Vericel Corporation: FY2015 Form 10-K Summary
Business context and reporting period
Vericel develops and commercializes patient-specific autologous cell therapies. The filing covers the fiscal year ended December 31, 2015; the supplied metadata refers to 2015 Q4, for which the filing reports quarterly results but is an annual Form 10-K.
- Commercial products: Carticel for knee cartilage defects and Epicel for severe burns affecting at least 30% of total body surface area.
- Development products: MACI, a next-generation cartilage implant, and ixmyelocel-T for advanced heart failure caused by ischemic dilated cardiomyopathy.
- 2015 was the first full year reflecting the acquired Sanofi Cell Therapy and Regenerative Medicine business; 2014 included only seven months of commercial operations.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $51.2 million | $28.8 million |
| Gross profit | $24.7 million | $11.5 million |
| Gross margin | 48.3% | 39.9% |
| Research and development | $18.9 million | $21.3 million |
| SG&A | $22.5 million | $13.8 million |
| Loss from operations | $16.7 million | $23.5 million |
| Net loss | $16.3 million | $19.9 million |
| Net loss per share | $0.97 | $2.23 |
| Net cash used in operating activities | $13.3 million | $25.4 million |
| Cash at year-end | $14.6 million | $30.3 million |
- Product revenue consisted of Carticel $35.2 million, Epicel $15.2 million, bone marrow $0.7 million and MACI $0.01 million.
- Approximately 1,050 Carticel implants were performed in 2015.
- Capital expenditures were $2.4 million, primarily related to integration and facility requirements.
- Working capital was $15.2 million at year-end, compared with $29.7 million in 2014. Total assets were $34.3 million and total liabilities were $12.2 million.
- Debt at December 31, 2015 was $0.1 million of long-term debt, excluding the subsequent March 2016 financing.
- The company had an accumulated deficit of approximately $324.0 million and continued to report operating and net losses.
Material changes versus the prior comparable period
- Revenue increased $22.4 million, primarily because 2015 included a full year of Carticel and Epicel sales versus seven months in 2014.
- Gross margin improved to 48.3% from 39.9%; 2014 included $2.5 million of restructuring charges in cost of product sales.
- Operating loss narrowed by $6.9 million despite higher SG&A, reflecting the larger commercial revenue base and lower R&D spending.
- R&D decreased $2.4 million, mainly because the ixCELL-DCM study completed enrollment and 2014 included a $3.2 million MACI milestone settlement. These savings were partly offset by the $2.4 million MACI BLA filing fee and other regulatory costs.
- SG&A increased $8.7 million, primarily due to a full year of commercial sales and marketing activity and higher personnel costs.
- Cash declined $15.8 million during 2015, with operating cash use of $13.3 million and investing cash use of $2.4 million; there was essentially no financing cash inflow during the year.
- Vericel ceased bone marrow collection operations in San Diego and discontinued Danish operations during 2015.
- Stonepine exchanged 1.25 million common shares for 1,250 shares of Series A Convertible Preferred Stock, which were recorded as treasury stock and preferred equity.
Guidance, outlook, risks and unusual items
- Management stated that Carticel and Epicel should provide nearly all product revenue until MACI and ixmyelocel-T obtain required approvals.
- Management expected cash on hand, together with available financing, to support operations for at least twelve months beyond December 31, 2015, but acknowledged that additional capital may be required for ixmyelocel-T development, MACI commercialization or strategic opportunities.
- On March 4, 2016, the FDA accepted the MACI BLA and assigned a January 3, 2017 PDUFA goal date. Approval was not assured, and additional studies or post-approval commitments could be required.
- On February 18, 2016, the FDA expanded Epicel labeling to include pediatric patients. Epicel therefore became eligible to be sold for profit without the prior HDE profit restriction; the FDA established an annual distribution number of 360,400 devices.
- On March 10, 2016, management announced that the Phase 2b ixCELL-DCM trial met its primary endpoint of reducing clinical cardiac events, with adverse events comparable to placebo. The product still required further development and regulatory approval.
- On March 8, 2016, Vericel entered into a $15.0 million Silicon Valley Bank facility: a $3.0 million term loan available immediately, a further $2.0 million term loan contingent on MACI approval and up to a $10.0 million revolving line, subject to borrowing-base and financial-ratio requirements.
- Key risks include continued losses, dependence on future financing, regulatory approval and clinical-trial uncertainty, reimbursement and market acceptance, complex autologous manufacturing, reliance on single facilities and sole suppliers, customer concentration, competition and patent expirations.
- A single U.S. distributor represented 66% of 2015 revenue and 76% of year-end accounts receivable; the next-largest customer represented 12% of revenue.
- The company reported a material weakness in internal control over financial reporting related to segregation-of-duties controls in its financial management system. Management began remediation in January 2016, and the auditor issued an adverse opinion on internal control effectiveness.
- Quarterly revenue is seasonal: Carticel is generally stronger in the second and fourth quarters, while Epicel is highly variable because of its low patient volume and tends to be stronger in colder months.
Important facts investors should verify
- Whether the MACI BLA was approved by the January 3, 2017 target date and whether approval imposed additional clinical, manufacturing or pediatric obligations.
- The detailed terms, amounts drawn and covenant compliance under the March 2016 Silicon Valley Bank facility.
- Progress toward remediation and auditor reassessment of the segregation-of-duties material weakness.
- Cash burn, revenue growth, gross-margin sustainability and the timing of potential profitability.
- Clinical and regulatory follow-up for ixmyelocel-T, including the need for Phase 3 development.
- Revenue concentration with the primary distributor and the effect of seasonal and low-volume Epicel demand.
- Exposure to patent expirations, sole-source suppliers and reliance on the Cambridge and Ann Arbor manufacturing facilities.