inventory was $4.0 million.
Debt consisted of approximately $7.8 million outstanding under the term loan and $2.5 million under the revolving facility, net of deferred financing costs in the balance sheet. The weighted-average interest rate was 7.8%, and remaining revolving capacity was $3.3 million. The company had $1.3 million of warrant liabilities.
Material Changes Versus the Prior Comparable Period
- MACI launched in January 2017 and replaced Carticel by the end of the second quarter. Increased MACI and Epicel units and higher average selling prices drove Q3 revenue growth.
- Gross margin improved primarily because of higher Carticel and MACI sales.
- Research and development expense declined to $2.9 million in Q3 and $9.4 million for nine months, mainly because ixCELL-DCM trial-related spending decreased after patient treatment was completed.
- Selling, general and administrative expense increased to $8.2 million in Q3 and $25.4 million for nine months, driven by the expanded MACI sales force, launch consulting and agency costs, and reimbursement and patient-support services.
- The company raised $7.5 million through common-stock issuance during the first nine months, primarily through its at-the-market program. Approximately $17.2 million of net ATM capacity remained at September 30.
- All outstanding preferred stock was converted into 1.1 million common shares in March 2017. Common shares outstanding increased to 34.9 million as of November 3, 2017, from 31.6 million at December 31, 2016.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that current cash and available financing were expected to support operations through at least November 2018, subject to actual results and other capital needs.
- The company was in compliance with its minimum trailing-twelve-month revenue covenant at September 30, 2017. The December 31, 2017 minimum revenue covenant was $51.7 million. Lenders have subjective material-adverse-change acceleration rights.
- Management warned that failure to meet debt covenants or a lender acceleration could require immediate additional financing. Financing may be unavailable or dilutive, and failure to raise capital could require significant operating and research reductions.
- A Vital Care reimbursement dispute led to changes in revenue allowances. The filing describes a $2.1 million reduction related to 2016 sales and a $0.7 million reduction related to 2017 sales in the first quarter, partially offset by a $1.4 million allowance reduction in the second quarter. Management stated that a subsequent negotiated reimbursement reduced nine-month 2017 revenue by $0.6 million for sales originally recorded in 2016.
- Revenue and receivables became more concentrated following the transition to Orsini as MACI distributor. One customer represented 55% of Q3 revenue, 25% of nine-month revenue, and 48% of accounts receivable at September 30.
- The FDA indicated that an additional clinical study would be required to support an ixmyelocel-T BLA. Vericel stated it would not fund further studies unless a partner provides full funding.
- The ICT license agreement for Asia had a potential $6.0 million upfront payment, approximately $8.0 million of development and commercial milestones, and low-double-digit royalties, but the upfront payment and related technology transfer had not occurred as of issuance of the financial statements. The agreement was being amended to allow additional payment time.
- Warrant fair-value expense was $1.1 million in Q3 and $0.5 million for nine months. These were non-cash adjustments and may remain volatile with changes in the company’s stock price.
- The SEC had an unresolved follow-up comment concerning revenue-recognition and product-sales accounting as of November 7, 2017. The company stated that no material legal proceedings were pending and that there were no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify MACI adoption, payer coverage, reimbursement rates, unit growth, and the sustainability of the improved gross margin.
- Monitor customer concentration, Orsini receivables, and any further changes to revenue allowances or reimbursement estimates.
- Verify compliance with the December 31, 2017 debt revenue covenant and the availability of the revolving facility.
- Assess cash burn, remaining ATM capacity, debt amortization, and the timing and terms of any future financing.
- Confirm whether ICT funded the Asia license and whether any milestones, royalties, or warrants became effective.
- Track the SEC’s resolution of its revenue-recognition comment.
- Evaluate whether ixmyelocel-T has a viable partner-funded development path after the FDA’s additional-study requirement.