Vericel Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on advanced cell therapies and specialty biologics for sports medicine and severe burn care. Its marketed products are MACI for knee cartilage repair and Epicel for severe burns. Vericel also holds North American rights to NexoBrid, a burn-debridement product under FDA review.
The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The report was filed November 5, 2020.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $32.3 million | $30.5 million | $79.0 million | $78.5 million |
| Gross profit | $22.5 million | $21.2 million | $50.6 million | $51.5 million |
| Gross margin | 70% | 69% | 64% | 66% |
| Operating income (loss) | $3.5 million | $3.1 million | $(9.9) million | $(20.5) million |
| Net income (loss) | $3.6 million | $3.5 million | $(9.4) million | $(19.2) million |
| Basic EPS | $0.08 | $0.08 | $(0.21) | $(0.44) |
| Operating cash flow | Not separately provided | Not separately provided | $6.2 million | $(10.3) million |
- Q3 revenue growth was driven by MACI recovery and $1.2 million of initial NexoBrid revenue from a BARDA delivery. MACI revenue was $24.4 million, compared with $20.6 million; Epicel revenue declined to $6.7 million from $9.9 million.
- Nine-month revenue was broadly flat because COVID-19 disruptions to elective surgeries earlier in the year offset MACI growth later in the period.
- Operating expenses were $19.0 million in Q3 and $60.5 million for nine months. Nine-month research and development expense fell substantially because 2019 included the $17.5 million NexoBrid upfront license payment; selling, general and administrative expense increased due largely to MACI sales-force expansion and support costs.
- At September 30, 2020, cash and cash equivalents were $43.5 million, short-term investments were $42.0 million, and total cash, cash equivalents and restricted cash were $43.7 million.
- Total liabilities were $42.9 million, consisting primarily of operating lease liabilities. The filing does not report traditional funded debt.
- Management believes existing cash, cash equivalents and investments will support current operations for at least 12 months from issuance of the financial statements, although a prolonged COVID-19 impact could require additional financing or cost reductions.
Material changes versus the prior comparable period
- Q3 revenue increased 5.8% year over year, while nine-month revenue increased 0.6%.
- Q3 gross margin improved to 70% from 69%; nine-month gross margin declined to 64% from 66%, reflecting the effect of COVID-19-related revenue disruption.
- Q3 operating income increased to $3.5 million from $3.1 million. The nine-month operating loss narrowed to $9.9 million from $20.5 million, primarily because the prior-year period included the NexoBrid license payment.
- Operating cash flow improved by $16.6 million year over year, turning positive, supported by collections and a $6.0 million reduction in accounts receivable.
- Cash and cash equivalents increased from $26.9 million at December 31, 2019 to $43.5 million at September 30, 2020. Inventory increased from $6.8 million to $10.1 million, primarily in raw materials.
- Shares outstanding increased to 45.3 million at September 30, 2020 from 44.9 million at December 31, 2019, primarily through equity-plan activity and option exercises.
Guidance, outlook, risks and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management stated that MACI procedure and order volumes had recovered as elective-surgery restrictions eased, but it could not reliably estimate the pandemic’s effect on fourth-quarter 2020 and future utilization or revenue.
- By the end of September, no state orders directly prevented MACI surgeries; however, renewed COVID-19 outbreaks could again restrict elective procedures. Epicel has been less affected because it is primarily used in emergent burn care, although burn volumes remain variable.
- The FDA accepted the NexoBrid Biologics License Application for review and assigned a PDUFA goal date of June 29, 2021. Vericel recognized $1.2 million of revenue from the first BARDA shipment. Potential NexoBrid obligations include a $7.5 million regulatory milestone, up to $125 million in sales milestones, and tiered royalties; these milestone liabilities were not probable as of September 30, 2020.
- Key operational risks include renewed elective-surgery restrictions, reimbursement and collection estimates, supply-chain or air-transportation disruptions, short product shelf lives, clinical-trial delays, FDA review delays, and the need for additional capital if revenue remains depressed.
- Vericel maintained safety stock of key raw materials and reported no material COVID-19-related impairments to investments, inventory, receivables or long-lived assets as of September 30, 2020.
- Effective October 21, 2020, Vericel extended a Cambridge facility lease through February 2032, with monthly payments ranging from $0.4 million to $0.6 million.
Important facts for investors to verify
- Whether MACI procedure volumes and revenue remained durable during subsequent COVID-19 surges and any renewed elective-surgery restrictions.
- The timing and outcome of the FDA’s NexoBrid review against the June 29, 2021 PDUFA date, including potential milestone payments and commercialization economics.
- MACI reimbursement and collection trends, including the $4.6 million allowance for uncollectible consideration and sensitivity to payer assumptions.
- Whether positive operating cash flow is sustained after considering working-capital changes, inventory growth and sales-force expansion.
- The company’s cash runway, future financing needs and potential effects of any equity financing on shareholders.
- Future Epicel revenue volatility, given the product’s dependence on the unpredictable occurrence of severe burns.