Vericel Corporation

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Vericel Corporation is a biopharmaceutical company focused on developing and commercializing cellular therapies for the treatment of serious diseases and conditions, including orthopedics, severe burns, and cardiovascular issues.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Vericel Corporation operates within the regenerative medicine sector, focusing on developing and commercializing advanced cell therapies. They do not sell pharmaceuticals or medical equipment in the traditional sense. Instead they specialize in products that are designed to repair damaged or diseased tissue. Their two core products are:

  • MACI (autologous cultured chondrocytes on porcine collagen membrane): A cell therapy product designed to repair articular cartilage defects in the knee. It involves taking a small sample of the patient’s own cartilage cells, culturing them in a lab, and then implanting them back into the knee on a scaffold of porcine collagen. This addresses a significant unmet need in the treatment of knee cartilage injuries.
  • NexoBrid (anacaulase-bcdb): A biological debridement agent used to remove eschar (dead tissue) from severe thermal burns. It is produced from enzymes found in the pineapple plant. Debridement is an essential early step in severe burn management.

Both MACI and NexoBrid are approved by the FDA.

Revenue Distribution:

Vericel generates revenue primarily from the sale of its two main products: MACI and NexoBrid.

  • MACI is approved for the treatment of articular cartilage defects in the knee, and the company has made a significant effort to drive adoption of this product. Growth from MACI is dependent on increased awareness from healthcare professionals and a higher demand in surgeries.
  • NexoBrid is approved for the debridement of severe burns, for adults, which makes this more of a market to be entered. In the short term it is the main growth driver for the company. International markets may also be an increasing factor. Historically, MACI has been a bigger generator of revenue; however, the recent surge in NexoBrid is the biggest contributor to growth.

Trends in the Industry:

  • Regenerative Medicine Growth: The regenerative medicine market is growing rapidly as the potential of cell and gene therapies in addressing a variety of medical conditions becomes more evident.
  • Focus on Advanced Therapies: There is a growing emphasis on sophisticated therapies that use the body’s own cells and regenerative processes to treat disease and injuries, with a focus on personalized treatment.
  • FDA and Regulatory Scrutiny: As seen with MACI and Nexobrid’s FDA path, regulatory scrutiny is a key influence in the timing of product development and revenue generation.
  • High Barriers to Entry: Developing and commercializing cell therapies requires significant investment in specialized facilities, manufacturing processes, and regulatory compliance, hence high barriers to entry.
  • Research Advances: There are major strides in the research of new and effective treatments for conditions that are currently underserved, which means that those who solve those problems will be greatly rewarded.

Margins:

  • Vericel has gross profit margins generally between 60-70%. This high gross profit margin allows the company to generate a high degree of operational leverage when revenues increase.
  • The company faces high SG&A costs as a result of sales and marketing efforts necessary to build product awareness. Additionally, research and development costs are also high, to support the discovery and development of new therapies and manufacturing process improvements. These costs might diminish in relative size if sales increase enough.
  • Over the last year, their gross profits margins have gone from around 75-80 percent to almost 60 percent. This is largely caused by the increased supply of the new manufacturing facility for Nexobrid and increased production.

Competitive Landscape:

The regenerative medicine space is fairly competitive with established players in both pharmaceutical and medical device space.

  • MACI: There are several competing treatments, from traditional techniques to newer cell-based therapies (such as autologous chondrocytes) and synthetic implants. However, MACI does provide a solution to some people that other treatments do not touch.
  • NexoBrid: The current market uses traditional surgical methods for debriding severe burn injuries (which may be slow and cause great injury and scarring). NexoBrid’s advantage is the speed and lack of need for surgical debridement. Other companies might enter this space by creating an alternative chemical method of debridement.
  • Established Pharma/Biotech: Many pharmaceutical and biotech companies may develop a competitor, having massive financial, research, and manufacturing abilities.

What Makes Vericel Different?

  • Proprietary Technologies: Vericel’s core products rely on proprietary technologies related to cell processing and delivery and have been developed over a number of years, creating an advantage in both knowledge and patents.
  • Niche Focus: By focusing on orthopedic and burn injuries, Vericel is targeting areas where the need for better options is clear, allowing them to focus their resources and marketing efforts in a niche area. The specificity of their focus results in them having better knowledge and insight into the markets and their needs.
  • Specialized Manufacturing: The creation of cell-based and biologic therapies requires specialized knowledge and manufacturing techniques. These facilities and the knowledge associated with them can be costly and difficult to replicate.
  • FDA Approved Products: MACI and Nexobrid’s FDA approvals gives an edge to Vericel. It takes a considerable amount of time and resources to gain approval for cell based treatments by any pharmaceutical entity.

Financials In-Depth:

The discussion below emphasizes the most recent reporting, which includes the results for third quarter of 2023.

  • Revenue:
    • Total net revenue was $42.2 million for Q3 2023.
    • Total net revenue was $35.4 million for Q3 2022. A growth of nearly 20%.
    • MACI net revenue was $19.9 million for Q3 2023.
    • NexoBrid net revenue was $22.3 million for Q3 2023.
    • Historically MACI has been the main revenue driver. Nexobrid is now a significant growth factor for the company.
  • Gross Profit:
    • Gross profit came in at $25.5 million for Q3 2023, or 60% of the revenue.
    • This is a decline in gross profit margins.
  • Operating Expenses:
    • Total operating expenses was $40.6 million for Q3 2023.
    • The major contributor to the expenses is selling, general and administrative expenses which has increased from 20.8 million in Q3 2022 to 26.7 million in Q3 2023. Also a significant contributor was research and development expenses which remained more or less flat.
    • Increased R&D and SG&A expenses have led to an operating loss, of $15.2 million, which is a concerning trend.
  • Profitability: The Company’s ability to generate profit is questionable and is under much scrutiny. A combination of low gross margins and increased expenses, has resulted in losses for the most recent quarters. This is an aspect that needs to be watched.
  • Cash flow: Although the company is not producing net income, its cash flow remains high. As of September 30, 2023, cash and equivalents was $125.8 million.

There was a recent issue regarding one of their product lines, where they failed some of the assays, or tests, and their inability to use some of their materials. A fix was put in place and management expects the production to continue as planned without any impact on timelines. However, this issue underlines a critical aspect of biopharmaceutical production and how important it is to have good control over production.

Understandability: 3 / 5

  • The core idea of cell-based therapies and their benefits is not difficult to understand. However, the technicalities behind how these products are made, and the regulatory process involved may not be so easily digestible for the average person.
  • Additionally, understanding the market for specialized treatments, such as severe burns and knee injuries is not something that one is always immediately familiar with.
  • Further, the financial statements are also complicated by the unusual nature of the company’s business, as well as constant write downs and inventory problems.
  • Overall, the concept is understandable, but the business and financials need some extra research to fully understand.

Balance Sheet Health: 4 / 5

  • The company has a moderate amount of cash reserves, which provides flexibility. The current assets of $161 million significantly outpaces current liabilities of $62.2 million.
  • Long term debt is also relatively low, at 39.8 million.
  • While the company has negative profitability, they have enough cash to continue their operations for a couple more years, or until they reach net profitability.
  • As such, their balance sheet is quite healthy.

Moat Rating: 1 / 5

Vericel is operating in a competitive space with significant challenges. The company also has difficulties in translating revenue into profits, and is very far from net profitability. Here is why it receives a moat of 1/5:

  • Limited Intellectual Property: Both MACI and NexoBrid are heavily dependant on patents that are difficult to predict the value of. In addition, the patents may not be that strong, or they are not diverse enough, which means that the potential for a successful challenge is very high. Also, there are limited barriers to the entry for the competitors.
  • Limited Pricing Power: The company may have the ability to charge a price premium for the products, but the competition has already created an alternative product using non-cell-based methods. They are not the only company offering cell based therapies and it is also relatively easy for other pharmaceutical companies to enter the space if desired.
  • Low Switching Costs: Patients have an option to change to different treatments without incurring significant switching costs, which weakens any advantage the company may have. The treatment landscape is also constantly changing, which may mean that newer innovations come up with better options.
  • Difficult to create Scale: The market that they operate in is rather small, therefore, economies of scale is difficult to achieve.
  • Heavy Reliance on Management: Because this is a smaller, growing firm, there is a high degree of reliance on management to execute their vision. However, there may be some issues in management such as CEO turnover (which has occurred recently), which may weaken the business.

The company has recently entered into a restructuring, with the departure of its CEO, a new CFO and a shift in their commercial strategy (focus on long-term value and expansion). It remains to be seen if these changes will produce positive results or whether they will be a setback.

Risks that could Harm the Moat & Business Resilience:

  • Competition: The largest threat to the business remains competition. Both in the areas they work and in new sectors, new therapies may supplant the older offerings from Vericel. The existence of several companies in the regenerative medicine sector is a concern.
  • Technological Obsolescence: As technologies advance at an incredibly fast rate, there is always the risk that newer technologies make the current offerings of Vericel obsolete.
  • Regulatory Setbacks: A key aspect of a company’s valuation is their ability to move a product from trials into commercialization and mass sales. Regulatory approvals are never a given, and any rejection may have disastrous consequences to their financials. There is also an added risk of new regulations affecting their existing operations.
  • Manufacturing Issues: Creating and maintaining the cell-based therapies may have some unforeseen challenges, such as failure in the facilities, inventory issues, or problems that make production difficult to predict or control.
  • Limited Management Experience: While there is certainly talent within the management structure, the company lacks an experienced CEO and CFO who have already led publicly traded companies.
  • Reliance on few products: Almost all of Vericel’s revenue is dependent on two products. Lack of revenue diversification means that any problem with MACI or Nexobrid could greatly affect the revenue and overall value.
  • Debt Burden: If the company fails to meet its earnings expectations and they don’t have a handle on their cash burn, then their long term debt burden may severely cripple them, especially when debt burden has to be serviced without any positive cash flow.
  • Geopolitical Risks: The company may face problems because of geopolitical conflicts affecting their supply lines. Their facilities also rely on some foreign markets which have their own instabilities.
  • Fluctuating Revenue: Because the sales cycle of the pharmaceutical industry is long, there may be many swings in the company’s revenue which might create problems in its ability to predict future performance.

In conclusion, based on the latest financials and other information, I have assigned the following rating: Moat: 1/5 Understandability: 3/5 Balance sheet health: 4/5 While Vericel does possess some advantages with its proprietary technologies and a focus on high growth industries, the company’s future remains volatile, because of a competitive landscape, high costs and debt, and a limited history of success and net profitability. There are many risks inherent in its current operations and structure that make it a dangerous investment for the ordinary investor. Overall, there are some positive signs, especially its most recent earnings numbers, but it’s best to wait and see.