Vericel Corporation — Q2 2017 Form 10-Q Summary
Business context and reporting period
Vericel is a commercial-stage biopharmaceutical company developing and marketing patient-specific cell therapies. The company markets MACI for knee cartilage repair and Epicel for severe burns; Carticel was replaced by MACI and stopped being manufactured and marketed at the end of the second quarter. Ixmyelocel-T remains in development for ischemic dilated cardiomyopathy.
This unaudited filing covers the three and six months ended June 30, 2017, compared primarily with the corresponding 2016 periods. The company operates primarily in the United States in one reportable segment.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Product sales | $17.0 million | $12.8 million | $26.3 million | $26.9 million |
| Gross profit | $9.3 million | $5.5 million | $11.5 million | $13.1 million |
| Gross margin | 55% | 43% | 44% | 49% |
| Operating loss | $2.5 million | $5.0 million | $12.1 million | $7.0 million |
| Net loss | $2.4 million | $3.0 million | $12.2 million | $6.7 million |
| Loss per share | $0.07 | $0.22 | $0.38 | $0.46 |
- Q2 revenue increased 32% year over year, while six-month revenue declined 2%.
- Q2 gross margin improved to 55%; six-month margin fell to 44%, principally because of lower Epicel sales, higher material costs and increased scrap from cancelled Epicel orders.
- Operating expenses rose to $11.8 million in Q2 and $23.7 million for the six-month period. Selling, general and administrative expense increased primarily from MACI launch marketing, personnel and reimbursement support costs. Research and development expense declined as ixCELL-DCM trial treatment activity wound down.
- Q2 product revenue consisted of $12.9 million from Carticel and MACI and $4.0 million from Epicel. Six-month revenue was $17.9 million from Carticel and MACI and $8.4 million from Epicel.
- Cash used in operations was $8.8 million for the six months ended June 30, 2017, compared with $6.4 million in the prior-year period. Capital expenditures were $0.3 million.
- Cash declined to $14.0 million at June 30, 2017, from $23.0 million at December 31, 2016. Total assets were $36.5 million and shareholders’ equity was $14.0 million.
- Debt outstanding included $8.0 million under the term loan and $2.5 million under the revolving facility. The weighted-average interest rate was 7.9%; remaining revolver capacity was $2.2 million.
Material changes versus the prior comparable period
- MACI launched commercially, with the first shipment and implantation on January 31, 2017, and replaced Carticel at the end of Q2.
- Q2 Carticel and MACI revenue benefited from higher implant volume, higher average selling prices and a $1.4 million reversal of previously recorded reimbursement reserves following resolution of a Vital Care payer dispute. The company also collected $0.5 million of prior-year sales previously considered uncollectible.
- Epicel six-month revenue declined from $9.1 million to $8.4 million, contributing to lower year-to-date revenue and gross margin.
- Research and development expense decreased by $1.2 million for the six-month period, mainly because ixCELL-DCM treatment activity was completed in February 2017.
- SG&A increased by $4.8 million for the six-month period, driven primarily by MACI launch initiatives, expanded sales personnel and patient-support activities.
- All outstanding preferred stock was mandatorily converted into 1.1 million common shares in March 2017. Weighted-average common shares increased to 32.3 million from 22.6 million for the six-month comparison.
- The company entered into a distribution agreement with Orsini for Carticel and MACI and mutually terminated its Dohmen patient-support agreement effective June 30, 2017.
Guidance, outlook, risks and unusual items
- Management stated that existing cash, the term loan and revolver are expected to support current operations through at least August 2018, based on current expectations. This is not a formal revenue or earnings forecast.
- The debt facility requires compliance with trailing-twelve-month minimum revenue covenants. The December 31, 2017 minimum revenue covenant is $51.7 million, and the company was compliant as of June 30, 2017.
- Lenders may accelerate the debt under subjective material-adverse-change provisions. Failure to meet covenants or a lender acceleration could require immediate additional financing.
- The company had approximately $24.2 million of remaining capacity under its $25.0 million at-the-market equity sales agreement as of June 30, 2017, but additional financing may be unavailable or dilutive.
- A proposed license agreement with Innovative Cellular Therapeutics for Greater China and other Asian markets contemplated a $6.0 million upfront payment, approximately $8.0 million of milestones and low-double-digit royalties. As of the financial statement issuance date, the payment, technology transfer, license grants and warrant purchase had not occurred because required funding had not been received.
- Ixmyelocel-T received FDA Fast Track and RMAT designations. The company had no current plans to independently fund a Phase 3 trial and was evaluating strategic partners and other non-dilutive financing.
- Revenue is subject to payer reimbursement estimates, customer concentration and seasonal fluctuations. The filing disclosed no material pending legal proceedings and no material changes to previously disclosed risk factors.
- The decrease in warrant fair value generated $0.5 million of other income for the six-month period; this was a non-cash item and future changes may materially affect reported earnings without affecting cash flow.
Most important facts for investors to verify
- Progress in MACI adoption, reimbursement coverage, pricing and physician utilization after the Carticel transition.
- Epicel patient volumes, pricing and manufacturing scrap, given the product’s low annual patient volume and revenue variability.
- Cash burn, remaining revolver availability and compliance with the $51.7 million year-end revenue covenant.
- Whether the ICT license upfront payment and related Asian commercialization arrangements become effective.
- Potential need for additional debt or equity financing and the resulting dilution or covenant impact.
- Regulatory and partnering developments for ixmyelocel-T, including the company’s ability to fund any future Phase 3 program.