Vericel Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Vericel is a U.S.-focused commercial-stage biopharmaceutical company specializing in advanced cell therapies. It markets MACI for repair of knee cartilage defects and Epicel for severe burns, and holds North American rights to pre-commercial NexoBrid. The filing covers the three and six months ended June 30, 2020; results were significantly affected by COVID-19 restrictions on elective surgeries.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net product sales | $20.0 million | $26.2 million | $46.7 million | $48.0 million |
| Gross profit | $11.4 million | $17.1 million | $28.1 million | $30.3 million |
| Gross margin | 57% | 66% | 60% | 63% |
| Loss from operations | $(8.4) million | $(20.2) million | $(13.4) million | $(23.6) million |
| Net loss | $(8.3) million | $(19.8) million | $(13.0) million | $(22.6) million |
| Net loss per share | $(0.18) | $(0.45) | $(0.29) | $(0.52) |
- Q2 revenue declined 23% year over year, primarily from lower MACI sales. Six-month revenue declined 3%.
- Q2 MACI revenue was $15.1 million versus $20.8 million; six-month MACI revenue was $35.4 million versus $37.4 million. Epicel revenue was $4.9 million versus $5.3 million in Q2 and $11.3 million versus $10.6 million for the six-month period.
- Q2 gross margin decreased to 57% from 66%, reflecting lower revenue and production-volume effects. Six-month gross margin decreased to 60% from 63%.
- Research and development expense fell to $3.2 million from $21.1 million in Q2 and to $7.0 million from $24.1 million for six months, primarily because the prior-year period included the $17.5 million NexoBrid license payment.
- Selling, general and administrative expense increased to $16.5 million from $16.3 million in Q2 and to $34.6 million from $29.8 million for six months, driven principally by MACI sales-force expansion, stock compensation and reimbursement-support costs.
- Cash provided by operating activities was $1.7 million for the first six months of 2020, compared with $18.2 million used in the prior-year period. The 2020 result benefited from collections and an $8.5 million decrease in accounts receivable, plus $8.1 million of non-cash stock compensation.
- Cash, cash equivalents and restricted cash totaled $55.8 million at June 30, 2020, including $55.7 million of cash and cash equivalents. Short-term investments totaled $25.1 million, providing approximately $80.9 million of cash and investments.
- Total liabilities were $39.1 million, consisting primarily of operating lease liabilities. The filing does not report funded debt or borrowings.
Material changes versus the prior comparable period
- COVID-19 restrictions caused increased cancellations of scheduled MACI procedures and slower new orders beginning in mid-March. Most U.S. surgical capacity was unavailable during April, with partial recovery in May and further easing by June.
- By the end of June, states representing approximately 90% of U.S. surgical capacity had lifted restrictions, but capacity remained below pre-pandemic levels because of testing, cleaning and other hospital procedures. Restrictions were also being re-imposed in some regions.
- Operating loss and net loss improved substantially year over year because the 2019 results included the $17.5 million NexoBrid upfront license payment. This improvement does not indicate comparable underlying revenue growth.
- Shares outstanding increased to 45.2 million at June 30, 2020 from 44.9 million at December 31, 2019, primarily through stock option exercises, employee purchases and equity awards.
- Vericel expanded its MACI sales organization to 76 representatives and approved an amended 2019 equity plan that increased the share reserve by 2.4 million shares.
Guidance, outlook, risks and unusual items
- No quantitative revenue, earnings or margin guidance is provided.
- Management stated that existing cash, cash equivalents and investments were expected to support current operations for at least 12 months from issuance of the financial statements.
- Management warned that renewed or widespread elective-surgery restrictions could materially reduce MACI sales, require layoffs or furloughs, impair liquidity and require additional capital. Financing may be unavailable or obtainable only on unfavorable terms.
- Epicel is expected to be less directly affected because it treats severe burns, although reduced trauma admissions and patient reluctance could still affect demand.
- The company maintained safety stock of key raw materials and did not expect current supply-chain interruptions to affect manufacturing. However, short product shelf lives and reliance on commercial or charter air transportation create delivery risk.
- COVID-19 could delay the PEAK clinical study, NexoBrid regulatory review, manufacturing and commercial activities, and could increase credit losses, inventory write-offs or long-lived-asset impairments. No material COVID-19-related impairments were recorded through June 30.
- On June 30, Vericel announced submission of a U.S. biologics license application for NexoBrid. It is obligated to pay MediWound $7.5 million upon regulatory approval and up to $125 million in sales milestones, plus royalties; these milestone obligations were not yet probable and were not recorded as liabilities.
- Accounts receivable included a $4.4 million allowance for uncollectible consideration at June 30, including less than $0.1 million attributed to potential COVID-19 effects.
- The company reported no material legal proceedings, no off-balance-sheet arrangements and effective disclosure controls as of June 30, 2020.
Investor verification points
- Track the pace and durability of MACI procedure recovery, including the effect of renewed elective-surgery restrictions and hospital capacity constraints.
- Separate the 2020 improvement in operating loss from the nonrecurring $17.5 million NexoBrid license expense recorded in 2019.
- Verify cash burn, operating cash flow and capital needs if MACI revenue remains below pre-pandemic levels.
- Monitor MACI reimbursement estimates, accounts receivable collections and the $4.4 million allowance for uncollectible consideration.
- Follow FDA review of the NexoBrid BLA and potential milestone, royalty and commercialization obligations.
- Assess dilution from stock-based compensation, equity-plan expansion and outstanding options and restricted stock units.