Vericel (VCEL) - 2024 Q4 - Annual Report

Part I Business Vericel is a commercial-stage biopharmaceutical company focused on advanced therapies for sports medicine and severe burn care, marketing three FDA-approved products: MACI, Epicel, and NexoBrid General Information and Strategy Vericel's strategy focuses on increasing revenue from MACI, Epicel, and NexoBrid by expanding adoption and managing supply chain risks - Vericel's core business is providing advanced cell therapies and biologics for sports medicine (MACI) and severe burn care (Epicel, NexoBrid)[17] - The company's strategic objectives include increasing MACI revenue by expanding surgeon use and indications, growing Epicel and NexoBrid revenue by increasing adoption in burn centers, and generating positive operating income and cash flow[19] - The company is monitoring potential supply disruptions for NexoBrid due to its manufacturing partner, MediWound, being located in Israel amidst regional conflicts. However, Vericel currently maintains an ample supply in the U.S.[19] Manufacturing Vericel manufactures MACI and Epicel in-house, transitioning to a new Burlington facility, while NexoBrid is produced by a partner in Israel - MACI and Epicel are manufactured at the company's facility in Cambridge, MA. A new, larger facility in Burlington, MA is substantially complete and will eventually become the primary manufacturing site[21] - NexoBrid is manufactured by MediWound in Israel, with its active ingredient sourced from Taiwan[22] - Vericel has an exclusive supply agreement with Matricel GmbH for the collagen membranes used in MACI, extending until at least December 31, 2030[23] Product Portfolio Vericel's portfolio includes MACI for cartilage repair, Epicel for severe burns, and NexoBrid for enzymatic eschar removal - In August 2024, the FDA approved MACI Arthro™, an arthroscopic delivery method for MACI, which is expected to be a significant growth opportunity. The target surgeon base was expanded from 5,000 to 7,000 in conjunction with this launch[35] - The company plans to initiate a clinical trial in 2025 to expand MACI's indication to treat cartilage defects in the ankle[35] - Epicel is the only FDA-approved cultured epidermal autograft for patients with large surface area burns (≥30% TBSA) and is not price-restricted as a Humanitarian Use Device (HUD)[36][38] - NexoBrid is an orphan biologic for eschar removal in burn patients, expanding Vericel's addressable market to over 30,000 hospitalized burn patients annually, a significantly larger segment than Epicel alone[45] Sales and Marketing Vericel utilizes two specialized sales teams for MACI (orthopedic surgeons) and Burn Care (Epicel, NexoBrid for burn centers) - The company has two dedicated sales teams: one for MACI targeting 7,000 orthopedic surgeons, and a Burn Care team for Epicel and NexoBrid targeting ~140 burn centers[56][57][60] - MACI is distributed through specialty pharmacies (Orsini, AllCare) and directly to military facilities via a distributor (DMS). Vericel retains the credit and collection risk for sales through specialty pharmacies[59] - Epicel is sold directly to hospitals and burn centers, while NexoBrid is sold to specialty distributors who then resell to these facilities[60] Government Regulation Vericel's products are subject to extensive FDA regulation as biologics or HDEs, requiring compliance with cGMP, healthcare fraud laws, and reimbursement policies - MACI and NexoBrid are regulated as biologics under BLAs, while Epicel is regulated as a medical device under an HDE. All are subject to cGMP requirements[62] - As a biologic, MACI is entitled to twelve years of data exclusivity, ending on December 13, 2028[52] - NexoBrid has received orphan drug designation, which provides seven years of marketing exclusivity for its approved indication[99] - The company is subject to healthcare fraud and abuse laws, including the Anti-Kickback Statute and the False Claims Act, which regulate interactions with healthcare providers and marketing activities[101][102] Competition Vericel faces intense competition for MACI (microfracture, allografts), Epicel (RECELL System), and NexoBrid (surgical excision, Santyl) - MACI's main competitors are microfracture and osteochondral allografts. Other competitors include DeNovo NT (Zimmer Biomet), Agili-C (Smith & Nephew), and NOVOCART 3D (Octane Medical Group)[115][116] - Epicel's primary competitor for severe burns is Avita Medical's RECELL System[116] - NexoBrid competes with the standard of care, surgical excision, and Santyl (Smith & Nephew), the only other FDA-approved enzymatic eschar removal product[116] Risk Factors Vericel faces significant risks in operations, manufacturing, regulation, and intellectual property, including supply chain dependencies and market acceptance Risks Related to Our Operations Operational risks include fluctuating financial results, challenges in managing growth, market acceptance of new therapies, and cybersecurity threats - Quarterly and annual results may fluctuate significantly due to seasonality, sales volatility, and changes in reimbursement[126][128] - The company's ability to effectively manage growth and scale manufacturing operations, particularly with the transition to the new Burlington facility, is critical and presents a risk if delayed[131] - A cybersecurity incident could lead to loss of confidential data, remediation expenses, and reputational damage, with evolving AI tools increasing the sophistication of threats[147][148] - The commercial success of NexoBrid is dependent on medical community acceptance, physician training, and MediWound's ability to supply the product[142][144] Risks Related to Manufacturing and Production Manufacturing risks include reliance on single facilities and sole-source suppliers, with geopolitical instability posing threats to the NexoBrid supply chain - The company relies on a single facility in Cambridge, MA for all MACI and Epicel manufacturing, making it vulnerable to disruptions until the new Burlington facility is validated[177] - The supply of NexoBrid is dependent on MediWound's manufacturing in Israel and its raw material supplier in Taiwan, creating geopolitical risks from conflicts in the Middle East and tensions between China and Taiwan[172][173][174] - Vericel depends on Matricel GmbH as the sole supplier of the collagen membrane for MACI, and any failure to supply would impair production[180] - The manufacturing of cell therapy products is inherently complex and costly, with risks related to biological raw material inconsistencies and significant manual processing[187] Risks Related to Regulation Regulatory risks include maintaining FDA approvals, securing adequate reimbursement, complying with healthcare laws, and obtaining new approvals for expanded indications - Failure to maintain FDA approvals or comply with cGMP and other post-marketing requirements could result in loss of marketing approval and severely limit sales[191][193] - Sales depend on adequate reimbursement from third-party payers, which is uncertain and may be negatively impacted by healthcare reform and cost-containment trends[194][195] - Promoting products for off-label uses or violating anti-kickback laws could lead to significant civil or criminal penalties[228][230] - Expanding MACI's indication to the ankle will require a new clinical trial and FDA approval, which is a costly and uncertain process[220][221] Risks Related to Intellectual Property Intellectual property risks include lack of patent protection for Epicel, potential insufficiency of MACI patents, and reliance on licensed patents for NexoBrid - The company has no patent protection for Epicel and relies on trade secrets, which may not prevent competition if other cultured epidermal autografts are approved[251] - The commercial success of NexoBrid depends on the strength and validity of patents licensed from MediWound, which could be challenged or found unenforceable[252] - Some patents for MACI have expired, and existing patents may not be strong enough to prevent competitors from designing around them or developing similar products[254][255] - Failure to fulfill obligations under license agreements, such as the one with MediWound for NexoBrid, could result in the loss of license rights crucial to the business[248] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[302] Cybersecurity Vericel has established processes to manage cybersecurity risks, overseen by the Audit Committee and managed by the Executive Director, Corporate Information Systems - The Audit Committee of the Board oversees cybersecurity risk management, receiving reports from management at least semi-annually[308] - The company's risk management strategy includes using security tools, periodic reviews, employee training, and testing an incident response plan with external partners[303][304][305] - As of the report date, Vericel has not experienced any material cybersecurity incidents in the three most recently completed fiscal years[307] Properties Vericel leases all its properties, including primary manufacturing and office facilities in Burlington and Cambridge, Massachusetts Leased Properties Summary (as of Jan 31, 2025) | Location | Primary Use | Approx. Sq. Footage | Lease Expiration | Renewal Option | | :--- | :--- | :--- | :--- | :--- | | Burlington, MA | Manufacturing, lab, office | 126,000 | June 2036 | One 10-year term | | Cambridge, MA | Manufacturing, lab, office | 57,000 | February 2032 | One 5-year term | | Ann Arbor, MI | Office space | 6,000 | April 2025 | None | Legal Proceedings The company states that it is not currently a party to any material legal proceedings - Vericel is not currently party to any material legal proceedings[314] Mine Safety Disclosures This item is not applicable to the company - Not applicable[315] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Vericel's common stock trades on NASDAQ under VCEL, with no cash dividends paid or planned, and no stock repurchases in 2024 - The company's common stock trades on NASDAQ under the symbol VCEL[318] - Vericel has never paid cash dividends and does not plan to in the foreseeable future[320] Stock Performance Comparison (2019-2024) | | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | 12/31/24 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Vericel Corporation (VCEL) | $100 | $177 | $226 | $151 | $205 | $316 | | NASDAQ Composite Index (^IXIC) | $100 | $144 | $174 | $117 | $167 | $215 | | NASDAQ Biotechnology Index (^NBI) | $100 | $126 | $125 | $111 | $115 | $114 | - During Q4 2024, CEO Dominick Colangelo, CFO Joseph Mara, COO Michael Halpin, and Director Heidi Hagen all entered into Rule 10b5-1 trading arrangements for potential sales of common stock in 2025 and 2026[325] Reserved This item is not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations Vericel's 2024 total revenue grew 20.1% to $237.2 million, achieving $10.4 million net income and $58.2 million cash from operations Results of Operations In FY2024, total revenue increased 20.1% to $237.2 million, driven by MACI and Epicel sales, leading to a positive operating income Consolidated Results of Operations (in thousands) | | 2024 | 2023 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $237,224 | $197,516 | $39,708 | 20.1% | | Gross profit | $172,107 | $135,576 | $36,531 | 26.9% | | Total operating expenses | $167,588 | $142,040 | $25,548 | 18.0% | | Income (loss) from operations | $4,519 | $(6,464) | $10,983 | 169.9% | | Net income (loss) | $10,362 | $(3,182) | $13,544 | 425.6% | Revenue by Product (in thousands) | Product | 2024 | 2023 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | MACI | $197,309 | $164,800 | $32,509 | 19.7% | | Epicel | $36,623 | $31,574 | $5,049 | 16.0% | | NexoBrid | $3,292 | $1,142 | $2,150 | 188.3% | | Total revenue | $237,224 | $197,516 | $39,708 | 20.1% | - The increase in R&D expenses was primarily due to costs for the MACI arthroscopic development program and higher headcount[351] - The increase in SG&A expenses was driven by higher headcount, stock compensation, costs for the new Burlington lease, and marketing programs supporting the MACI arthroscopic launch[352] Liquidity and Capital Resources Vericel reported $85.0 million in cash and $81.6 million in investments, generating $58.2 million cash from operations in 2024, sufficient for future funding Summary of Cash Flows (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $58,163 | $35,311 | | Net cash used in investment activities | $(79,034) | $(3,130) | | Net cash provided by financing activities | $19,054 | $3,618 | - Cash from operations increased to $58.2 million in 2024, primarily due to net income of $10.4 million and non-cash stock compensation of $36.5 million[358] - Cash used in investing activities of $79.0 million was mainly for $64.0 million in property and equipment purchases, largely for the new Burlington facility[360] - The company has a $150.0 million five-year senior secured revolving credit agreement with no outstanding borrowings as of December 31, 2024[366] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition, lease accounting, stock-based compensation, and deferred tax asset valuation allowance - Revenue recognition for MACI requires significant estimates for contractual allowances. A 50 basis point change in the uncollectible percentage estimate could impact annual revenue by about $0.5 million[377][378] - Stock-based compensation expense is calculated using the Black-Scholes model, which relies on management's best estimates for key assumptions like volatility and expected term[384] - The company maintains a full valuation allowance against its net deferred tax assets due to its cumulative loss position, but this could be reversed in the future if profitability is sustained[385] Quantitative and Qualitative Disclosures About Market Risk Vericel is exposed to interest rate risk on its investment portfolio, with a 100 basis point change impacting fair value by $0.8 million - The company is exposed to interest rate risk on its marketable debt securities. A 1% (100 basis point) unfavorable change in interest rates would decrease the portfolio's fair value by approximately $0.8 million[389] - As of Dec 31, 2024, there were no borrowings outstanding under the variable-rate Revolving Credit Agreement, mitigating immediate interest rate risk from debt[390] Consolidated Financial Statements and Supplementary Data This section presents Vericel's audited consolidated financial statements and notes, with an unqualified audit opinion from PricewaterhouseCoopers LLP Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified audit opinion on Vericel's financial statements and internal controls, identifying MACI sales estimates as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[397] - The single Critical Audit Matter identified was the estimation of contractual allowances for MACI implant sales, due to the significant management judgment and auditor subjectivity required to evaluate the assumptions[404][405] Consolidated Financial Statements Vericel's 2024 financial statements show total assets of $432.7 million, liabilities of $140.8 million, and net income of $10.4 million Key Balance Sheet Data (in thousands) | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $212,777 | $205,631 | | Total Assets | $432,722 | $353,657 | | Total Current Liabilities | $50,286 | $45,749 | | Total Liabilities | $140,755 | $127,705 | | Total Shareholders' Equity | $291,967 | $225,952 | Key Statement of Operations Data (in thousands) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenue | $237,224 | $197,516 | $164,365 | | Gross Profit | $172,107 | $135,576 | $109,788 | | Net Income (Loss) | $10,362 | $(3,182) | $(16,709) | | Diluted EPS | $0.20 | $(0.07) | $(0.35) | Notes to Consolidated Financial Statements The notes detail revenue breakdown, lease obligations totaling $146.0 million, stock compensation, and NexoBrid license milestones Revenue by Product and Customer Type - 2024 (in thousands) | Category | Revenue | | :--- | :--- | | MACI - Specialty Pharmacy (Contracted Rate) | $141,806 | | MACI - Specialty Pharmacy (Third-Party Reimbursement) | $15,058 | | MACI - Direct Sales | $35,820 | | MACI - Biopsy Kits & Instruments | $2,096 | | MACI - Change in Estimates | $2,529 | | Total MACI | $197,309 | | Epicel | $36,623 | | NexoBrid | $3,292 | | Total Revenue | $237,224 | - As of Dec 31, 2024, the company has total future minimum lease payments of $146.0 million under non-cancellable leases[495][496] - The NexoBrid license agreement includes up to $125.0 million in contingent sales milestone payments, with the first $7.5 million payment triggered if annual net sales exceed $75.0 million[532] - The company has a renewed supply agreement with Matricel for MACI membranes with minimum purchase commitments totaling approximately €12.5 million over the eight-year term[536] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[544] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective[545] - Management concluded that internal control over financial reporting was effective as of December 31, 2024. This was audited and attested to by PricewaterhouseCoopers LLP[547][548] Other Information This item is not applicable - Not applicable[550] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[551] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the upcoming 2025 Definitive Proxy Statement[554] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2025 Definitive Proxy Statement - Information is incorporated by reference from the upcoming 2025 Definitive Proxy Statement[555] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership is incorporated by reference from the 2025 Definitive Proxy Statement - Information is incorporated by reference from the upcoming 2025 Definitive Proxy Statement[556] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the upcoming 2025 Definitive Proxy Statement[557] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the upcoming 2025 Definitive Proxy Statement[558] Part IV Exhibit and Financial Statement Schedules This section lists the documents and exhibits filed as part of the Annual Report on Form 10-K, including financial statements - This section references the Consolidated Financial Statements filed under Item 8 and provides an index of all exhibits filed with the report[561][564] Form 10-K Summary The company reports that there is no Form 10-K summary - None[562]