Vericel Corporation — FY2014 Form 10-K Summary
Business context and reporting period
Vericel filed its annual report for the fiscal year ended December 31, 2014. The company became a commercial-stage cell-therapy business after acquiring Sanofi’s Cell Therapy and Regenerative Medicine business on May 30, 2014. Vericel markets Carticel for knee cartilage defects and Epicel for severe burns, while developing MACI and ixmyelocel-T. Consolidated 2014 results include seven months of acquired CTRM operations, so year-over-year comparisons are not fully comparable.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $28.8 million | $19 thousand |
| Gross profit | $11.5 million | $15 thousand |
| Gross margin | 40% | Not meaningful |
| Research and development | $21.3 million | $15.1 million |
| SG&A | $13.8 million | $5.9 million |
| Operating loss | $23.5 million | $21.0 million |
| Net loss | $19.9 million | $15.6 million |
| Net loss per common share | $2.23 | $6.95 |
| Cash used in operations | $25.4 million | $19.9 million |
| Cash balance at year-end | $30.3 million | $8.1 million |
Reported 2014 revenue consisted of Carticel $22.3 million, Epicel $6.0 million, bone marrow $0.4 million and MACI $0.2 million. Separately, management states that full-year pre- and post-acquisition sales were approximately $34.8 million for Carticel and $9.5 million for Epicel; these amounts are not directly comparable with the consolidated revenue table because the acquisition closed during the year.
Gross profit included $2.5 million of restructuring charges, reducing reported gross margin by approximately 10 percentage points. Research and development spending increased primarily because of the ixCELL-DCM trial and MACI activities, including a $3.2 million Verigen settlement payment. The company recorded a $3.5 million bargain-purchase gain related to the CTRM acquisition and $3.0 million of restructuring charges.
Year-end current assets were $41.5 million, including $30.3 million of cash, $8.2 million of receivables and $1.9 million of inventory. Current liabilities were $11.8 million, including $1.1 million of warrant liabilities. Long-term liabilities were $0.1 million; the filing does not indicate material conventional long-term debt. Total shareholders’ equity was $35.6 million.
Financing activities provided $49.9 million in 2014, including $37.5 million of net proceeds from a September public offering, $7.1 million from the ATM program and $3.7 million from the Lincoln Park equity line. Management believed available cash would fund operations until cash-flow breakeven, but stated that positive operating cash flow was not expected for at least a year and depended on sales growth, margin improvement and expense reductions.
Material changes versus the prior comparable period
- Revenue increased sharply because of the acquired commercial products, but the comparison with 2013 is not meaningful because 2013 included only nominal legacy revenue.
- Vericel’s workforce expanded from approximately 38 employees before the acquisition to approximately 190 at December 31, 2014.
- Operating expenses increased substantially as Vericel assumed sales, marketing, manufacturing, integration and acquired-business costs.
- R&D spending shifted toward ixmyelocel-T for ischemic dilated cardiomyopathy; critical limb ischemia spending declined after the REVIVE program was stopped.
- Management discontinued MACI manufacturing in Denmark and temporarily suspended European MACI sales in August 2014 because of low utilization and unfavorable pricing. Approximately 80 positions were eliminated.
- Vericel settled potential future MACI milestone obligations for approximately $3.2 million, paid in October 2014.
- The company’s cash balance increased by $22.3 million, primarily from equity financing, despite $25.4 million of operating cash use.
Guidance, outlook, risks and unusual items
- Management’s strategy was to increase Carticel and Epicel sales, improve manufacturing efficiency and margins, pursue U.S. approval of MACI, evaluate a selective European reintroduction, and advance ixmyelocel-T.
- The Phase 2b ixCELL-DCM study enrolled and treated 114 patients at 28 sites. Enrollment was completed in early 2015, with top-line efficacy results expected around the end of the first quarter of 2016 and an additional 12 months of safety follow-up.
- Epicel remained subject to an HDE profit restriction. Vericel was evaluating a pediatric labeling and HDE supplement strategy but had not obtained FDA permission to sell the product for profit.
- Sales are seasonal: Carticel historically has been strongest in the second and fourth quarters, while Epicel is concentrated in colder-weather periods and can vary materially because fewer than 100 patients are treated annually.
- One U.S. distributor represented approximately 76% of 2014 revenue, creating significant customer concentration risk.
- Vericel identified a material weakness in internal control over financial reporting related to accounting personnel, technical expertise, significant-transaction evaluation and the financial close process. Remediation had begun but the weakness had not been fully eliminated at year-end.
- Commercial manufacturing for Carticel and Epicel depended primarily on the Cambridge facility, while ixmyelocel-T manufacturing depended on the Ann Arbor facility. The Cambridge facility received an FDA Form 483 in March 2014; the company reported completing remedial measures and responding to the observations.
- Key risks include continued losses, dependence on additional equity financing, regulatory approval uncertainty, clinical-trial failure, reimbursement pressure, manufacturing variability, reliance on a sole supplier for certain cell cassettes, intellectual-property limitations and competition.
Most important facts an investor should verify
- Reconcile consolidated revenue of $28.8 million with the separate full-year Carticel and Epicel sales figures disclosed for pre- and post-acquisition periods.
- Assess whether the $30.3 million cash balance can support operating losses, clinical development and commercialization without further dilution.
- Monitor progress and results of the ixCELL-DCM trial and any required Phase 3 program.
- Verify the FDA pathway, timing and commercial economics for MACI and the proposed Epicel profit exemption.
- Confirm remediation and auditor assessment of the material weakness in internal controls.
- Evaluate the effect of customer concentration, seasonal revenue volatility and the Denmark facility lease or restoration obligations.
- Review dilution from outstanding warrants, preferred stock, the Lincoln Park equity line and remaining ATM capacity.