Vericel (VCEL): Revenue Growth Fueled by Three Cellular Therapies

We’ve been following Vericel (Nasdaq: VCEL), a specialty biologics company with three approved cellular therapy products on the market, and we wonder whether or not the company may still be underappreciated by investors after its recent run. Vericel’s second quarter numbers, reported earlier this month, showed strong growth in revenues and gross margin year-over-year, driven by sales of its newly introduced MACI implant for the treatment of symptomatic cartilage defects in the knee.

The company’s three commercial products are the result of its research and development in autologous cell therapy, in which a patient’s own cells are used to treat a condition or disease. The cells are collected from the patient and then expanded or multiplied outside the body, before being reintroduced to the same patient for therapeutic benefit. The patient effectively acts as his or her own donor. Advantages for this type of cell therapy include minimizing the risk of rejection and therefore the need for potentially toxic immunosuppressive therapy.

Commercial Product Line

MACI (autologous cultured chondrocytes on porcine collagen membrane) was approved by the FDA in December 2016 as an implantable scaffold to repair symptomatic, full-thickness cartilage defects of the knee in adults. (Chondrocytes are cartilage cells.) MACI is the first FDA-approved product that applies the process of tissue engineering to grow cells on scaffolds using healthy cartilage tissue from the patient’s own knee.

Carticel is used to repair articular cartilage injuries in the knee in patients who’ve had inadequate responses to prior arthroscopic or other surgical procedures. Carticel consists of a patient’s own harvested chondrocytes which are then multiplied into millions of cells before being implanted into the knee cartilage defect and generating repair tissue.

Epicel is a skin graft grown from a patient’s own skin, providing replacement for deep dermal or full thickness burns comprising a total body surface area of at least 30%. From two postage stamp-sized biopsies, Vericel can grow enough skin to cover the patient’s entire body. Epicel may be used in conjunction with split-thickness autografts (including the epidermis and part of the dermis) or alone in patients for whom split-thickness autografts may not be an option due to the severity and extent of their burns.

In development: Ixmyelocel-T for Advanced Heart Failure

The company’s ixmyelocel-T candidate, a multicellular therapy produced from a patient’s own bone marrow, for treating patients with advanced heart failure due to ischemic dilated cardiomyopathy received Fast Track designation from the FDA in February 2017. Vericel’s Phase 2b data showed last year that ixmyelocel-T met the primary endpoint of a reduction in the total number of all-cause deaths, cardiovascular hospitalizations or unplanned outpatient and emergency department visits to treat acute decompensated heart failure during the 12 months following treatment compared to placebo.

Subsequently, in May 2017, Vericel received the Regenerative Medicine Advanced Therapy (RMAT) designation from the FDA for ixmyelocel-T, becoming the first company to receive the RMAT designation for the treatment of a serious cardiovascular disease.

Q2 Highlights

• 28% growth in total MACI and Carticel net product revenues compared to the same period in 2016, excluding the impact of a $1.4 million partial reversal of a revenue reserve
• 51% gross margins vs 43% in the same period in 2016, also excluding the above impact of the partial reversal of a revenue reserve
• Trained more than 350 surgeons on MACI surgical procedures to date, with approximately 50% of trained surgeons coming from former Carticel user and non-Carticel user segments
• Increased biopsies 23% compared to the same periods in 2016
• Medical benefit policies updated to include MACI at multiple commercial plans, including 18 of the top 28 commercial plans, representing about half of covered lives according to Vericel
• Distribution agreement with Orsini Healthcare for MACI
• Launched a standalone patient case management service for patient support services for MACI
• Announced data from over 950 severe burn patients treated with Epicel demonstrating a probable survival benefit at the 49th annual meeting of the American Burn Association
• Licensed the company’s product portfolio to Innovative Cellular Therapeutics for distribution in China, South Korea, Singapore and elsewhere in the region.

VCEL Stock

Vericel has had a pronounced summer rally, with shares up over 75% from their mid-June lows. With a current market value of just $150 million, however, the stock still feel undervalued given the addressable market sizes for the product line in the US alone.

• 854,000 cartilage repair surgical procedures annually
• 500,000 burn victims annually

One issue that the company will need to address is maintaining its operating capital. There was $14 million in cash on the balance sheet as of June 30th, with a term loan and revolver outstanding of $10.5 million. Vericel raised $20 million in a December 2016 follow-on and $6 million in a licensing agreement in May 2017. The company used $8.8 million in cash for operating activities in the first half of 2017.

We like the risk-reward at this level and are encouraged by the growth in revenues and margins. We’ll be watching for continued signs of growth this quarter from the product line and further developments related to ixmyelocel-T for advanced heart failure.

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