Elle Investments Research Report: VCEL

 

Company: Vericel Corporation

Symbol: VCEL

Analysis Date: 3/31/20

Analysis Price: $9.00

Price Target (PT): $21.11

Upside: 125%

Dividend: NA

Recommendation: Strong Buy

 

VCEL: 5-Year Chart

Source: Seeking Alpha

INVESTMENT THESIS:

After rising to $20.00/share over the past few years, shares of VCEL sold off hard from the COVID-19 panic. Near-term, it’s unclear how long elective procedures such as knee surgeries will be put on hold so that medical facilities can focus on virus patients. But once things return to normal, we think lead product MACI will resume its strong sales growth. The balance sheet is more than adequate to ride out the economic slowdown (plenty of cash and no debt), and so we think VCEL is a Strong Buy.

 

LIQUIDITY POSITION: Adequate

As of 4Q19, VCEL had cash and equivalents of $70M. And also very importantly, they have no debt. Their cash on hand is sufficient both to make it through a prolonged economic slowdown, as well as expand the MACI and Epicel salesforces once things go back to normal.

COMMERCIAL PROSPECTS: Very Good

VCEL’s three main products are MACI, Epicel, and NexoBrid.

MACI

 

VCEL’s flagship product is MACI, which is a new treatment for knee cartilage repair. MACI was the first FDA-approved product that, using the process of tissue engineering, grows cells on scaffolds using healthy cartilage tissue that has been taken from the patient’s own knee. After a surgeon takes an initial biopsy, the sample is sent to VCEL’s lab in Cambridge, MA. There, the patient’s cells are used to grow additional cells which are then sent back to the surgeon and inserted into the patient’s knee.

The growing success of the procedure has led to various news pieces on MACI popping up around the country. These stories highlight the ability of the patient to fully recover their ability to walk, hike, and even run up flights of stairs without experiencing the pain they felt previously.

MACI is a much simpler and quicker procedure than their previous product called Carticel. MACI has also shown more durable results when compared with traditional arthroscopic surgery, which is a main reason why a growing number of surgeons are being trained to perform the procedure. Since launching in 3Q17, sales have grown from $44M to $92M per year, blowing well past Carticel’s peak sales. Annual total sales guidance for 2020 (provided when 4Q19 earnings were announced on February 25) was $144M, up 22% over 2019, with the majority of the growth likely coming from MACI. Now that COVID-19 has put a lot of elective surgeries on hold, this sales guidance will likely be pulled. But we remain very bullish on MACI, and the strong uptake in the first three years since launch, as well as the market’s reaction to successive earnings announcements, serve to validate our bullishness on this product.

Epicel

 

VCEL also sells a product called Epicel. Epicel is a cultured epidermal autograft (CEA), which means that it is a skin graft that has been grown using the patient’s own skin. These grafts are intended for use on patients that have deep dermal or full thickness burns covering at least 30% of their total body surface area (TBSA). For 2019, Epicel sales were only $26M, up from $23M in 2018 and $19M in 2017. The company believes that Epicel has been underutilized due to the lack of a consistent promotional effort prior to 2015. We would certainly welcome a boost in sales, but this product is not central to our thesis.

NexoBrid

 

VCEL’s final product is called NexoBrid. NexoBrid consists of a proprietary mixture of enzymes that facilitate the removal of eschar (crusty, non-viable skin) in adults suffering from deep thermal burns. This process of eschar removal is known as debridement.

NexoBrid has already successfully gone through the approval process in the EU and several other ex-US countries already (where it is on the market). Even with the seemingly great trial results, thus far, ex-US sales have been low. For 2018 and 2019, MediWound’s product sales (which consist solely of NexoBrid) were only $3.2M and $3.4M, respectively (2019 20-F, pg 73). These amounts do not yet validate NexoBrid’s value proposition in the US.

The product has attracted some interested from the US Biomedical Advanced Research and Development Authority (BARDA), which has committed considerable funding to bring it to market in the US. But material sales for NexoBrid would be icing on the cake, as this product, like Epicel, is also not central to our thesis.

CONCLUSION:

The stock of VCEL lost much ground from the COVID-19 panic after climbing to $20.00/share. There will certainly be a significant hit to revenues in the short-term given the suspension of most elective surgeries. But with plenty of cash on hand and no debt, VCEL is in a great position to ride out the near-term uncertainties. Once things return to normal, we feel that the strong sales growth of MACI will resume, and investors will come back to the stock. We think VCEL is a Strong Buy.

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Published By: Elle Investments Research Team

Phone: (914) 715-8066

Email: info@elle-investments.com

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