Vericel Corporation — Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
Vericel is a commercial-stage biopharmaceutical company developing and manufacturing patient-specific cell therapies. It markets MACI for repair of knee cartilage defects and Epicel for severe burns in the United States. The filing covers the unaudited quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $22.5 million | $14.3 million | $59.5 million | $40.6 million |
| Gross profit | $14.3 million | $7.1 million | $36.0 million | $18.6 million |
| Gross margin | 64% | 50% | 60% | 46% |
| Operating loss | $(1.3) million | $(4.0) million | $(9.9) million | $(16.2) million |
| Net loss | $(1.1) million | $(5.4) million | $(13.4) million | $(17.6) million |
| Net loss per share | $(0.02) | $(0.16) | $(0.34) | $(0.54) |
- Revenue increased approximately 58% in the quarter and 47% for the nine-month period, primarily from higher MACI and Epicel volumes.
- Q3 MACI revenue was $16.4 million and Epicel revenue was $6.0 million. Nine-month revenue was $42.6 million for MACI and $16.9 million for Epicel.
- Gross margin expanded to 64% in Q3 and 60% year-to-date, principally because higher volume leveraged largely fixed manufacturing costs.
- Operating expenses increased to $15.7 million in Q3 and $45.9 million year-to-date. SG&A growth reflected expanded MACI sales resources, reimbursement support, pharmacy distributor fees and higher stock compensation.
- Cash used in operations was $3.0 million for the first nine months, compared with $14.0 million in the prior-year period. Investing cash use was $46.6 million, including $44.5 million invested in short-term securities and $2.1 million for property and equipment. Financing provided $76.0 million, including the June equity offering.
- At September 30, 2018, cash and cash equivalents were $53.3 million, short-term investments were $44.5 million, and total assets were $124.5 million.
- Debt consisted of a $15.0 million term loan and $2.5 million drawn on a revolving facility. The company reported $7.5 million of remaining revolver capacity and a weighted-average interest rate of 9.07%, plus a 3.6% final term-loan payment at maturity.
Material Changes Versus the Prior Comparable Period
- MACI and Epicel volumes increased substantially, while the 2017 nine-month period included a $0.6 million revenue reduction related to a payer-distributor dispute.
- The company expanded its MACI sales force from 28 to 40 representatives and increased related commercial and reimbursement-support spending.
- In June 2018, Vericel sold 5.75 million shares at $13.00 per share, generating $70.1 million of net proceeds. Shares outstanding increased to approximately 43.2 million at September 30, 2018, from 35.9 million at December 31, 2017.
- Vericel changed its MACI distribution model. Amendments with Orsini eliminated its broad exclusivity, added a limited distributor network, and shifted certain end-customer credit and collection risk to Vericel. AllCare was added as a non-exclusive specialty pharmacy provider.
- The company adopted ASC 606 revenue recognition using the modified retrospective method with no cumulative adjustment. Management reported no material difference in revenue timing or amount compared with prior guidance.
- Warrant liabilities declined to zero at September 30, 2018, following warrant exercises and expiration of the August 2013 warrants. The related fair-value accounting produced a $2.5 million expense for the first nine months.
Guidance, Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance is provided in the filing. Management expects existing cash, investments, and available debt capacity to support current operations through at least November 2019.
- The company remains dependent on continued growth of MACI and Epicel, favorable reimbursement and collections, manufacturing performance, and access to additional capital if operating needs exceed projections.
- Vericel was in compliance with its minimum trailing-twelve-month revenue covenant and other debt covenants. However, lenders have subjective material-adverse-change acceleration rights, and covenant failure could permit the debt to be called.
- Future contractual commitments totaled $41.0 million, including $16.9 million of operating leases, $20.9 million of debt and interest payments, and $3.2 million of purchase commitments. The Orsini arrangement also includes an incremental administrative fee of approximately $1.3 million tied to future MACI cases, with unpaid amounts due by June 30, 2019 or earlier termination.
- Revenue is subject to payer reimbursement estimates and collection risk, particularly for MACI implants. Revenue and product volumes may be seasonal and variable, especially for Epicel.
- Research and development spending includes preparation for a MACI pediatric clinical study. Vericel has no current plan to independently fund an additional Phase 3 study for ixmyelocel-T unless a partner funds the program.
- The accumulated deficit was $374.3 million, and the company continues to report net losses. Management notes that additional financing may be required and may be unavailable or dilutive.
- No material pending legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported.
Investor Verification Checklist
- Verify whether MACI volume growth and reimbursement collections continue after the revised distributor arrangements and transfer of certain credit risk to Vericel.
- Monitor gross-margin sustainability as manufacturing capacity, pharmacy fees, reimbursement-support costs and product mix evolve.
- Track operating cash burn against management’s stated November 2019 liquidity runway and assess the likelihood and terms of future financing.
- Review compliance with the minimum revenue covenant and the lenders’ subjective acceleration provisions.
- Assess dilution from the June equity offering, outstanding options and remaining warrants.
- Evaluate the impact of the MACI pediatric study, manufacturing investments, lease commitments and the Orsini fee obligation on future cash needs.