posting the Seeking Alpha article before it gets locked down
Surprise Jump In Epicel Sales Highlights 'Outstanding' 3Q For Vericel
Nov. 27, 2019 8:01 AM ET|
Joe Younger
Growth, dividend investing, long-term horizon, medium-term horizon
(567 followers)
Summary
Unexpectedly strong Epicel revenue growth carries Vericel to another strong quarter of revenue gains and positive net income.
The company is showing more balance in revenue, adding stability to the company and its share price.
Despite the recent NexoBrid acquisition, Vericel remains in acquisition mode, and it has the cash to do so.
Technically, the share price is forming a high flag right below major resistance, setting the stage for a long-awaited breakout above $20.
Another strong quarter is in the books for Vericel Corporation (VCEL), as Vericel metamorphosizes from a volatile, insomnia-inducing microcap to a sleep-well-at-night small-cap with fundamentals that are gaining in strength and stability. Vericel is generating impressive top-tier revenue growth, and the company anticipates "strong annual profit and cash flow growth in the years ahead." And from a technical standpoint, the 3Q gap up in stock price has set the stage for a push, finally, through what has proved to be a formidable price ceiling of $20.
Investment Thesis: Vericel's strong third-quarter performance reinforces its place as one of the leading companies in the regenerative medicine industry, and technically, the share price is nicely set-up for a breakout to new highs.
The Epicel Revenue Jump
The surprise news for third-quarter 2019 was the astonishing growth in Vericel's regenerative tissue burn care product, Epicel. Epicel revenue jumped an astonishing 64% YOY, to $9.9 million. To put this in perspective, Epicel growth for Q2 2019 was only 9% YOY. This is the highest quarterly Epicel revenue in company history. CEO Nick Colangelo was quick to remind us not to get too stratospheric in our expectations going forward; Epicel sales are highly variable (dependent upon severe burn incidences). As he explained in the 3Q question and answer session:
It's going to bounce all over the map, and I frequently say, don't cry in your coffee if it's a down quarter; don't pop the champagne bottles if it's way up.
While we should not pop the champagne bottles, it is clear that the Epicel team expansion from six to nine representatives is having a marked positive effect. Note also that the fourth-quarter revenue last year was the highest ever for Epicel; therefore, I think we can expect to see another strong quarter of Epicel growth in Q4. Colangelo also reminded us that the company's newly acquired debridement agent NexoBrid commercial launch (tentatively commencing in the first half of 2021) will double the addressable burn care market.
Total revenue growth for the quarter was $30.5 million; a solid +36% YOY, with MACI sales coming in at $20.6 million.
Revenue Guidance and Net Income
Vericel raised top-line estimates to $116-118 million for 2019; up from previous guidance of $112-116. Obviously, a guidance raise is good, and income estimates are even better. Vericel is estimated to make a total of $0.31 per share in 2020, as compared to an estimated $-0.24 for 2019. After years of losing money Vericel has reached the tipping point and is now a money-making venture.
For 3Q, Vericel netted $3.5 million, or $0.07 per share for the quarter, an increase of $4.5 million YOY.
Other Positives from Q3 2019
Gross Margins are Exceptional: 69%, an increase of over 550 basis points YOY.
Costs Stable as Revenue Grows: Largely fixed cost manufacturing footprint allows for revenue growth while minimizing increase of expenses.
Sales Force Expansion Part III: From 49 to 76 territories by Q2 of 2020
Acquisition Mode Engaged: "We're making additional targeted investments in both our sports medicine and burn care commercial franchises," Colangelo stated in the 3Q conference call. And with $74.7 million in cash, the company has ample funds to make another acquisition.
MACI Biopsies Increasing Markedly: Knee cartilage tissue biopsies from 1,300 surgeons, +26% from the previous four quarters ending Q3 2018. Biopsies are a leading indicator of MACI growth. Making rapid progress, but still only 1/4 of the 5000 target surgeons. Much opportunity remains.
After a blockbuster 1000% run from 2016 to 2019, VCEL has been Oscillating in a rectangular base for the greater part of a year now. In general, the greater the run-up, the greater the "digestion" period, and the fact that VCEL has been sliding sideways rather than giving up the majority of its gains gives us confidence that the meandering 2019 price action will ultimately be the rest phase for a new measured move upward. See the five-year price chart below:
Source: StockCharts.com
As we see in the one-year chart below, VCEL has made two failed attempts to breach $20 this year. The strong 3Q earnings results on November 5, 2019 resulted in a gap up, and the price has been setting up in a descending triangle flag pattern. What I anticipate is for the flag to break out to the upside and make a third run at that troublesome $20 mark. Perhaps the third time is the charm. I am holding my shares here and will add when the price closes with conviction above $20, or should macroeconomic turmoil pull the share price back down to $16. As VCEL does not offer a dividend and has proven to be volatile in the past, I see no reason to buy at this level, as it is very possible that the stock price may continue to slide sideways until the next quarter. Better to wait for the breakout or for a better price to enter. With patience, VCEL will give us one or the other.
Source: StockCharts.com
Final Thoughts
A few quarters ago, Vericel was more or less a "one trick pony," with its innovative autologous knee cartilage product, MACI accounting for almost all of its revenue. Today, Vericel is looking like a well-balanced two-tiered company. Epicel revenue grew markedly in the third-quarter of 2019 and was nearly 1/2 of total revenue (3Q revenue was $9.9 million for Epicel and $20.6 million for MACI), and when NexoBrid sales commence in 2021, Vericel's days of burn care being a small side hustle will be over.
I'll let Vericel CEO Nick Colangelo wrap this article up for me with his concluding thoughts from the 3Q 2019 Conference Call:
...We had another outstanding quarter, and we're really excited about the growth opportunities for our business that lie ahead in the years to come.
Vericel continues to grow revenue expeditiously, it is profitable (something of a rarity among small biotechs), it is flush with cash, and it is aggressively seeking acquisition opportunities. I share CEO Colangelo's enthusiasm for Vericel's future.
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