Vericel Corporation — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Vericel is a commercial-stage biopharmaceutical company focused on advanced cell therapies. It markets MACI for adult knee cartilage repair and Epicel for severe burn treatment in the United States. The filing covers the unaudited three months ended March 31, 2019, and compares results with the three months ended March 31, 2018.
Financial Results and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Product sales | $21.8 million | $18.0 million | 21.0% increase |
| MACI revenue | $16.6 million | $12.1 million | 37.5% increase |
| Epicel revenue | $5.2 million | $6.0 million | 12.5% decrease |
| Gross profit | $13.2 million | $10.4 million | 27.1% increase |
| Gross margin | 60% | 57% | Up approximately 3 percentage points |
| Operating expenses | $16.5 million | $14.7 million | 12.6% increase |
| Loss from operations | $3.4 million | $4.3 million | 22.3% improvement |
| Net loss | $2.8 million | $7.7 million | 62.9% improvement |
| Basic and diluted loss per share | $0.07 | $0.21 | Improved |
| Cash provided by operating activities | $0.2 million | $0.4 million | Lower operating cash generation |
MACI growth more than offset lower Epicel revenue. Gross profit benefited from higher MACI volume and Vericel’s largely fixed manufacturing cost structure. Selling, general and administrative expense increased to $13.5 million, primarily due to higher stock-based compensation, expanded sales-force costs, and increased selling and patient-support expenses. Research and development expense declined to $3.0 million from $3.7 million.
Other income was $0.5 million compared with other expense of $3.3 million in the prior-year quarter. The change primarily reflected the absence of the prior-year warrant fair-value expense and the generation of interest income from marketable securities. All outstanding debt was repaid in December 2018.
Cash, Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $35.1 million at March 31, 2019, compared with $18.3 million at December 31, 2018.
- Short-term investments were $49.0 million, resulting in total cash, cash equivalents, and short-term investments of approximately $84.1 million.
- Operating cash flow was $0.2 million; investing cash flow was $15.7 million, primarily reflecting short-term investment maturities; financing cash flow was $1.0 million from stock-option exercises.
- The company had no outstanding debt, but reported operating lease liabilities of $27.5 million and finance lease liabilities with a present value of approximately $0.2 million.
- Management expects existing cash, cash equivalents, and short-term investments to fund current operations through at least May 2020. Management stated that, at current revenue levels, it does not currently anticipate needing equity financing.
- The company had an accumulated deficit of $371.9 million and remains loss-making.
Material Changes Versus the Prior Comparable Period
- Revenue increased 21%, driven by a 38% increase in MACI revenue, while Epicel revenue declined 13%.
- Gross margin improved from 57% to 60% because of increased MACI volume and operating leverage.
- Operating loss narrowed by approximately $1.0 million despite higher selling, general and administrative spending.
- Net loss improved by approximately $4.8 million, largely because the prior-year period included a $2.9 million increase in the fair value of warrants and $0.4 million of interest expense.
- Research and development spending declined, primarily because of lower MACI pediatric trial start-up and other external costs.
- Adoption of the new lease accounting standard on January 1, 2019 added approximately $25.2 million of right-of-use assets and $27.5 million of operating lease liabilities at March 31, 2019; the adoption had an immaterial effect on earnings and cash flows.
- The MACI sales force was expanded from 40 to 48 representatives, with the expanded force expected to be in the field during the second quarter of 2019.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific revenue, earnings, or margin guidance. Management expects current liquidity to support operations through at least May 2020, but notes that additional funding could be required if revenue declines or cash needs increase. Financing may not be available on acceptable terms and could dilute shareholders or adversely affect shareholder rights.
- MACI revenue depends on physician adoption, payer coverage, reimbursement levels, patient approvals, and the company’s ability to expand distribution and sales execution.
- Epicel revenue is volatile and subject to seasonal and patient-volume fluctuations.
- Revenue estimates for certain MACI implants depend on expected third-party reimbursement and may be revised through revenue in later periods.
- The company has substantial accumulated losses and may incur future losses while investing in commercialization, manufacturing, clinical activities, and compliance.
- Vericel has no current plans to independently fund an additional Phase 3 study for ixmyelocel-T following FDA feedback that further clinical development would be required.
- On May 6, 2019, after the reporting period, Vericel entered into North American license and supply agreements for MediWound’s NexoBrid. The company was obligated to pay $17.5 million shortly after signing, plus $7.5 million upon U.S. regulatory approval, up to $125 million in sales milestones, royalties, and product supply costs.
- There were no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether MACI growth and payer reimbursement trends continue to offset Epicel revenue volatility.
- The sustainability of the 60% gross margin as sales volume, product mix, and manufacturing costs change.
- The timing and cash impact of the NexoBrid upfront payment, development obligations, milestones, royalties, and supply agreement.
- Actual cash burn and liquidity runway relative to management’s expectation of funding operations through at least May 2020.
- The effect of expanded commercial spending, stock-based compensation, and lease obligations on the path to profitability.
- Potential dilution from outstanding equity awards and approximately 27,000 shares issuable under December 2017 warrants.