Vericel Corporation — 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Vericel is a commercial-stage biopharmaceutical company developing and commercializing patient-specific cellular therapies. Its marketed products include Carticel for knee cartilage defects and Epicel for severe burns; MACI is under development for potential U.S. commercialization, and ixmyelocel-T is in clinical development for advanced heart failure.
This unaudited quarterly report covers the three and six months ended June 30, 2015. Comparisons with 2014 are affected by the May 30, 2014 acquisition of Sanofi’s Cell Therapy and Regenerative Medicine business, which contributed substantially to 2015 revenue.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $13.6 million | $24.4 million |
| Gross profit | $6.7 million; 49.2% margin | $12.0 million; 49.0% margin |
| Research and development | $3.4 million | $7.7 million |
| Selling, general and administrative | $5.6 million | $11.1 million |
| Loss from operations | $(2.3) million | $(6.8) million |
| Net loss | $(2.2) million | $(7.0) million |
| Net loss per common share | $(0.16) | $(0.43) |
| Cash flow from operations | Not separately presented | $(8.6) million |
Revenue by product for the six-month period was $16.2 million from Carticel, $7.9 million from Epicel and $0.3 million from the bone marrow business. One U.S. distributor represented approximately 63% of first-half revenue and 74% of accounts receivable at June 30, 2015.
Cash was $20.2 million at June 30, 2015, compared with $30.3 million at December 31, 2014. Total current assets were $33.5 million and current liabilities were $10.8 million, implying working capital of approximately $22.7 million. Long-term debt was $0.1 million, and warrant liabilities were $1.3 million. The company held $15.9 million of cash in an Insured Cash Sweep program.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased to $13.6 million from $4.4 million; first-half revenue increased to $24.4 million from $4.4 million. The comparison is not fully comparable because the acquired business was owned for only part of the 2014 period.
- Second-quarter gross profit improved from a $0.6 million loss in 2014 to $6.7 million in 2015. The 2014 period included restructuring charges and did not include a full period of the acquired commercial operations.
- Operating loss narrowed to $2.3 million from $8.5 million in the second quarter and to $6.8 million from $13.2 million for the first half.
- Net loss improved to $2.2 million from $4.6 million for the quarter and to $7.0 million from $10.6 million for the first half. The 2014 results included a $3.6 million bargain purchase gain, making the improvement in net loss despite that prior-period benefit notable.
- Second-quarter research and development expense declined by approximately $1.0 million, primarily because ixCELL-DCM enrollment had been completed and the Critical Limb Ischemia study was cancelled. First-half research and development expense was approximately flat year over year.
- Second-quarter SG&A increased by $2.0 million and first-half SG&A increased by $6.1 million, primarily due to sales and marketing, personnel, information technology, legal, consulting and integration costs associated with the acquired business.
- Cash declined by $10.1 million during the first half, principally from operating cash usage of $8.6 million and capital expenditures of $1.6 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects Carticel and Epicel to provide nearly all product revenue until MACI and ixmyelocel-T receive any required approvals and reach commercialization.
- The company does not expect positive operating cash flow for at least a year. Management believes current cash is sufficient to sustain operations until cash flow improves, but acknowledges that additional capital may be required if results differ from projections.
- Available financing included $11.3 million of remaining capacity under the Lincoln Park equity purchase agreement and approximately $7.8 million of remaining capacity under the MLV at-the-market agreement.
- Management planned to submit a U.S. Biologics License Application for MACI by the end of 2015. Sales of MACI in Europe had been suspended because of low utilization and an unfavorable pricing environment.
- The company planned to submit an Epicel HDE supplement in the fourth quarter of 2015 seeking pediatric labeling and potential exemption from the prohibition on profit-making sales. Epicel was then sold at prices reflecting research, fabrication and distribution costs.
- The Phase 2b ixCELL-DCM study completed enrollment of 114 patients in January 2015, with top-line efficacy results expected around the end of the first quarter of 2016.
- Revenue is seasonal: Carticel generally has stronger second- and fourth-quarter sales, while Epicel revenue is volatile because fewer than 100 patients are treated annually and demand is affected by seasonality.
- Warrant fair-value changes are non-cash but may create significant future income or expense volatility. The six-month period included a $0.2 million expense from the increase in warrant liabilities; the 2014 period included a $3.6 million bargain purchase gain.
- Major risks include continued operating losses, dependence on a small number of customers, regulatory approval and reimbursement for product candidates, clinical-trial outcomes, market acceptance, manufacturing and integration execution, and potential financing needs. No material changes to the risk factors in the 2014 Form 10-K were reported.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether revenue growth and approximately 49% gross margins are sustained after the acquisition-related comparison effects normalize.
- The pace of cash consumption, operating expense reductions and the timing of achieving positive operating cash flow.
- Customer concentration, distributor dependence and accounts-receivable exposure.
- Progress toward the planned MACI BLA submission and potential Epicel pricing relief.
- Results and regulatory implications of the ixCELL-DCM trial, expected around the end of the first quarter of 2016.
- Potential dilution from the equity financing facilities, stock options, warrants and convertible preferred stock.
- Future non-cash warrant revaluation effects and the company’s ability to fund operations without additional capital.