Vericel Corporation 10-Q Summary
Business Context and Reporting Period
Vericel filed a quarterly report for the three months ended March 31, 2016. The commercial-stage biopharmaceutical company markets Carticel for knee cartilage defects and Epicel for severe burns, while developing MACI and ixmyelocel-T. The company operates primarily in the United States through one reportable segment.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $14.1 million | $10.8 million |
| Gross profit / margin | $7.5 million / 54% | $5.3 million / 49% |
| Operating loss | $2.0 million | $4.6 million |
| Net loss | $3.7 million | $4.9 million |
| Net loss per common share | $0.24 | $0.27 |
| Cash used in operating activities | $1.3 million | $4.1 million |
| Cash and cash equivalents, March 31 | $13.5 million | $25.9 million |
- Revenue increased approximately 30%, driven by Carticel revenue of $8.8 million and Epicel revenue of $5.3 million. Bone marrow revenue declined to zero from $0.1 million.
- Gross margin improved to 54% from 49%, reflecting higher volume, a Carticel price increase effective January 2016, and lower professional services costs.
- Operating expenses declined to $9.5 million from $9.9 million. Research and development expense fell to $3.5 million from $4.4 million, while selling, general and administrative expense increased to $6.0 million from $5.5 million.
- Reported net loss included a $1.6 million non-cash increase in the fair value of warrant liabilities. Management reported adjusted net loss of $2.0 million, or $0.08 per share, compared with $4.5 million, or $0.19 per share, in the prior-year quarter; these are non-GAAP measures.
- Cash declined by $1.0 million during the quarter. Investing activities provided $0.1 million and financing activities provided $0.2 million.
- Total current assets were $25.8 million and current liabilities were $13.8 million at March 31, 2016. Accounts receivable were $9.7 million and inventory was $1.9 million.
- Long-term debt was $0.1 million on the balance sheet. The company entered into a $15.0 million Silicon Valley Bank facility, including $3.0 million immediately available, a $2.0 million tranche contingent on FDA approval of the MACI BLA, and up to $10.0 million of revolving capacity. No SVB debt was outstanding at quarter-end; revolving capacity was $7.8 million.
Material Changes Versus the Prior Comparable Period
- Carticel revenue increased from $7.1 million to $8.8 million, and Epicel revenue increased from $3.6 million to $5.3 million.
- Gross margin expanded by approximately five percentage points.
- Operating loss improved by $2.6 million, although the higher warrant revaluation expense increased other expense from $0.3 million to $1.7 million.
- Operating cash usage improved by $2.8 million, largely due to improved operating results and working-capital movements.
- Cash and cash equivalents decreased substantially year over year, from $25.9 million to $13.5 million.
- The company granted 835,480 service-based stock options during the quarter. Common shares outstanding increased to approximately 23.9 million as of May 3, 2016.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance is provided. Management stated that Carticel and Epicel are expected to constitute nearly all product revenue until MACI or ixmyelocel-T receives applicable approvals.
- The FDA accepted the MACI BLA on March 4, 2016, with a PDUFA goal date of January 3, 2017. A $2.0 million debt tranche is contingent on FDA approval of the MACI BLA.
- Epicel received FDA approval in February 2016 to add pediatric labeling. The product is no longer subject to HDE profit restrictions, and the FDA established an annual distribution number of 360,400.
- The Phase 2b ixCELL-DCM study met its primary endpoint. However, several secondary measures, including time to first event, cardiac structural measures, left ventricular ejection fraction, NYHA class, and six-minute walk results, did not show statistically significant differences between treatment groups. Future development depends on regulatory discussions and available non-dilutive financing.
- Management believes current cash and available financing are sufficient to sustain operations for twelve months beyond March 31, 2016, but stated that additional capital may be required, particularly for ixmyelocel-T development and a potential U.S. launch of MACI.
- Revenue concentration is significant: one distributor represented approximately 62% of Q1 revenue and 72% of accounts receivable at March 31, 2016. The next-largest customer represented approximately 16% of revenue.
- Carticel and Epicel revenue is seasonal and may fluctuate materially due to procedure timing, insurance considerations, weather, and Epicel’s low patient volume.
- The company disclosed a material weakness in internal control over financial reporting related to segregation-of-duties conflicts in its financial management software. Management began remediation in January 2016 by removing inappropriate access and developing enhanced audit-trail reporting.
- Future contractual obligations included approximately $26.6 million of operating lease payments and $0.8 million of purchase commitments. Subsequent events included agreements with Dohmen Life Science Services for administrative and patient-support services and Vention Medical for cell-cassette manufacturing through 2021.
Facts Investors Should Verify
- Progress toward the January 3, 2017 MACI FDA action date and the availability of the contingent $2.0 million debt tranche.
- Whether revenue growth and the 54% gross margin are sustainable given customer concentration and seasonal product demand.
- Cash burn, access to the SVB facility, and the potential need for equity or other financing.
- Regulatory and financing plans for ixmyelocel-T following the Phase 2b trial results.
- Remediation and independent auditor assessment of the disclosed material weakness in internal controls.
- Potential dilution from preferred stock, warrants, stock options, and available equity financing arrangements.