Vericel Corporation (VCEL) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Vericel Second Quarter 2016 Earnings Conference. At this time, all participants are in a listen-only mode. Later we'll have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference is being recorded. I will now like to introduce your host for today's conference, Chief Financial Officer, Gerard Michel. Sir, you may begin.

Thank you, operator, and good morning everyone. Welcome to Vericel’s second quarter 2016 conference call to discuss our second quarter 2016 financial results, as well as the progress of our commercial business and development program. Before we begin, let me remind you that on today’s call, we will be making forward-looking statements represent our judgement as of today. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC, which are also available on our website. In addition, any forward-looking statement represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, Vericel’s Chief Operating Officer; Dr. David Recker, our Chief Medical Officer and Dr. Ross Tubo, Vericel’s Chief Scientific Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good morning everyone. I'm pleased to review the results of another productive quarter for Vericel. Before we discuss our second quarter and year-to-date financial results, I'd like to take a few moments to discuss two important initiatives that we completed in the second quarter which we believe will increase the profitability of the business and ensure that we can reliably meet the needs of our customers. First, during the second quarter, we initiated our collaboration with Dohmen Life Science Services, a leading provider of patient and reimbursement services for rare disease and specialty biologics products. Under this arrangement Dohmen will provide patient support services as well as payer contracting and product reimbursement services for Carticel and MACI if approved, under a fee per service payment structure. We're moving from the previous exclusive distributor structure that we inherited as part of the acquisition of the business, where in the distributor took legal title of the Carticel, negotiated reimbursement rates directly with payers and thereby captured the spread between our transfer price and payer reimbursement rates. We will now control pricing strategy and capture the full negotiated reimbursement from the pairs and pay Dohmen a fee for their services. We expect that this arrangement with Dohmen will allow us to increase the profitability of these products by capturing the distribution profit margin. We also believe this patient centric arrangement will be better for our customers and payers as we can now implement consistent pricing and we expect improved service levels for our customers. We believe that this new arrangement will meaningfully enhance the customer experience as well as the profitability of the business. The second important initiative that we completed during the quarter was the previously announced project to replace a 30-year-old rooftop air handler for the Carticel and Epicel cleanrooms at our Cambridge facility, which became necessary in order to avoid the potentially extended period of unplanned manufacturing downtime based upon recent performance issues with the unit. The cleanroom downtime for this project resulted in a two week or approximately 16% reduction in product shipment dates for both products during the second quarter. Given that we manufacture Autologous Cell Therapies unlike other businesses, we can't start to file final product inventory. And as such we performed this necessary maintenance project in early April, which historically is one of the slowest periods of the year, in order to minimize the impact of the business. The project was completed successful, with the cleanrooms being validated back online in accordance with the project timelines. Turning to our commercial results, total Carticel and Epicel net revenues in the second quarter were $12.8 million. As a result of the cleanroom downtime, total Carticel and Epicel net revenues decrease 3.9% compared to the second quarter of 2015 with Carticel revenues decreasing less than a $100,000 and Epicel revenues decreasing approximately $400,000. We are pleased to have limited the impact of the cleanroom downtime to a modest decrease in revenue despite the 16% reduction in product shipment dates in the second quarter. In fact, we generated strong growth in our core commercial business during the first half of the year. Total Carticel and Epicel revenues increased 12% for the first half of 2016, compared to the first half of 2015, with Carticel revenues increasing 10% and Epicel revenues increasing 15% compared to the same period a year ago. We believe that demand for our products remain strong and but for the manufacturing downtime, our net revenue growth would have been consistent with the double-digit compound annual growth rate that we've achieved since we purchased the business. To that end, we had the highest level of Carticel implants in June in four years, Epicel volume increased at a double-digit rate in the first half of the year. We've had 10 Epicel order year-to-date from burn centers that were not active in 2015 as e continued to expand the Epicel business. From a pipeline perspective, we're increasingly excited about the prospects for MACI as we continue to progress through the BLA review process in approach to the PDUFA goal date of January 3rd, 2017. We've completed the activities and milestones expected at this point and the review process and the FDA has indicated that it is not currently planned to hold an advisory committee meeting. We're engaged in all of the expected launch preparation and operational activities to ensure that we're prepared for the potential launch of MACI if approved in the first quarter of 2017. Finally, early in the second quarter, the results from the Phase 2b ixCELL-DCM clinical trial of ixmyelocel-T for the treatment of advanced heart failure were presented at the American College of Cardiology 65th annual scientific session and published in the Lancet. The trial met its primary endpoint with patients in the trail met its primary endpoint with patients in the ixmyelocel-T group having a 37% reduction in all-cause deaths, cardiovascular hospitalizations or unplanned outpatient and emergency room department visits to treat acute decompensated heart failure during the 12 months following treatment with ixmyelocel-T compared to placebo. Consistent with the study protocol, given that the trial met its primary endpoint, patients randomized placebo in the double blind portion of the study or patients randomized to ixmyelocel-T that did not receive treatment are being offered the option to receive treatment in an open-label crossover extension of the study. We expect to begin treating patients in the crossover portion of the study in the fourth quarter of this year. In light of the compelling results in the ixCELL-DCM study and our goal to reach profitability as rapidly as possible, our strategy with respect to ixmyelocel-T is to meet our obligations to patients and investigators in conducting the open-label crossover study and to make relatively modest incremental investment to maintain our manufacturing capability while we explore potential expedited regulatory pathways in the US, Japan, and Europe and regional or global partnering opportunities for the program. I'll now turn the call over to Gerard to review our second quarter financial results.

Thanks Nick. Total net revenues for the quarter ended June 30th, 2016 were approximately $12.8 million and included $9 million of Carticel and net revenues and $3.8 million of Epicel revenues. As Nick previously mentioned, due to the two week downtime for the Carticel and Epicel cleanrooms which resulted in a 16% reduction in final product shipment dates for both products, total Carticel and Epicel net revenues decreased 3.9% compared to the second quarter of 2015, with Carticel net revenues decreasing less than a $100,000 and Epicel revenues decreasing approximately $400,000 respectively compared to the second quarter of 2015. Total net revenues for the first half of 2016 were $26.9 million and included $17.8 million of Carticel net revenues and $9.1 million of Epicel net revenues. Total Carticel and Epicel net revenues for the first half of 2016 increased 12% compared to the first half of 2015 with Carticel revenues increasing 10% and Epicel revenues increasing 15%, compared to the same period in 2015. Gross profit for the quarter end in June 30th, 2016, was $5.5 million or 43% of net product revenues compared to $6.7 million or 49% of net product revenues for the second quarter of 2015. The reduction in gross profit was primarily due to the reduced volume resulting from the cleanroom downtime, gross profit for the first half of 2016 was $13.1 million or 49% of net product revenue, compared to $12 million or 49% of net product revenues for the first half of 2015. R&D expenses for the quarter end at June 30th, 2016 were $4.1 million compared to $3.4 million in the second quarter of 2015. The increase in second quarter R&D expenses if primarily due to an increase in expenses associated with the completion of the ixCELL-DCM clinical trial and preparing to treat patients in the open-label crossover extension portion of the study, as well as for research, development, and regulatory consulting expenses for MACI. Selling, general & administration expenses for the quarter ended June 30th, 2016 were $6.4 million compared to $5.6 million of the same period in 2015. The increase in selling general & administrative expenses if primarily due to costs associated with the start-up of the Dohmen collaboration of Carticel, professional services related preparing for the potential launch of MACI, as well as legal fees, shared facility fees and an increase in personnel costs. Loss from operations for the quarter ended June 30th, 2016 was $5 million compared to $2.3 million for the second quarter of 2015. Material non-cash items impacting the operating loss for the quarter included $800,000 of stock-based compensation expense and $500,000 in depreciation and amortization expense. Other income for the quarter ended June 30th, 2016 was $1.9 million compared to $100,000 for the same period in 2015. The change in other income is primarily due to the change in the fair value of warrants in the second quarter of 2016 compared to the same period in 2015. Vericel reported GAAP net loss for the quarter ended June 30th, 2016 was $3 million, or $0.22 per share, compared to a net loss of $2.2 million, or $0.16 per share, for the same period in 2015. Vericel reported an adjusted net loss for the quarter ended June 30th, 2016 of $5 million dollars, or $0.21 per share, compared to an adjusted net loss of $2.3 million, or $0.10 per share, for the same period in 2015. The adjusted net loss excludes the non-cash change in the fair value of warrants and the non-cash accumulated dividend on the Series B convertible preferred stock. The adjusted net loss per share includes common shares reserved as treasury shares received in exchange for the Series A non-voting convertible preferred stock. As of June 30, 2016, the company had $9.8 million in cash compared to $14.6 million in cash at December 31st, 2015. That completes my financial review, now I'll turn the call over to Nick.

Thanks Gerard. Our second quarter financial results were solid in light of the manufacturing downtime and we generated strong growth in our core commercial business during the first half of the year. In initiating the Dohmen collaboration, we completed a major step in controlling the pricing, contracting and reimbursement aspects of our business which we believe will significantly enhance the customer experience as well as the profitability of the business. We've worked productively with the FDA during the ongoing MACI and BLA review process as we prepare for the potential launch of MACI in the first quarter of 2017. And finally, we continue to carefully manage our investment in the ixmyelocel-T program as we attempt to monetize this valuable asset in the near to medium term timeframe. That concludes our prepared remarks. Now, I'd like the operator to open the call to your question.

Thank you. [Operator Instructions] And our first question comes from the line of Kevin DeGeeter of Ladenburg. Your line is open, sir.

Hi guys, this is Jake Colby on the line for Kevin. How are you?

Good, Jake.

So, I guess my first question is regarding the crossover control patients. How are you thinking about their timing of this sort of cost getting ready to treat them and how do you expect these cost to build over the life of the crossover portion?

Yes. I think what you'll see is R&D expenses remaining relatively flat over the next few quarters. We'll have a mix of expenses as we continue to work with the FDA, is another big component of it getting for MACI because there is always a certain amount of Q&A going on with the agency. But I think, over about three quarters, you'll see that a consistent level and then it should drop off really significantly.

Okay, great, that's helpful. And then I believe was on the last call, you mentioned you guys recently wrote out new Epicel marking material which included the updated label. Could you comment on how this material has impacted the discussions with sales reps to existing and new clients and what this sort of done per volume?

Yes. So, I think Nick highlighted in his comments on Epicel that we were able to generate 10 orders in the first half of the year that came from accounts that had not ordered since prior of the 2015. In fact, six of those accounts, it was a total of seven accounts, six of those accounts hadn’t ordered since 2011. So, we take that it's hard to just attribute all of that to a single improvement in our label but certainly it contributes to their renewed interest in the product. So, we feel great about it.

Okay, great, that’s it from me. Thank you.

Our next question comes from the line of Ted Tenthoff of Piper Jaffray. Ted, your line is open. [Operator Instructions] And we have a question from Ted Tenthoff of Piper Jaffray. Your line is open, sir. And sir, I'm showing no further questions in the queue at this time. One moment. Our next question comes from the line of Nicholas Zocchi of Brill Securities.

Well, good afternoon, gentlemen. Given that the cash balance is down to a $9.8 million. Do you anticipate having the chart done to the revolver on the term loan, are you achieving profitability.

Yes. As a matter of fact we have passed into the revolver. We brought in $2.3 million in the last quarter from the revolver. We have approximately up to $12 million left in the company to that term and revolver depending on a variety of factors.

Do you anticipate achieving profitability in the next couple of quarters, I mean, third quarter is typically seasonably light, things are getting a little tight.

Yes. We think we have adequate liquidity with the relationships we have currently with Silicon Valley banks operative business.

Great. Thank you, very much.

And I'm showing no further questions in the queue. I'd like to turn the call back to Mr. Nick Colangelo.

Okay, well. Thank you very much. And thanks everyone for your question and continued interest in Vericel. We're excited about the opportunities that lie ahead for us and we look forward to reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may all disconnect. Everyone have a wonderful day.