Vericel Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company focused on advanced therapies for sports medicine and severe burn care. Its U.S. products are MACI, Epicel and NexoBrid. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $45.9 million | $37.0 million | $86.9 million | $73.1 million |
| Revenue growth | 24.0% | — | 18.9% | — |
| Gross profit | $29.9 million | $22.9 million | $56.5 million | $46.3 million |
| Gross margin | 65.2% | 61.7% | 65.0% | 63.3% |
| Loss from operations | $(6.0) million | $(9.1) million | $(14.1) million | $(16.4) million |
| Net loss | $(5.0) million | $(9.0) million | $(12.5) million | $(16.1) million |
| Loss per share | $(0.11) | $(0.19) | $(0.26) | $(0.34) |
| Operating cash flow | — | — | $18.1 million | $6.6 million |
Q2 operating margin was approximately negative 13.0%, compared with negative 24.5% in the prior-year quarter. Six-month operating margin was approximately negative 16.3%, compared with negative 22.4%. Net loss margins were approximately negative 10.9% and negative 14.4% for Q2 2023 and the six-month period, respectively.
- Revenue mix: Q2 MACI revenue was $36.3 million, up 27.0%; Epicel revenue was $9.6 million, up 16.7%; and NexoBrid revenue was zero, compared with $0.2 million in Q2 2022. Six-month MACI revenue increased 29.2% to $70.5 million, while Epicel declined 9.2% to $16.4 million.
- Expenses: Q2 research and development expense increased 9.6% to $5.3 million, and selling, general and administrative expense increased 12.9% to $30.6 million. Six-month SG&A increased 13.4% to $60.1 million.
- Cash and investments: At June 30, 2023, cash and cash equivalents were $43.0 million, restricted cash was $27.8 million, and investments totaled $75.8 million, for approximately $146.6 million of cash, restricted cash and investments.
- Cash flow: Six-month operating cash flow was $18.1 million. Investing activities provided $0.4 million after investment maturities and purchases, the $7.5 million NexoBrid milestone payment and $5.6 million of capital expenditures. Financing activities provided $1.3 million.
- Debt and liquidity: Vericel had no outstanding borrowings under its $150.0 million senior secured revolving credit facility and reported compliance with its covenants. The facility includes a $15.0 million letter-of-credit subfacility, of which approximately $6.2 million was utilized.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher MACI volume and price growth. Gross profit grew faster than revenue, despite higher employee, raw-material, storage and manufacturing-facility costs.
- Operating and net losses narrowed, aided by revenue growth, improved gross margin and higher interest income. Interest income increased to $1.1 million in Q2 and $1.9 million for the six-month period.
- Stock-based compensation declined 18.9% in Q2 and 14.0% for the six-month period, to $8.8 million and $17.5 million, respectively.
- Total assets increased to $310.7 million from $273.0 million at December 31, 2022, substantially reflecting the Burlington facility lease and related right-of-use asset. Operating lease liabilities increased to $83.4 million from $47.6 million.
- The company recorded a $7.5 million intangible asset for the NexoBrid regulatory milestone payment following FDA approval.
Guidance, outlook, commentary and risks
- The filing does not provide specific revenue, earnings or margin guidance. Management expects existing cash, investments, product-sale proceeds and available borrowing capacity to support current operations for at least 12 months from issuance of the financial statements.
- NexoBrid received FDA approval in December 2022, but the first U.S. commercial lot could not be released because of a deviation involving a third-party testing laboratory used in manufacturing. Management stated that its risk assessment found no incremental product quality or safety risk and expects commercial sales of future lots to begin in the first quarter of 2024 if the affected lot is not released earlier.
- BARDA committed an additional $3.0 million to support replacement of expired NexoBrid inventory. The filing states that the FDA review of the manufacturing deviation will not affect this commitment.
- Vericel is developing potential MACI arthroscopic delivery for knee procedures and evaluating a potential ankle indication. A human-factors validation study for arthroscopic delivery was expected to begin in the third quarter of 2023.
- The company began funding its Burlington, Massachusetts manufacturing and headquarters project. Approximately $28.3 million, representing 50% of its required construction escrow contribution, had been funded by June 30, with the remaining 50% expected in late 2023 or early 2024. The lease carries substantial future payments and is expected to support expanded manufacturing capacity.
- Key risks include continued operating losses, dependence on MACI growth, reimbursement and collection estimates, NexoBrid manufacturing and regulatory timing, reliance on MediWound and certain suppliers, facility construction and scaling, supply-chain disruptions, inflation, interest-rate and financial-institution risks, and potential resumption of pandemic-related disruptions.
- As of June 30, 2023, the company reported no material ongoing litigation or material regulatory proceedings.
Most important facts for investors to verify
- Whether MACI volume and pricing growth can continue and translate into sustained profitability.
- The FDA resolution and commercial-release timing for the affected NexoBrid lot, and the timing of future NexoBrid sales.
- Progress, remaining funding requirements and eventual operating costs associated with the Burlington facility.
- The company’s ability to maintain positive operating cash flow while funding capital expenditures, product development and commercial expansion.
- Changes in MACI reimbursement, collection experience and the related uncollectible consideration estimate; management noted that a 50-basis-point change could affect six-month revenue by approximately $0.3 million.
- Exposure of cash and investments to financial-institution liquidity risk and to market-value changes in marketable debt securities.
- Potential future NexoBrid sales milestone payments of up to $125.0 million and tiered royalties; no sales milestone liability was recorded as of June 30, 2023 because the payments were not yet probable.