Vericel Corporation—Q1 2017 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 were Carticel, MACI and Epicel; ixmyelocel-T remained in development. The report covers the unaudited quarter ended March 31, 2017, filed May 10, 2017.
MACI received FDA approval in December 2016, with its first shipment and implantation on January 31, 2017. Management planned to replace Carticel with MACI as soon as practicable, potentially beginning in the second quarter of 2017.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net product sales | $9.4 million | $14.1 million |
| Gross profit / margin | $2.3 million / 24% | $7.5 million / 54% |
| Operating expenses | $11.9 million | $9.5 million |
| Loss from operations | $9.6 million | $2.0 million |
| Net loss | $9.8 million | $3.7 million |
| Loss per share | $0.31 | $0.24 |
| Cash used in operations | $3.1 million | $1.3 million |
Revenue declined approximately 34% year over year. Carticel and MACI revenue was $5.0 million versus $8.8 million, while Epicel revenue was $4.4 million versus $5.3 million. The company attributed the decline to fewer Carticel and MACI implants and smaller average Epicel orders.
Gross margin fell primarily because of lower Epicel order size, reduced Carticel sales, higher material usage and increased facility expense. Research and development expense was $3.5 million, broadly unchanged year over year. Selling, general and administrative expense increased 40% to $8.4 million, driven by MACI launch consulting, expanded sales personnel, reimbursement and patient-support costs, and higher audit, tax and information-technology expenses.
Cash was $19.8 million at March 31, 2017, down from $23.0 million at December 31, 2016. Total assets were $40.6 million and shareholders’ equity was $15.5 million. Accounts receivable declined to $12.1 million from $17.1 million, while inventory increased to $4.0 million from $3.5 million.
Debt consisted of approximately $8.0 million of term loans and $2.5 million drawn on the revolving facility, with a weighted-average interest rate of 7.8%. Reported debt, net of deferred costs, totaled approximately $10.1 million. Only approximately $0.3 million of revolving capacity remained at March 31, 2017.
Material changes versus the prior comparable period
- Revenue decreased $4.7 million, primarily from lower Carticel/MACI and Epicel sales.
- Gross profit decreased $5.3 million and gross margin contracted from 54% to 24%.
- Operating loss increased $7.6 million, reflecting lower gross profit and higher SG&A.
- Net loss increased $6.1 million. The prior-year period included a $1.6 million unfavorable noncash warrant fair-value adjustment; Q1 2017 included a $0.1 million favorable adjustment.
- Operating cash use increased $1.9 million. A $5.0 million reduction in accounts receivable provided cash, but the company continued to consume cash because of its operating loss.
- On March 9, 2017, all outstanding preferred stock was mandatorily converted into 1.1 million common shares. No preferred shares remained outstanding at quarter-end.
- The company granted 892,390 stock options during the quarter, contributing to potential future dilution.
Guidance, outlook, risks and unusual items
Management stated that existing cash and the SVB-MidCap facility were expected to support current operations through at least May 2018, subject to operating results, covenant compliance and other assumptions. The filing does not provide formal revenue or earnings guidance.
Vericel was not in compliance with the minimum revenue covenant as of March 31, 2017. On May 9, 2017, it amended the credit facility to enable compliance with the March 31 covenant and revised the December 31, 2017 minimum revenue covenant to $51.7 million. The lenders retained rights under material-adverse-change provisions, and a covenant breach or acceleration could require immediate repayment and additional financing.
Vital Care notified the company in April 2017 of a contractual dispute with a third-party payer involving Carticel and MACI reimbursement claims from 2016 and Q1 2017. Vericel recorded revenue-reserve changes of $2.1 million related to 2016 sales and $0.7 million related to 2017 sales. Claims could ultimately be reimbursed at lower out-of-network rates, and previously collected amounts might require repayment, creating additional liquidity risk.
Other key risks include uncertain reimbursement for MACI, dependence on third-party payers and service providers, seasonal and volatile Epicel demand, limited remaining borrowing capacity, continuing operating losses, potential dilution from equity financing and warrants, and the need for external funding to advance ixmyelocel-T. Management stated it did not currently plan to fund a Phase 3 ixmyelocel-T trial independently and was evaluating strategic partners and other financing sources.
As a subsequent event, Vericel announced a license agreement with Innovative Cellular Therapeutics for certain Asian markets. The agreement contemplated a $6.0 million upfront payment, approximately $8.0 million of potential development and commercial milestones, tiered low-double-digit royalties and a warrant; the funding transfer was subject to Chinese regulatory approval.
Facts investors should verify
- Whether the Vital Care reimbursement dispute is resolved and the ultimate revenue adjustment or repayment exposure.
- Compliance with the amended SVB-MidCap revenue covenants, including the $51.7 million December 31, 2017 threshold.
- Actual cash runway, borrowing-base availability and any need for ATM equity issuance or other financing.
- The pace of MACI adoption, Carticel discontinuation and reimbursement rates for MACI.
- Whether the Asian licensing transaction closed and the $6.0 million upfront payment was received.
- Progress, funding strategy and potential partnering for ixmyelocel-T development.