Vericel Corporation — Form 10-Q Summary
Business Context and Reporting Period
Vericel is a commercial-stage biopharmaceutical company focused on advanced cell therapies for sports medicine and severe burn care. It markets MACI, an autologous cartilage-repair product, and Epicel, a cultured skin-replacement product, in the United States. In May 2019, Vericel obtained exclusive North American rights to commercialize NexoBrid, which remains in clinical development.
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company operates in one reportable segment.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Product sales | $30.5 million vs. $22.5 million | $78.5 million vs. $59.5 million |
| Gross profit | $21.2 million vs. $14.3 million | $51.5 million vs. $36.0 million |
| Gross margin | 69% vs. 64% | 66% vs. 60% |
| Operating income (loss) | $3.1 million vs. $(1.3) million | $(20.5) million vs. $(9.9) million |
| Net income (loss) | $3.5 million vs. $(1.1) million | $(19.2) million vs. $(13.4) million |
| Diluted EPS | $0.07 vs. $(0.02) | $(0.44) vs. $(0.34) |
- MACI revenue was $20.6 million for the quarter and $58.0 million for the nine months, compared with $16.4 million and $42.6 million, respectively, in 2018.
- Epicel revenue was $9.9 million for the quarter and $20.4 million for the nine months, compared with $6.0 million and $16.9 million, respectively.
- Research and development expense was $3.1 million for the quarter and $27.2 million for the nine months. The nine-month amount includes the $17.5 million upfront NexoBrid license payment.
- Selling, general and administrative expense increased to $15.0 million for the quarter and $44.8 million for the nine months, driven by higher stock compensation, marketing, patient-support costs and MACI sales-force expansion.
- Cash used in operating activities was $10.3 million for the nine months, compared with $3.0 million in 2018. Capital expenditures were $2.3 million.
- Cash and cash equivalents were $36.9 million and short-term investments were $37.8 million at September 30, 2019, for total cash and short-term investments of $74.7 million.
- The company had no term loan at quarter-end; the prior term loan was repaid in December 2018. Lease liabilities totaled $28.1 million for operating leases and $0.1 million for finance leases on a present-value basis.
- 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, although additional debt or equity financing may be sought if conditions change.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased approximately 36%, while nine-month revenue increased approximately 32%, reflecting volume growth in both MACI and Epicel.
- Gross margin improved by five percentage points for both the quarter and nine-month period, principally because manufacturing costs are relatively fixed as sales volumes increase.
- The company generated quarterly operating income and net income, compared with losses in the third quarter of 2018. However, the nine-month operating and net losses widened because of the NexoBrid upfront payment and higher operating expenses.
- R&D expense increased by $16.6 million for the nine months, primarily because of the $17.5 million NexoBrid license payment.
- The MACI sales force expanded from 40 to 48 representatives in the second quarter of 2019. Management plans to expand it to 76 representatives in 2020.
- Vericel adopted the new lease accounting standard on January 1, 2019, recognizing approximately $25.6 million of right-of-use assets and $27.8 million of lease liabilities at adoption. This had an immaterial effect on earnings and cash flows.
- Non-cash stock-based compensation increased to $10.1 million for the nine months from $5.7 million in 2018.
- All outstanding warrants were exercised or otherwise settled by September 30, 2019; no warrants remained outstanding.
Guidance, Outlook, Risks and Unusual Items
- Management targeted submission of a U.S. Biologics License Application for NexoBrid in the second quarter of 2020. MediWound continues to conduct the clinical activities supporting the filing.
- Vericel paid $17.5 million upfront for NexoBrid rights and may owe $7.5 million upon U.S. regulatory approval, up to $125 million in sales milestones, and tiered royalties on sales.
- The company stated that MACI sales tend to be seasonally stronger in the fourth quarter. Epicel sales can be stronger in winter and weaker in summer, but patient volumes are variable.
- Key risks include payer reimbursement and collection estimates for MACI, clinical and regulatory approval of NexoBrid, reliance on manufacturing capacity and suppliers, potential need for additional capital, commercialization expenses, and the company’s accumulated deficit of $388.2 million.
- The MACI allowance for uncollectible consideration was $4.2 million at September 30, 2019, compared with $2.0 million at December 31, 2018, highlighting sensitivity to payer and patient collections.
- There were no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements reported.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether MACI and Epicel volume growth and the improved gross margin are sustainable after the planned sales-force expansion.
- The timing, clinical results, regulatory status and commercial economics of the NexoBrid BLA submission and approval process.
- The impact of MACI payer reimbursement, denials, collection experience and changes in the $4.2 million uncollectible-consideration allowance.
- Whether operating cash burn improves after the one-time $17.5 million NexoBrid upfront payment.
- The company’s future funding requirements, including potential dilution or financing costs if revenue growth slows or development expenses increase.
- The significance of lease commitments, which total approximately $39.3 million in undiscounted payments as of September 30, 2019.
- The filing text does not provide a clear quantitative revenue or earnings forecast beyond the targeted NexoBrid BLA submission timing and planned 2020 sales-force expansion.