Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vericel Corporation is a leader in advanced cell therapies for the sports medicine and severe burn care markets, and a developer of cell therapies for use in the treatment of patients with severe diseases and conditions. We currently market two FDA approved autologous cell therapy products in the United States. MACI® (autologous cultured chondrocytes on porcine collagen membrane) is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. We also market Epicel® (cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (HUD) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns greater than or equal to 30 percent of total body surface area (TBSA).
Manufacturing
We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel.
Product Portfolio
Our marketed products include two FDA-approved autologous cell therapies: MACI, a third-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel, a permanent skin replacement for adult and pediatric patients with deep dermal or full thickness burns greater than or equal to 30% of TBSA. Both products are currently marketed in the U.S. We also own Carticel which is no longer marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in all countries of North America. NexoBrid is currently in clinical development in North America. Until 2017, our active product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to dilated cardiomyopathy, or DCM. We have no current plans to continue the development of ixmyelocel-T.
MACI
MACI is a third-generation product for autologous chondrocyte implantation (ACI), a class of methods for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. MACI replaced Carticel, an earlier generation ACI product for the treatment and repair of cartilage defects in the knee and was the first FDA-approved cartilage repair product.
In the U.S., the physician target audience which repairs cartilage defects is concentrated and is comprised of a group of orthopedic surgeons who self-identify and/or have a formal specialty as sports medicine physicians. We believe this target audience is approximately 3,000 physicians. In addition to these physicians there is a population of approximately 8,000 general orthopedic surgeons who treat cartilage injuries, although typically at a much lower average volume relative to the sports medicine segment. As we look to more effectively engage this customer base, we expanded our field force from 40 to 48 representatives in the second quarter of 2019 to target the majority of the approximately 3,000 sports medicine physicians. In 2020 we plan on a further expansion to 76 representatives to enable the field force to also call on 2,000 of the general orthopedic surgeons. Most private payers have a medical policy that covers treatment with MACI with the top 30 largest commercial payers having a formal medical policy for MACI or ACI in general. Even for private payers which have not yet approved a medical policy for MACI, for medically appropriate cases, we often obtain approval on a case by case basis. For the three and nine months ended September 30, 2019, net revenues for MACI were $20.6 million and $58.0 million, respectively and $16.4 million and $42.6 million, for the same periods in 2018.
Epicel
Epicel is a permanent skin replacement for deep dermal or full thickness burns greater than or equal to 30% of total body surface area (TBSA). Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the U.S. Food and Drug Administration, or FDA under medical device authorities, and is the only FDA-approved cultured epidermal autograft product available for large total surface area burns. Epicel was designated as a Humanitarian Use Device (HUD) in 1998 and a Humanitarian Device Exception (HDE) application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the U.S. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met.
A HUD is eligible to be sold for profit after receiving HDE approval if the device meets certain eligibility criteria, including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients. If the FDA determines that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit as long as the number of devices distributed in any calendar year does not exceed the Annual Distribution Number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the U.S.
On February 18, 2016, the FDA approved our HDE supplement to revise the labeled indications of use to specifically include pediatric patients and to add pediatric labeling. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Due to the change in the label to specifically include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with adding the pediatric labeling and meeting the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel is 360,400 which is approximately 45 times larger than the volume of grafts sold in 2018. We currently have a 9-person field force. For the three and nine months ended September 30, 2019, net revenues for Epicel were $9.9 million and $20.4 million, respectively, and $6.0 million and $16.9 million for the same periods in 2018.
NexoBrid
Our preapproval stage portfolio includes NexoBrid, a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. NexoBrid is currently in clinical development in North America, and a BLA currently is targeted for submission to the FDA in the second quarter of 2020. Pursuant to the terms of our license agreement with MediWound, MediWound will continue to conduct all clinical activities described in the development plan to support the filing of a BLA with the United States Food and Drug Administration under the supervision of a Central Steering Committee comprised of members of each party.
Ixmyelocel-T
Our preapproval stage portfolio also includes ixmyelocel-T, a unique multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. This multicellular therapy was developed for the treatment of advanced heart failure due to DCM.
Ixmyelocel-T has been granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM. We completed enrolling and treating patients in our completed Phase 2b ixCELL-DCM study in February 2015. On September 29, 2017, the FDA indicated we would be required to conduct at least one additional Phase 3 clinical study to support a BLA for ixmyelocel-T. Given the expense required to conduct further development and our focus on growing our existing commercial products, at this time we have no current plans to initiate or fund a Phase 3 trial on our own.
Results of Operations
Net Income (Loss)
Our net earnings and loss for the three and nine months ended September 30, 2019 totaled $3.5 million and $19.2 million, respectively and a loss of $1.1 million and $13.4 million for the same periods in 2018.
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|
|
|
|
|
|
|
|
|
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
(In thousands)
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|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total revenues
|
|
$
|
30,499
|
|
|
$
|
22,484
|
|
|
$
|
78,460
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|
|
$
|
59,522
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|
Cost of product sales
|
|
9,324
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|
|
8,138
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|
|
26,986
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|
|
23,531
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Gross profit
|
|
21,175
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|
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14,346
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|
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51,474
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|
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35,991
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Total operating expenses
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18,078
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|
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15,682
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|
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71,935
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|
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45,895
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Income (loss) from operations
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|
3,097
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(1,336
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)
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(20,461
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)
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(9,904
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)
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Other income (expense)
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|
373
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|
|
267
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1,295
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(3,475
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)
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Net income (loss)
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|
$
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3,470
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|
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$
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(1,069
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)
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$
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(19,166
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)
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$
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(13,379
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)
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Net Revenues
Net revenues increased for the three and nine months ended September 30, 2019 compared to the same periods in 2018 due to significant volume growth for both MACI and Epicel.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Revenue by product (in thousands)
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2019
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2018
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2019
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2018
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MACI
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$
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20,610
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|
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$
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16,449
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|
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$
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58,015
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|
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$
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42,629
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Epicel
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9,889
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6,035
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|
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20,445
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|
|
16,893
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Total Revenue
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|
$
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30,499
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|
|
$
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22,484
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|
|
$
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78,460
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|
|
$
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59,522
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|
Seasonality. Over the last four years ACI (MACI and Carticel prior to its replacement) sales volumes from the first through the fourth quarter have on average represented 20%, 24%, 22% and 35% respectively, of total annual volumes. In some years individual quarters have deviated from these means by up to 4%. MACI orders are stronger in the fourth quarter due to several factors including insurance copay limits and the time of year patients prefer to start rehabilitation. Epicel revenue is also subject to seasonal fluctuations mostly associated with the use of heating elements during the colder months, with stronger sales occurring in the winter months of the first and fourth quarters, and weaker sales occurring in the hot summer months of the third quarter. However, in any single year, this trend can be absent due to the extreme variability inherent with Epicel’s patient volume. Over the last four years the percentage of annual product orders for Epicel has on average been 28%, 25%, 21% and 27% from the first to the fourth quarters.
Gross Profit and Gross Profit Ratio
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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|
2019
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|
2018
|
|
2019
|
|
2018
|
Gross profit
|
|
$
|
21,175
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|
|
$
|
14,346
|
|
|
$
|
51,474
|
|
|
$
|
35,991
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|
Gross profit %
|
|
69
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%
|
|
64
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%
|
|
66
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%
|
|
60
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%
|
Gross profit increased for the three and nine months ended September 30, 2019 compared to the same period in 2018 due primarily to an increase in MACI and Epicel sales combined with our highly fixed manufacturing cost structure which consists mainly of labor and facility costs that do not materially fluctuate with volume increases.
Research and Development Costs
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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|
2019
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2018
|
|
2019
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|
2018
|
Research and development costs
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|
$
|
3,096
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|
|
$
|
3,113
|
|
|
$
|
27,174
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|
|
$
|
10,581
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The following table summarizes the approximate allocation of cost for our research and development projects:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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|
2019
|
|
2018
|
|
2019
|
|
2018
|
Dilated Cardiomyopathy
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|
$
|
2
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|
|
$
|
153
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|
|
$
|
32
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|
|
$
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1,119
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MACI
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|
1,804
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|
|
2,095
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|
|
6,165
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|
|
7,169
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Epicel
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|
875
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|
|
865
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|
|
2,813
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|
|
2,293
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NexoBrid
|
|
415
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|
|
—
|
|
|
18,164
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|
|
—
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Total research and development costs
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|
$
|
3,096
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|
|
$
|
3,113
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|
|
$
|
27,174
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|
|
$
|
10,581
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|
Research and development costs for the three months ended September 30, 2019 and 2018 were $3.1 million. Research and development expenses are due primarily to manufacturing process improvement activities, the ongoing MACI pediatric trial, pharmacovigilance and other reporting and compliance requirements, and medical affairs and external grants which are similar to the same period in the previous year.
Research and development costs for the nine months ended September 30, 2019 were $27.2 million compared to $10.6 million for the same period a year ago. The increase in research and development costs during the nine months ended September 30, 2019 is due to the $17.5 million upfront payment to MediWound for the North American rights to NexoBrid, partially offset by costs related to the ongoing MACI pediatric trial which decreased compared to the same period a year ago.
Selling, General and Administrative Costs
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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|
2019
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|
2018
|
|
2019
|
|
2018
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Selling, general and administrative costs
|
|
$
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14,982
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|
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$
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12,569
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|
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$
|
44,761
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|
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$
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35,314
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Selling, general and administrative costs for the three months ended September 30, 2019 were $15.0 million compared to $12.6 million for the same period a year ago. The increase in selling, general and administrative costs for the three months ended September 30, 2019 is due primarily to $0.9 million increase in stock-based compensation expenses, a $0.8 million increase in marketing expenses, and a $0.7 million increase in MACI sales force expenses driven by the expansion in the second quarter of 2019.
Selling, general and administrative costs for the nine months ended September 30, 2019 were $44.8 million compared to $35.3 million for the same period a year ago. The increase in selling, general and administrative costs for the nine months ended September 30, 2019 is due primarily to a $3.0 million increase in stock-based compensation expenses, a $2.1 million increase in marketing expenses, an incremental $1.9 million increase in MACI sales force expenses driven by the expansions in the second quarter of 2019 and a $1.1 million increase in patient reimbursement support services.
Other Income (Expense)
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|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
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2018
|
Increase in fair value of warrants
|
|
$
|
—
|
|
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$
|
420
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|
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$
|
—
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|
|
$
|
(2,524
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)
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Other income (expense)
|
|
(10
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)
|
|
—
|
|
|
8
|
|
|
(1
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)
|
Net interest income (expense)
|
|
383
|
|
|
(153
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)
|
|
1,287
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|
|
(950
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)
|
Total other income (expense)
|
|
$
|
373
|
|
|
$
|
267
|
|
|
$
|
1,295
|
|
|
$
|
(3,475
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)
|
The other income and expense for the three and nine months ended September 30, 2019 is due primarily to interest income as a result of our investments in various marketable debt securities. The other income and expense for the same periods in 2018 relate to the increase in our stock price in 2018 resulting in an increase in the fair value of warrants and interest expense related to the then outstanding term loan. For the three and nine months ended September 30, 2019 we did not incur interest expense as the term
loan was repaid in December 2018 and we did not experience a change in warrant value due to the expiration of the liability classified 2013 warrants in 2018.
Stock Compensation
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of goods sold
|
|
$
|
543
|
|
|
$
|
284
|
|
|
$
|
1,519
|
|
|
$
|
820
|
|
Research and development
|
|
583
|
|
|
365
|
|
|
1,993
|
|
|
1,282
|
|
Selling, general and administrative
|
|
2,159
|
|
|
1,283
|
|
|
6,583
|
|
|
3,637
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|
Total non-cash stock-based compensation expense
|
|
$
|
3,285
|
|
|
$
|
1,932
|
|
|
$
|
10,095
|
|
|
$
|
5,739
|
|
The changes in stock-based compensation expense are due primarily to fluctuations in the fair value of the options granted in 2019 compared to 2018 as a result in the increase in stock price. In addition, we granted restricted stock units in 2019 and none in 2018.
Liquidity and Capital Resources
Since the acquisition in 2014 of MACI, Epicel and Carticel from Sanofi, our primary focus has been to invest in our existing commercial business with the goal of growing revenue. We have raised significant funds in order to complete our product development programs, and complete clinical trials needed to market and commercialize our products. To date, we have financed our operations primarily through public and private sales of our equity securities. At present revenue levels, we do not currently anticipate the need to finance our operations through the sales of equity securities.
Our cash and cash equivalents totaled $36.9 million, and short-term investments totaled $37.8 million as of September 30, 2019. During the nine months ended September 30, 2019, the cash used in operations of $10.3 million was largely a result of our net loss of $19.2 million which included a cash outflow of $17.5 million for the upfront payment for the NexoBrid license. The net loss was offset by noncash charges including $10.1 million of stock compensation expense and $1.2 million of depreciation expense.
Our cash and cash equivalents totaled $53.3 million as of September 30, 2018. During the nine months ended September 30, 2018, the cash used for operations of $3.0 million was largely a result of our net loss of $13.4 million, offset by noncash charges including $5.7 million of stock compensation expense, $2.5 million due to the change in fair value of warrants and $1.1 million of depreciation expense.
The change in cash provided by investing activities as of September 30, 2019 is the result of $46.3 million in short-term investments purchases offset by $73.8 million of short-term investment maturities and property plant and equipment purchases of $2.3 million primarily for manufacturing upgrades and leasehold improvements through September 30, 2019. The change in cash used for investing activities as of September 30, 2018 is the result of $44.5 million in short term investments and the purchases of $2.1 million of property plant and equipment for manufacturing upgrades through September 30, 2018.
The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $3.8 million during the nine months ended September 30, 2019. The change in cash provided from financing activities during the nine months ended September 30, 2018 is the result of net proceeds from our public equity offering of common stock of $70.0 million, proceeds from the exercise of stock options of $3.3 million and exercise of warrants of $2.7 million.
We believe that, based on current revenue levels, cash on hand, cash equivalents and short-term investments we are able to operate our business without the need to finance our operations through the sales of equity securities. If revenues decline for a sustained period, we may need to access additional capital; however, we may not be able to obtain financing on acceptable terms or at all. The terms of any financing may adversely affect the holdings or the rights of our shareholders. Actual cash requirements may differ from projections and will depend on many factors, including the level of future research and development, the scope and results of ongoing and potential clinical trials, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost to market our products.
Off-Balance Sheet Arrangements
At September 30, 2019, we were not party to any off-balance sheet arrangements.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these condensed consolidated financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events. These estimates and judgments, in and of themselves, could materially impact the condensed consolidated financial statements and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K for the fiscal year ended December 31, 2018 are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. There have been no material changes to that information disclosed in our Annual Report during the nine months ended September 30, 2019.
Forward-Looking Statements
This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “anticipates,” “estimates,” “plans,” “projects,” “trends,” “opportunity,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “target,” “achieve,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in them. The factors described in our Annual Report, among others, could have a material adverse effect upon our business, results of operations and financial conditions.
Because the factors referred to in the preceding paragraph could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements we make, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. These forward-looking statements include statements regarding:
•manufacturing and facility capabilities;
•potential strategic collaborations with others;
•future capital needs and financing sources;
•adequacy of existing capital to support operations for a specified time;
•reimbursement for our products;
•submission of a BLA for NexoBrid to the FDA;
•product development and marketing plans;
•features and successes of our therapies;
•clinical trial plans, including publication thereof;
•anticipation of future losses;
•replacement of manufacturing sources;
•commercialization plans; or
•revenue expectations and operating results.