# Vericel Corp: Form 10-Q for the period ended Jun 30, 2019

- Company: [Vericel Corp](/companies/vcel.md) (CIK 887359)
- Form: 10-Q
- Filed: 2019-08-06
- Accepted by EDGAR: Aug 6, 2019, 13:58 ET
- Period: 2019-06-30
- Accession: 0001628280-19-010077
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/887359/000162828019010077/vericel6301910q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/887359/000162828019010077/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $26.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $48.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $17.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-01-01 to 2019-06-30 | $30.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $21.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $24.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $16.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-01-01 to 2019-06-30 | $29.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | −$20.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | −$23.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $2.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $4.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | −$19.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | −$22.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | −$0.52 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | −$18.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $1.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-06-30 | $14.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $94.0m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $125.8m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $12.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $37.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-06-30 | $88.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,312 characters.

### 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. We also 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 autologous implant 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 autologous 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 2,500 to 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 physicians. 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. 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. For those private payers which have not yet approved a medical policy for MACI, for medically appropriate cases we can often obtain approval on a case by case basis. For the three and six months ended June 30, 2019, net revenues for MACI were $20.8 million and $37.4 million, respectively and $14.1 million and $26.2 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 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 autologous epidermal product available for large total surface area burns. Epicel was designated as a 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 5-person field force. For the three and six months ended June 30, 2019, net revenues for Epicel were $5.3 million and $10.6 million, respectively, and $4.9 million and $10.9 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 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. Patients were followed for 12 months for the primary efficacy endpoint of major cardiac adverse events, or MACE. On March 10, 2016, we announced the trial had met its primary endpoint of reduction in clinical cardiac events and that the incidence of adverse events, including serious adverse events, in patients treated with ixmyelocel-T was comparable to patients in the placebo group. Patients were then followed for an additional 12 months for safety. Because the trial met the primary endpoint, patients who received placebo or were randomized to ixmyelocel-T in the double-blind portion of the trial but did not receive ixmyelocel-T were offered the option to receive ixmyelocel-T. We successfully treated the last patients in February 2017, and the last follow-up visit occurred approximately one year later. In addition, we have conducted clinical studies for the treatment of critical limb ischemia, and an ixmyelocel-T investigator-initiated clinical study was conducted for the treatment of craniofacial reconstruction.

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 Loss

Our net loss for the three and six months ended June 30, 2019 totaled $19.8 million and $22.6 million, respectively and $4.7 million and $12.3 million for the same periods in 2018.

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $26,151 | $19,011 | $47,961 | $37,038 |
| Cost of product sales | 9,022 | 7,727 | 17,662 | 15,393 |
| Gross profit | 17,129 | 11,284 | 30,299 | 21,645 |
| Total operating expenses | 37,329 | 15,530 | 53,857 | 30,213 |
| Loss from operations | (20,200) | (4,246) | (23,558) | (8,568) |
| Other income (expense) | 408 | (405) | 922 | (3,742) |
| Net loss | $(19,792) | $(4,651) | $(22,636) | $(12,310) |

#### Net Revenues

Net revenues increased for the three and six months ended June 30, 2019 compared to the same periods in 2018 primarily due to significant MACI volume growth.

| Revenue by product (in thousands) | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| MACI | $20,823 | $14,125 | $37,406 | $26,180 |
| Epicel | 5,328 | 4,886 | 10,555 | 10,858 |
| Total Revenue | $26,151 | $19,011 | $47,961 | $37,038 |

*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

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $17,129 | $11,284 | $30,299 | $21,645 |
| Gross profit % | 66% | 59% | 63% | 58% |

Gross profit increased for the three and six months ended June 30, 2019 compared to the same period in 2018 due primarily to an increase in MACI 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

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Research and development costs | $21,070 | $3,739 | $24,078 | $7,468 |

The following table summarizes the approximate allocation of cost for our research and development projects:

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Dilated Cardiomyopathy | $— | $604 | $3 | $1,160 |
| MACI | 2,231 | 2,423 | 4,390 | 4,880 |
| Epicel | 1,091 | 712 | 1,937 | 1,428 |
| NexoBrid | 17,748 | — | 17,748 | — |
| Total research and development costs | $21,070 | $3,739 | $24,078 | $7,468 |

Research and development costs for the three months ended June 30, 2019 were $21.1 million compared to $3.7 million for the same period a year ago. The increase in research and development costs during the three months ended June 30, 2019 is due to a $17.5 million upfront payment to MediWound for the North American rights to NexoBrid.

Research and development costs for the six months ended June 30, 2019 were $24.1 million compared to $7.5 million for the same period a year ago. The increase in research and development costs during the six months ended June 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

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative costs | $16,259 | $11,791 | $29,779 | $22,745 |

Selling, general and administrative costs for the three months ended June 30, 2019 were $16.3 million compared to $11.8 million for the same period a year ago. The increase in selling, general and administrative costs for the three months ended June 30, 2019 is due primarily to a $1.1 million increase in marketing expenses, an incremental $0.7 million in MACI sales force expenses driven by the expansion in the second quarter of 2019, a $1.0 million increase in stock-based compensation expenses and a $0.9 million increase in selling expenses and patient reimbursement support services. The increase in selling expenses and patient reimbursement support services is primarily driven by higher MACI sales volume and the engagement of a third-party services provider to provide the patient support program under the current distributor model which began June 15, 2018, compared to the same period a year ago.

Selling, general and administrative costs for the six months ended June 30, 2019 were $29.8 million compared to $22.7 million for the same period a year ago. The increase in selling, general and administrative costs for the six months ended June 30, 2019 is due primarily to a $2.1 million increase in stock-based compensation expenses, a $1.5 million increase in selling expenses and patient reimbursement support services, an incremental $1.3 million in MACI sales force expenses driven by the expansions in the second quarter of 2019 and a $1.3 million increase in marketing expenses.

#### Other Income (Expense)

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Increase in fair value of warrants | $— | $(37) | $— | $(2,944) |
| Other income (expense) | (18) | (3) | 18 | 83 |
| Net interest income (expense) | 426 | (365) | 904 | (881) |
| Total other income (expense) | $408 | $(405) | $922 | $(3,742) |

22

The other income and expense for the three and six months ended June 30, 2019 is due primarily to interest income as a result of our investments in various marketable debt securities. 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 we did not experience a change in warrant value for the three and six months ended June 30, 2019 due to the expiration of the liability classified 2013 warrants in 2018 which contributed to the valuation change.

#### 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:

*(In thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $716 | $394 | $976 | $536 |
| Research and development | 886 | 442 | 1,410 | 917 |
| Selling, general and administrative | 2,581 | 1,629 | 4,424 | 2,354 |
| Total non-cash stock-based compensation expense | $4,183 | $2,465 | $6,810 | $3,807 |

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 $14.0 million, and short-term investments totaled $52.0 million as of June 30, 2019. The cash used in operations of $18.2 million was largely a result of our net loss of $22.6 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 $6.8 million of stock compensation expense and $0.7 million of depreciation expense.

Our cash and cash equivalents totaled $95.0 million as of June 30, 2018. During the six months ended June 30, 2018, the cash used for operations of $5.0 million was largely a result of our net loss of $12.3 million, offset by noncash charges including $3.8 million of stock compensation expense, $2.9 million due to the change in fair value of warrants and $0.8 million of depreciation expense.

The change in cash provided by investing activities as of June 30, 2019 is the result of $32.4 million in short-term investments purchases offset by $45.5 million of short-term investment maturities and property plant and equipment purchases of $1.2 million primarily for manufacturing upgrades and leasehold improvements through June 30, 2019. The change in cash used for investing activities as of June 30, 2018 is the result of the purchases of $1.0 million of property plant and equipment for manufacturing upgrades.

The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $2.1 million during the six months ended June 30, 2019. The change in cash provided from financing activities during the six months ended June 30, 2018 is the result of net proceeds from our public equity offering of common stock of $70.1 million, proceeds from the exercise of stock options of $2.1 million and exercise of warrants of $2.0 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 June 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 six months ended June 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.

## Market risk

As filed, 428 characters.

As of June 30, 2019, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates or credit conditions on our securities portfolio. For additional information regarding our market risk, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2018.

## Controls and procedures

As filed, 1,307 characters.

### Evaluation of Disclosure Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer (its “Certifying Officers”), as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company, with the participation of its Certifying Officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules l3a-15(e) and l5d-15(e) under the Exchange Act. Based on the evaluation as of June 30, 2019, our Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 11,980 characters.

Certain risks described below update the risk factors discussed in Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which could materially affect our business, financial condition, results of operations, or cash flows. The risks described below and in the Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect our business, financial condition, results of operations or cash flows.

***We rely on complex information technology (IT) systems for various critical purposes, including timely delivery of product and maintaining patient confidentiality.***

We have developed a comprehensive, integrated information technology (IT) system for the intake of physician orders for our products, to track product delivery, and to store patient-related data we obtain for purposes of manufacturing MACI and Epicel. We rely on this system to maintain the chain of identity for each autologous product, and to ensure timely delivery of product prior to expiration. Each product has a limited usable life measured in days from the completion of the manufacturing process to patient implant or grafting. Accordingly maintaining accurate scheduling logistics is critical. In addition, this IT system stores and protects the privacy of the required patient information for the manufacture of our products. If our systems were to fail or be disrupted for an extended period of time, we could lose product sales and our revenue and reputation would suffer. In the event our systems were to be breached by an unauthorized third party, they could potentially access confidential patient information we obtain in manufacturing our products, which could cause us to suffer reputational damage and loss of customer confidence. Any one of these events could cause our business to be materially harmed and our results of operations would be adversely impacted.

***If we fail to fulfill our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.***

We are a party to intellectual property license agreements with third parties, including our license agreement with MediWound Ltd. for NexoBrid, and may enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. In addition, if these in‑licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products identical to ours after the expiry of data exclusivity. The occurrence of such events could materially harm our business.

***If our licensing arrangement with MediWound is unsuccessful, our revenues and product development may be limited.***

We have entered into a licensing arrangement with MediWound Ltd. for the development of NexoBrid in North America. However, there can be no assurance that this agreement and our and MediWound's efforts pursuant to it will result in FDA approval of NexoBrid, or that we will be able to market NexoBrid at a profit. Under the terms of the License Agreement, MediWound will continue to conduct all development activities under the supervision of a Central Steering Committee comprised of members of each party until the BLA is approved and subsequently transferred to Vericel. Collaboration and licensing arrangements pose the following risks:

- collaborations and licensing arrangements may be terminated;
- collaborators and licensors may delay clinical trials and prolong clinical development, or under-fund or stop a clinical trial;
- expected revenue might not be generated because product candidates may not be approved;
- collaborators and licensors could independently develop, or develop with third parties, products that could compete with our future products despite non-competition provisions;
- the terms of our contracts with current or future collaborators and license parties may not be favorable to us in the future;
- disputes may arise delaying or terminating the research, development, or commercialization of our product candidates, or result in significant and costly litigation or arbitration; and
- one or more third-party developers could obtain approval for a similar product prior to the product candidate resulting in unforeseen price competition in connection with the product candidate.

***Product development is a lengthy and expensive process, with an uncertain outcome.***

We intend to commercialize NexoBrid in the U.S. and potentially other North American countries. However, before we can commercialize NexoBrid, we must first obtain regulatory approval for the sale of NexoBrid in any jurisdiction, which includes the submission of an application utilizing completed and ongoing clinical studies to demonstrate that the product is safe and effective. We depend on MediWound for its efforts in completing clinical trials and other clinical activities pursuant to the development plan, obtaining regulatory approval and manufacturing and supplying NexoBrid.

Certain events could delay or prevent our ability to successfully gain regulatory approval, including:

- patients may not participate in necessary follow-up visits to obtain required data, which would result in significant delays in the clinical testing process;
- third-party contractors, such as a research institute, may fail to comply with regulatory requirements or meet their contractual obligations to MediWound;
- undetected or concealed fraudulent activity by a clinical researcher, if discovered, could preclude the submission of clinical data prepared by that researcher, lead to the suspension or substantive scientific review of one or more of our marketing applications by regulatory agencies, and result in the recall of any approved product distributed pursuant to data determined to be fraudulent; and
- an audit of preclinical or clinical studies by regulatory authorities may reveal noncompliance with applicable protocols or regulations, which could lead to disqualification of the results and the need to perform additional studies.

***We may be unable to successfully obtain approval of NexoBrid for treatment of severe burns in the United States and other North American markets.***

Our continued growth partially depends on our and MediWound’s ability to develop and obtain regulatory approval from the FDA for NexoBrid for treatment of severe burns in the United States. MediWound recently announced top-line results from the Phase 3 pivotal study to support a BLA submission to the FDA, according to which the study has met its primary and all secondary endpoints. Planned twelve-month and twenty-four month safety follow-ups are ongoing for cosmesis, function, quality of life and other safety measurements. While this and previous studies have met their primary endpoints, we cannot predict the outcome of the planned safety follow-ups, whether the FDA will accept a BLA submission based on the available preclinical and clinical data, how long the FDA may take to review and approve NexoBrid following the BLA submission or whether any such approval in the United States will ultimately be granted. Similarly, we cannot predict how long regulatory authorities in Mexico or Canada will take to provide NexoBrid with marketing authorization in their jurisdictions or whether such authorizations will be granted at all. The failure to receive regulatory approval in the United States would have a materially adverse impact on our business prospects.

***There is no guarantee that NexoBrid will be accepted in the market even if regulatory approval is received.***

The success of NexoBrid, if and when approved, depends upon the acceptance of NexoBrid by patients, the medical community and third-party payors, effectively competing with other products, a continued acceptable safety profile following approval and qualifying for, maintaining, enforcing and defending related intellectual property rights and claims. Even if we and MediWound successfully obtain regulatory approvals to market NexoBrid, our revenues will be dependent, in part, upon the size of the markets for which we gain regulatory approval. If the markets that we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

***Our licensor MediWound is dependent on a contract with the U.S. Biomedical Advanced Research and Development Authority to fund the Phase 3 pivotal studies and other development activities of NexoBrid in the United States.***

MediWound has a contract with BARDA valued at up to $132 million for the advancement of the development and manufacturing, as well as the procurement, of NexoBrid in the United States. Under the contract, BARDA has agreed to fund up to $56 million of the development costs of NexoBrid required to obtain marketing approval in the United States, including its ongoing pediatric Phase 3 study and its expansion to include U.S. pediatric burn care sites, and has an option to further fund $10 million in development activities for other potential NexoBrid indications. BARDA has also made a $16.5 million commitment for procurement of NexoBrid, which is contingent upon the U.S. FDA Emergency Use Authorization and/or FDA regulatory approval for NexoBrid, and has a $50 million option for additional procurement of NexoBrid. In addition, MediWound was recently awarded a new contract to develop NexoBrid for the treatment of Sulfur Mustard injuries as part of BARDA preparedness for mass casualty events. The contract provides approximately $12 million of funding to support research and development activities up to pivotal studies in animals under the U.S. FDA Animal Efficacy Rule and contains options for additional funding of up to $31 million for additional development activities, animal pivotal studies, and the BLA submission for licensure of NexoBrid for the treatment of Sulfur Mustard injuries. MediWound also was recently awarded funding for the NexoBrid expanded access treatment (NEXT) protocol being conducted under the FDA’s expanded access program. However, the contracts provide that BARDA may terminate the contract at any time, at its convenience, without any further funding obligations. There can be no assurances that BARDA will not terminate the contract. Changes in government budgets and agendas may result in a decreased and de-prioritized emphasis on supporting the development of products for the treatment of severe burns such as NexoBrid. Any reduction or delay in BARDA funding may result in a decrease in planned development activities, including the development of NexoBrid for the treatment of Sulfur Mustard injuries and the NEXT study. In addition, the loss of funding may adversely affect MediWound’s ability to complete the required activities to file the BLA without access to alternative sources of funding. This could lead to a modification to the financial provisions of our agreement or a significant delay in the development of NexoBrid. Further, we cannot provide any assurances as to when or whether BARDA’s commitment for procurement of NexoBrid will occur nor when or whether BARDA's option to fund additional development activities for NexoBrid will be exercised.

Filed Aug 6, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-010077. Last ingested by Listed: Nov 13, 2026, 17:29 ET. No prices; not investment advice.