Vericel Corporation — Q2 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 burns in the United States, and holds North American rights to develop and commercialize NexoBrid, a biological product for burn eschar removal. This report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Product sales | $26.2 million | $19.0 million | $48.0 million | $37.0 million |
| Gross profit | $17.1 million | $11.3 million | $30.3 million | $21.6 million |
| Gross margin | 66% | 59% | 63% | 58% |
| Operating loss | $(20.2) million | $(4.2) million | $(23.6) million | $(8.6) million |
| Net loss | $(19.8) million | $(4.7) million | $(22.6) million | $(12.3) million |
| Basic and diluted loss per share | $(0.45) | $(0.12) | $(0.52) | $(0.33) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(18.2) million | $(5.0) million |
Q2 revenue increased approximately 38%, and six-month revenue increased approximately 29%, primarily due to MACI volume growth. MACI revenue was $20.8 million in Q2 and $37.4 million for the six months, versus $14.1 million and $26.2 million, respectively, in the prior-year periods. Epicel revenue was $5.3 million in Q2 and $10.6 million for the six months, compared with $4.9 million and $10.9 million.
As of June 30, 2019, cash and cash equivalents were $14.0 million and short-term investments were $52.0 million, for total cash and short-term investments of approximately $66.0 million. Accounts receivable were $21.1 million and inventory was $4.8 million. Total assets were $125.8 million.
The filing reports no conventional borrowings. Liabilities primarily included operating and finance lease obligations of approximately $27.3 million in present value, including $24.6 million of non-current operating lease liabilities. Shareholders’ equity was $88.5 million, and accumulated deficit was $391.7 million.
Material changes versus the prior comparable period
- Gross margin improved to 66% in Q2 and 63% for the six months, compared with 59% and 58%, respectively, reflecting higher MACI sales against a largely fixed manufacturing cost structure.
- Research and development expense increased to $21.1 million in Q2 and $24.1 million for the six months, from $3.7 million and $7.5 million. The increase primarily reflects the $17.5 million upfront payment for North American NexoBrid rights, recorded as in-process research and development.
- Selling, general and administrative expense increased 38% in Q2 and 31% for the six months, driven by higher marketing, patient support, selling expenses, MACI sales-force expansion and stock-based compensation.
- Operating and net losses widened materially because of the NexoBrid upfront payment and higher commercial investment. The absence of 2018 warrant fair-value expense partially offset the increase.
- Operating cash use increased to $18.2 million for the six months from $5.0 million. Cash declined by $4.3 million during the period, while short-term investment maturities exceeded purchases by $13.1 million.
- The company expanded its MACI field force from 40 to 48 representatives during Q2. The Orsini distribution agreement and AllCare dispensing agreement were extended to May 2022, with modified fees and revised distribution terms.
- Adoption of the new lease accounting standard on January 1, 2019 added approximately $25.6 million of right-of-use assets and $27.8 million of lease liabilities, with no material earnings or cash-flow impact.
Guidance, outlook, risks and unusual items
- Management stated that existing cash, cash equivalents and short-term investments are expected to fund current operations for at least 12 months from issuance of the financial statements. The company stated that, at current revenue levels, it does not currently anticipate needing equity financing, but may seek additional debt or equity funding if revenue declines or cash needs increase.
- Management targeted submission of a U.S. Biologics License Application for NexoBrid in the second quarter of 2020. MediWound remains responsible for specified clinical activities, while regulatory approval, timing, commercialization and market acceptance remain uncertain.
- The NexoBrid agreement requires a $7.5 million payment upon U.S. BLA approval, up to $125 million in sales milestones, and tiered royalties ranging from high single-digit to low double-digit percentages of net sales. The company also paid $17.5 million upfront.
- Key risks include failure or delay in NexoBrid development or regulatory approval, dependence on MediWound and BARDA funding, reimbursement and payer uncertainty for MACI, seasonal and variable Epicel demand, manufacturing and supply-chain constraints, IT-system or patient-data breaches, intellectual-property obligations, and the need for future capital if operating losses persist.
- MACI demand is historically stronger in the fourth quarter, while Epicel generally has stronger demand in colder months. The filing does not provide formal revenue or earnings guidance.
- No material pending legal proceedings or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective as of June 30, 2019.
Important facts for investors to verify
- Whether MACI growth and improved gross margins continue after the Q2 expansion of the sales force.
- The timing and outcome of NexoBrid clinical, BLA-submission and FDA-review milestones, including MediWound’s performance under the development and supply agreements.
- The cash-burn trajectory excluding and including one-time NexoBrid payments, and whether the stated liquidity runway remains adequate.
- Future reimbursement rates, collection experience and credit exposure for MACI cases sold through specialty pharmacies.
- The potential effect of NexoBrid milestone payments, royalties, lease commitments and stock-based compensation on future cash needs and dilution.
- The impact of seasonal MACI and Epicel demand, manufacturing capacity, IT-system reliability and BARDA funding decisions.