17MAR201516112986
To Our Shareholders:
While 2014 was a transformative year for Vericel following our acquisition of Sanofi’s commercial cell
therapy business, 2015 was a year in which we established a strong foundation for growth. We rebuilt the
Carticel® commercial organization, creating new momentum for that product ahead of the potential launch
of MACI™; we increased the number of Epicel® sales representatives and treatment centers that placed
orders for Epicel; and we significantly advanced three key clinical and regulatory priorities: completing a
Biologics License Application (BLA) for MACI™ (matrix applied characterized autologous cultured
chondrocytes), our investigational third-generation cartilage repair product, expanding the labeled
indications for use of Epicel to include pediatric patients, and completing the Phase 2b ixCELL-DCM
clinical trial in patients with advanced heart failure due to ischemic dilated cardiomyopathy (DCM).
Our commercial success in 2015 reflected aggressive cost-cutting and revenue-enhancing initiatives to
expand our customer base, increase sales and improve profit margins. Total Carticel and Epicel net
product revenues increased 14 percent over 2014 pro forma revenues to $50.4 million, while gross profit
for the year increased to 48 percent of total revenues versus 40 percent of total revenues in 2014. Total
Epicel net revenues increased 60 percent in 2015 to $15.2 million compared to pro forma net revenues of
$9.5 million in 2014. Carticel net revenues increased one percent during 2015 to $35.2 million compared
to pro forma net revenues of $34.8 million in 2014, reversing the previous decline in revenue prior to the
acquisition and reflecting renewed support for the product as physicians await the introduction of MACI as
a less invasive third-generation cartilage repair product.
The positive response of physicians and medical centers to our expanded commercial efforts bodes well for
the Carticel and Epicel franchises as we continue to drive the business to operating profitability. With the
progress we made in 2015 and the sales growth we have achieved with Carticel and Epicel, we believe we
have established a successful and sustainable cell therapy business.
Our regulatory and clinical progress in 2015 has already been eclipsed by more recent successes. In
January 2016, we submitted to the FDA the BLA for MACI, which has now been accepted for FDA review
with a PDUFA goal date of January 3, 2017. We believe that MACI may offer the reliability of Carticel
with improved ease-of-use for the surgeon and the potential for a less invasive procedure for the patient.
By leveraging these advantages and building off the Carticel franchise we believe MACI will quickly
become an important product in the market for knee cartilage repair – so we are very optimistic about the
future of our Carticel/MACI franchise.
In support of the MACI development program, we recently announced a long-term supply agreement with
the German company Matricel for the ACI-Maix collagen membrane used in the manufacture of MACI.
Matricel’s proprietary collagen scaffold technology and previous experience as a reliable supplier of the
ACI-Maix membrane for MACI make Matricel a valuable partner for us as we pursue registration of
MACI in the United States.
We also submitted to the FDA a Humanitarian Device Exemption (HDE) supplement to revise the labeled
indications for use of Epicel to include pediatric patients, which was approved in February 2016 – an
important development for this life-saving burn treatment. The approval allows us to inform physicians
and patients about Epicel’s use and probable survival benefit in pediatric patients. Approval of the HDE
supplement also allows Epicel to be sold for profit up to the annual distribution number, which is defined
as the number of devices reasonably needed to treat a population of 4,000 individuals per year in the
United States.
The completion and success of the Phase 2b ixCELL-DCM clinical trial with ixmyelocel-T were important
milestones in the development of this potentially life-saving cell therapy. The study, in which 114 patients
with advanced heart failure due to DCM were treated at 28 sites in the United States via catheter-based
injections, met the primary endpoint of reducing the number of all-cause deaths, cardiovascular
hospitalizations or unplanned hospital visits over 12 months, compared to placebo. We plan to present the
full data results at the 65th Annual Scientific Sessions of the American College of Cardiology on April 4,
2016 and meet with the FDA to determine the registration requirements and development costs for this
product candidate.
We recently strengthened our financial position and flexibility with an agreement to borrow up to $15
million through two debt facilities with Silicon Valley Bank. With this agreement and our improving
commercial performance, we believe we are well-positioned to operate without any near-term financial
constraints.
Our progress during 2015 reflects our unwavering focus on execution and the commitment of an
extraordinary team of clinical, operations, and commercial professionals to our mission of becoming a
leading cell therapy company. In the year ahead, we anticipate continued growth of our two marketed
products, productive review of our pending regulatory application for MACI, determination of the
development plan for ixmyelocel-T, and careful expense management as we move the company toward
profitability. Our achievements are not possible without our dedicated employees, collaborators and
shareholders, and we thank all of you for your continued support.
Sincerely,
Nick Colangelo
President and CEO
March 2016
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 31, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-35280
VERICEL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)
94-3096597
(I.R.S. Employer
Identification No.)
64 Sidney Street
Cambridge, MA 02139
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (800) 556-0311
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock (No par value)
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer -
Non-accelerated filer -
(Do not check if a smaller reporting company)
Accelerated filer -
Smaller reporting company -
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the registrant’s Common Stock, no par value (“Common Stock”), held by non-affiliates of the registrant (based on the
closing sales price of the Common Stock as reported on the NASDAQ Capital Market) on June 30, 2015 was approximately $86,924,377. This
computation excludes shares of Common Stock held by directors, officers and each person who holds 5% or more of the outstanding shares of Common
Stock, since such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 8, 2016, 23,852,412 shares of Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders scheduled for May 4, 2016
Items 10, 11, 12, 13 and 14 of Part III
Document
Form 10-K Reference
VERICEL CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Signatures
Exhibit Index
Glossary
Page
4
25
47
47
47
47
48
49
50
59
60
83
83
84
84
84
85
85
85
85
2
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain statements that describe our management’s beliefs concerning future business
conditions, plans and prospects, growth opportunities and the outlook for our business based upon information currently available.
Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Wherever possible, we have identified these forward-looking statements by words such as “will,” “may,” “anticipates,” “believes,”
“intends,” “estimates,” “expects,” “projects” and similar phrases. These forward-looking statements are based upon assumptions
our management believes are reasonable. Such forward-looking statements are subject to risks and uncertainties which could cause
our actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements,
including, among others, the risks and uncertainties listed in this Annual Report on Form 10-K under “Part I, Item 1A Risk Factors”.
Because our forward-looking statements are based on estimates and assumptions that are subject to significant business,
economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be
materially different and any or all of our forward-looking statements may turn out to be wrong. Forward-looking statements speak
only as of the date made and can be affected by assumptions we might make or by known or unknown risks and uncertainties.
Many factors mentioned in our discussion in this Annual Report on Form 10-K will be important in determining future results.
Consequently, we cannot assure you that our expectations or forecasts expressed in such forward-looking statements will be
achieved. Except as required by law, we undertake no obligation to publicly update any of our forward-looking or other statements,
whether as a result of new information, future events, or otherwise.
3
Except for the historical information presented, the matters discussed in this Report, including our product development
and commercialization goals and expectations, our plans and anticipated timing and results of clinical development activities,
potential market opportunities, revenue expectations and the potential advantages and applications of our products and
product candidates under development, include forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors.” Unless the
context requires otherwise, references to “we,” “us,” “our” and “Vericel” refer to Vericel Corporation.
PART I
Item 1. Business
General Information
Vericel Corporation is a leader in developing patient-specific expanded cellular therapies for use in the treatment of patients
with severe diseases and conditions. We market two autologous cell therapy products in the United States: Carticel® (autologous
cultured chondrocytes), an autologous chondrocyte implant for the treatment of cartilage defects in the knee, and Epicel® (cultured
epidermal autografts), a permanent skin replacement for the treatment of patients with deep-dermal or full-thickness burns
comprising greater than or equal to 30 percent of total body surface area (TBSA). We are also developing MACI™, a third-
generation autologous chondrocyte implant for the treatment of cartilage defects in the knee, and ixmyelocel-T, a patient-specific
multicellular therapy for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy (DCM).
The following table summarizes our product portfolio and product candidate pipeline:
Acquisition of Sanofi’s CTRM Business
On May 30, 2014, we completed the acquisition of the Cell Therapy and Regenerative Medicine (CTRM) business of Sanofi,
a French société anonyme (Sanofi), certain assets, including all of the outstanding equity interests of Genzyme Biosurgery ApS
(now known as Vericel Denmark ApS), a wholly-owned subsidiary of Sanofi, and over 250 patents and patent applications of
Sanofi and certain of its subsidiaries, and assumed certain liabilities for purposes of acquiring the portion of the CTRM business,
which researches, develops, manufactures, markets and sells Carticel, MACI and Epicel.
Our Strategy
Our objective is to become the leading cell therapy and regenerative medicine company by developing, manufacturing and
marketing best-in-class therapies for patients with significant unmet medical needs that require the repair and regeneration of
damaged tissues and organs.
To achieve this objective, we intend to:
4
•
•
Fully integrate the acquired commercial stage CTRM business and improve efficiencies to reduce redundancies and
related costs, as well as take advantage of complementary technology platforms;
Increase the operating income from the U.S. Carticel and Epicel business and become profitable without raising additional
equity capital unless required for additional strategic transactions or other events;
• Lower the manufacturing costs for Carticel through an improved ratio of Carticel unit sales to biopsies as well as other
efficiencies;
• Assess and capitalize on opportunities to increase revenue from Carticel and Epicel in the U.S.;
• Develop and execute on a regulatory strategy for the approval of MACI in the U.S.;
• Expand Epicel usage in the severely burned patient segment by increasing sales and marketing resources;
• Capitalize on our recent U.S. Food and Drug Administration (FDA) approval to label Epicel for use in pediatric patients
and the related determination from the FDA that Epicel meets the criteria to be sold for profit; and
•
Initiate and complete our pivotal phase 3 clinical trials for the treatment of the orphan indication, advanced heart failure
due to ischemic DCM, and evaluate potential strategic collaborations.
Our Products
We believe that our acquired CTRM business has been a pioneer in the development and commercialization of autologous cell
therapies. The CTRM portfolio includes three autologous cell therapy products: Carticel (autologous cultured chondrocytes), a
first-generation product for autologous chondrocyte implantation (ACI) currently marketed in the U.S., Epicel (cultured epidermal
autografts), a permanent skin replacement for full thickness burns in adults and pediatrics with greater than or equal to 30% of
TBSA, also currently marketed in the U.S, and MACI (matrix-applied characterized autologous cultured chondrocytes), a third-
generation ACI product approved in Europe and for which a Biologics License Application (BLA) is under review by the FDA.
Our product candidate portfolio also includes ixmyelocel-T, a patient-specific multicellular therapy currently in development for
the treatment of advanced heart failure due to ischemic DCM.
Background of Cartilage Defects
Damage to cartilage in the knee can occur from acute trauma or repetitive trauma from playing sports, exercising, working or
performing everyday activities. When damaged, cartilage in the knee does not usually heal on its own. If left untreated, cartilage
defects can progress and lead to degenerative joint disease, osteoarthritis and potentially require total knee replacement, a poor
option for younger and more active patients.
For patients diagnosed with cartilage defects, there are several treatment options, including arthroscopic debridement/
chondroplasty, marrow stimulation techniques such as microfracture, a minimally invasive procedure that can be performed during
the initial arthroscopic procedure, osteochondral autografts for smaller cartilage injuries, allografts, and autologous chondrocyte
implants for larger injuries.
Carticel
Carticel, a first-generation ACI product for the treatment and repair of cartilage defects in the knee, is the first and currently
the only FDA-approved autologous cartilage repair product. Carticel is indicated for the repair of symptomatic cartilage defects
of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate
response to a prior arthroscopic or other surgical repair procedure such as debridement (the removal of damaged or defective
cartilage), microfracture (the creation of tiny fractures in the bone to encourage new cartilage development, drilling/abrasion
arthroplasty), or osteochondral allograft/autograft (transferring cartilage from one joint to another). Carticel received a BLA
approval in 1997 and is currently marketed in the U.S. It is generally used on patients with larger lesions (greater than 3 cm2).
Carticel is implanted by orthopedic surgeons after obtaining a cartilage biopsy during an initial arthroscopic procedure. The
patient’s chondrocytes, which are the cells that produce cartilage, are isolated and expanded in a manufacturing process compliant
with current Good Manufacturing Practices (cGMP). During a second surgical procedure, the cells are implanted in the cartilage
defect under a sutured periosteal flap, where they produce new hyaline cartilage. The therapeutic advantage of this approach
5
relative to other approaches, such as microfracture, is that the autologous chondrocytes produce the hyaline cartilage that is naturally
present in the knee, rather than fibrous cartilage which lacks durability and the wear characteristics of hyaline cartilage.
The Study of the Treatment of Articular Repair (STAR) was designed to determine the safety and efficacy of Carticel in patients
who had an inadequate response to a prior cartilage repair procedure. Completed in 2005, this FDA post-approval commitment
was a four-year, prospective, multicenter study of 154 patients at 29 participating sites. In a clinically challenging population
comprised of patients who suffered moderate-to-large chondral defects and who failed at least one prior surgical cartilage repair
treatment, Carticel demonstrated long-term durability up to four years and statistically significant and clinically meaningful
reductions in pain and improvement in function.
Market Opportunity for Carticel
In the U.S. annually, there are approximately 1 million arthroscopic procedures and more than 250,000 cartilage surgical
procedures. In addition, approximately 50,000 have full thickness defects greater than 2 cm2. Patients seek retreatment for the
repair of larger, symptomatic femoral condyle cartilage defects caused by acute or repetitive trauma. In our experience, patients
are often frustrated by recurring symptoms, as they tend to be young, active and motivated to return to a high level of activity.
Typical initial cartilage surgical procedures include chondroplasty (debridement) and/or microfracture. These two procedures
account for 98% of all cartilage surgical procedures. Although initial microfracture results demonstrate pain score improvement
generally, only patients with Class 1, or the smallest, defects do not experience deterioration after 18 months. Patients seeking
retreatment account for about 2.5% of the cartilage surgical repair market and often receive either allograft, autograft or ACI.
Treatment with Carticel provides an opportunity to replace the damaged cartilage with native hyaline cartilage.
In the U.S., the orthopedic physician target audience is very concentrated, with 60% of the current Carticel business originating
from approximately 110 physicians. Our target audience is a group of physicians who self-identify as or have the formal specialty
of sports medicine physicians. We believe this target audience is approximately 450 physicians. We currently have a 21 person
field force calling on these sports-injury targeted orthopedic physician audience. Most private payers have a medical policy that
allows treatment with Carticel. The 15 largest payers have a formal medical policy for Carticel, representing 132 million covered
lives.
In the year ended December 31, 2015, approximately 1,050 Carticel implants were performed, which generated net revenues
of approximately $35.2 million. Carticel revenue is subject to seasonal fluctuations with stronger sales occurring in the fourth
quarter and second quarter due to a number of factors including insurance copay limits and the time of year patients prefer to start
rehabilitation. Over the last five years, the percentage of annual sales by quarter has ranged as follows: first quarter, 20% to 24%;
second quarter, 24% to 26%; third quarter, 21% to 23%; and fourth quarter, 29% to 33%.
Epicel
Epicel (cultured epidermal autografts) is a permanent skin replacement for full thickness burns greater than or equal to 30%
of TBSA. Epicel is currently the only FDA-approved autologous epidermal product available for large total surface area burns.
Currently, fewer than 100 patients are treated with Epicel in the U.S. each year. In the year ended December 31, 2015, net revenues
were $15.2 million for Epicel.
Epicel is produced by isolating and expanding keratinocytes, which are the predominant cell type in the epidermis or outer
layer of the skin, obtained from a small biopsy of a patient’s healthy skin. Epicel is an important treatment option for patients with
severe burns because these patients are generally understood to need a keratinocyte-based epithelium and there is very little skin,
which is the only other source of keratinocyte-based epithelium, available for autografts for these patients.
Epicel is a cell-based product that is regulated by the Center for Biologics Evaluation and Research (CBER) under medical
device authorities. Epicel was designated as a Humanitarian Use Device (HUD) in 1998 and a Humanitarian Device Exemption
(HDE) application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect
fewer than 4,000 individuals annually in the United States. 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 the following eligibility criteria:
• The device is intended for the treatment or diagnosis of a disease or condition that occurs in pediatric patients or in a
pediatric subpopulation, and such device is labeled for use in pediatric patients or in a pediatric subpopulation in which
the disease or condition occurs; or
6
• The device is intended for the treatment or diagnosis of a disease or condition that does not occur in pediatric patients or
that occurs in pediatric patients in such numbers that the development of the device for such patients is impossible, highly
impracticable or unsafe.
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, diagnose or cure a population of 4,000 individuals per year in the United States.
The holder of the HDE must immediately notify FDA if the number of devices distributed during a calendar year exceeds the
ADN.
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 the standard care. Due to the change in the label to include
use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with meeting the pediatric
eligibility criteria, the FDA has determined that the ADN for Epicel is 360,400 devices.
Market Opportunity for Epicel
Each year in the U.S., more than 40,000 people are hospitalized for burns. More than 2,000 of these patients are treated for
burns covering more than 30% of their TBSA, the labeled indication for Epicel. Of these patients, approximately 100 patients
were treated with Epicel in 2015. Currently, the mortality rate for this group is approximately 34%, partially due to the lack of
healthy tissue from which to harvest autografts. Although age can vary, the typical Epicel patient is young and has suffered full
thickness burns due to occupational, household or auto accidents, trash burning with gasoline, inappropriate use of space heaters
or carelessness with flammable materials. Many of the most severely burned patients are medivac transported to one of the 128
specialized burn centers across the U.S. While the average acute care hospital has less than 3 admissions for burns annually, these
specialized burn centers average over 200 admissions per year.
Relative to clinical need, we believe Epicel is underutilized due to lack of consistent promotional effort and burn center support.
We expect Epicel’s utility to grow as commercial and regulatory efforts are appropriately dedicated to the product and providers.
In 2014, a single sales representative supported Epicel in 2014, and in 2015, we expanded our Epicel sales force to four.
Epicel revenue is 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 low patient volume of approximately 100 patients per year. Over the last five years, the percentage of annual sales by
quarter has ranged as follows: first quarter, 27%; second quarter, 25%; third quarter, 20%; and fourth quarter, 28%. The variability
between the same quarters in consecutive years has been as high as 10% of the annual volume. While the number of patients treated
per year remains low, we expect these large swings in revenue in some quarters to continue.
MACI
MACI, is a third-generation ACI product for the treatment of focal chondral cartilage defects in the knee. MACI received
marketing authorization in Europe in June 2013 by meeting the requirements of the Advanced Therapy and Medicinal Product
(ATMP) guidelines based on the results of the SUMMIT trial in which MACI was manufactured at, and supplied from, the
Cambridge, Massachusetts site. MACI has been commercially available in the EU since 1998. As part of the June 2014 restructuring,
we temporarily suspended the marketing of MACI as of September 2014 primarily due to low utilization and an unfavorable
pricing environment. The timing and strategy for a possible reintroduction in select EU countries have not yet been determined.
We believe that MACI has significant revenue potential in the U.S., if approved and reimbursed. On March 4, 2016, the FDA
accepted the company’s BLA seeking approval to market MACI as an autologous cellular treatment for symptomatic cartilage
defects of the knee. The FDA provided a PDUFA (Prescription Drug User Fee Act) goal date of January 3, 2017. In addition, the
FDA communicated that it is not currently planning to hold an advisory committee meeting to discuss the application.
Similar to Carticel, during an initial surgical procedure, a surgeon obtains a biopsy of healthy cartilage from the patient and
the chondrocytes are isolated, expanded and uniformly seeded onto a bioabsorbable Type I/III collagen membrane to form the
autologous implantation. MACI is manufactured in a cGMP manufacturing facility. Unlike Carticel, MACI is implanted during
a mini-arthrotomy in which the implant is trimmed to the size of the defect and fixed in the defect with fibrin glue and without
sutures.
7
The pivotal clinical trial supporting MACI registration in Europe, Superiority of MACI Implant to Microfracture Treatment
(SUMMIT), was completed in 2012. Analysis of this 144 patient superiority study demonstrated that there is a statistically significant
and clinically meaningful improvement in the co-primary endpoint of pain and function for those patients treated with a MACI
implant compared to microfracture which was the current standard of care.
MACI was obtained via the acquisition by Genzyme Corporation, a subsidiary of Sanofi, of Verigen AG (Verigen) in 2005.
As part of its acquisition of Verigen, Genzyme Corporation agreed to make cash payments to Verigen upon the achievement of
developmental milestones relating to regulatory and commercialization of MACI in the United States. In connection with our
acquisition of the CTRM business, we agreed that if we further developed MACI in the U.S., we would be obligated to pay these
milestone payments. In the third quarter of 2014, at the request of the Company, Sanofi entered into a settlement agreement with
the former shareholders of Verigen whereby these shareholders agreed to discharge all obligations related to these MACI milestone
payments in exchange for a one-time cash payment of €2.5 million (approximately $3.2 million). We accrued the liability in the
third quarter of 2014 and paid the amount in full in October 2014. This agreement was reached in full settlement of any and all
potential obligations to Verigen related to future MACI developmental milestones.
Market Opportunity for MACI
MACI, if introduced in the U.S., should both replace Carticel and expand the market since we believe MACI shares the
advantages of Carticel, while being less invasive, shortening procedure time, eliminating the need for a periosteal harvest and
having a lower frequency of subsequent surgical interventions.
Marrow Donation
In December 2015, we ceased operations at our bone marrow collection center located in San Diego, California (operated by
our wholly-owned subsidiary Marrow Donation, LLC).
Ixmyelocel-T Technology Platform
In 2015, our preapproval stage portfolio also included ixmyelocel-T, a unique patient-specific multicellular therapy derived
from an adult patient’s own bone marrow, which utilized our proprietary, highly automated and scalable manufacturing system.
Our proprietary cell manufacturing process significantly expands the mesenchymal stromal cells (MSCs) and M2-like anti-
inflammatory macrophages in the patient’s bone marrow mononuclear cells while retaining many of the hematopoietic cells. These
cell types are known to regulate the immune response and play a key role in tissue repair and regeneration by resolving pathologic
inflammation, promoting angiogenesis, and remodeling ischemic tissue. We believe the novelty and advantage of using ixmyelocel-
T is the expansion of a unique combination of cell populations, including MSCS and M2-like macrophages, which secrete a distinct
combination of angiogenic and regenerative factors, and possess the ability to remain anti-inflammatory in the face of inflammatory
challenge.
MSCs and M2-like macrophages have a wide range of biological activities that promote repair and regeneration of damaged
tissues through the paracrine effects of their secreted factors, as well as their direct cell activities. These cells produce high levels
of potent anti-inflammatory and angiogenic factors, as well as factors involved in extracellular matrix remodeling. These cells
also have direct activities such as phagocytosis of cellular debris and apoptotic cells, which control the inflammatory response,
uptake of LDL and removal of cholesterol, and remodeling of extracellular matrix.
The following illustration summarizes the multiple biological activities of ixmyelocel-T that promote repair and regeneration
of ischemic tissue:
8
Studies examining the impact of ixmyelocel-T on human umbilical vein endothelial cells in vitro demonstrate the secretion of
pro-angiogenic factors, enhanced migration of endothelial cells following injury, increased endothelial cell proliferation, and
branch formation. Treatment with ixmyelocel-T in a rat model of hind limb ischemia in vivo resulted in significantly increased
blood flow perfusion and capillary density, gene expression and plasma levels of the anti-inflammatory cytokine. Our studies
demonstrate that ixmyelocel-T brings to bear a dynamic combination of angiogenic and anti-inflammatory effects, which facilitate
ischemic tissue repair.
Ixmyelocel-T has several features that we believe are primarily responsible for success in treating adult patients with severe
ischemic cardiovascular diseases such as advanced heart failure due to ischemic DCM:
• Patient-specific (autologous) — We start with the patient’s own cells, which are accepted by the patient’s immune system,
allowing the cells to integrate into existing functional tissues. We believe that this characteristic of our therapy eliminates
both the risk of rejection and the need to use immunosuppressive therapy pre- or post-therapy. Our data also suggests
that ixmyelocel-T may provide the potential for long-term engraftment and tissue repair.
• Expanded — We begin with a small amount of bone marrow from the patient (up to 60 ml) and significantly expand the
number of certain cell types, primarily MSCs and M2-like anti-inflammatory macrophages, to a substantially greater
number than are present in the patient’s own bone marrow (up to 200 times the number of certain cell types compared
with the starting bone marrow).
• Multicellular — We believe the multiple cell types in ixmyelocel-T, which are normally found in bone marrow but in
smaller quantities, possess the key functions required for reducing chronic inflammation and promoting angiogenesis
and tissue repair. By reducing inflammation, we believe that ixmyelocel-T provides the ideal conditions to allow for the
growth of new tissue and blood vessels.
• Minimally invasive — Our procedure for collecting bone marrow can be performed in an out-patient setting and takes
approximately 15 minutes. Administration of ixmyelocel-T for the treatment of advanced heart failure due to ischemic
dilated cardiomyopathy is performed in the cardiac catheterization laboratory using a cell injection catheter system in a
one-time procedure. Bone marrow and bone marrow-derived therapies have been used safely and efficaciously in medicine
for over three decades. Ixmyelocel-T leverages this body of scientific study and medical experience, and appears well
tolerated in over 200 patients treated to date.
Ixmyelocel-T Clinical Development Programs
Our clinical development program is focused on addressing severe, chronic ischemic cardiovascular disease, an area of high
unmet medical need. We have completed our Phase 1/2 clinical trials in DCM, and on March 10, 2016 we announced that our
Phase 2b ixCELL-DCM study, which is a randomized, double-blind, placebo-controlled clinical trial for patients with advanced
heart failure due to ischemic DCM, had met its primary endpoint of reduction in clinical cardiac events and that ixmyelocel-T has
comparable incidence of adverse events, including serious adverse events, relative to patients in the placebo group.
9
Ixmyelocel-T has been granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM. We also have an
ixmyelocel-T investigator-initiated clinical study for the treatment of craniofacial reconstruction, for which we expect results by
the first half of 2016, and we have conducted clinical studies for the treatment of CLI.
Heart Failure Due to Dilated Cardiomyopathy
Heart failure represents a significant unmet medical need and a growing public health problem. The American Heart Association
reports that there are approximately six million patients currently suffering from heart failure in the United States and an estimated
550,000 new cases in the U.S. each year. Current medical costs to treat these patients exceed $25 billion and this is expected to
more than triple to nearly $80 billion by 2030 as a result of a growing patient population and the high cost of the limited treatment
alternatives for advanced heart failure patients, as described below.
DCM is a leading cause of heart failure and of heart transplantation in the United States. DCM is a disease characterized by
weakening of the heart muscle, thinning of the heart walls, enlargement of the heart chambers, and the inability to sufficiently
pump blood throughout the body. Patients with DCM typically present with symptoms of congestive heart failure, including
limitations in physical activity and shortness of breath. Ischemic DCM is associated with atherosclerotic cardiovascular disease
and prior heart attacks and is the most common form of dilated cardiomyopathy. Patient prognosis depends on the stage and cause
of the disease, but is typically characterized by a very poor quality of life and a high mortality rate.
Current treatments for ischemic DCM patients that are refractory to further medical therapy such as prescription drugs, devices,
and/or further revascularization procedures including bypass surgery and angioplasty, are limited to heart transplantation and
placement of left ventricular assist devices (LVADs). There are less than 2,500 heart transplantations in the United States each
year. Many refractory DCM patients are not eligible for heart transplantation and transplants are extremely expensive at an estimated
cost of approximately $1 million. LVADs are also expensive at an estimated cost of over $175,000 and have a mortality rate of
50% at two years.
We believe that the refractory ischemic DCM market represents a substantial market opportunity for ixmyelocel-T. These
refractory ischemic DCM patients are currently the target patient population for our clinical development of ixmyelocel-T. The
estimated incidence of DCM is 148 cases per 100,000 persons, or 444,000 patients. The more severe or refractory (NYHA Class III/
IV) ischemic DCM patient population is difficult to estimate, but we believe it to be approximately one third of the overall DCM
population. Ixmyelocel-T has been granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM, which we
believe provides the potential for an efficient and cost-effective path to approval for ixmyelocel-T in this heart failure indication.
We have conducted two Phase 2a multicenter, randomized, open-label clinical studies in patients with ischemic DCM and
nonischemic DCM investigating surgical (IMPACT-DCM) and catheter-based (Catheter-DCM) delivery of ixmyelocel-T. Sixty-
one patients were randomized, and of those, 59 received treatment in the phase 2a studies. We reported 12-month data for the
surgical IMPACT-DCM study at the Heart Failure Society of America meeting in September 2011 and final 12-month results from
the Catheter-DCM study at the Society for Cardiovascular Angiography and Interventions (SCAI) 2012 Scientific Sessions. The
results have also been published in the journal Circulation Research in August of 2014. Results from these studies demonstrated
that ixmyelocel-T was well-tolerated in patients with DCM. In the Catheter-DCM study and post-surgery in the IMPACT-DCM
study, the incidence of adverse events was comparable between the ixmyelocel-T groups and the control groups.
While these exploratory Phase 2a studies were not powered for determining differences in efficacy between treatment groups,
there were consistent trends of clinically meaningful improvement in clinical endpoints observed in the ischemic DCM groups in
both studies. In these studies, fewer ischemic patients treated with ixmyelocel-T experienced a MACE during follow up compared
to control patients, representing greater than 50% reduction in the number of patients having a MACE event. A similar benefit
was not seen in the non-ischemic patients. Heart failure exacerbation was the most common MACE. In the combined ischemic
DCM groups across both studies, MACE were experienced by a lower percentage of ixmyelocel T-treated patients compared to
control patients, representing greater than 50% reduction in the number of patients having a MACE event. Likewise, patients in
the combined ischemic DCM groups that were treated with ixmyelocel-T had a reduction in the average number of MACE events
per patient. MACE is the recommended endpoint (mortality and cardiovascular hospitalizations) in Phase 3 heart failure studies
as stated in the FDA 2009 Somatic Cell Therapy for Cardiac Diseases Draft Guidance. Consistent positive trends also were observed
in several secondary efficacy measures in the ischemic DCM groups. The majority of ixmyelocel-T-treated patients with ischemic
DCM, but not control patients, had statistically significant improvement in New York Heart Association (NYHA) Class that was
sustained over the 12 months following treatment. Improvement in NYHA Class is considered clinically meaningful. Additionally,
a higher percentage of ixmyelocel T-treated ischemic DCM patients showed a clinically meaningful improvement in self-reported
quality of life and a statistically significant increase in six-minute walk distance compared to the ischemic DCM control patients.
Since the initiation of the trial, 28 clinical trial sites have treated 114 patients.
10
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 adverse cardiovascular events, defined as all-cause deaths, all-
cause hospitalizations, and unplanned outpatient or emergency department visits for IV treatment of acute worsening heart failure.
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 no greater than in patients
in the placebo group. Patients are now being followed for an additional 12 months for safety. Because the trial met the primary
endpoint, patients who had been assigned to the placebo group or randomized to ixmyelocel-T in the double-blind portion of the
trial but did not receive ixmyelocel-T will be offered the option to receive treatment.
Production
Cell Manufacturing and Cell Production Components
Our cell-manufacturing facility is located in Cambridge, Massachusetts, is used for U.S. manufacturing and distribution of
Carticel, Epicel manufacturing and worldwide distribution and also manufactured MACI for the SUMMIT study conducted for
approval in Europe and for a small number of MACI implants following suspension of sales in the EU. The Cambridge facility
also houses our research and development function, which is responsible for process development, release assay development,
and technology transfers between sites and departments.
We also operate a centralized cell manufacturing facility in Ann Arbor, Michigan. The facility supports the current open label
extension of the ixCELL-DCM clinical trial being conducted in the United States and Canada and we believe it has sufficient
capacity, with minor modifications, to supply our Phase 3 trial and limited initial commercialization requirements. To treat a
significant portion of the United States ischemic DCM patient population we will need to establish and operate larger commercial-
scale cell manufacturing facilities. We have reached agreement with the FDA on Chemistry, Manufacturing and Control (CMC)
which was completed as part of the Special Protocol Assessment process with the FDA for the Phase 3 REVIVE clinical trial.
Our ixmyelocel-T patient-specific multicellular therapies are manufactured using our proprietary Aastrom Replicell System
(ARS) cell manufacturing system. Our manufacturing process is conducted in a highly-automated, fully-closed and rigorously
controlled system. Our system is modular and thus both highly scalable and reproducible and is located in a 5,000-square-foot
centralized manufacturing facility in Ann Arbor, Michigan. We believe the ARS based production is conducted under cGMP
requirements of the FDA and has a current annual capacity to treat up to 1,500 patients. Upon approval we can scale-up to meet
demand simply by adding additional ARS modules into existing and new clean rooms.
We have established relationships with various third parties who manufacture and/or supply certain components, equipment,
disposable devices and other materials used in our cell manufacturing process to develop our cell products, as well as our final
assemblies, component parts, subassemblies and associated spare parts used in the instrumentation platform of our cell production
system.
In October 2010, we entered into a contract manufacturing and supply agreement (Supply Agreement) with ATEK Medical, LLC
(ATEK) for the manufacture of our proprietary cell cassette for use in our manufacturing process. In November 2011, ATEK was
purchased by Vention Medical, Inc. (Vention) and currently operates as a division of Vention. There were no changes to the terms
of the Supply Agreement as a result of this purchase.
Pursuant to the terms of the Supply Agreement, we have granted Vention the exclusive right to manufacture our proprietary
cell cassette, which includes assembly, labeling, packaging and sterilization. Vention is responsible for obtaining all of our approved
components pertaining to the cassettes and we are obligated to order and purchase the cassettes from Vention on an agreed upon
schedule and in agreed upon quantities. In addition, we provided Vention with reasonable engineering support to initiate and ramp
up manufacturing of the cassettes and expect to supply all manufacturing equipment. We are in the process of renegotiating a
longer term supply agreement with Vention.
Research & Development
The bulk of our ongoing research and development activities are focused on exploring methods that improve our ability to
efficiently manufacture high quality cell therapy products for patients. We have performed an in depth analysis of the cell culture
processes used in the manufacture of Epicel, Carticel, and ixmyelocel-T, and have identified several areas for their potential
betterment. Therefore, our research and development program is focused on the many facets of process development for all of
our products including, but not limited to, tissue procurement and processing, cell culture surface and media modification, and
other process efficiencies.
11
The bulk of our ongoing research is based on ixmyelocel-T, our unique multicellular product produced from a patient’s bone
marrow using our proprietary manufacturing system. We have demonstrated in the laboratory that the cells in our therapy are
capable of multiple biological activities thought to play a critical role in repairing diseased and damaged tissues. These activities
include aspects of tissue remodeling, promotion of angiogenesis and resolution of inflammation. In addition to these properties
demonstrated in vitro, we have also shown that the therapy increases blood perfusion in both rat and mouse models of CLI. We
have conducted preclinical studies designed to further characterize the mechanism of action of our product in the treatment of
cardiovascular diseases as well as explore other potential disease states which may benefit from the use of ixmyelocel-T.
In addition, our proprietary cell manufacturing system has demonstrated the capability to produce other types of cells. In the
future, we may continue to explore the application of our manufacturing technology for the production of other cell types where
there are potential opportunities to collaborate in the development of new cell therapies.
Patents and Proprietary Rights
Our success depends in part on our ability, and the ability of our licensors, to obtain patent protection for our products and
processes.
As part of the acquired CTRM business, we acquired a multinational intellectual property estate. The intellectual property
estate includes patents and patent applications directed to chondrocyte implants and related technologies. Although we do not own
any patents or patent applications relating to Epicel, many of the processes and techniques are trade secrets and would be difficult
to replicate without significant investment and time. We do own issued patents directed to the combinations of chondrocytes and
collagen membranes used in MACI, which are scheduled to expire in August of 2016 in the U.S. and in August of 2017 abroad.
When these patents expire, our opportunity to establish or maintain product revenue could be substantially reduced or eliminated.
See “Risk Factors - Risks Related to Intellectual Property” below for additional information. In certain foreign countries, selected
patent rights covering Carticel are scheduled to expire in 2022.
We also own a broadly filed trademark portfolio with registrations for Carticel, MACI, and Epicel.
The processes and technologies related to ixmyelocel-T include 3 issued United States patents. These patents are material
patents that protect our cellular therapy.
Certain patent equivalents to the United States patents have also been issued in other jurisdictions including Australia, Japan,
and Canada, and under the European Patent Convention. Our most significant patent that protects the composition of the cellular
therapy directly, “Mixed cell populations for tissue repair and separation technique for cell processing” (U.S. Patent 7,871,605),
was issued in January 2011 and will expire in 2029. A divisional application of 7,871,605 (U.S. Patent 8,158,122) for administration
of this composition to patients was issued in April 2012 and will expire in 2027. A second divisional application of 7,871,605
(U.S. Patent 8,394,631) directed to the methods of manufacture of our cell compositions was issued in March 2013 and will expire
in 2027. In addition, we have 2 pending United States patent applications and equivalent applications in certain other countries
claiming other aspects of our cell products and manufacturing processes. We own all of these patents, Patents that protected our
automated bioreactor device and culture system expired in 2015, but we will continue to rely on trade secrets and un-patentable
know-how.
In 2007, the use of ixmyelocel-T for the treatment of DCM received an Orphan Drug Designation from the FDA, which provides
seven years of market exclusivity, should ixmyelocel-T receive FDA approval for this indication. The validity and breadth of
claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or any future patent applications by us, or our licensors,
will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any
of the patents that have been or may be issued to us or our licensors will be held valid if subsequently challenged or that others
will not claim rights in or ownership of the patents and other proprietary rights held or licensed by us. Furthermore, there can be
no assurance that others have not developed or will not develop similar products, duplicate any of our products or design around
any patents that have been or may be issued to us or our licensors. Since patent applications in the United States are maintained
in secrecy until they are published 18 months after filing, we also cannot be certain that others did not first file applications for
inventions covered by our and our licensors’ pending patent applications, nor can we be certain that we will not infringe any patents
that may be issued to others on such applications.
We rely on certain licenses granted by a number of third parties, including Sanofi and the University of Michigan for certain
patent rights. If we breach such agreements or otherwise fail to comply with such agreements, or if such agreements expire or are
otherwise terminated, we may lose our rights in such patents.
12
We also rely on trade secrets and un-patentable know-how that we seek to protect, in part, by confidentiality agreements. It is
our policy to require our employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored
researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential information developed or made known to the individual
during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in
specific limited circumstances. We also require signed confidentiality or material transfer agreements from any company that is
to receive our confidential information. In the case of employees, consultants and contractors, the agreements generally provide
that all inventions conceived by the individual while rendering services to us shall be assigned to us as the exclusive property of
Vericel. There can be no assurance, however, that these agreements will not be breached, that we would have adequate remedies
for any breach, or that our trade secrets or un-patentable know-how will not otherwise become known or be independently developed
by competitors.
Our success will also depend in part on our ability to develop additional commercially viable products without infringing the
proprietary rights of others. We do not believe any of our approved products or our currently contemplated products or processes
infringe any existing valid issued patent. However, the results of patent litigation are unpredictable, and no assurance can be given
that patents do not exist or could not be filed which would have an adverse effect on our ability to market our products or maintain
our competitive position with respect to our products. If our technology components, designs, products, processes or other subject
matter are claimed under other existing United States or foreign patents, or are otherwise protected by third-party proprietary
rights, we may be subject to infringement actions. In such event, we may challenge the validity of such patents or other proprietary
rights or we may be required to obtain licenses from such companies in order to develop, manufacture or market our products.
There can be no assurances that we would be able to obtain such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. Furthermore, the failure either to develop a commercially viable alternative or obtain such licenses
could result in delays in marketing our proposed products or the inability to proceed with the development, manufacture or sale
of products requiring such licenses, which could have a material adverse effect on our business, financial condition and results of
operations. If we are required to defend ourselves against charges of patent infringement or to protect our proprietary rights against
third parties, substantial costs will be incurred regardless of whether we are successful. Such proceedings are typically protracted
with no certainty of success. An adverse outcome could subject us to significant liabilities to third parties and force us to curtail
or cease our development and sale of our products and processes.
Certain of our licensors’ research has been funded in part by the Department of Commerce and by a Small Business Innovation
Research Grant obtained from the Department of Health and Human Services. As a result of such funding, the United States
government has certain rights in the technology developed with such funding. These rights include a non-exclusive, fully paid-
up, worldwide license under such inventions for any governmental purpose. In addition, the United States government has the
right to require us to grant an exclusive license under any of such inventions to a third party if the United States government
determines that: (i) adequate steps have not been taken to commercialize such inventions; (ii) such action is necessary to meet
public health or safety needs; or (iii) such action is necessary to meet requirements for public use under federal regulations.
Additionally, under the federal Bayh-Dole Act, a party which acquires an exclusive license for an invention that was partially
funded by a federal research grant is subject to the following government rights: (i) products using the invention which are sold
in the United States are to be manufactured substantially in the United States, unless a waiver is obtained; (ii) the government may
force the granting of a license to a third party who will make and sell the needed product if the licensee does not pursue reasonable
commercialization of a needed product using the invention; and (iii) the United States government may use the invention for its
own needs.
Sales and Marketing
Both our marketed and development stage products are specialty products with focused physician and institutional call points.
The U.S. Carticel commercial organization is comprised of approximately 28 employees, including Cell Therapy Specialists and
Regional Sales Directors. The target audience is a small (well under 1,000) set of sports medicine orthopedic surgeons. We expect
to utilize the same sales force for MACI.
Reimbursement coverage for Carticel is widespread. The 15 largest payers, representing approximately 98% of commercial
lives, have a formal medical policy that allows treatment with Carticel within labeled indications. These 15 plans represent
approximately 132 million covered lives and include the top five national plans—WellPoint, United Healthcare, Aetna, CIGNA
and Humana.
US Bioservices Corporation (USB) is the exclusive distributor of Carticel in the United States. USB purchases and takes title
to Carticel upon shipment of the product. USB works with the payers on behalf of patients and surgeons to ensure medical coverage
and to obtain reimbursement for Carticel implantation procedures. We retain all responsibility for shipment of the product to the
13
surgical suite and may have certain indemnification obligations to USB. By mid-year 2016 we expect to improve our distributor
model through an extensive request for proposal process, which includes USB.
Sales of Epicel are supported by four Cell Therapy Specialists. This represents an expansion over past support levels. Since
there are approximately 128 specialized burn centers in the U.S. increasing coverage to the majority of the target audience should
be feasible with only a small number of incremental Cell Therapy Specialists.
If and when ixmyelocel-T is approved, we anticipate augmenting our existing sales and marketing organization to cover the
expanded physician audience. The target physician population will likely be heart failure specialists and interventional cardiologists
in secondary and tertiary cardiac facilities, a specialty audience which can be covered by a modest sized sales force. However, we
intend to explore other options, including partnerships, to help minimize costs and increase penetration if and when the product
is commercialized.
Government Regulation
Our research and development activities and the manufacturing and marketing of our products are subject to the laws and
regulations of governmental authorities in the United States and other countries in which our products will be marketed. Specifically,
in the United States, the FDA regulates drugs, biologics and medical devices and requires new product approvals or clearances to
assure safety and effectiveness of these products. Governments in other countries have similar requirements for testing and
marketing. In the United States, in addition to meeting FDA regulations, we are also subject to other federal laws, such as the
Occupational Safety and Health Act and the Environmental Protection Act, as well as certain state laws.
While some human cell or tissue products that are intended for implantation, transplantation, infusion, or transfer into a human
recipient are regulated as human cell, tissue, and cellular and tissue-based products (HCT/Ps) and do not require the FDA’s premarket
review, if these cell or tissue products do not meet the FDA’s requirements for regulation as an HCT/P they require premarket
review and a marketing authorization. The type of marketing authorization required depends on how the product is regulated by
the FDA. With the exception of Epicel (a medical device), our cell products are regulated as biological products that require an
approved BLA to be marketed in the U.S. Commercial production of these products needs to occur in FDA-registered facilities
in compliance with cGMP requirements for biologics. Epicel is a humanitarian use medical device that has an approved HDE
application.
Regulatory Process
The FDA regulates biologics under the Federal Food, Drug and Cosmetic Act (FFDCA) and the Public Health Service Act,
and their implementing regulations. Obtaining approval of a BLA for new biological products is a lengthy process leading from
development of a new product through preclinical and clinical testing. This process takes a number of years and the expenditure
of significant resources. There can be no assurance that our product candidates will ultimately receive approval.
The FFDCA and other federal and state statutes and regulations govern the research, testing, manufacture, safety, labeling,
storage, record-keeping, approval, distribution, use, adverse event reporting, advertising and promotion of our products.
Noncompliance with applicable requirements can result in civil penalties, recall, injunction or seizure of products, refusal of the
government to approve our product approval applications or to allow us to enter into government supply contracts, withdrawal of
previously approved applications and criminal prosecution.
Product Approval
In order to obtain FDA license, or approval of, a new biological product, sponsors must submit proof of safety, purity and
potency, or effectiveness. In most cases, such proof entails extensive nonclinical, also known as preclinical studies in animal
models and well-controlled clinical trials in human subjects. The testing, preparation of necessary applications and processing of
those applications by the FDA is expensive, may take several years to complete and could have an uncertain outcome. The FDA
regulatory review and approval process is complex and can result in request for additional data, increase development cost, time
to market delays, or preclude us from bringing to market new products. The FDA may also require post-marketing studies and
risk-management plans as condition to approval. These requirements will add to the cost of regulatory compliance and the cost to
sell our products, due to complex distribution and restricted commercial operations. Product approvals may be withdrawn if
compliance with applicable regulations is not maintained or if safety issues are identified during routine safety monitoring following
commercialization. For patented technologies, product development and the regulatory review/ approval process can materially
reduce the period during which we will have the exclusive right to exploit such technologies. Regulatory exclusivity may offer
some additional protection.
14
Adequate and well-controlled clinical studies are required by the FDA for approval of a BLA. To conduct a clinical trial the
study sponsor is required to submit an Investigational New Drug (IND) application including the study protocol prior to commencing
human clinical trials. The submission must be supported by data, typically including the results of nonclinical, manufacturing and
laboratory testing. The conduct of the nonclinical tests must comply with Good Laboratory Practice (GLP), and GMP requirements.
Long term nonclinical testing, such as animal reproductive toxicity and carcinogenicity, is conducted if warranted and is submitted
to the IND to support a future BLA. Following the initial submission of the IND, the FDA has 30 days to review the application
and raise safety and other clinical trial issues. If questions or objections are not raised within that period, the clinical trial may
commence according to the investigational protocol submitted to the FDA and following Institutional Review Board (IRB)
approvals for each of the clinical sites where the study will be conducted. Protocol amendments need to be submitted and approved
by FDA prior to implementation. We have submitted several INDs for our cell products, and we have conducted clinical trials
under these INDs.
Carticel, MACI and ixmyelocel-T are regulated by the FDA as biologics. For products that are regulated as biologics, the FDA
requires: (i) nonclinical animal testing to establish a starting dose for initiation of clinical trials in humans; (ii) submission to the
FDA of an IND application, which must become effective prior to the initiation of human clinical trials; (iii) adequate and well-
controlled clinical trials to demonstrate the safety, purity and potency, or effectiveness, of the product for its intended use;
(iv) submission to the FDA of a BLA; and (v) review and approval of the BLA as well as pre-approval inspections of the
manufacturing facility by the FDA.
For purposes of BLA approval, human clinical trials are typically conducted in three sequential phases that may overlap:
•
•
•
Phase 1—The biological product is initially tested for safety and tolerability. In the case of biological products and those
for severe or life-threatening diseases, the initial human testing is generally conducted in patients. These trials may also
provide early evidence on effectiveness.
Phase 2—These trials are conducted in a limited number of subjects in the target population to determine a safe and
effective dosage to evaluate in Phase 3 and to identify possibly related adverse effects and safety risks. Multiple Phase 2
clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3
clinical trials.
Phase 3—Phase 3 trials are undertaken to provide evidence of clinical efficacy and to further evaluate dosage, potency,
and safety in an expanded patient population at multiple clinical trial sites. Phase 3 studies are performed after preliminary
evidence suggesting effectiveness of the product has been obtained, and are intended to establish the overall benefit-risk
relationship of the investigational product, and to provide an adequate basis for product approval and labeling.
Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval.
These trials may be required by the FDA as a condition of approval and are used to gain additional experience from the treatment
of patients in the intended therapeutic indication, particularly for long-term safety follow-up. The FDA has express statutory
authority to require post-market clinical trials to address safety issues. All of these trials must be conducted in accordance with
good clinical practice (GCP) requirements in order protect the health and safety of human subjects and for the data to be considered
reliable for regulatory purposes.
During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities,
clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted
to the IND. Written IND safety reports must be promptly submitted to the FDA and the investigators for serious and unexpected
adverse events; any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for
human subjects; or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the
protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines
that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening
suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information.
Phase 1, Phase 2, and Phase 3 clinical trials may not be completed successfully or within any specified period, or at all.
Regulatory authorities, a data safety monitoring board or the sponsor may suspend a clinical trial at any time on various grounds,
including a finding that the participants are being exposed to an unacceptable health risk. Similarly, an Institutional Review Board
(IRB) can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance
with the IRB’s requirements or if the biological product has been associated with unexpected serious harm to patients.
15
Our ongoing and planned clinical trials for our product candidates may not begin or be completed on schedule, if at all. Clinical
trials can be delayed for a variety of reasons, including delays in:
• Obtaining regulatory approval to commence a trial;
• Reaching agreement with third-party clinical trial sites and their subsequent performance in conducting accurate and
reliable trials on a timely basis;
• Obtaining IRB approval to conduct a trial at a prospective site;
• Recruiting patients to participate in a trial; and
• Obtaining supply of the biological product.
Typically, if a biological product is intended to treat a chronic disease, safety and efficacy data must be gathered over an
extended period of time, which can range from six months to three years or more. Success in early stage clinical trials does not
ensure success in later stage clinical trials. Data obtained from clinical activities are not always conclusive and may be susceptible
to varying interpretations, which could delay, limit or prevent regulatory approval.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional
information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product
in commercial quantities in accordance with cGMP requirements. To help reduce the risk of the introduction of adventitious agents
with the use of biological products, the PHS Act emphasizes the importance of manufacturing control for products whose attributes
cannot be precisely defined. The manufacturing process must be capable of consistently producing quality batches of the product
candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency, and purity
of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be
conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.
After completion of the required clinical testing, a BLA is prepared and submitted to the FDA. FDA review and approval of
the BLA is required before marketing of the product may begin in the United States. The BLA must include the results of all
nonclinical, clinical, and other testing and a compilation of data relating to the quality and manufacture of the product, including,
chemistry, manufacture, and controls, to demonstrate the safety, purity and potency, or efficacy, of the product based on these
results. The cost of preparing and submitting a BLA is substantial. Under federal law, the submission of most BLAs is subject to
an application user fee, as well as annual product and establishment user fees, which may total several million dollars and are
increased annually.
The FDA has 60 days from its receipt of a BLA to determine whether the application will be accepted for filing based on the
agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for
filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of BLAs. Most such
applications for standard review biologics are reviewed within ten months from the date the application is accepted for filing.
Although FDA often meets its user fee performance goals, the FDA can extend these timelines as warranted. FDA review goals
are to review 90 percent of BLA’s within 10 months. The FDA usually refers applications for novel biologics, or biologics which
present difficult questions of safety or efficacy, to an advisory committee-typically a panel that includes clinicians and other experts-
for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the
recommendation of an advisory committee, but it generally follows such recommendations. Before approving a BLA, the FDA
will typically inspect one, or more, clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility
or the facilities at which the biologic is manufactured. The FDA will not approve the product unless it verifies that compliance
with requirements for cGMP is satisfactory and the BLA contains data that provide substantial evidence that the biologic is safe,
pure and potent, or effective, for the intended use.
For certain products, the FDA also will not approve the product if the manufacturer is not in compliance with the Good Tissue
Practices (GTPs). These are FDA regulations that govern the methods used in, and the facilities and controls used for, the manufacture
of human cells, tissues, and cellular and tissue based products (HCT/Ps), which are human cells or tissue intended for implantation,
transplant, infusion, or transfer into a human recipient. The primary intent of the GTP requirements is to ensure that cell and tissue
based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable
disease. FDA regulations also require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable,
to evaluate donors through screening and testing. To assure GMP, GTP and GCP compliance, an applicant must incur significant
expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.
After the FDA evaluates the BLA and the manufacturing facilities, it issues either an approval letter or a complete response
letter. A complete response letter means that the BLA will not be approved in its present form and generally outlines the deficiencies
in the submission. Complete responses may require substantial additional testing, or information, in order for the FDA to reconsider
the application. If and when those deficiencies have been addressed to the FDA’s satisfaction, the FDA will issue an approval
16
letter. The FDA’s regulations provide that the agency will review such resubmissions in two or six months depending on the type
of information included. The FDA approval is never guaranteed, and the FDA may refuse to approve a BLA if the regulatory
requirements are not satisfied.
An approval letter authorizes commercial marketing of the biologic with specific prescribing information for specific
indications. The approval for a biologic may be significantly more limited than requested in the application, including limitations
on the specific diseases and dosages or the indications for use, which could restrict the commercial value of the product. The FDA
may also require that certain contraindications, warnings, or precautions be included in the product labeling. In addition, as a
condition of BLA approval, the FDA may require a risk evaluation and mitigation strategy (REMS) to help ensure that the benefits
of the biologic outweigh the potential risks. REMS can include medication guides, communication plans for healthcare
professionals, and elements to assure safe use (ETASU). ETASU can include, but are not limited to, special training or certification
for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries.
The requirement for a REMS or use of a companion diagnostic with a biologic can materially affect the potential market and
profitability of the biologic. Moreover, product approval may require, as a condition of approval, substantial post-approval testing
and surveillance to monitor the biologic’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance
with regulatory requirements and standards is not maintained or problems are identified following initial marketing.
Under current requirements, facilities manufacturing biological products for commercial distribution must be registered with
the FDA. To accomplish this, an establishment registration must be filed with the FDA. In addition to the preclinical studies and
clinical trials, the BLA includes a description of the facilities, equipment and personnel involved in the manufacturing process. A
biologics license, which is the product’s approval, is granted on the basis of inspections of the applicant’s facilities in which the
primary focus is on compliance with cGMP and the ability to consistently manufacture the product in the facility in accordance
with the BLA. If the FDA finds the results of the inspection unsatisfactory, it may decline to approve the BLA, resulting in a delay
in production of products.
Humanitarian Device Exemption
Unless an exemption applies, each medical device commercially distributed in the United States requires either a substantial
equivalence determination under a premarket notification submission pursuant to Section 510(k) of the FFDCA, or an approval
of a premarket approval application (PMA). The FDA provides an incentive for the development of certain devices intended to
benefit patients by treating or diagnosing a disease or condition that affects or is manifested in fewer than 4,000 individuals in the
United States per year. These devices receive a HUD designation and may be eligible for marketing approval under an HDE
application. An HDE application is a premarket approval application that seeks an HDE from the effectiveness requirement that
would otherwise apply to the application. FDA approval of an HDE application authorizes the applicant to market the device.
To obtain approval for a HUD, an HDE application is submitted to the FDA. An HDE application is similar in both form and
content to a PMA application in that the applicant must demonstrate a reasonable assurance of safety, but in an HDE application,
the applicant seeks an exemption from the PMA requirement of demonstrating a reasonable assurance of effectiveness. An HDE
application is not required to contain the results of scientifically valid clinical investigations demonstrating that the device is
effective for its intended purpose. The application, however, must contain sufficient information for the FDA to determine that
the device does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit to health outweighs
the risk of injury or illness from its use, taking into account the probable risks and benefits of currently available devices or
alternative forms of treatment. Additionally, the applicant must demonstrate that no comparable devices are available to treat or
diagnose the disease or condition, and that they could not otherwise bring the device to market.
Except in certain circumstances, HUDs approved under an HDE cannot be sold for an amount that exceeds the costs of research
and development, fabrication, and distribution of the device (i.e., for profit). Under the current HDE provision, as amended by
FDASIA, a device is eligible to be sold for profit after receiving HDE approval if the device is intended for the treatment or
diagnosis of a disease or condition that occurs in pediatric patients or in a pediatric subpopulation, and such device is labeled for
use in pediatric patients or in a pediatric subpopulation in which the disease or condition occurs; or is intended for the treatment
or diagnosis of a disease or condition that does not occur in pediatric patients or that occurs in pediatric patients in such numbers
that the development of the device for such patients is impossible, highly impracticable, or unsafe. If the FDA makes a determination
that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit after receiving HDE approval as long as the
number of devices distributed in any calendar year does not exceed the ADN for the device. The holder of the HDE must immediately
notify the FDA if the number of devices distributed during a calendar year exceeds the ADN. The ADN is determined by the FDA
when the agency approves the original HDE application; or when the agency approves an HDE supplement for an HDE approved
before the enactment of FDASIA if the HDE holder seeks a determination for the HUD in an HDE supplement based upon the
profit-making eligibility criteria, and the FDA determines that the HUD meets the eligibility criteria.
17
Regulation of Combination Products in the United States
Certain products may be comprised of components that would normally be regulated under different types of regulatory
authorities and frequently by different centers at the FDA. These products are known as combination products. Specifically, under
regulations issued by the FDA, a combination product may be:
• A product comprised of two or more regulated components that are physically, chemically, or otherwise combined or
mixed and produced as a single entity;
• Two or more separate products packaged together in a single package or as a unit and comprised of drug and device
products, device and biological products, or biological and drug products;
• A drug, or device, or biological product packaged separately that according to its investigational plan or proposed
labeling is intended for use only with an approved individually specified drug, or device, or biological product where
both are required to achieve the intended use, indication, or effect and where upon approval of the proposed product
the labeling of the approved product would need to be changed, e.g., to reflect a change in intended use, dosage form,
strength, route of administration, or significant change in dose; or
• Any investigational drug, or device, or biological product packaged separately that according to its proposed labeling
is for use only with another individually specified investigational drug, device, or biological product where both are
required to achieve the intended use, indication, or effect.
Under the FFDCA, the FDA is charged with assigning a center with primary jurisdiction, or a lead center, for review of a
combination product. That determination is based on the “primary mode of action” of the combination product. Thus, if the primary
mode of action of a device-biologic combination product is attributable to the biologic product, the FDA center responsible for
premarket review of the biologic product would have primary jurisdiction for the combination product. The FDA has also established
an Office of Combination Products to address issues surrounding combination products and provide more certainty to the regulatory
review process. That office serves as a focal point for combination product issues for agency reviewers and industry. It is also
responsible for developing guidance and regulations to clarify the regulation of combination products, and for assignment of the
FDA center that has primary jurisdiction for review of combination products where the jurisdiction is unclear or in dispute.
FDA Post-Approval Requirements
Maintaining substantial compliance with applicable federal, state, local, and foreign statutes and regulations requires the
expenditure of substantial time and financial resources. Rigorous and extensive FDA regulation of biological products and devices
continues after approval, particularly with respect to cGMP. We will rely, and expect to continue to rely, on third parties to
manufacture or supply certain components, equipment, disposable devices and other materials used in our manufacturing process
for any products that we commercialize or may commercialize. Manufacturers of our products are required to comply with applicable
requirements in the cGMP regulations, including quality control and quality assurance and maintenance of records and
documentation. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP and other
FDA regulatory requirements. Other post-approval requirements applicable to biological products include reporting of cGMP
deviations that may affect the identity, potency, purity and overall safety of a distributed product, record-keeping requirements,
monitoring and reporting of adverse effects, reporting updated safety and efficacy information, periodic reporting requirements
and complying with electronic record and signature requirements. Similarly, there are a number of post-marketing requirements
for devices, including medical device reporting regulations that require manufacturers to report to the FDA if a device may have
caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or
serious injury if it were to recur; and corrections and removal reporting regulations that require manufacturers to report to the FDA
field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation
of the FFDCA that may present a risk to health. Additionally, devices must comply with the cGMP requirements that are set forth
in the FDA’s Quality System Regulation (QSR).
After a BLA is approved, the biological product also may be subject to official lot release. As part of the manufacturing process,
the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product
is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a
release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests
performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products, such as viral vaccines, before
releasing the lots for distribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory
standards on the safety, purity, potency, and effectiveness of biological products. After approval of biologics, manufacturers must
18
address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after
approval.
Discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements, by us or our
suppliers, may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions and adverse publicity. FDA sanctions could include refusal to approve pending applications, license
revocation, withdrawal of an approval, clinical hold, warning or untitled letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective advertising or
communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. Any agency or judicial
enforcement action could have a material adverse effect on us.
Biological product and medical device manufacturers and other entities involved in the manufacture and distribution of
approved biological products and devices are required to register their facilities with the FDA and certain state agencies, and are
subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. In
addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and
other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to
further FDA review and approval, with certain exceptions.
U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration, and specifics of the FDA approval of the use of our product candidates, some of our
U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act
of 1984, commonly referred to as the Hatch-Waxman Amendments. Patent term restoration can compensate for time lost during
product development and the regulatory review process by returning up to five years of patent life for a patent that covers a new
product or its use. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from
the product’s approval date. The period of patent term restoration is generally one-half the time between the effective date of an
IND (falling after issuance of the patent) and the submission date of a BLA, plus the time between the submission date of the BLA
and the approval of that application, except that the review period is reduced by any time during which the applicant failed to
exercise due diligence. Only one patent applicable to an approved biological product is eligible for the extension and the application
for the extension must be submitted prior to the expiration of the patent. The application for patent term extension is subject to
approval by the United States Patent and Trademark Office, or PTO, in consultation with the FDA.
A patent term extension is only available when the FDA approves a biological product for the first time. We believe MACI
and the manner in which it is manufactured have not been previously approved by the FDA. However, we cannot be certain that
the PTO and the FDA will agree with our analysis or will grant a patent term extension.
A biological product can obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six
months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity
protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-
issued “Written Request” for such a study.
Biosimilars
The Patient Protection and Affordable Care Act, or the Affordable Care Act, includes the Biologics Price Competition and
Innovation Act of 2009. That Act created an approval pathway authorizing the FDA to approve biosimilars and interchangeable
biosimilars. Biosimilars are biological products which are “highly similar” to a previously approved biologic product or “reference
product” and for which there are no clinically meaningful differences between the biosimilar product and the reference product
in terms of the safety, purity, and potency as shown through analytical studies, animal studies and a clinical study or studies. For
the FDA to approve a biosimilar product as interchangeable with a reference product, the agency must find that the biosimilar
product can be expected to produce the same clinical results as the reference product and, for products administered multiple times,
the biosimilar and the reference biologic may be switched after one has been previously administered without increasing safety
risks or risks of diminished efficacy relative to exclusive use of the reference biologic. However, complexities associated with the
larger, and often more complex, structures of biological products, as well as the process by which such products are manufactured,
pose significant hurdles to implementation, which are still being worked out by the FDA. A reference biologic is granted 12 years
of exclusivity from the time of first licensure of the reference product.
19
Pediatric Research Equity Act
Under the Pediatric Research Equity Act, or PREA, a BLA or BLA supplement must contain data to assess the safety and
effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing
and administration for each pediatric subpopulation for which the product is safe and effective, for a new product, new indication
or dosage form. The intent of PREA is to compel sponsors whose products have pediatric applicability to study those products in
pediatric populations, rather than ignoring pediatric indications for adult indications that could be more economically desirable.
FDA may grant deferrals for submission of data or full or partial waivers. By its terms, PREA does not apply to any biological
product for an indication for which orphan designation has been granted, unless the FDA issues regulations saying otherwise.
Because the FDA has not issued any such regulations, submission of a pediatric assessment is not required for an application to
market a product for an orphan-designated indication, and waivers are not needed at this time. However, if only one indication
for a product has orphan designation, a pediatric assessment may still be required for any applications to market that same product
for the non-orphan indication(s).
Advertising and Promotion
Once an FDA-regulated product is approved, the product will be subject to continuing post-approval regulatory requirements.
For instance, the FDA closely regulates the post-approval marketing and promotion of biologics and devices including standards
and regulations for direct-to-consumer advertising and promotional activities involving the internet. The agency also prohibits the
off-label promotion of biologics and devices, and provides guidance on industry-sponsored scientific and educational activities
to ensure that these activities are not promotional. Failure to comply with these requirements can result in significant penalties,
including the issuance of warning letters directing a company to correct deviations from FDA standards, a requirement that future
advertising and promotional materials be pre-cleared by the FDA, and federal and state civil and criminal investigations and
prosecutions.
Biologics and devices may be marketed only for the approved or cleared indications and may only make claims for the product
that are covered by the approval or clearance. For BLAs, changes to some of the conditions established in an approved application,
including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a
new BLA or BLA supplement before the change can be implemented. A BLA supplement for a new indication typically requires
clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA
supplements as it does in reviewing BLAs. Similarly, changes to approved or cleared devices may require FDA’s premarket review.
While doctors are free to prescribe any product approved by the FDA for any use, a company can only make claims relating
to safety and effectiveness of a biological product or device that are consistent with the FDA approval or clearance, and the company
is allowed to actively market and promote a biological product or device only for the particular use and treatment approved or
cleared by the FDA. In addition, any claims we make for our products in advertising or promotion must be appropriately balanced
with important safety information and otherwise be adequately substantiated. Failure to comply with these requirements can result
in adverse publicity, warning letters, corrective advertising, injunctions and potential civil and criminal penalties.
Orphan Drug
Under the Orphan Drug Act, the FDA may grant orphan drug designation to biologics intended to treat a rare disease or condition
—generally a disease or condition that affects fewer than 200,000 individuals in the United States, or affects more than 200,000
individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available
in the United States a drug for such disease or condition will be recovered from sales of such drug. Orphan drug designation must
be requested before submitting a BLA. After the FDA grants orphan drug designation, the generic identity of the biologic and its
potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not necessarily convey any advantage in,
or shorten the duration of, the regulatory review and approval process. The first BLA applicant to receive FDA approval for a
particular product to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing
period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve
any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical
superiority to the product with orphan drug exclusivity. Orphan drug exclusivity, which would most likely run concurrently with
the exclusivity, if any, received from the time of first licensure of a reference product, does not prevent the FDA from approving
a different biologic for the same disease or condition, or the same biologic for a different disease or condition. Among the other
benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application user fee.
The Food and Drug Administration Safety and Innovation Act (FDASIA) added Section 529 to the Federal Food, Drug, and
Cosmetic Act. Pursuant to that provision, FDA will award priority review vouchers to sponsors of rare pediatric disease product
20
applications that meet certain criteria after approval of the application. The priority review voucher may be used by the sponsor
or sold/transferred to another.
Anti-Kickback and False Claims Laws
In the United States, the research, manufacturing, distribution, sale and promotion of biological products and devices are subject
to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid
Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S.
Department of Justice, state Attorneys General, and other federal, state and local government agencies. For example, sales,
marketing and scientific/educational grant programs must comply with the Anti-Kickback Statute, as amended, the False Claims
Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA,
and similar state laws. If products are made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state
consumer protection and unfair competition laws.
As noted above, in the United States, we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,”
including, but not limited to, the federal Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and
regulations. The Anti-Kickback Statute makes it illegal for any person, including a biological product manufacturer (or a party
acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral
of business, including the purchase or order of an item for which payment may be made under a federal healthcare program, such
as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil
money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws
similar to the Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services
reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal
and state anti-kickback laws and the potential for additional legal or regulatory change in this area, it is possible that our future
sales and marketing practices and/or our future relationships with physicians might be challenged under anti-kickback laws, which
could harm us. Because we intend to commercialize products that could be reimbursed under a federal healthcare program and
other governmental healthcare programs, we plan to develop a comprehensive compliance program that establishes internal controls
to facilitate adherence to the rules and program requirements to which we will or may become subject.
The federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented,
for payment to federal programs (including Medicare and Medicaid) claims for items or services, including biological products,
that are false or fraudulent. Although we would not submit claims directly to payers, manufacturers can be held liable under these
laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or
coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of
wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and
other information affecting federal, state, and third-party reimbursement for our products, and the sale and marketing of our
products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under the federal
False Claims Act in connection with their off-label promotion of drugs. Penalties for a False Claims Act violation include three
times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each
separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False
Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes.
If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial
fine and may suffer a decline in our stock price. In addition, private individuals have the ability to bring actions under the federal
False Claims Act and certain states have enacted laws modeled after the federal False Claims Act.
There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing
information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, a provision of
the Patient Protection and Affordable Care Act, referred to as the Sunshine Act, requires biological product manufacturers to track
and report to the federal government certain payments or other transfers of value made to physicians and teaching hospitals made
in the previous calendar year. These laws may affect our sales, marketing, and other promotional activities by imposing
administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their
implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.
International Regulation
In addition to regulations in the United States, a variety of foreign regulations govern clinical trials, commercial sales, and
distribution of product candidates. The approval process varies from country to country and the time to approval may be longer
or shorter than that required for FDA approval.
21
Pharmaceutical Coverage, Pricing, and Reimbursement
In the United States and other countries, sales of any products for which we receive regulatory approval for commercial sale
will depend in part on the availability of reimbursement from third-party payers, including government health administrative
authorities, managed care providers, private health insurers, and other organizations. Third-party payers are increasingly examining
the medical necessity and cost effectiveness of medical products and services in addition to safety and efficacy and, accordingly,
significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Third-party reimbursement adequate
to enable us to realize an appropriate return on our investment in research and product development may not be available for our
products.
Competitive Environment For Cell Therapy and Regenerative Medicine
The biotechnology and medical device industries are characterized by rapidly evolving technology and intense competition.
Our competitors include major multinational medical device companies, pharmaceutical companies, biotechnology companies
and stem cell companies operating in the fields of tissue engineering, regenerative medicine, cardiac, vascular, orthopedics and
neural medicine. Many of these companies are well-established and possess technical, research and development, financial, and
sales and marketing resources significantly greater than ours. In addition, many of our smaller potential competitors have formed
strategic collaborations, partnerships and other types of joint ventures with larger, well established industry competitors that afford
these companies potential research and development and commercialization advantages in the technology and therapeutic areas
currently being pursued by us. Academic institutions, governmental agencies and other public and private research organizations
are also conducting and financing research activities which may produce products directly competitive to those being
commercialized by us. Moreover, many of these competitors may be able to obtain patent protection, obtain FDA and other
regulatory approvals and begin commercial sales of their products before us.
For patients diagnosed with cartilage defects, there are several treatment options, including arthroscopic debridement/
chondroplasty, marrow stimulation techniques such as microfracture, osteochondralautografts for smaller cartilage injuries,
allografts, and autologous chondrocyte implants for larger, more complex injuries.
The main competitor for Carticel in the U.S. is the microfracture procedure. Microfracture is a minimally invasive procedure
that can be performed during the initial arthroscopic procedure. Short term results are generally considered good in smaller cartilage
defects. Other competitive treatments in the U.S. include autograft/allograft procedures and a juvenile donor-derived allograft
product DeNovo NT from Zimmer Holdings Inc. (Zimmer).
Carticel is the only FDA-approved ACI product on the market in the United States. We are aware of two ACI products in
development. Histogenics Corporation began a Phase 3 study of its Neocart implant in February 2010. Neocart is an autologous
chondrocyte tissue implant under development for treatment of symptomatic articular cartilage lesions on the femur. Aesculap
Biologics, LLC initiated a Phase 3 study in 2014 of NovoCart 3D®, a matrix induced autologous chondrocyte product designed
to repair articular cartilage defects of the knee.
The competitive treatment alternatives to MACI in the EU are the same as those for Carticel in the U.S., including debridement/
chondroplasty, microfracture, and osteochondralautografts. Although there is very little use of allografts or allograft-derived
products, the competitive product environment is much more robust. Competitors include microfracture augmentation products
such as ChondroGide® from Geistlich Pharma AG and direct ACI competitors including ChondroCelect® from TiGenix NV.
Patients suffering catastrophic burns over a significant portion of total body surface area have few options for permanent skin
coverage. When undamaged skin is available, a procedure known as meshed split-thickness auto-grafting can be considered.
However, this option becomes less viable as the percentage of total body surface area burn increases. Epicel is a lifesaving therapy
and represents the only option for patients with TBSA burns greater than 70%. In lower TBSA (<50%) Avita Medical is developing
ReCell® for the U.S. market for patients with TBSA burns lower than 50%, with a late stage trial and project approval expected
in 2017. ReCell is an on-site preparation of autologous epithelial cells suspension.
We are investigating ixmyelocel-T, an autologous cell therapy, in ischemic dilated cardiomyopathy (ischemic heart failure)
and recently completed the blinded portion of the Phase 2b clinical trial and announced that the trial had met its primary endpoint
of reduction in clinical cardiac events and that incidence of adverse events, including serious adverse events, in patients treated
with ixmyelocel-T was comparable to patients in the placebo group. Competitor cell (autologous and allogeneic) and gene therapies
are currently under clinical development in Phases 1, 2 and 3 in heart failure patients. Examples are, Mesoblast Ltd., which is
conducting a Phase 3 trial with allogeneic cell therapy and Cardio3 Biosciences which completed enrollment in an EU based Phase
22
3 trial with a bone marrow derived autologous therapy with stated plans to initiate a U.S. Phase 3 trial. Gene therapies are being
evaluated in Phase 2 trials by Juventas Therapeutics, Inc. and Celladon Corporation.
Our potential commercial products address a broad range of existing and emerging therapeutic markets, in which cell-based
therapy is a new and as of yet, unproven, commercial strategy. In a large part, we face primary competition from existing medical
devices and drug products. Some of our competitors have longer operating histories and substantially greater resources. These
include companies such as Arthrex Inc. (Arthrex), Zimmer, Baxter International, Inc. (Baxter), Biomet, Inc., Johnson &
Johnson, Inc. (Johnson & Johnson), Medtronic, Inc. (Medtronic), and others.
In the general area of cell-based therapies, we potentially compete with a variety of companies, most of whom are specialty
medical products or biotechnology companies. Some of these, such as Arthrex and Zimmer, Baxter, Johnson & Johnson, Medtronic
and Miltenyi Biotec Inc. are well-established and have substantial technical and financial resources compared to ours. However,
as cell-based products are only just emerging as viable medical therapies, many of our most direct competitors are smaller
biotechnology and specialty medical products companies. These include Ocata Therapeutics, Inc. (formerly Advanced Cell
Technology, Inc.), Cytomedix, Inc. (formerly Aldagen, Inc.), Arteriocyte Medical Systems, Inc., Athersys, Inc., Cytori
Therapeutics, Inc., International Stem Cell Corporation, Neostem, Inc., Terumo Medical Corporation (formerly Harvest
Technologies Corporation), Mesoblast Ltd., Osiris Therapeutics, Inc., Pluristem, Inc. Stem Cells, Inc., Tengion, Inc., and others.
Employees
As of December 31, 2015, we employed approximately 190 full-time employees. A significant number of our management
and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. None
of our employees are covered by collective bargaining agreements, and management considers relations with our employees to
be good.
Executive Officers
The following table presents our executive officers and key employees and their respective ages and positions as of December 31,
2015:
Name
Dominick C. Colangelo (1)
Daniel R. Orlando (1)
David Recker, MD
Gerard Michel (1)
Ross Tubo, PhD
(1) Denotes Executive Officer
Position
President and Chief Executive Officer
Chief Operating Officer
Chief Medical Officer
Chief Financial Officer & Vice President of
Corporate Development
Chief Scientific Officer
Age
53
50
58
52
56
Executive
Officer Since
2013
2012
2013
2014
2014
Dominick C. Colangelo — Mr. Colangelo joined Vericel Corporation in 2013 with more than twenty years of executive
management and corporate development experience in the biopharmaceutical industry, including nearly a decade with Eli Lilly
and Company. Most recently, he was President and Chief Executive Officer of Promedior, Inc. from 2009 to 2012. During his
career, he has held a variety of executive positions of increasing responsibility in product development, pharmaceutical operations,
sales and marketing, and corporate development. He has extensive experience in the acquisition, development and
commercialization of therapies to treat fibrovascular, metabolic and cardiovascular diseases. During his tenure at Eli Lilly and
Company, he held positions as Director of Strategy and Business Development for Lilly’s Diabetes Product Group and also served
as a founding Managing Director of Lilly Ventures. Mr. Colangelo received his B.S.B.A. in Accounting, Magna Cum Laude, from
the State University of New York at Buffalo and a J.D. degree, with Honors, from the Duke University School of Law.
Daniel R. Orlando — Mr. Orlando joined Vericel as Chief Commercial Officer in August of 2012. Mr. Orlando served as interim
Chief Executive Officer of Vericel from December 2012 to March 2013. He has more than 20 years of commercial product
preparation and launch experience including leadership roles in sales, marketing and most recently as a vice president of business
development for North and South America at Takeda Pharmaceuticals U.S.A., Inc., a wholly owned subsidiary of Takeda
Pharmaceutical Limited (Takeda North America) from January 1999 to March 2012. As an early employee at Takeda North
America, he served as the original brand director for Actos, which became the #1 branded anti-diabetic agent in the United States.
Mr. Orlando’s initial pharmaceutical experience came in progressively expanding roles in sales and marketing at Abbott
23
Laboratories. He holds an MBA from Florida Atlantic University and a BA in Economics with Honors from the University of
Florida.
David Recker, MD — Dr. Recker joined Vericel in April 2014 and has more than 20 years of experience in drug development
most recently at Takeda Global Research & Development, Inc. where he served as Senior Vice President for Clinical Science from
2002 to 2012. Dr. Recker has had responsibility for multiple development programs in a variety of therapeutic areas in his career.
He is a Fellow of the American College of Physicians as well as a Fellow of the American College of Rheumatology. He holds
an M.D. with Distinction from the University of Michigan where he conducted his internship and residency and was Chief Resident
in Internal Medicine. He did his fellowship in training at the National Institutes of Health.
Gerard Michel — Mr. Michel joined Vericel in June of 2014 with over 25 years of experience in the pharmaceutical industry
across multiple functional areas. He has considerable experience in business development, raising capital and executing successful
financial transactions. Mr. Michel was formerly chief financial officer and vice president, corporate development of Biodel Inc.
from November 2007 to May 2014, where he oversaw strategic development, fundraising and capital structure management,
marketing efforts, investor relations, and financial reporting and internal controls. Prior to his role at Biodel, from August 2002
to November 2007, Mr. Michel served as chief financial officer and vice president of corporate development of NPS
Pharmaceuticals Inc, where he led the first syndicated royalty monetization. Prior to that, Mr. Michel was a Principal at Booz
Allen Hamilton Inc. and also held a variety of commercial roles at both Lederle Labs and Wyeth Labs. Mr. Michel holds an M.S.
in Microbiology from the University of Rochester School of Medicine, an M.B.A. from the Simon School of Business, and a B.S.
in both Biology and Geology from the University of Rochester.
Ross Tubo, PhD — Dr. Tubo joined Vericel in April 2014 with more than twenty years of experience in cell therapy, regenerative
medicine, and stem cell biology. Prior to joining Vericel, Dr. Tubo served as a Principal of Research Translation, LLC from
November 2010 to March 2014. Dr. Tubo was a pioneer in the research, development, and commercialization of the first autologous
cell therapy for articular cartilage repair, known as Carticel. As Vice President of Stem Cell and Chemokine Biology for Genzyme
Corporation, a position he held from 1998 to 2010, he developed a world-class research organization designed to understand the
underlying cell and molecular mechanism(s) of action of mesenchymal stem cells (MSCs) in autoimmune disease and cancer.
These efforts led to the identification of specific therapeutic targets for treatment of these diseases. He holds a Ph.D. in Cell and
Molecular Biology from the State University of New York at Buffalo and completed post-doctoral studies at Harvard Medical
School.
Available Information
Additional information about Vericel is contained at our website, www.vcel.com. Information on our website is not incorporated
by reference into this report. We make available on our website free of charge our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after those reports are filed with the Securities
and Exchange Commission (SEC). Our reports filed with the SEC are also made available to read and copy at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information about the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov. The
following Corporate Governance documents are also posted on our website: Code of Business Conduct and Ethics, Code of Ethics
for Senior Financial Officers, Board Member Attendance at Annual Meetings Policy, Director Nominations Policy, Shareholder
Communications with Directors Policy and the Charters for each of the Committees of the Board of Directors.
24
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could
adversely affect our business, financial condition, results of operations, cash flows, and trading price of our common stock. The
risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties that are
not known to us or that we do not consider to be material at this time. If the events described in these risks occur, our business,
financial condition, and results of operations would likely suffer.
Risks Related to our Business
We have incurred losses, anticipate continuing to incur losses and may not achieve or maintain profitability for some time or
at all.
We have incurred net losses each year since our inception in 1989, including net losses of $16.3 million and $19.9 million for
the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had accumulated a deficit of
approximately $324.0 million and had $14.6 million of cash. Based on our current plan and cash on hand, we believe that we are
well positioned to sustain our operations until we achieve profitability.
Although we believe we will achieve profitability without the need to raise additional capital, we may continue to incur
significant operating losses over the next several years despite sales increasing and margins improving, due to continuing expenses
related to our research and development programs, and the expense associated with continuing the commercialization of our
approved products and completing the development of our product candidates. We cannot predict with any certainty the amount
of future losses. Our ability to maintain profitability will depend on, among other things, increasing sales of our current products,
improving gross margins, successfully commercializing our new products, completing the development of our product candidates,
timely initiation and completion of clinical trials, obtaining regulatory approvals, establishing manufacturing, sales and marketing
arrangements with third parties, maintaining supplies of key manufacturing components and the possible acquisition and
development of complementary products. Therefore, we may not be able to achieve or sustain profitability.
In the longer term, we may need to raise additional funds in order to continue to complete product development programs and
complete clinical trials needed to obtain approval for and commercialize our current product candidates or to capitalize on potential
strategic opportunities. We cannot be certain that actual results will not differ materially from our current projections and that
current capital will be sufficient to achieve profitability nor that funding will be available on favorable terms, if at all. Some of
the factors that will impact our ability to raise additional capital and our overall success include:
• The rate and degree of progress of our product development;
•
tThe ability to maintain our manufacturing facility's compliance with U.S. Food and Drug Administration (FDA)
requirements including establishment and license fees;
• The rate of regulatory approval to proceed with clinical development programs;
• The level of success achieved in clinical trials;
• The requirements to maintain marketing authorization and licenses from regulatory bodies in the United States and other
countries in good standing;
• The liquidity and market volatility of our equity securities;
• Regulatory and manufacturing requirements and uncertainties; and
Staying ahead of technological developments by competitors.
•
While we have access to certain amounts of financing through a loan and security agreement (Loan and Security Agreement)
that we entered into with Silicon Valley Bank (SVB) in March 2016 (SVB Facility), an agreement with Lincoln Park Capital
Fund, LLC (Lincoln Park), and an at-the-market sales agreement (ATM) with MLV & Co., LLC (MLV) (formerly McNicoll,
Lewis & Vlak) there are certain factors, such as volume of trading in our common stock and our stock price and the ability to
terminate the agreement with notice, which limit the amount that can be raised in a short period of time through these agreements
with Lincoln Park and the ATM. In addition there are limits to our borrowing level with SVB based on financial ratios and accounts
receivable balance. If funding is needed and we cannot raise such funds, we will not be able to develop, manufacture or enhance
products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which would
have a material adverse impact on our business, financial condition and results of operations.
We may not be able to raise the required capital to conduct our operations, develop and commercialize our product candidates
and otherwise grow and expand our business.
25
Notwithstanding the net proceeds of approximately $37.5 million we received from our September 2014 public offering and
the availability of funds under the SVB Facility, we will require substantial additional capital resources to complete the development
of ixmyelocel-T for the treatment of advanced heart failure due to ischemic DCM and potentially for other strategic opportunities.
In order to grow and expand our business, to introduce other new product candidates into the marketplace, we may need to
raise additional funds. We may also need significant additional funds or a collaborative partner, or both, to finance the research
and development activities of our cell therapy product candidates for additional indications or in additional markets.
Our future capital requirements will depend upon many factors, including:
• Continued scientific progress in our research, clinical and development programs;
• Costs and timing of conducting clinical trials and seeking regulatory approvals;
• Competing technological and market developments;
• Avoiding infringement and misappropriation of third-party intellectual property;
• Obtaining valid and enforceable patents that give us a competitive advantage;
• Our ability to establish additional collaborative relationships;
• Our ability to scale up our production capabilities for larger quantities of our products;
• The effect of commercialization activities and facility expansions, if and as required; and
• Complementary business acquisitions or development opportunities.
We may direct Lincoln Park to purchase up to $15 million worth of shares of our common stock over a 30-month period
generally in amounts up to 50,000 shares of our common stock on certain business days under a Purchase Agreement (the Purchase
Agreement) we entered into with Lincoln Park on January 21, 2014 (the Lincoln Park Equity Line). As of December 31, 2015,
we had sold $3.7 million worth of shares to Lincoln Park under this purchase agreement. However, there are certain factors, such
as volume of trading in our common stock and our stock price, which limit the amount that can be raised in a short period of time.
The extent to which we rely on the Lincoln Park Equity Line as sources of funding will depend on a number of factors, including
the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources.
If obtaining sufficient funding from Lincoln Park were to prove impracticable or prohibitively dilutive, we may need to secure
other sources of funding in order to satisfy our working capital needs. Even if we sell the maximum amount we are eligible to sell
to Lincoln Park under the Purchase Agreement, we may need additional capital to fully implement our business, operating and
development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive
should we require it, the consequences may have a material adverse effect on our business, operating results, financial condition
and prospects. Additionally, during the year ended December 2014, we raised net proceeds of $7.1 million utilizing our ATM with
MLV. The ATM, which as of December 31, 2015 had remaining capacity of approximately $7.8 million, allowed us to sell our
common stock from time to time under a registration statement on Form S-3 filed in June 2011, pursuant to which we registered
$100 million of our securities for public sale. The Form S-3 registration statement filed in June 2011 expired in July 2014. If we
choose to access the remaining capacity, we will file a new Form S-3 registration statement.
We may try to access the public or private equity markets if conditions are favorable to complete a financing, even if we do
not have an immediate need for additional capital at that time, or whenever we require additional operating capital. In addition,
we may seek collaborative relationships, incur debt and access other available funding sources. This additional funding may not
be available to us on reasonable terms, or at all. Some of the factors that will impact our ability to raise additional capital and our
overall success include:
• Our ability to further commercialize our products;
• The rate and degree of progress of our product development;
• The rate of regulatory approval to proceed with clinical developmental programs;
• The level of success achieved in clinical trials;
• The requirements for marketing authorization from regulatory bodies in the United States and other countries;
• The liquidity and market volatility of our equity securities; and
• Regulatory and manufacturing requirements and uncertainties, and technological developments by competitors.
If adequate funds are not available in the future, we may not be able to develop or enhance our products, take advantage of
future opportunities, or respond to competitive pressures or unanticipated requirements and we may be required to delay or terminate
research and development programs, curtail capital expenditures, and reduce business development and other operating activities,
which would have a material adverse impact on our business, financial condition and results of operations.
Failure to obtain and maintain required regulatory approvals would severely limit our ability to sell our products.
26
We must maintain our domestic regulatory approvals to continue to commercialize our products. We must demonstrate the
safety, purity and potency, or efficacy, of cell therapy products to obtain FDA regulatory approval prior to marketing in the United
States or other countries. Demonstration of safety and efficacy requires the conduct of nonclinical studies and well-controlled
clinical trials in compliance with FDA, ICH (International Conference of Harmonization) and applicable local regulations. The
FDA regulatory review process to obtain marketing approval is a rigorous process that requires demonstrating the ability to
manufacture the product in compliance with current Good Manufacturing Practices (cGMP) in addition to demonstrating a favorable
risk/benefit profile. Regulatory requirements outside the U.S. often require additional studies and data to obtain registration.
Timelines can also be longer than those in the U.S. We must maintain our domestic and foreign regulatory approvals in compliance
with FDA regulatory requirements and applicable local regulations to allow for continued commercialization. The safety, potency
and purity of our products must be monitored to be in compliance with FDA requirements for safety, cGMP, and all other applicable
regulations. This requires adverse event monitoring and reporting to regulatory agencies, as well as submission and approval of
any changes in the manufacturing process. Our manufacturing and testing facilities are subject to FDA periodic inspections for
compliance with cGMP requirements. Failure to meet regulatory requirements and maintain cGMP compliance could result in
severe and detrimental regulatory actions.
Any changes in the regulatory requirements that affect our products and/or product candidates could prevent, limit or delay
our ability to market or develop new product candidates.
FDA regulations establish the regulatory requirements for drugs, devices and biological products. Our cell therapy products
are regulated as devices or biologics under current regulations. Biologics require Biologics License Application (BLA) approval
in the U.S. prior to being marketed. The regulations and guidance that govern the approval of biological products for marketing
in the U.S. are subject to review and change by the FDA and could have an adverse impact on our ability to continue to market
our products and bring new products to the market.
Our product candidate, ixmyelocel-T, still needs to initiate and then successfully complete pivotal Phase 3 studies. If we do not
successfully continue or complete the clinical development of ixmyelocel-T and MACI, and achieve regulatory approval, our
ability to finance our operations may be adversely impacted.
Our near-term prospects depend in part upon our ability to successfully continue and complete clinical development of our
product candidates, ixmyelocel-T and MACI, demonstrating adequate safety and effectiveness to obtain regulatory approval in
the U.S. The ongoing Phase 2b ixCELL DCM clinical trial is evaluating patients who have been treated with ixmylocel-T. Our
ability to finance our company and to generate revenues will depend on the results of the ongoing and planned clinical studies
required to demonstrate the safety and effectiveness of ixmyelocel-T to secure marketing authorization and to secure marketing
authorization for MACI. Ixmyelocel-T and MACI each could be unsuccessful if it:
• Does not demonstrate acceptable safety and efficacy in clinical trials, or otherwise does not meet applicable regulatory
requirements for regulatory approval;
• Does not offer sufficient, clinically meaningful therapeutic benefit over the standard of care/ existing therapies;
• Cannot be produced in commercial quantities at an acceptable costs;
•
Is not accepted as a safe, efficacious, and cost-effective treatment over the standard of care and/or current therapies by
the medical community and third-party payers.
If the development or commercialization of ixmyelocel-T or MACI is not successful or is significantly delayed, our financial
condition and future prospects may be adversely impacted, which could cause us to have substantial difficulties raising the additional
capital required to fund our business.
Our products and product development programs are based on novel technologies and are inherently risky.
Our products are subject to the inherent risks of failure associated with the development of new products based on novel
technologies. The innovative nature of our therapeutics creates significant challenges in regard to product development and
optimization, manufacturing, regulatory environment and emerging regulations, third-party reimbursement and market
acceptance. Therapeutic advancements are generally ahead of development and release of regulatory guidance and requirements.
The lack of established precedents and evolving regulatory policy for novel products can pose significant challenges in product
and clinical development, which can decrease the chances of regulatory success.
Further, when manufacturing autologous cell therapies, the number and the composition of the cell population varies from
patient to patient, in part due to the age of the patient, since the therapy is dependent on patient-specific physiology. Such variability
in the number and composition of these cells could adversely affect our ability to manufacture autologous cell therapies in a cost-
effective manner and meet acceptable product release specifications for use in a clinical trial or, if approved, for commercial sale.
27
As a consequence, the development and regulatory approval process for autologous cell therapy products could be delayed or may
never be completed.
Our products represent new classes of therapy that the marketplace may not understand or accept. Furthermore, the success
of our products is dependent on wider acceptance by the medical community.
While our acquired products have had some commercial success to date, the broader market may not understand or accept our
products. Our products represent new treatments or therapies and compete with a number of more conventional products and
therapies manufactured and marketed by others. The new nature of our products creates significant challenges in regards to product
development and optimization, manufacturing, regulations, and third-party reimbursement. As a result, the commercialization of
our current products and the development pathway for our potential new products may be subject to increased scrutiny, as compared
to the pathway for more conventional products.
The degree of market acceptance of any of our marketed or potential new products will depend on a number of factors, including:
• The clinical safety and effectiveness of our products and their demonstrated advantage over alternative treatment methods;
• Our ability to demonstrate to healthcare providers that our products provide a therapeutic advancement over standard of
•
care or other competitive products / methods;
Our ability to educate healthcare providers on the autologous use of patient-specific human tissue, to avoid potential
confusion with and differentiate ourselves from the ethical controversies associated with human fetal tissue and engineered
human tissue;
• Our ability to educate healthcare providers, patients and payers on the safety and adverse reactions involving our products;
• Our ability to meet supply and demand and develop a core group of medical professionals familiar with and committed
to the use of our products; and
• The cost-effectiveness of our products and the reimbursement policies of government and third-party payers.
If the medical community or patients do not accept the safety and effectiveness of our products or if our products fail to
demonstrate a favorable risk/benefit profile, it could negatively affect our sales, which would have a material adverse impact on
our business, financial condition and operations. While acceptance by the medical community may be fostered by broad evaluation
via peer-reviewed literature, we may not have the resources to facilitate additional research that can result in additional scientific
publications.
Our inability to complete our product development activities successfully would materially limit our ability to operate or finance
our operations.
In order to obtain regulatory approval to commercialize our cell product in the United States, we must conduct adequate and
well-controlled clinical trials to demonstrate the safety and effectiveness in compliance with current regulatory requirements. We
may not be able to successfully complete the development of our product candidates, or successfully market our technologies or
product candidates. We, and any of our potential collaborators, may encounter problems and delays relating to research and
development, regulatory approval and intellectual property rights of our technologies and product candidates. Our research and
development programs may not be successful, and our cell culture technologies and product candidates may not facilitate the
production of cells outside the human body with the expected results. Our technologies and cell product candidates may not prove
to be safe and effective in clinical trials, and we may not obtain the requisite regulatory approvals for our product candidates. If
any of these events occur, we may not have adequate resources to continue operations for the period required to resolve any issues
delaying commercialization and we may not be able to raise capital to finance our continued operations during the period required
for resolution of any such issues.
We must successfully complete our nonclinical and clinical development program to be able to demonstrate safety and efficacy
to seek marketing approval of our cell therapy product candidates. Lack of efficacy and or safety events can lead to the
discontinuation of clinical development, and this can occur at any stage of the clinical development program. We may experience
numerous unforeseen events during development that can delay or prevent commercialization of our development candidates.
The results of early stage clinical trials do not ensure success in later clinical trials, and interim results are not necessarily
predictive of final results.
With respect to any clinical trials affecting our products or development candidates, failures or delays can occur at any stage
of the trials, and may be directly or indirectly caused by a variety of factors, including but not limited to:
• Delays in securing clinical investigators or trial sites for our clinical trials;
28
• Delays in obtaining Institutional Review Board (IRB) and other regulatory approvals to commence a clinical trial;
•
Slower than anticipated rates of patient recruitment and enrollment in our clinical trials, or failing to reach the targeted
number of patients due to competition for patients from other trials;
• Limited or no availability of coverage, reimbursement and adequate payment from health maintenance organizations and
other third party payers for the use of biological products supplied for use in our clinical trials;
• Negative or inconclusive results from clinical trials;
• Unforeseen adverse effects interrupting, delaying, or halting clinical trials of any future therapeutic product candidates,
and possibly resulting in the FDA or other regulatory authorities denying approval of any future therapeutic product
candidates;
• Unforeseen safety issues;
• Approval and introduction of new therapies or changes in standards of practice or regulatory requirements or guidance
•
•
that render our clinical trial endpoints or the targeting of our proposed indications obsolete;
Inability to monitor patients adequately during or after treatment or problems with investigator or patient compliance
with the trial protocols;
Inability to replicate in large controlled trials safety and efficacy data obtained from a limited number of patients in
uncontrolled trials;
Inability or unwillingness of medical investigators to follow our clinical protocols; and
•
• Unavailability of clinical trial supplies.
The FDA and the sponsor monitor the progress of clinical trials and they may suspend or terminate a clinical trial at any time
due to patient safety or other considerations. The FDA may impose a clinical hold on our trials because of safety concerns that
have arisen for products or product candidates that are similar to our product candidates.
Our research programs are currently directed at improving product functionality for certain clinical indications, improving
product shelf life, and decreasing the cost of manufacturing our products. These production process changes may alter the
functionality of our cells and require various additional levels of experimental and clinical testing and evaluation. Any such testing
could lengthen the time before these products would be commercially available.
Even when successful clinical results are reported for a product from a completed clinical trial, the durability of response may
not be sustained over time, or may not be sufficient to support regulatory approval.
We may rely on third parties to conduct some of our clinical trials, and their failure to perform their obligations in a timely or
competent manner may delay development and/or impact commercialization of our product candidates.
We may use clinical research organizations (CROs) to assist in the conduct of our clinical trials. There are numerous alternative
sources to provide these services. However, we may face delays outside of our control if these parties do not perform their obligations
in a timely or competent fashion, or if we are forced to change service providers. Any third party that we hire to conduct clinical
trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we
experience significant delays in the progress of our clinical trials, the commercial prospects for product candidates could be harmed
and our ability to generate product revenue would be delayed or prevented. In addition, we and any provider that we retain will
be subject to Good Clinical Practice (GCP) requirements. If GCP and other regulatory requirements are not adhered to by us or
our third-party providers, the conduct of the trial may be compromised and the development and commercialization of our product
candidates could be delayed or approval may never be obtained.
Any failure of such CRO to successfully accomplish clinical trial monitoring, data collection, safety monitoring and data
management and the other services it provides for us in a timely manner and in compliance with regulatory requirements could
have a material adverse effect on our ability to utilize the trial to obtain regulatory approval or complete clinical development of
our products to support regulatory approval. Problems with the timeliness or quality of the work of a CRO may lead us to seek to
terminate the relationship and use an alternate service provider. However, making such changes may be costly and may delay our
trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be difficult to find a
replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.
Failure of third parties, including Vention Medical, Sanofi or Matricel GmbH, to manufacture or supply certain components,
equipment, disposable devices and other materials used in our ixmyelocel-T, Epicel and MACI cell manufacturing processes
would impair our cell product development.
We rely on third parties, including Vention Medical, Inc. (Vention), Sanofi and Matricel GmbH (Matricel) to manufacture
and/or supply certain of our devices/manufacturing equipment and to manufacture and/or supply certain components, equipment,
disposable devices and other materials used in our cell manufacturing process to develop our marketed cell therapy products and
29
our product candidates. In many instances these third parties serve as our sole suppliers. For example, Vention is the sole supplier
for the cell cassettes used in the ixmyelocel-T manufacturing process; Sanofi is the sole supplier of 3t3 cells for Epicel; and Matricel
is the sole supplier of the membrane for MACI. In each case it would be difficult to obtain alternate sources of supply on a short-
term basis. If any of our manufacturers or suppliers fails to perform its respective obligations, or if our supply of certain components,
equipment, disposable devices and other materials is limited or interrupted, it could impair our ability to manufacture our products,
which would delay our ability to conduct our clinical trials or market our product candidates on a timely and cost-competitive
basis, if at all.
In addition, we may not be able to continue our present arrangements with our suppliers, supplement existing relationships,
establish and maintain new relationships or be able to identify and obtain the ancillary materials that are necessary to develop our
product candidates in the future. Our dependence upon third parties for the supply and manufacture of these items could adversely
affect our ability to develop and deliver commercially feasible products on a timely and competitive basis.
Failure by our third-party manufacturers, including Vention and Matricel, to comply with the regulatory requirements set
forth by the FDA with respect to our products could delay or prevent the completion of clinical trials, the approval of any
product candidates or the commercialization of our products.
Third-party manufacturers, such as Vention and Matricel, must be inspected by the FDA for current Good Manufacturing
Practice, or cGMP, compliance, as well as for their ability to manufacture the product in compliance with the established process
and procedure for the proposed new product during a pre-approval inspection. We may be in competition with other companies
for access to these manufacturers’ facilities and may be subject to delays in manufacture if the manufacturers give other clients
higher priority than they give to us. If we are unable to secure and maintain third-party manufacturing capacity, the development
and sales of our products and our financial performance may be materially affected.
Manufacturers are obligated to operate in accordance with FDA-mandated requirements. A failure of any of our third-party
manufacturers to establish and follow cGMP requirements and to document their adherence to such practices may lead to significant
delays in the availability of material for clinical trials, may delay or prevent filing or approval of marketing applications for our
products, and may cause delays or interruptions in the availability of our products for commercial distribution following FDA
approval. This could result in higher costs to us or deprive us of potential product revenues.
Complying with cGMP and non-U.S. regulatory requirements will require that we expend time, money, and effort in production,
recordkeeping, and quality control to assure that the product meets applicable specifications and other requirements. We, or our
contracted manufacturing facility, must also pass a pre-approval inspection prior to FDA approval. Failure to pass a pre-approval
inspection may significantly delay FDA approval of our products. Failure to comply with cGMP requirements, can result in
regulatory action that can limit the ability to manufacture commercial products. As a result, our business, financial condition, and
results of operations may be materially harmed.
The manufacture of cell therapy products is characterized by inherent risks and challenges and has proven to be a costly
endeavor relative to manufacturing other therapeutic products.
The manufacture of cell therapy products, such as our products and product candidates, is highly complex and is characterized
by inherent risks and challenges such as autologous raw material inconsistencies, logistical challenges, significant quality control
and assurance requirements, manufacturing complexity, and significant manual processing. Unlike products that rely on chemicals
for efficacy, such as most pharmaceuticals, cell therapy products are difficult to characterize due to the inherent variability of
biological input materials. Difficulty in characterizing biological materials or their interactions creates greater risk in the
manufacturing process. We attempt to mitigate risk associated with the manufacture of biologics by continuing to improve the
characterization of all of our input materials, utilizing multiple vendors for supply of qualified biological materials, and
manufacturing some of these materials ourselves. However, there can be no assurance that we will be able to maintain adequate
sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy
applicable product release criteria. Our inability to obtain necessary biological materials or to successfully manufacture cell
therapy products that incorporate such materials could have a material adverse effect on our results of operations.
There can be no assurance that we or any third-party contractors with whom we enter into strategic relationships will be
successful in streamlining manufacturing operations and implementing efficient, low-cost manufacturing capabilities and processes
that will enable us to meet the quality, price and production standards or production volumes to achieve profitability. Our failure
to develop these manufacturing processes in a timely manner could prevent us from achieving our growth and profitability objectives
as projected or at all.
30
We have limited manufacturing capacity and our commercial manufacturing operations in the U.S. depend on one facility.
Similarly, manufacturing of our lead product candidate, ixmyelocel-T, is conducted at one facility. If either facility is destroyed
or we experience any manufacturing difficulties, disruptions or delays, this could limit supply of our products or adversely
affect our ability to conduct our clinical trials and our business would be adversely impacted.
We presently conduct all of our commercial manufacturing operations in the U.S. at one facility located in Cambridge,
Massachusetts. As a result, all of the commercial manufacturing of our marketed products, Epicel and Carticel, for the U.S. market
takes place at a single U.S. facility. In addition, clinical trials for certain product candidates would primarily depend upon the
manufacturing of such product candidates in the same Cambridge facility. Similarly, manufacturing of our product candidate
ixmyelocel-T takes place at one facility located in Ann Arbor, Michigan. If regulatory, manufacturing or other problems require
us to discontinue production at either facility, we will not be able to supply our products to our patients or have supplies for any
clinical trials, which would adversely impact our business. If either facility or the equipment in it is significantly damaged or
destroyed by fire, flood, power loss or similar events, we may not be able to quickly or inexpensively replace our manufacturing
capacity or replace our facility at all. In the event of a temporary or protracted loss of this facility or equipment, we might not be
able to transfer manufacturing to a third party. Even if we could transfer manufacturing from one facility to the other or to a third
party, the shift would likely be expensive and time-consuming, particularly since an alternative facility would need to comply
with the applicable regulatory and quality standard requirements whereby validation and FDA approval would be required before
any products manufactured at that facility could be made commercially available.
While we do maintain insurance coverage against damage to our property and equipment, if we have underestimated our
insurance needs, we will not have sufficient insurance to cover losses above and beyond the limits on our policies.
We are subject to significant regulation with respect to the manufacturing of our products.
All of those involved in the preparation of a cellular therapy for clinical trials or commercial sale, including our existing supply
contract manufacturers and clinical trial investigators, are subject to extensive and continuing government regulations by the FDA
and comparable agencies in other jurisdictions. Components of a finished therapeutic product approved for commercial sale or
used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes
and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products
and products approved for sale. Our facilities and quality systems and the facilities and quality systems of some or all of our third
party contractors and suppliers are subject to pre-approval and routine FDA inspections for compliance with the applicable
regulations as a condition of FDA approval of our products.
Our manufacturing facility in Cambridge, Massachusetts was inspected by the FDA in 2014. On March 19, 2014, the FDA
issued a Form 483 List of Inspectional Observations. A Form 483 is issued when, in an investigator’s judgment, the observed
conditions or practices observed during an FDA inspection of the manufacturing facility indicate that an FDA-regulated product
may be in violation of FDA’s requirements. We have completed remedial measures to improve our manufacturing process and
have responded to all FDA observations. Generally, if any such inspection or audit identifies a failure to comply with applicable
regulations or if a violation of our product specifications or applicable regulation occurs independent of such an inspection or
audit, we or the FDA may require remedial measures that may be costly and/or time consuming for us or a third party to implement
and that may include the temporary or permanent suspension of a clinical trial or commercial sales, recalls, warning letters, market
withdrawals, seizures or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third
parties with whom we contract could materially harm our business.
We could incur significant costs complying with environmental and health and safety requirements, or as a result of liability
for contamination or other harm caused by hazardous materials that we use.
Our research and development and manufacturing processes involve the use of hazardous materials. We are subject to federal,
state, local and foreign environmental requirements, including regulations governing the use, manufacture, handling, storage and
disposal of hazardous materials, discharge to air and water, the cleanup of contamination and occupational health and safety
matters. We cannot eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability
as a result of any contamination or injury. Under some environmental laws and regulations, we could also be held responsible for
costs relating to any contamination at our past or present facilities and at third party waste disposal sites where we have sent wastes.
These could include costs relating to contamination that did not result from any violation of law, and in some circumstances,
contamination that we did not cause. We may incur significant expenses in the future relating to any failure to comply with
environmental laws. Any such future expenses or liability could have a significant negative impact on our financial condition.
The enactment of stricter laws or regulations, the stricter interpretation of existing laws and regulations or the requirement to
undertake the investigation or remediation of currently unknown environmental contamination at our own or third party sites may
require us to make additional expenditures, which could be material.
31
In order to obtain marketing authorization of any of our cell therapy product candidates, including MACI and ixmyelocel-T,
in the United States, the FDA requires us to submit a BLA, which is subject to the agency’s detailed review.
The Biologics License Application (BLA) is a request for permission to introduce, or deliver for introduction, a biologic product
into interstate commerce in the U.S. MACI (matrix applied characterized autologous cultured chondrocytes) and ixmyelocel-T
are subject to the FDA’s biological product requirements. A BLA was submitted on January 4, 2016, and subsequently accepted
for review by the FDA for MACI on March 4, 2016. The FDA will have 10 months per the timelines set forth under the Prescription
Drug User Fee Act (PDUFA), to review the application for compliance with the requirements set forth in Section 351 of the Public
Health Service Act (PHSA). The approvability of the BLA is based on the acceptability of the results of a single clinical study
conducted outside the United States to meet the safety and effectiveness requirements for approval, and the acceptability of foreign
data. The Cambridge manufacturing facility will also be subject to a pre-approval inspection to demonstrate the capabilities to
manufacture the product under cGMP requirements in compliance with the procedures provided in the BLA. MACI is considered
a combination product consisting of the autologous cultured chondrocytes (the cell product) and ACI-Maix membrane (the device).
The ACI-Maix membrane is manufactured by Matricel. Matricel will also be subject to an FDA pre-approval inspection in
connection with the BLA review and approval. A filing fee of $2.4 million was paid to the FDA for review of the application. If
the application is not filed, and a Refuse to File letter is received, 25% of the filing fee will be forfeited. There are risks with
respect to the review of the MACI BLA. A second study may be required to secure regulatory approval or as a post-marketing
commitment. This can result in additional time to market and/or additional cost. The MACI regulatory approval in the U.S. will
be associated with a commitment to conduct a pediatric clinical study in the U.S. The conduct of this study will require funding
and resources. This will be a post-approval commitment. If not met the product may be withdrawn from the market by FDA.
Our business, financial condition, results of operation and cash flows could be significantly and negatively affected by
substantial governmental regulations.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental
authorities. Overall, there appears to be a trend toward more stringent regulation worldwide, and we do not anticipate this trend
to dissipate in the near future.
In general, the development, testing, labeling, manufacturing and marketing of our products are subject to extensive regulation
and review by numerous governmental authorities both in the United States and abroad. The regulatory process requires the
expenditure of significant time, effort and expense to bring new products to market. For example, the FDA approved Epicel as a
HUD pursuant to an HDE application. A HUD is a medical device intended to benefit patients in the treatment or diagnosis of a
disease or condition that affects fewer than 4,000 individuals in the United States per year. A HUD with an approved HDE is
approved by the FDA for marketing. However, Institutional Review Board (IRB) approval is required before a HUD can be used
at a facility, with the exception of emergency use. The HDE holder is responsible for ensuring that a HUD approved under an
HDE is administered only in facilities having an IRB constituted and acting in accordance with the agency’s regulation governing
IRBs, including continuing review of use of the device. HUDs are also subject to additional FDA requirements, such as adverse
event reporting and the submission of updated information on a periodic basis to demonstrate that the HUD designation is still
valid. Failure to meet FDA requirements pertaining to a HUD could result in the suspension or revocation of the HDE.
If the HDE is suspended or revoked, marketing approval for Epicel would require the submission and approval of a premarket
approval application (PMA) in order to be made commercially available. The PMA process is costly, lengthy and uncertain. A
PMA must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and
labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. If the HDE approval
for Epicel was withdrawn, and we were unable to obtain approval of a PMA, we could not market Epicel for sale in the U.S.
We are also required to implement and maintain stringent reporting, labeling and record keeping procedures. More specifically,
in the United States, both before and after a product is commercially released, we have ongoing responsibilities under FDA
regulations. Compliance with the FDA’s requirements, including the FDA’s cGMP recordkeeping regulations, labeling and
promotional requirements and adverse event reporting regulations, is subject to continual review and is monitored rigorously
through periodic inspections by the FDA. Our failure to comply with U.S. federal, state and foreign governmental regulations
could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory
approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal
sanctions or closure of our manufacturing facility are possible.
In addition, the pharmaceutical, biologic and medical device industries also are subject to many complex laws and regulations
governing Medicare and Medicaid reimbursement and targeting healthcare fraud and abuse, with these laws and regulations being
subject to interpretation. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation
32
of these laws and regulations. In certain public statements, governmental authorities have taken positions on issues for which
little official interpretation was previously available. Some of these positions appear to be inconsistent with common practices
within the industry but have not previously been challenged.
Various federal and state agencies have become increasingly vigilant in recent years in their investigation of various business
practices, such as the federal Anti-kickback Statute and the federal False Claims Act. Governmental and regulatory actions against
us can result in various actions that could adversely impact our operations, including:
• The recall or seizure of products;
• The suspension or revocation of the authority necessary for the production or sale of a product;
• The suspension of shipments from particular manufacturing facilities;
• The imposition of fines and penalties;
• The delay of our ability to introduce new products into the market;
• Our exclusion or the exclusion of our products from being reimbursed by federal and state healthcare programs (such as
Medicare, Medicaid, Veterans Administration, or VA, health programs and Civilian Health and Medical Program
Uniformed Service, or CHAMPUS); and
• Other civil or criminal prosecution or sanctions against us or our employees, such as fines, penalties or imprisonment.
Any of these actions, in combination or alone, or even a public announcement that we are being investigated for possible
violations of these laws, could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
The Sunset Clause provided under European Union (EU) pharmaceutical legislation, requires Marketing Authorization Holders
(MAH) in the EU to place the product on the market within 3 years from the date of granting of the authorization. Otherwise, the
authorization will cease to be valid. Likewise, for a product that was previously placed on the market and is no longer actually
present on the market for 3 consecutive years from the last day of distribution, the authorization will cease to be valid. The rules
have been the subject of interpretation by European Medicines Agency (EMA) and the European Commission to mean that the
marketing authorization of a medicinal product will remain valid if at least one presentation of the existing product presentations
is placed on the market in at least one Member State of the EU and the European Economic Area (EEA). In the case of MACI,
this means that Vericel has 3 years from the date of last distribution to make the product available in at least one Member State
of the EU/EEA. In order to resume product supply in the EU/EEA, this will require the registration, qualification and approval
of an EU compliant cGMP manufacturing facility within the allotted timeframe. In addition, Vericel must comply with the Pediatric
Investigational Plan (PIP) that is in place as a post-authorization commitment agreed with the EMA. The current PIP requires
Vericel to submit the results of the pediatric study prior to 2017 according to the study protocol previously agreed between the
EMA and the previous sponsor. Unless the PIP commitment date is modified and unless Vericel decides to make investments to
register and qualify its cGMP manufacturing facility in the EU for it to be approved, the marketing authorization for MACI could
be at risk of being revoked under the prevailing EU law.
In the United States, if the FDA were to conclude that we are not in compliance with applicable laws or regulations or that any
of our products are ineffective or pose an unreasonable health risk, the FDA could ban such products, detain or seize adulterated
or misbranded products, order a recall, repair, replacement, or refund of payment of certain products, refuse to grant pending
applications, refuse to provide certificates to foreign governments for exports, and/or require us to notify healthcare professionals
and others that the products present unreasonable risks of substantial harm to the public health. The FDA may also impose operating
restrictions on a companywide basis, enjoin and restrain certain violations of applicable law pertaining to our products and assess
civil or criminal penalties against our officers, employees or us. The FDA may also recommend prosecution to the United States
Department of Justice (DOJ). Adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing
and selling our products.
In many of the foreign countries in which our products are marketed, we are subject to regulations affecting, among other
things, clinical efficacy, product standards, packaging requirements, labeling requirements, import/export restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to our products in these countries, such as the Medicinal
Products Directive and the ATMP guidelines, governing products in the EU, are similar to those of the FDA. In addition, in many
countries the national health or social security organizations require our products to be qualified before they can be marketed with
the benefit of reimbursement eligibility. Failure to receive or delays in the receipt of relevant foreign qualifications also could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
As both the U.S. and foreign government regulators have become increasingly stringent, we may be subject to more rigorous
regulation by governmental authorities in the future. Our products and our operations are also often subject to the rules of industrial
33
standards bodies, such as the International Standards Organization, or ISO. If we fail to adequately address any of these regulations,
our business will be harmed.
Changes to our products or product candidates may require regulatory approvals. It may be necessary to recall or cease
marketing our products until certain issues are resolved and regulatory approval is obtained.
Changes or modifications in the manufacturing process may require the submission of supplements to our BLAs, Humanitarian
Device Exemption (HDE) application, and Investigational New Drug applications (INDs). These supplements require the
generation of data to support the change, review and approval by FDA to obtain authorization for the change in the commercial
product or in the investigational biological product before they can be implemented. Obtaining regulatory approvals for these
changes may require the conduct of new studies and purchase of new equipment to justify the change. This can be costly and
time consuming. Regulatory delays can adversely impact our ability to improve our products and to introduce new products in a
timely manner. This can be detrimental to our future growth.
If we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience
unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
The manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for each of our
products is subject to continued regulatory reporting and periodic inspections by the FDA, as well as other domestic and foreign
regulatory agencies. In particular, we and our suppliers are required to comply with cGMP and Good Tissue Practice (GTP)
regulations for the manufacture of our products and other regulations which include, methods and documentation of production
controls, labeling, packaging, storage and shipment of any product to name a few. Regulatory agencies, such as the FDA, enforce
the cGMP, GTP and other regulations through periodic inspections and reporting. For example, the holder of an approved BLA
or HUD is obligated to monitor and report adverse events, and product failures, including critical deviations and lack of efficacy.
A BLA or HDE device holder must maintain regulatory compliance for all aspects of the applicable regulations or can be subject
to regulatory action, including recall or withdrawal from the market.
Product manufacturers and their facilities are subject to payment of annual user fees and periodic inspections by the FDA and
other regulatory agencies for compliance with cGMP and other applicable regulations. If at any time we or a regulatory agency
discovers a previously unknown safety concern with a product, such as a serious adverse event of unanticipated severity or
frequency that cannot be adequately manage and changes the risk-benefit profile of the product, or there are problems with the
facility where the product is manufactured; a regulatory agency may impose restrictions relative to that product or the manufacturing
facility, including suspension of manufacturing recall or withdrawal of the product from the market.
Advertising and promotional materials, including educational and web-site material, must comply with FDA’s promotional
and advertising regulations in addition to other potentially applicable federal and state laws, and such materials for biologics are
subject to submission and review by the Center of Biological Research (CBER), Promotional Advertising Labeling Branch (PALB).
The failure by us or one of our suppliers to comply with applicable legal statutes and regulations administered by the FDA
and other regulatory agencies, or the failure to timely and adequately respond to any adverse inspectional or review observations,
or product safety issues, could result in, among other things, any of the following enforcement actions:
• Untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
• Unanticipated expenditures to address or defend such actions;
• Client notifications for repair, replacement, or refunds of a device;
• Recall, detention or seizure of our products;
• Operating restrictions or partial suspension or total shutdown of production;
• Denying, refusing or delaying our requests for approval of new products or proposed changes to existing products;
• Operating restrictions;
• Withdrawing product approvals that have already been granted;
• Refusal to approve a pending marketing application, such as a BLA or supplements to a BLA submitted by us;
• Refusal to grant export approval for our products; or
• Criminal prosecution.
If any of these actions were to occur it would harm our reputation and cause our product sales and profitability to suffer,
preventing us from generating revenue. Furthermore, our key suppliers may have compliance issues which could impact our ability
to manufacture our products on a timely basis and in the required quantities.
34
Our marketed products may be used by physicians for indications that are not approved by the FDA. If the FDA finds that
we marketed our products in a manner that promoted off-label use, we may be subject to civil or criminal penalties.
Under the Federal Food, Drug, and Cosmetic Act (FFDCA) and other laws, we are prohibited from promoting our products
for off-label uses. This means, for example, that we may not make claims about the use of any of our marketed products, including
Carticel or Epicel, outside of their approved labeling and indications. Therefore, we may not proactively discuss or provide
information on off-label uses. The FDA does not, however, restrict physicians from prescribing products for off-label uses in the
practice of medicine. Should the FDA determine that our activities constitute the promotion of off-label uses, the FDA could bring
an action to prevent us from distributing Carticel or Epicel for the off-label use and could impose fines and penalties on us and
our executives. In addition, failure to follow FDA rules and guidelines relating to promotion and advertising can result in, among
other things, the FDA’s refusal to approve a product, the suspension or withdrawal of an approved product from the market, product
recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecutions.
If the Office of Inspector General within the Department of Health and Human Services, the DOJ, or another federal or state
agency determines that we have promoted off-label use of our products, we may be subject to various penalties, including civil
or criminal penalties, and the off-label use of our products may result in injuries that lead to product liability suits, which could
be costly to our business.
In addition to the FDA restrictions on our marketed products, several other types of state and federal healthcare laws have been
applied by DOJ and state attorneys general to restrict certain marketing practices in the pharmaceutical industry. While physicians
may prescribe products for off-label uses and indications, if other federal or state regulatory authorities determine that we have
engaged in off-label promotion through remuneration, kickbacks or other monetary benefits to prescribers, we may be subject to
civil or criminal penalties and could be prohibited from participating in government healthcare programs such as Medicaid and
Medicare. In addition, government agencies or departments could conclude that we have engaged in off-label promotion and,
potentially, caused the submission of false claims. Even if we are successful in resolving such matters without incurring penalties,
responding to investigations or prosecutions will likely result in substantial costs and could significantly and adversely impact
our reputation and divert management’s attention and resources, which could have a material adverse effect on our business,
operating results, financial condition and ability to finance our operations. In addition, the off-label use of our products may
increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to
defend and could divert our management’s attention and result in substantial damage awards against us.
The price and sale of any of our products may be limited by health insurance coverage and government regulation.
Maintaining and growing sales of our products will depend in large part on the availability of adequate coverage and the extent
to which third-party payers, including health insurance companies, health maintenance organizations (HMOs), and government
health administration authorities such as Medicare and Medicaid, private insurance plans and managed care programs will pay
for the cost of the products and related treatment. Hospitals and other healthcare provider clients that purchase our products
typically bill various third-party payers to cover all or a portion of the costs and fees associated with the procedures in which such
products are used, including the cost of the purchase of these products. Third-party payers are also increasingly attempting to
contain healthcare costs by demanding price discounts or rebates and limiting both coverage and the amounts that they will pay
for certain products, and, as a result, they may not cover or continue to provide adequate payment for our products. We might
need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products and product candidates to
such payers’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and
other resources. Our products and future products might not ultimately be considered cost-effective. Adequate third-party
reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on investment
in our products and future product development. If coverage and adequate reimbursement are not available, reimbursement is
available only to limited levels, or if our costs of production increase faster than increases in reimbursement levels, we may not
be able to successfully grow the sales of our products or commercialize any product candidates for which marketing approval is
obtained.
Coverage decisions and payment amounts are established at the discretion of the individual third-party payer, and the regulations
that govern pricing, coverage and reimbursement vary widely from country to country. Many private payers in the United States,
however, use coverage decisions and payment amounts determined by the Centers for Medicare & Medicaid Services (CMS), as
guidelines in setting their coverage and reimbursement policies. As the portion of the U.S. population over the age of 65 and
eligible for Medicare continues to grow, we may be more vulnerable to coverage and reimbursement limitations imposed by CMS.
While certain procedures using our products are currently covered by Medicare and other third-party payers, future action by CMS
or other government agencies may diminish payments to physicians, outpatient centers and/or hospitals for covered services. As
a result, we cannot be certain that the procedures performed with our products will be reimbursed at a cost-effective level or
reimbursed at all.
35
Furthermore, the healthcare industry in the United States has experienced a trend toward cost containment as government and
private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with
service providers. Therefore, we cannot be certain that the procedures performed with our products will be reimbursed at a cost-
effective level. Nor can we be certain that third-party payers using a methodology that sets amounts based on the type of procedure
performed, such as those utilized by Medicare and in many privately managed care systems, will view the cost of our products to
be justified so as to incorporate such costs into the overall cost of the procedure. Moreover, we are unable to predict what changes
will be made to the reimbursement methodologies used by third-party payers in the future.
We face intense competition in the markets targeted by our products. Many of our competitors have substantially greater
resources than we do, and we expect that all of our products will face intense competition from existing or future products.
All of our products face intense competition from existing and future products marketed by large companies. These competitors
may successfully market products that compete with our products, identify and bring to market new product candidates earlier
than we do, or develop products that are more effective or less costly than our products. These competitive factors could require
us to conduct substantial new research and development activities to establish new product targets, which would be costly and
time consuming. These activities can adversely impact our ability to effectively commercialize products and achieve revenue and
profits.
If we do not keep pace with our competitors and with technological and market changes, our products will become less attractive
or obsolete and our business may suffer.
The markets for our products are highly competitive, subject to rapid technological changes, and vary for different candidates
and processes that directly compete with our products. Our competitors in the medical and biotechnology industries may have
superior products, research and development, manufacturing, and marketing capabilities, and financial resources or marketing
positions. Furthermore, our competitors may have developed, or could in the future develop, new technologies that compete with
our products or even render our products obsolete. As an example, in the past, published studies have suggested that hematopoietic
stem cell therapy use for bone marrow transplantation, following marrow ablation due to chemotherapy, may have limited clinical
benefit in the treatment of breast cancer, which was a significant portion of the overall hematopoietic stem cell transplant market.
This resulted in the practical elimination of this market for our cell-based product for this application.
Our cell manufacturing system for ixmyelocel-T is designed to improve and automate the processes for producing cells used
in therapeutic procedures. Even if we are able to demonstrate improved or equivalent results, the cost or process of treatment and
other factors may cause researchers and practitioners to not use our products and we could suffer a competitive disadvantage. To
the extent that others develop new technologies that address the targeted application for our products, our business will suffer.
Finally, if we are unable to continue to develop and market new products and technologies in a timely manner, the demand for
our products may decrease or our products could become obsolete, and our revenue may decline.
Ethical, legal, social and other concerns surrounding the use of human tissue in synthetic biologically engineered products
may negatively affect public perception of us or our products, or may result in increased scrutiny of our products and any
future product candidates from a regulatory perspective, thereby reducing demand for our products, restricting our ability to
market our products, or adversely affecting the market price for our common stock.
The commercial success of our products depends in part on general public acceptance of the use of human tissue for the
treatment of human diseases and other conditions. While not as controversial as the use of embryonic stem cells and fetal tissue,
the use of adult tissue has been the subject of substantial debate regarding related ethical, legal and social issues. We do not use
embryonic stem cells or fetal tissue, but the public may not be able to, or may fail to, differentiate our autologous use of adult
tissue from the use by others of embryonic stem cells or fetal tissue. This could result in a negative perception of our company
or our products.
Future adverse events in the field of cellular based therapy or changes in public policy could also result in greater governmental
regulation of our products and potential regulatory uncertainty or delay relating to any required testing or approval.
Use of animal-derived materials could harm our product development and commercialization efforts.
Some of the manufacturing materials and/or components that we use in, and which are critical to, implementation of our
technology involve the use of animal-derived products, including fetal bovine serum. Supplier changes or regulatory actions may
limit or restrict the availability of such materials for clinical and commercial use for a variety of reasons including contamination
or perceived risk of contamination with an adventitious agent, such as bovine spongiform encephalopathy (BSE), in one of our
36
suppliers’ herds. This may lead to a restricted supply of the serum currently required for our product manufacturing processes.
Any restrictions on these materials would impose a potential competitive disadvantage for our products or prevent our ability to
manufacture our cell products. The FDA and other regulatory agencies have issued regulations for controls over bovine material
in animal feed. These regulations do not appear to affect our ability to purchase the manufacturing materials we currently use.
However, regulatory agencies may introduce new regulations that could affect our operations. Our inability to develop or obtain
alternative compounds would harm our product development and commercialization efforts. There are certain limitations in the
supply of certain animal-derived materials, which may lead to delays in our ability to complete clinical trials or eventually to meet
the anticipated market demand for our cell products.
Health care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could
hinder or prevent the commercial success of our products.
In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that
could affect our future results of operations and the future results of operations of our potential customers.
Furthermore, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce
healthcare costs. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010, as
amended by the Health Care and Education Reconciliation Act (jointly, the Affordable Care Act), which includes measures to
significantly change the way health care is financed by both governmental and private insurers. Among the provisions of the
Affordable Care Act of importance to the pharmaceutical industry are the following:
• An annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic
products, apportioned among these entities according to their market share in certain government healthcare programs;
• Expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage
to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or
below 133% of the Federal Poverty Level, thereby potentially increasing both the volume of sales and manufacturers’
Medicaid rebate liability;
• Expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
• New requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in the
Affordable Care Act and its implementing regulations, including reporting any “transfer of value” made or distributed
to physicians and teaching hospitals and reporting any ownership and investment interests held by physicians and their
immediate family members and applicable group purchasing organizations during the preceding calendar year, with data
collection required and reporting to the Centers for Medicare & Medicaid Services (CMS) required by the 90th day of
each calendar year;
•
• Expansion of health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new
government investigative powers, and enhanced penalties for noncompliance;
• A licensure framework for follow-on biologic products;
• A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research;
• Creation of the Independent Payment Advisory Board which, beginning in 2014, has authority to recommend certain
changes to the Medicare program that could result in reduced payments for prescription products and those
recommendations could have the effect of law even if Congress does not act on the recommendations; and
• Establishment of a Center for Medicare Innovation at the CMS to test innovative payment and service delivery models
to lower Medicare and Medicaid spending.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2,
2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. This includes
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year. On January 2, 2013, President Obama signed
into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers,
including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government
37
to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and
other health care funding, which could have a material adverse effect on our customers and accordingly, our financial operations.
Additionally, individual states have become increasingly aggressive in passing legislation and implementing regulations
designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access, and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries
and bulk purchasing. Legally-mandated price controls on payment amounts by third-party payers or other restrictions could harm
our business, results of operations, financial condition and prospects.
In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine
what products and which suppliers will be included in their healthcare programs. This can reduce demand for our products or put
pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.
Additionally, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress
and state legislatures will likely continue to focus on healthcare reform and the reform of the Medicare and Medicaid programs.
While we cannot predict the full outcome of any such legislation, it may harm our ability to market our products and generate
revenues.
Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and effectiveness can
change over time and can be affected by many factors, such as the emergence of new information, including on other products,
changing policies and agency funding, staffing and leadership. We cannot be sure whether future changes to the regulatory
environment will be favorable or unfavorable to our business prospects.
Tissue-based products are regulated differently in different countries. These requirements may be costly and result in delay or
otherwise preclude the distribution of our products in some foreign countries, any of which would adversely affect our ability
to generate operating revenues.
Tissue based products are regulated differently in different countries. Many foreign jurisdictions have a different and may have
a more difficult regulatory pathway for human tissue based products, which may prohibit the distribution of these products until
the applicable regulatory agencies grant marketing approval, or licensure. The process of obtaining regulatory approval is lengthy,
expensive and uncertain, and we may never seek such approvals, or if we do, we may never gain those approvals. Any adverse
events in our clinical trials for a future product under development could negatively impact our products.
Competitor companies or hospitals may be able to take advantage of the EU rules permitting sales of unlicensed medicines for
individual patients to sell competing products without a marketing authorization.
The EU medicines rules allow individual member states to permit the supply of a medicinal product without a marketing
authorization to fulfill special needs, where the product is supplied in response to a bona fide unsolicited order, formulated in
accordance with the specifications of a healthcare professional and for use by an individual patient under the healthcare
professional's direct personal responsibility.
This may, in certain countries, also apply to products manufactured in a country outside the EU and imported to treat specific
patients or small groups of patients. In addition, Advanced Therapy Medicinal Products do not need a marketing authorization if
they are prepared on a non-routine basis and are used within the same EU member state in a hospital under the exclusive professional
responsibility of a medical practitioner and in accordance with a medical prescription for a custom-made product for an individual
patient (named-patient basis).
These exemptions could allow our competitors to make sales in the EU without having obtained a marketing authorization and
without undergoing the expense of clinical trials, especially if those competitors have cell processing facilities in the relevant EU
member state. Similarly, certain hospitals may be able to compete with us on the basis of these rules. Because any such sales
would be made without a marketing authorization, there would be no need for the competitor company or hospital to refer to the
clinical data in our marketing authorization dossiers, and so any data exclusivity protection that we may obtain for our products
would not prevent such competing sales.
The current credit and financial market conditions may exacerbate certain risks affecting our business.
We rely upon third parties for certain aspects of our business, including collaboration partners, wholesale distributors, contract
clinical trial providers, contract manufacturers and third-party suppliers. Because of the recent tightening of global credit and the
38
volatility in the financial markets, there may be a delay or disruption in the performance or satisfaction of commitments to us by
these third parties, which could adversely affect our business.
We are dependent on our key manufacturing, quality and other management personnel and the loss of any of these individuals
could harm our business.
Our success depends in large part upon the efforts of our key management and manufacturing and quality staff. The loss of
any of these individuals, or our inability to attract and retain highly qualified scientific and management personnel in a timely
manner, could materially and adversely affect our business and our future prospects. In the future, we may need to seek additional
manufacturing and quality staff members. There is a high demand for highly trained manufacturing and quality personnel in our
industry. We face competition for such personnel from other companies, research and academic institutions and other entities.
We do not know whether we will be able to attract, train and retain highly qualified manufacturing and quality personnel in the
future, which could have a material adverse effect on our business, financial condition and results of operations. A loss of one or
more of our key personnel could severely and negatively impact our operations. Our key personnel are employed “at-will,” and
any of them may elect to pursue other opportunities at any time. We have no present intention of obtaining key man life insurance
on any of our key management, manufacturing, quality or other personnel.
A cyber security incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to
liability under HIPAA, consumer protection laws, or other common law theories, subject us to litigation and federal and state
governmental inquiries, damage our reputation, and otherwise be disruptive to our business.
We collect and store sensitive information, including intellectual property and personally identifiable information, on our
networks. The secure maintenance of this information is critical to our business operations. We have implemented multiple layers
of security measures to protect this confidential data through technology, processes, and our people; we utilize current security
technologies; and our defenses are monitored and routinely reviewed by internal and external parties. Despite these efforts, threats
from malicious persons and groups, new vulnerabilities, and advanced new attacks against information systems create risk of
cyber security incidents. There can be no assurance that we will not be subject to cyber security incidents that bypass our security
measures, result in loss of personal health information or other data subject to privacy laws or disrupt our information systems or
business. As a result, cyber security and the continued development and enhancement of our controls, processes and practices
designed to protect our information systems from attack, damage or unauthorized access remain a priority for us. As cyber threats
continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective
measures or to investigate and remediate any cyber security vulnerabilities. The occurrence of any of these events could result in
interruptions, delays, the loss, access, misappropriation, disclosure or corruption of data, liability under privacy, security and
consumer protection laws or litigation under these or other laws, including common law theories, and subject us to federal and
state governmental inquiries, any of which could have a material adverse effect on our financial position and results of operations
and harm our business reputation.
Risks Related to Intellectual Property
We have no patent protection for Epicel.
We have no issued patents or pending patent applications relating to Epicel. While we attempt to protect our proprietary
information as trade secrets through certain agreements with our employees, consultants, agents and other organizations to which
we disclose our proprietary information, we cannot give any assurance that these agreements will provide effective protection for
our proprietary information in the event of unauthorized use or disclosure of such information. If other cultured epidermal autografts
are approved and marketed, we will be unable to prevent them from competing with Epicel in the marketplace. We expect that
the presence of one or more competing products would reduce our market share and could negatively impact price levels and third
party reimbursement policies for Epicel, any of which would materially affect our business.
Our issued patents relating to Carticel and MACI will expire soon and may be insufficient to protect our business.
We have issued patents in the United States and in certain foreign countries that relate to the combinations of chondrocytes
and collagen membranes used in Carticel and MACI. However, the issued patents relating to Carticel are scheduled to expire by
August of 2016 in the U.S. and by 2022 in Europe. Furthermore, the issued patents relating to MACI are scheduled to expire by
August of 2016 in the U.S. and by August of 2017 in Europe. When these patents expire we may be subject to increased competition
and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated.
The patents we own may not be of sufficient scope or strength to provide us with significant commercial protection or commercial
advantage, and competitors may be able to design around our patents or develop products that provide outcomes that are similar
39
to ours without infringing on our intellectual property rights. In addition, we cannot be certain that any of our pending patent
applications will be issued or that the scope of the claims in our pending patent applications will not be significantly narrowed or
determined to be invalid.
If our patents and proprietary rights do not provide substantial protection, then our business and competitive position will
suffer.
Our success depends in large part on our ability to develop or license intellectual property rights to protect our proprietary
products and technologies. This involves complex legal, scientific, and factual questions and uncertainties. We rely upon patent,
trade secret, copyright and contract laws to protect proprietary technology and trademark law to protect brand identities. However,
we cannot assure you that any patent applications filed by, assigned to, or licensed to us will be granted, and that the scope of any
of our issued or licensed patents will be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents
licensed to us could be successfully challenged, invalidated, held to be unenforceable, or circumvented so that our patent rights
would not create an effective competitive barrier. We also cannot assure you that the inventors of the patents and applications that
we own or license were the first to invent or the first to file on the inventions, or that a third party will not claim ownership in one
of our patents or patent applications. We cannot assure you that a third party does not have or will not obtain patents that dominate
the patents we own or license now or in the future.
Patent law relating to the scope of claims in the biotechnology field is evolving and our patent rights in this country and abroad
are subject to this uncertainty. For example, from time to time, the U.S. Supreme Court (Supreme Court), other federal courts, the
U.S. Congress or the United States Patent and Trademark Office (USPTO) may change the standards of patentability and any such
changes could have a negative impact on our business. There have been several cases involving “gene patents” and diagnostic
claims that have been considered by the Supreme Court. A suit brought by multiple plaintiffs, including the American Civil Liberties
Union (ACLU) against Myriad Genetics (Myriad) and the USPTO, could impact biotechnology and diagnostic patents. That case
involves certain of Myriad’s U.S. patents related to the breast cancer susceptibility genes BRCA1 and BRCA2. The Federal Circuit
court issued a written decision on July 29, 2011 that reversed the decision of the U.S. District Court for the Southern District of
New York that Myriad’s composition claims to “isolated” DNA molecules cover unpatentable subject matter. The Federal Circuit
court instead held that the breast cancer genes are patentable subject matter. Subsequently, on March 20, 2012, the Supreme Court
issued a decision in Mayo Collaborative v. Prometheus Laboratories (Prometheus) a case involving patent claims directed to
optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to add
enough inventive content to the underlying correlations to allow the processes they describe to qualify as patent-eligible processes
that apply natural laws. The Supreme Court subsequently granted certiorari in the Myriad case, vacated the judgment, and remanded
the case back to the Federal Circuit court for further consideration in light of their decision in the Prometheus case. The Federal
Circuit court heard oral arguments on July 20, 2012, and issued a decision on August 16, 2012. The Federal Circuit court reaffirmed
its earlier decision and held that composition of matter claims directed to isolated nucleic acids are patent-eligible subject matter,
but that method claims consisting of only abstract mental processes are not patent-eligible. On September 25, 2012, the ACLU
filed a petition for a writ of certiorari asking the Supreme Court to review the Federal Circuit court’s decision with respect to the
composition of matter claims. On November 30, 2012, the Supreme Court granted the petition and agreed to review the case. On
June 13, 2013, the Supreme Court issued a decision in the Myriad case. According to the decision, claims directed to genomic
DNA cover unpatentable subject matter. However, claims directed to cDNA are patent eligible subject matter.
On March 4, 2014, the USPTO issued a memorandum entitled “2014 Procedure For Subject Matter Eligibility Analysis Of
Claims Reciting Or Involving Laws Of Nature/Natural Principles, Natural Phenomena, And/Or Natural Products”. This
memorandum provides guidance to patent examiners for examining claims reciting laws of nature/natural principles, natural
phenomena, and/or natural products for patent eligibility in view of the Supreme Court decisions in Prometheus and Myriad. The
guidance indicates that claims reciting such natural subject matter, read as a whole, that do not significantly differ from such
natural subject matter should be rejected as non-statutory subject matter. We cannot assure you that our patent portfolio or our
efforts to seek patent protection for our technology and products will not be negatively impacted by the guidance issued by the
USPTO, the decisions described above, rulings in other cases, or changes in guidance or procedures issued by the USPTO.
Congress directed the USPTO to study effective ways to provide independent, confirming genetic diagnostic test activity where
gene patents and exclusive licensing for primary genetic diagnostic tests exist. This study will examine the impact that independent
second opinion testing has on providing medical care to patients; the effect that providing independent second opinion genetic
diagnostic testing would have on the existing patent and license holders of an exclusive genetic test; the impact of current practices
on testing results and performance; and the role of insurance coverage on the provision of genetic diagnostic tests. The USPTO
was directed to report the findings of the study to Congress and provide recommendations for establishing the availability of
independent confirming genetic diagnostic test activity by June 16, 2012. On August 28, 2012, the Department of Commerce sent
a letter to the House and Senate Judiciary Committee leadership updating them on the status of the genetic testing report. The
letter stated in part: “Given the complexity and diversity of the opinions, comments, and suggestions provided by interested parties,
40
and the important policy considerations involved, we believe that further review, discussion, and analysis are required before a
final report can be submitted to Congress.” The USPTO issued a Request for Comments and Notice of Public Hearing on Genetic
Diagnostic Testing on January 25, 2012, and held additional public hearings in February and March 2013. It is unclear whether
the results of this study will be acted upon by the USPTO or result in Congressional efforts to change the law or process in a
manner that could negatively impact our present or future patent portfolio.
There can be no assurance that the Supreme Court’s decision in either the Myriad or Prometheus case will not have a negative
impact on biotechnology patents generally or the ability of biotechnology companies to obtain or enforce their patents in the future.
Such negative decisions by the Supreme Court could have a material adverse effect on our existing patent portfolio and our ability
to protect and enforce our intellectual property in the future.
We also rely on trade secrets and un-patentable know-how that we seek to protect, in part, by confidentiality agreements with
our employees, consultants, suppliers and licensees. These agreements may be breached, and we might not have adequate remedies
for any breach. Our competitors may also independently develop technologies substantially equivalent or superior to ours. If this
were to occur, our business and competitive position would suffer.
Given our patent position in regard to our products, if we are unable to protect the confidentiality of our proprietary information
and know-how related to these products, our competitive position would be impaired and our business, financial condition and
results of operations could be adversely affected.
Some of our technology, including our knowledge regarding the processing of our products, is unpatented and is maintained
by us as trade secrets. In an effort to protect these trade secrets, we require our employees, consultants, collaborators and advisors
to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all
confidential information developed by the individual or made known to the individual by us during the course of the individual’s
relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with
adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. A
breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict
with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous
employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure
of our trade secrets would impair our competitive position and could have a material adverse effect on our business, financial
condition and results of operations.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee
payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or
eliminated for non-compliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages
over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number
of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent
lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a
patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-
payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent
applications covering our products or product candidates, our competitive position would be adversely affected.
With respect to MACI and ixmyelocel-T, if we are unable to obtain and enforce patents and to protect our trade secrets, others
could use our technology to compete with us, which could limit opportunities for us to generate revenues by licensing our
technology and selling products.
Our success will depend in part on our ability to obtain and enforce patents and maintain trade secrets in the United States and
in other countries. If we are unsuccessful in obtaining and enforcing patents, our competitors could use our technology and create
products that compete with our products, without paying license fees or royalties to us.
The preparation, filing, and prosecution of patent applications can be costly and time consuming. Our limited financial resources
may not permit us to pursue patent protection of all of our technology and products throughout the world.
41
Even if we are able to obtain issued patents covering our technology or products, we may have to incur substantial legal fees
and other expenses to enforce our patent rights in order to protect our technology and products from infringing uses. We may not
have the financial resources to finance the litigation required to preserve our patent and trade secret rights.
A successful challenge to our trademarks could force us to rebrand Epicel, Carticel, or MACI.
We rely on our trademarks to distinguish our products from the products of our competitors, and have registered or applied to
register a number of these trademarks. Third parties may challenge our use of the trademarks. In the event that our trademarks
are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could
require us to devote resources to advertising and marketing these new brands.
Intellectual property litigation could harm our business. We may be subject to patent infringement claims that could be costly
to defend, which may limit our ability to use disputed technologies, and which could prevent us from pursuing research and
development or commercialization of some of our products, require us to pay licensing fees to have freedom to operate and/or
result in monetary damages or other liability for us.
The success of our business will depend significantly on our ability to operate without infringing patents and other proprietary
rights of others. Our cell processing system and cell compositions utilize a wide variety of technologies and we can give no
assurance that we have identified or can identify all inventions and patents that may be infringed by development and manufacture
of our cell compositions. If the technology that we use infringes a patent held by others, we could be sued for monetary damages
by the patent holder or its licensee, or we could be prevented from continuing research, development, and commercialization of
products that rely on that technology, unless we are able to obtain a license to use the patent. The cost and availability of a license
to a patent cannot be predicted, and the likelihood of obtaining a license at an acceptable cost would be lower if the patent holder
or any of its licensees is using the patent to develop or market a product with which any of our existing product candidates or our
products would compete. If we could not obtain a necessary license, we would need to develop or obtain rights to alternative
technologies, which could prove costly and could cause delays in product development, or we could be forced to discontinue the
development or marketing of any products that were developed using the technology covered by the patent.
Although we have not been subject to any filed infringement claims, patents could exist or could be filed which would prohibit
or limit our ability to market our products or maintain our competitive position. In the event of an intellectual property dispute,
we may be forced to litigate. Such litigation is typically protracted and the results are unpredictable. Intellectual property litigation
would divert management’s attention from developing our products and would force us to incur substantial costs regardless of
whether we are successful. An adverse outcome could subject us to significant liabilities to third parties including treble damages
and the opposing party’s attorney fees, and force us to pay significant license fees and royalties or cease the development and sale
of our products and processes.
We have hired and expect to continue to hire individuals who have experience in cell culture and cell based therapeutics and
may have confidential trade secret or proprietary information of third parties. We caution these individuals not to use or reveal
this third-party information, but we cannot assure you that these individuals will not use or reveal this third-party information.
Thus, we could be sued for misappropriation of proprietary information and trade secrets. Such claims are expensive to defend
and could divert our attention and could result in substantial damage awards and injunctions that could have a material adverse
effect on our business, financial condition or results of operations.
We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming
and unsuccessful and have a material adverse effect on the success of our business.
Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counter
infringement or unauthorized use, litigation may be necessary in the future to enforce or defend our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights
of others. Also, third parties may initiate legal proceedings against us to challenge the validity or scope of intellectual property
rights we own or control. These proceedings can be expensive and time consuming. Many of our current and potential competitors
have the ability to dedicate substantially greater resources to defend their intellectual property rights than we can. Accordingly,
despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial
results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or
unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not
42
cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of
being invalidated, held unenforceable or interpreted narrowly.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could
also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have a material adverse effect on our business, financial condition
or results of operations.
If we infringe the rights of third parties we could be prevented from selling products, forced to pay damages, and defend
against litigation.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur
substantial costs and we may have to: obtain licenses, which may not be available on commercially reasonable terms, if at all;
abandon an infringing product; redesign our products or processes to avoid infringement; stop using the subject matter claimed
in the patents held by others; pay damages; and/or defend litigation or administrative proceedings which may be costly whether
we win or lose, and which could result in a substantial diversion of our financial and management resources.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights
have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following
examples are illustrative:
•
Others may be able to make products that are the same as or similar to our products or product candidates, but that are
not covered by the claims of the patents that we own or have exclusively licensed;
• We or any strategic partners might not have been the first to make the inventions covered by the issued patents or pending
patent applications that we own or have exclusively licensed;
• We might not have been the first to file patent applications covering certain of our inventions;
• Others may independently develop similar or alternative technologies or duplicate any of our technologies without
•
•
infringing our intellectual property rights;
It is possible that our pending patent applications will not lead to issued patents;
Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be
held invalid or unenforceable as a result of legal challenges;
• Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe
harbor from patent infringement claims for certain research and development activities, as well as in countries where we
do not have patent rights and then use the information learned from such activities to develop competitive products for
sale in our major commercial markets;
• We may not develop additional proprietary technologies that are patentable; and
•
The patents of others may have an adverse effect on our business.
Others may challenge our patent or other intellectual property rights or sue us for infringement.
The use of our products and product candidates may expose us to product liability claims, and we may not be able to obtain
adequate insurance. As a result, such claims could affect our earnings and financial condition.
We face an inherent business risk of exposure to product liability claims in the event that the manufacture and/or use of our
products during clinical trials, or after commercialization, results in adverse events. Moreover, we derive the raw materials for
our products from patients serving as their own donors, the production process is complex, and the handling requirements are
specific, all of which increase the likelihood of quality failures and subsequent product liability claims. We may not be able to
obtain or maintain product liability insurance on acceptable terms with adequate coverage or at all. If we are unable to obtain
insurance, or if claims against us substantially exceed our coverage, then our business could be adversely impacted. Excessive
insurance costs or uninsured claims would increase our operating loss and adversely affect our financial condition. Whether or
not we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial
and managerial resources and could result in, among other things:
Significant awards against us;
Substantial litigation costs;
•
•
• Recall of the product;
43
Injury to our reputation;
•
• Withdrawal of clinical trial participants; or
• Adverse regulatory action.
Any of these results could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to an Investment in our Common Stock
We have identified a material weakness in our internal control over segregation of duties. If we fail to remediate this material
weakness and implement and maintain proper and effective internal control over segregation of duties in the future, a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis, which could
harm our operating results, investors’ views of us and, as a result, the value of our common stock.
We identified a material weakness in the operation of our internal controls over segregation of duties as of December 31, 2015.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. The material weakness relates to the design of controls to mitigate segregation of duties conflicts in
our financial management/ERP software. Specifically, our Controller had access to modules in the financial management software
beyond necessary to perform the job of Controller, and the controls that were designed and implemented to be performed by the
Controller to mitigate the incompatible duties of other financial personnel were ineffective. Thus, the material weakness impacted
substantially all financial statement accounts and all financial statement assertions. While the material weakness did not result in
any financial statement adjustments during the year ended December 31, 2015, it could result in misstatements to substantially
all accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements
that would not be prevented or detected. We have commenced efforts to remediate this material weakness through modification
and removal of the controller's access to modules in the financial management software. However, if we cannot correct the material
weakness we have identified, or if we experience other material weaknesses investor confidence and our stock price could be
adversely affected. Further, if other material weaknesses or deficiencies in our internal controls exist and go undetected, our
financial statements could contain material misstatements that, when discovered in the future, could cause us to fail to meet our
future reporting obligations and cause the price of our common stock to decline.
The market price of the common stock of the combined company may be affected by factors different from those affecting the
market price for our common stock in recent history.
Our business in recent history differs from that of the CTRM business, and our current combined business differs from recent
history, and accordingly, the results of operations for the combined company may be affected by factors different from those
affecting our results of operation in recent history. As a result, the market price for our stock may be impacted differently in the
future by those factors than it is currently.
Our common stock price has been volatile and future sales of shares of common stock could have an adverse effect on the
market price of such shares.
The market price of shares of our common stock has been volatile, ranging in closing price between $1.71 and $3.95 during
the year ended December 31, 2015. The price of our common stock may continue to fluctuate in response to a number of events
and factors, such as:
• Clinical trial results;
• The amount of our cash resources and our ability to obtain additional funding;
• Announcements of research activities, business developments, technological innovations or new products by us or our
competitors;
• Entering into or terminating strategic relationships;
• Regulatory developments in both the United States and abroad;
• Disputes concerning patents or proprietary rights;
• Changes in our revenues or expense levels;
•
•
• News or reports from other stem cell, cell therapy or regenerative medicine companies;
• Reports by securities analysts;
•
• Concerns related to management transitions; and
Status of the investment markets;
Seasonal or other variations in patient demand for Carticel and Epicel;
Public concern regarding the safety, efficacy or other aspects of the products or methodologies we are developing;
44
• Delisting from The NASDAQ Capital Market.
Any of these events may cause the price of our shares to fall, which may adversely affect our business and financing opportunities.
In addition, the stock market in general and the market prices for biotechnology companies in particular have experienced significant
volatility recently that often has been unrelated to the operating performance or financial conditions of such companies. These
broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our operating
performance or prospects.
Our failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a de-listing of our
common stock.
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as the corporate governance
requirements or the minimum closing bid price requirement, NASDAQ may take steps to de-list our common stock. Such a de-
listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with NASDAQ’s
listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become
listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping
below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing requirements.
The sale of our common stock through future equity offerings may cause dilution and could cause the price of our common
stock to decline.
In the year-ended December 31, 2014, we sold (i) an aggregate gross amount of approximately $7.1 million worth of shares
of common stock pursuant to our At-the-Market Sales Agreement (ATM) with MLV (ii) an aggregate of approximately $3.7 million
worth of shares of our common stock to Lincoln Park pursuant to the Lincoln Park Equity Line, and (iii) on September 17, 2014,
we sold 15.8 million shares of common stock under a Form S-1 registration statement and pursuant to a prospectus first made
available on September 11, 2014. The ATM, which as of December 31, 2015 had remaining capacity of approximately $7.8
million, allowed us to sell our common stock from time to time under a registration statement on Form S-3 filed in June 2011,
pursuant to which we registered $100 million of our securities for public sale. The Form S-3 registration statement filed in June 2011
expired in July 2014. Additionally, pursuant to the Lincoln Park Equity Line we may direct Lincoln Park to purchase up to $15
million worth of shares of our common stock over a 30-month period generally in amounts up to 50 thousand shares of our common
stock. As of December 31, 2015, we had remaining capacity of approximately $11.3 million worth of shares under the Lincoln
Park Equity Line. However, there are certain factors, such as volume of trading in our common stock, our stock price and the
ability to terminate the agreement with notice, which limit the amount that can be raised in a short period of time through the
Lincoln Park Equity Line.
Sales of our common stock offered through future equity offerings may result in substantial dilution to the interests of other
holders of our common stock. The sale of a substantial number of shares of our common stock to investors, or anticipation of
such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that
we might otherwise wish to effect sales.
We do not anticipate paying dividends on our common stock, and accordingly, shareholders must rely on stock appreciation
for any return on their investment.
We have never declared or paid cash dividends on our common stock and do not expect to do so in the foreseeable future. The
declaration of dividends is subject to the discretion of our board of directors and will depend on various factors, including our
operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should
not rely on an investment in our company if you require dividend income from your investment in our company. The success of
your investment will likely depend entirely upon any future appreciation of the market price of our common stock, which is
uncertain and unpredictable. There is no guarantee that our common stock will appreciate in value.
Our Loan and Security Agreement contains restrictions that limit our flexibility in operating our business. We may be required
to make a prepayment or repay the outstanding indebtedness earlier than we expect if a prepayment event or an event of default
occurs, including a material adverse change with respect to us, which could have a materially adverse effect on our business.
The Loan and Security Agreement contains various covenants that limit our ability to engage in specified types of transactions.
These covenants limit our ability to, among other things:
•
convey, sell, lease or otherwise dispose of certain parts of our business or property;
45
change the nature of our business;
liquidate or dissolve;
enter into certain change in control or acquisition transactions;
incur or assume certain debt;
grant certain types of liens on our assets;
•
•
•
•
•
• maintain certain collateral accounts;
•
• make certain investments;
•
• make or permit certain payments on subordinate debt; and
•
pay dividends or make certain distributions to our stockholders;
enter into material transactions with affiliates;
become an “investment company” as defined under the Investment Company Act of 1940, as amended.
The restrictive covenants of the Loan and Security Agreement could cause us to be unable to pursue business opportunities
that we or our stockholders may consider beneficial.
A breach of any of these covenants could result in an event of default under the Loan and Security Agreement. An event of
default will also occur if, among other things, a material adverse change in our business, operations or condition occurs, which
could potentially include negative results in clinical trials, or a material impairment of the prospect of our repayment of any portion
of the amounts we owe under the Loan and Security Agreement occurs. In the case of a continuing event of default under the
agreement, SVB could elect to declare all amounts outstanding to be immediately due and payable, proceed against the collateral
in which we granted SVB a security interest under the Loan and Security Agreement, or otherwise exercise the rights of a secured
creditor. Amounts outstanding under the Loan and Security Agreement are secured by all of our existing and future assets, excluding
intellectual property, which is subject to a negative pledge arrangement.
We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline.
Our quarterly operating results are likely to fluctuate in the future. These fluctuations could cause our stock price to decline.
The nature of our business involves variable factors, such as the timing of the research, development and regulatory pathways of
our product candidates, which could cause our operating results to fluctuate. Due to the possibility of fluctuations in our revenues
and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future
performance.
Efforts to comply with securities laws and regulations will increase our costs and require additional management resources,
and we still may fail to comply.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (SEC) adopted
rules requiring public companies to include a report of management on their internal controls over financial reporting in their
annual reports on Form 10-K. For the year ended December 31, 2015, we are no longer a smaller reporting company and therefore,
the independent registered public accounting firm auditing our financial statements is required to attest to the effectiveness of our
internal controls over financial reporting. If, in any year, we are unable to conclude that we have effective internal controls over
financial reporting or if our independent registered public accounting firm is required to, but is unable to provide us with a report
as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our
financial statements, which could result in a decrease in the value of our securities.
If our common stock becomes subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing
customer transactions and trading activity in our securities may be adversely affected.
If at any time our securities are no longer listed on a national securities exchange, including The NASDAQ Stock Market, or
we have net tangible assets of $5.0 million or less and our common stock has a market price per share of less than $5.00, transactions
in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock becomes subject to the “penny stock”
rules promulgated under the Securities Exchange Act of 1934, as amended, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely affected. For any transaction involving a penny stock,
unless exempt, the rules require:
• That a broker or dealer approve a person’s account for transactions in penny stocks; and
• The broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
46
Obtain financial information and investment experience objectives of the person; and
•
• Make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC
relating to the penny stock market, which, in highlight form:
Sets forth the basis on which the broker or dealer made the suitability determination; and
•
• That the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading
and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities
and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
Our corporate documents and Michigan law contain provisions that may make it more difficult for us to be acquired.
Our Board of Directors (Board) has the authority, without shareholder approval, to issue additional shares of preferred stock
and to fix the rights, preferences, privileges and restrictions of these shares without any further vote or action by our shareholders.
Michigan law contains a provision that makes it more difficult for a 10% shareholder, or its officers, to acquire a company. This
authority, together with certain provisions of our charter documents, may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third-party from attempting to acquire, control of our company. This effect could occur even
if our shareholders consider the change in control to be in their best interest. We have adopted a shareholder rights plan, the purpose
of which is, among other things, to enhance our Board’s ability to protect shareholder interests and to ensure that shareholders
receive fair treatment in the event any coercive takeover attempt of our company is made in the future. The shareholder rights
plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our company or a
large block of our company’s common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease approximately 26,000 square feet in Ann Arbor, Michigan and 50,000 square feet in Cambridge, Massachusetts. In
conjunction with the acquisition of the CTRM Business, we also assumed the leases for the facility in Kastrup, Denmark which
was sublet in October 2015. The Ann Arbor lease agreement expires in April 2018 and the Cambridge lease expires in
February 2022. The facilities include clean rooms, laboratories and office space. We believe that our facilities are adequate to
meet our current needs. Additional facilities may be required to support expansion for research and development activities or to
assume manufacturing operations that are currently fulfilled through contract manufacturing relationships.
Item 3. Legal Proceedings
We are currently not party to any material legal proceedings, although from time to time we may become involved in disputes
in connection with the operation of our business.
Item 4. Mine Safety Disclosures
Not applicable.
47
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities
Our common stock is currently quoted on the NASDAQ Capital Market under the symbol “VCEL”. The following table sets
forth the high and low closing prices per share of common stock as reported on the NASDAQ Stock Market.
Price Range of Common Stock
High
Low
Year ended December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
6.49
5.05
4.08
3.04
3.95
3.76
3.61
2.71
3.31
3.51
2.61
2.68
2.75
3.02
2.40
1.71
As of February 29, 2016 there were approximately 171 holders of record of the common stock. We have never paid any cash
dividends on our common stock and we do not anticipate paying such cash dividends in the foreseeable future. We currently
anticipate that we will retain all future earnings, if any, for use in the development of our business.
Stock Performance Graph
The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2011 through
December 31, 2015 for (i) our common stock, (ii) the NASDAQ Composite Index (U.S.) and (iii) the NASDAQ Biotechnology
Index. Pursuant to applicable SEC rules, all values assume reinvestment of the full amount of all dividends, however, no dividends
have been declared on our common stock to date. The stockholder return shown on the graph below is not necessarily indicative
of future performance, and we do not make or endorse any predictions as to future stockholder returns.
Stock Price Comparison
Equity Compensation Plan Information as of December 31, 2015
The following table sets forth information as of December 31, 2015 with respect to compensation plans (including individual
compensation arrangements) under which equity securities are authorized for issuances:
48
Number of Securities
to be Issued upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans(2)
Equity compensation plans approved by
security holders (employees and directors)(1)
Employee stock purchase plan(1)
2,523,400
63,193
$
$
6.36
2.19
1,962,168
936,807
(1) The material features of these securities are described in note 7 of the Consolidated Financial Statements.
(2) Shares issuable under the 2009 Omnibus Incentive Plan.
Recent Sales of Unregistered Securities
The following is a summary of all securities that we have sold during the year ended December 31, 2015 without registration
under the Securities Act of 1933, as amended (the Securities Act).
On December 18, 2015, we entered into a Securities Exchange Agreement (the Exchange Agreement) with Stonepine Capital,
LP (Stonepine), pursuant to which Stonepine exchanged an aggregate of 1,250,000 shares of our common stock for 1,250 shares
of our Series A Convertible Preferred Stock (the Exchange). Upon the closing of the Exchange on December 23, 2015, we issued
the Class A Convertible Preferred Stock to Stonepine without registration under the Securities Act in reliance on the exemption
from registration contained in Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
There were no repurchases of shares of common stock made during the year ended December 31, 2015.
Item 6. Selected Financial Data
The data for each of the five years in the period ended December 31, 2015 are derived from our Consolidated Financial
Statements. The selected historical financial data for the financial position of our Company as of December 31, 2015 and 2014
and the results of their operations for each of the three years in the period ended December 31, 2015 presented below should be
read together with our consolidated financial statements and the notes to those statements and “Item 7 Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Form 10-K.
49
(In thousands, except per share amounts)
Revenues:
Product sales(a)
Total revenues
Costs and expenses:
Cost of product sales(a)
Gross profit
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
(Increase) decrease in fair value of warrants(b)
Bargain purchase gain(c)
Foreign currency translation gain (loss)
Interest income
Other income (expense)
Interest expense
Total other income (expense)
Net loss
Net loss per share attributable to common
shareholders (Basic and Diluted)
$
$
2015
2014
2013
2012
2011
Year Ended December 31,
$
51,168
$
28,796
$
51,168
28,796
26,470
24,698
18,890
22,479
41,369
(16,671)
324
—
(67)
36
47
(9)
331
(16,340) $
17,293
11,503
21,263
13,774
35,037
(23,534)
(27)
3,473
152
24
(2)
(6)
3,614
(19,920) $
$
19
19
4
15
$
21
21
6
15
18
18
4
14
15,104
5,875
20,979
(20,964)
26,025
7,750
33,775
(33,760)
21,330
7,724
29,054
(29,040)
5,337
4,248
9,329
—
—
16
—
—
50
—
—
53
—
(11)
5,342
(15,622) $
—
(12)
4,286
(29,474) $
—
(10)
9,372
(19,668)
(0.97) $
(2.23) $
(6.95) $
(16.25) $
(10.18)
(a) Revenue from commercial operations began in June 2014 following the acquisition of the CTRM business. Prior to June
2014, we were a development stage entity.
(b) Fluctuations in the fair value of the warrants are due to the reduction in the time to maturity and changes in our stock
price.
(c) The bargain purchase gain is a result of the CTRM business acquisition.
(In thousands, except per share amounts)
Cash
Working capital (deficit)
Property and equipment, net
Total assets
Total liabilities
Total shareholders' equity (deficit)
2015
2014
2013
2012
2011
December 31,
$
14,581
$
30,343
$
8,059
$
13,638
$
15,235
4,049
34,309
12,179
22,130
29,661
2,892
47,579
11,938
35,641
3,155
739
9,215
5,321
3,894
8,331
1,188
15,178
5,665
(32,100)
5,530
(14,495)
1,564
7,739
20,710
(12,971)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
Our reports, filings and other public announcements contain certain statements that describe our management’s beliefs
concerning future business conditions, plans and prospects, growth opportunities and the outlook for our business and the electric
transmission industry based upon information currently available. Such statements are “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Wherever possible, we have identified these forward-looking
statements by words such as “will,” “may,” “anticipates,” “believes,” “intends,” “estimates,” “expects,” “projects” and similar
phrases. These forward-looking statements are based upon assumptions our management believes are reasonable. Such forward-
50
looking statements are subject to risks and uncertainties which could cause our actual results, performance and achievements to
differ materially from those expressed in, or implied by, these statements, including, among others, the risks and uncertainties
listed in this report under “Item 1A Risk Factors” and in our other reports filed with the SEC from time to time.
Because our forward-looking statements are based on estimates and assumptions that are subject to significant business,
economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be
materially different and any or all of our forward-looking statements may turn out to be wrong. Forward-looking statements speak
only as of the date made and can be affected by assumptions we might make or by known or unknown risks and uncertainties.
Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, we cannot
assure you that our expectations or forecasts expressed in such forward-looking statements will be achieved. Except as required
by law, we undertake no obligation to publicly update any of our forward-looking or other statements, whether as a result of new
information, future events, or otherwise.
Overview
Vericel Corporation is a leader in developing patient-specific expanded cellular therapies for use in the treatment of patients
with severe diseases and conditions. We market two autologous cell therapy products in the United States: Carticel® (autologous
cultured chondrocytes), an autologous chondrocyte implant for the treatment of cartilage defects in the knee, and Epicel® (cultured
epidermal autografts), a permanent skin replacement for the treatment of patients with deep-dermal or full-thickness burns
comprising greater than or equal to 30 percent of total body surface area. We are also developing MACI™, a third-generation
autologous chondrocyte implant for the treatment of cartilage defects in the knee, and ixmyelocel-T, a patient-specific multicellular
therapy for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy.
Acquisition of Sanofi’s CTRM Business
On May 30, 2014, we completed the acquisition of Sanofi’s Cell Therapy and Regenerative Medicine (CTRM) business, certain
assets, including all of the outstanding equity interests of Genzyme Biosurgery ApS (now known as Vericel Denmark ApS)(the
Danish subsidiary), a wholly-owned subsidiary of Sanofi and over 250 patents and patent applications of the seller and certain of
its subsidiaries and assumed certain liabilities for purposes of acquiring a portion of the CTRM business which included Carticel,
MACI and Epicel (the CTRM Transaction).
Concurrent with the closing of the CTRM Transaction, we and Sanofi entered into (i) certain IP assignment and license
agreements to effect the transfer and license of the intellectual property related to the CTRM Business assigned and/or licensed
to us, (ii) certain assignment and assumption of lease agreements for each of the real property leases being assigned to us, and
(iii) transition services and transition supply agreements.
See Note 4 “Acquisitions” and Note 5, “Restructuring” of the Consolidated Financial Statements for additional information.
Manufacturing
We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of
Carticel, Epicel manufacturing and also manufactured MACI for the SUMMIT study conducted for approval in Europe. We also
operate a centralized cell manufacturing facility in Ann Arbor, Michigan. The Ann Arbor facility supports the current open label
extension portion of the ixCELL-DCM clinical trial being conducted in the United States and Canada and we believe we have
sufficient capacity, with minor modifications, to supply our early commercialization requirements.
Product Portfolio
Our approved and marketed products include three approved autologous cell therapy products: Carticel (autologous cultured
chondrocytes), a first-generation product for autologous chondrocyte implantation (ACI) currently marketed in the U.S., Epicel
(cultured epidermal autografts), a permanent skin replacement for full thickness burns in adults and pediatrics with greater than
or equal to 30% of total body surface area (TBSA) also currently marketed in the U.S, and MACI (matrix-applied characterized
autologous cultured chondrocytes), a third-generation ACI product approved in Europe and for which a BLA is under review by
the FDA. Our product candidate portfolio also includes ixmyelocel-T, a patient-specific multicellular therapy currently in
development for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy (DCM). We completed enrolling
and treating patients in our Phase 2b ixCELL-DCM study in February 2015 and on March 10, 2016 announced the trial had met
its primary endpoint of reduction in clinical cardiac events and that incidence of adverse events, including serious adverse events,
in patients treated with ixmyelocel-T was comparable to patients in the placebo group.
Carticel
51
Carticel, a first-generation ACI product for the treatment and repair of cartilage defects in the knee, is the first and currently
the only FDA-approved autologous cartilage repair product. Carticel is indicated for the repair of symptomatic cartilage defects
of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate
response to a prior arthroscopic or other surgical repair procedure such as debridement, microfracture, drilling/abrasion arthroplasty,
or osteochondral allograft/autograft. Carticel received a Biologics License Application (BLA) approval in 1997 and is currently
marketed in the U.S. It is generally used on patients with larger lesions (greater than 3 cm2).
In the U.S., we focus net sales of Carticel on the sports-injury-targeted orthopedic physician target audience, which is very
concentrated, with 60% of the current Carticel business originating from 25% of this audience, or approximately 110 physicians.
We currently have a 21-person field force calling on this sports-injury targeted orthopedic physician audience. In the year ended
December 31, 2015, net revenues were $35.2 million for Carticel.
Epicel
Epicel (cultured epidermal autografts) is a permanent skin replacement for full thickness burns greater than or equal to 30%
of TBSA. Epicel is regulated by the CBER 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 an HDE application for the
product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 4,000
individuals annually in the United States. 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. Currently, fewer than 100 patients are
treated with Epicel in the U.S. each year. In the year ended December 31, 2015, net revenues were $15.2 million for Epicel.
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 4,000 individuals per year in the United
States.
On February 18, 2016, the FDA approved the Company’s 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 include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with meeting the
pediatric eligibility criteria, the FDA has determined the the ADN number for Epicel is 360,400.
We currently have a 4-person field force calling upon dedicated burn centers.
MACI
MACI is a third-generation ACI product for the treatment of focal chondral cartilage defects in the knee. MACI received
marketing authorization in Europe in July 2013 by meeting the requirements of the Advanced Therapy and Medicinal Product
(ATMP) guidelines. MACI had been commercially available in the European Union (EU) since 1998. As part of the June 2014
restructuring we temporarily suspended sales of MACI in August 2014, primarily due to low utilization and an unfavorable pricing
environment. We believe that MACI has significant revenue potential in the U.S., if approved and reimbursed. On March 4, 2016,
the FDA accepted our BLA seeking approval to market MACI as an autologous cellular treatment for symptomatic cartilage defects
of the knee. The FDA provided a PDUFA (Prescription Drug User Fee Act) goal date of January 3, 2017. In addition, the FDA
communicated that it is not currently planning to hold an advisory committee meeting to discuss the application.
MACI was obtained by Sanofi by acquiring Verigen AG (Verigen) in 2005. As part of Sanofi’s acquisition of Verigen, Sanofi
agreed to make cash payments to Verigen upon the achievement of developmental milestones relating to regulatory and
commercialization of MACI in the United States. In connection with our acquisition of the CTRM business, we agreed that if we
further developed MACI in the U.S., we would be obligated to pay these milestone payments. During the third quarter of 2014,
at our request, Sanofi entered into a settlement agreement with the former shareholders of Verigen whereby these shareholders
agreed to discharge all obligations related to these MACI milestone payments in exchange for a one-time cash payment of
€2.5 million (approximately $3.2 million). We paid this amount in full in 2014.
52
Ixmyelocel-T
Our preapproval stage portfolio includes ixmyelocel-T, a unique patient-specific multicellular therapy derived from an adult
patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. Our proprietary
cell manufacturing process significantly expands the mesenchymal stromal cells (MSCS) and M2-like anti-inflammatory
macrophages in the patient’s bone marrow mononuclear cells while retaining many of the hematopoietic cells. These cell types
are known to regulate the immune response and play a key role in tissue repair and regeneration by resolving pathologic
inflammation, promoting angiogenesis, and remodeling ischemic tissue. The novelty and advantage of using ixmyelocel-T is the
expansion of a unique combination of cell populations, including MSCS and M2-like macrophages, which secrete a distinct
combination of angiogenic and regenerative factors, and possess the ability to remain anti-inflammatory in the face of inflammatory
challenge.
Our lead clinical development program for ixmyelocel-T is focused on severe, chronic ischemic cardiovascular diseases. We
are currently conducting the open label extension portion of the Phase 2b ixCELL-DCM study, which is a randomized, double-
blind, placebo-controlled clinical trial for patients with advanced heart failure due to ischemic DCM. Ixmyelocel-T has been
granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM. We also have an ongoing ixmyelocel-T clinical
program for the treatment of craniofacial reconstruction and have conducted clinical studies for the treatment of critical limb
ischemia.
The ongoing Phase 2b ixCELL-DCM clinical study has treated 114 patients at 28 sites in the U.S. and Canada. We completed
enrolling and treating patients in February, 2015. Patients were followed for 12 months for the primary efficacy endpoint of major
adverse cardiovascular events, defined as all-cause deaths, all-cause hospitalizations, and unplanned outpatient or emergency
department visits for IV treatment of acute worsening heart failure. Secondary endpoints include clinical, functional, structural,
symptomatic, quality of life, and biomarker measures at 3, 6 and 9 months. On March 10, 2016, we announced the trial had met
its primary endpoint of reduction in clinical cardiac events and that incidence of adverse events, including serious adverse events,
in patients treated with ixmyelocel-T was comparable to patients in the placebo group. Because the trial met the primary endpoint,
patients who had been assigned to the placebo group or randomized to ixmyelocel-T in the double-blind portion of the trial but
did not receive ixmyelocel-T will be offered the option to receive treatment.
Results of Operations
Net Loss
Our net loss for the year ended December 31, 2015 totaled $16.3 million or $0.97 per share. Our net loss for the year ended
December 31, 2014 totaled $19.9 million or $2.23 per share, Results for the year ended December 31, 2014 include only seven
months of operating results of the CTRM Business. The 2014 results below include restructuring charges in the U.S. and Denmark
of $3.0 million of which $2.5 million were recorded in cost of product sales and $0.5 million was recorded in selling, general and
administrative expenses, other expenses for our discontinued Denmark business of $0.4 million and a bargain purchase gain of
approximately $3.5 million. We did not have commercial operations for the year ended December 31, 2013 as we were a development
stage entity. Our net loss for the year ended December 31, 2013 totaled $15.6 million or $6.95 per share.
(In thousands)
Net revenues
Cost of product sales
Gross profit
Total operating expenses
Loss from operations
Other income (expense)
Bargain purchase gain
Total other income
Net loss
Net Revenues
Year Ended December 31,
2015
2014
2013
$
51,168
26,470
24,698
41,369
(16,671)
331
—
331
(16,340) $
$
28,796
17,293
11,503
35,037
(23,534)
141
3,473
3,614
(19,920) $
19
4
15
20,979
(20,964)
5,342
—
5,342
(15,622)
$
$
53
Net revenues (comprised of gross revenue from sales net of a provision for rebates and cash discounts) for the years ended
December 31, 2015, 2014 and 2013 are shown below.
Revenue by product (In thousands)
Carticel
Epicel
Bone Marrow
MACI
Other
Year Ended December 31,
2015
2014
2013
$
$
35,203
15,242
714
9
—
51,168
$
$
22,267
5,989
354
186
—
28,796
$
$
—
—
—
—
19
19
Net revenues (which includes for the year ended December 31, 2014 reflect only seven months of results from commercial
operations of the CTRM Business. Period comparisons for net revenues are not yet meaningful.
We did not have commercial operations for the year ended December 31, 2013 as we were a development stage entity. Period
comparisons for net revenues are not meaningful.
Seasonality. Carticel revenue is subject to seasonal fluctuations with stronger sales occurring in the fourth quarter and second
quarter due to a number of factors including insurance copay limits and the time of year patients prefer to start rehabilitation. Over
the last five years, the percentage of annual sales by quarter has ranged as follows: first quarter, 20% to 24%; second quarter, 24%
to 26%; third quarter, 21% to 23%; and fourth quarter, 29% to 33%. During 2015, the percentage of annual sales by quarter was
as follows: 20.2% in the first quarter; 25.7% in the second quarter; 22.0% in the third quarter; and 32.1% in the fourth quarter.
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 low patient volume of fewer than 100 patients per year. Over the last five years, the percentage of annual sales by quarter
has ranged as follows: first quarter, 27%; second quarter, 25%; third quarter, 20%; and fourth quarter, 28%. The variability
between the same quarters in consecutive years has been as high as 10% of the annual volume. While the number of patients
treated per year remains low, we expect these large swings in revenue in some quarters to continue. These seasonal trends have
caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth
rates.
Gross Profit and Gross Profit Ratio
(In thousands)
Gross profit
Gross profit %
Year Ended December 31,
2015
2014
2013
$
24,698
$
48.3%
11,503
$
39.9%
15
78.9%
Gross profit increased for the year ended December 31, 2015 compared to 2014 primarily due to $2.5 million of restructuring
expenses recognized in 2014 as a result of the CTRM business acquired in May 2014. We did not have commercial operations for
the year ended December 31, 2013 as it was a development stage entity and therefore, period comparisons for gross profit and
gross profit ratio are not meaningful.
Research and Development Costs
(In thousands)
Research and development costs
Year Ended December 31,
2015
2014
2013
$
18,890
$
21,263
$
15,104
54
The following table summarizes the approximate allocation of cost for our research and development projects:
(In thousands)
Dilated Cardiomyopathy
Critical Limb Ischemia
MACI
Carticel
Epicel
Total research and development expenses
Year Ended December 31,
2015
2014
2013
$
$
8,937
—
5,497
2,798
1,658
18,890
$
$
15,099
801
3,752
1,008
603
21,263
$
$
7,881
7,223
—
—
—
15,104
Research and development expenses for the year ended December 31, 2015 were $18.9 million compared to $21.3 million for
the year ended December 31, 2014. The decrease in research and development expenses is due to lower costs incurred for the
ixCELL-DCM study, which completed enrollment in January 2015; a $3.2 million payment in 2014 to the former shareholders
of Verigen whereby these shareholders agreed to discharge all obligations related to these MACI milestone payments in exchange
for a one-time cash payment; and the canceled Critical Limb Ischemia study. The decrease was offset by additional research,
development and regulatory costs incurred for the MACI BLA submission which included a filing fee of $2.4 million paid in 2015
to the FDA and other regulatory consulting expenses in addition to expenses incurred for the HDE supplement submission to
obtain an exemption from the profit prohibition and to revise the labeled indications for use of Epicel.
Research and development expenses for the year ended December 31, 2014 were $21.3 million versus $15.1 million for the
same period in 2013. The increase in research and development expenses resulted from $7.2 million in increased expenses for
the ixCELL-DCM clinical trial, $3.8 million expenses for MACI (including $3.2 million for the Verigen agreement), $0.6 million
of expenses for Epicel, and $1.0 million of expenses for Carticel, all of which are offset by a $6.4 million reduction in the CLI
clinical trial expenses. DCM trial expenses increased in the year ended December 31, 2014 versus 2013 since most patients were
enrolled and treated in 2014. With respect to CLI, we completed the trial in early 2014 and as a result, expenses declined.
Selling, General and Administrative Costs
(In thousands)
Selling, general and administrative costs
2015
2014
2013
$
22,479
$
13,774
$
5,875
Year Ended December 31,
Selling, general and administrative expenses for the years ended December 31, 2015 and 2014 were $22.5 million and $13.8
million, respectively. The increase is primarily due to an increase in sales and marketing expenses of $6.6 million for the full year
in 2015 compared to 2014 which reflects only seven months of selling and marketing expenses from commercial operations of
the CTRM Business. In addition, an increase of $2.0 million for general and administration expenses was due to higher personnel
related expenses offset by lower consulting expenses.
Selling, general and administrative expenses for the years ended December 31, 2014 and 2013 were $13.8 million and $5.9
million, respectively. The increase in expenses is primarily due to approximately $5.4 million in sales and marketing expenses
from the CTRM Business, approximately $1.6 million in increased information technology, legal, consulting and personnel costs
related to integrating and managing the CTRM Business in the U.S., an increase of approximately $0.5 million in restructuring
charges, and $1.4 million in general administrative costs from the Danish subsidiary. Neither the CTRM Business nor the Danish
operations were part of our business in 2013.
55
Other Income (Expense)
(In thousands)
(Increase) decrease in fair value of warrants
Bargain purchase gain
Foreign currency translation gain (loss)
Interest income
Other income (expense)
Interest expense
Total other income (expense)
Year Ended December 31,
2015
2014
2013
324
—
(67)
36
47
(9)
331
$
$
(27) $
3,473
152
24
(2)
(6)
3,614
$
5,337
—
—
16
—
(11)
5,342
$
$
The change in other income and expense for the year ended December 31, 2015 compared to 2014 is due primarily to the
change in warrant value as a result of the decrease in our stock price, the reduction in the time to maturity and the January and
December 2010 Class A warrants which expired. Fluctuations in the fair value of the warrants in future periods could result in
significant non-cash adjustments to the condensed consolidated financial statements, however, any income or expense recorded
will not impact our cash, operating expenses or cash flow. The bargain purchase gain of $3.5 million for the year ended December 31,
2014 is associated with the acquisition of the CTRM Business on May 30, 2014. The change in foreign currency translation is due
to the U.S. dollar and its impact on intercompany balances with the Danish subsidiary. We suspended commercial operations in
Denmark in 2015.
The change in other income and expense for the year ended December 31, 2014 compared to 2013 is primarily due to the
bargain purchase gain of $3.5 million recognized in 2014.
Stock Compensation
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and general,
selling and administrative expenses is summarized in the following table:
(in thousands)
Cost of goods sold
Research and development
General, selling and administrative
Total non-cash stock-based compensation expense
Years Ended December 31,
2015
2014
2013
$
$
308
555
1,884
2,747
$
$
— $
197
642
839
$
—
75
851
926
The increase in stock-based compensation expense is due primarily to an increase in options granted in the year ended December
31, 2015 as compared to the year ended December 31, 2014 due to an increase in the number of employees as a result of the
acquisition of the CTRM business.
Non-cash stock-based compensation expense for the years ended December 31, 2014 and 2013 were consistent.
Liquidity and Capital Resources
We are currently focused on utilizing our technology to identify, develop and commercialize innovative therapies that enable
the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Until such time as we
satisfy, if at all, applicable regulatory approval requirements for ixmyelocel-T and MACI, we expect the sales of Carticel and
Epicel therapies to constitute nearly all of our product sales revenues. Additionally, we are focusing significant resources to grow
our CTRM business.
Notwithstanding the net proceeds of approximately $37.5 million we received from our September 2014 public offering and
the availability of funds under the SVB Facility, we expect that we will require substantial additional capital resources to complete
the development of ixmyelocel-T for the treatment of advanced heart failure due to ischemic DCM and for other strategic
opportunities.
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
56
of our equity securities. While we believe that, based on our current cash on hand, we are well positioned to sustain operations
twelve months beyond December 31, 2015, if actual results differ from our projections, we may need to access additional capital.
We have access to certain amounts of financing through an agreement with Lincoln Park Capital Fund, LLC (Lincoln Park). We
may direct Lincoln Park to purchase up to $15.0 million worth of shares of our common stock over a 30-month period generally
in amounts up to 50,000 shares of our common stock on certain business days under a Purchase Agreement. However, there are
certain factors, such as volume of trading in our common stock and our stock price, which limit the amount that can be raised in
a short period of time. The extent to which we rely on the Lincoln Park Equity Line as a source of funding will depend on a number
of factors, including the prevailing market price of our common stock and the extent to which we are able to secure working capital
from other sources. The remaining capacity under this agreement is $11.3 million as December 31, 2015.
At December 31, 2015 there was approximately $7.8 million of net capacity remaining on the At-the-Market Sales Agreement
with MLV & Co. LLC (formerly McNicoll, Lewis & Vlak), which allowed us to sell our common stock from time to time under
a registration statement on Form S-3 filed in June 2011, pursuant to which we registered $100 million of our securities for public
sale. The Form S-3 registration statement filed in June 2011 expired in July 2014. If we choose to access the remaining capacity,
we will file an updated Form S-3 registration statement.
Our cash totaled $14.6 million at December 31, 2015. The primary uses of cash included $13.3 million for our operations and
working capital requirements. This use of funds was fueled largely by our operating loss reduced by stock compensation expense
of $2.7 million as a result of an increase in personnel, depreciation and amortization expense of $1.6 million as a result of required
capital expenditures in conjunction with the purchase of the CTRM business, $1.7 million in accounts payable primarily related
to timing of payments and expenses incurred since the CTRM business has been fully integrated, and inventory provision of $0.6
million offset by a change in fair value of warrants of $0.3 million.
The change in cash used for investing activities is the result of material property plant and equipment purchases of $2.4 million
primarily for purchases in connection with the integration of the CTRM business through December 31, 2015.
The change in cash provided from financing activities is the result of the September 2014 equity raise as well as Lincoln Park
and ATM activity in 2014, all of which did not occur in the year ended December 31, 2015.
As of December 31, 2015 we had $12.0 million of cash deposited into an Insured Cash Sweep (ICS) program which is
administered by Bank of New York Mellon. This program maximizes our Federal Deposit Insurance Company (FDIC) coverage
by dividing our ICS funds into amounts under the standard FDIC maximum and places these amounts with other ICS Network
member banks (each an FDIC-insured institute). These funds are placed in savings accounts at the member banks earning interest
while still maintaining insurance coverage.
On March 8, 2016, we entered into a $15.0 million debt financing with Silicon Valley Bank (SVB). The debt financing consists
of a $3.0 million term loan available immediately upon the closing, $2.0 million term loan available upon the FDA's approval of
the MACI BLA and up to $10.0 million revolving line of credit. The term loans are interest only (indexed to Wall Street Journal
(WSJ) Prime plus 0.75%) until March 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing February
1, 2020. The revolving credit is limited to a borrowing base calculated using eligible accounts receivable and maturing March 8,
2018 with an interest rate indexed to WSJ Prime plus 0.25% up to 0.75%. Monthly, we must remain in compliance with an adjusted
quick ratio greater than or equal to 1.10 to 1.0. The adjusted quick ratio is the ratio of (a) unrestricted cash and cash equivalents
and net billed accounts receivable to (b) current liabilities minus the current portion of deferred revenue and warrant liabilities.
While we believe that, based on our current cash on hand and the funds available under our credit facility, we are well positioned
to sustain operations twelve months beyond December 31, 2015, if actual results differ from our projections or if we undertake
additional development of ixmyelocel-T or pursue other strategic opportunities, we may need to access additional capital. Actual
cash requirements may differ from projections and will depend on many factors, including continued scientific progress in our
research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patents, competing technological and market developments,
costs of possible acquisition or development of complementary business activities, and the cost of product launch and
commercialization of newly approved products. If MACI receives the required FDA approvals, we may need to raise additional
capital in anticipation of introduction of MACI in the U.S. markets.
Contractual Obligations
We lease facilities in Ann Arbor, Michigan; Cambridge, Massachusetts and Kastrup, Denmark. On March 8, 2016, we amended
our current lease in Cambridge to extend the terms until March 2022. In addition to the property leases, we also lease an offsite
warehouse, various vehicles and computer equipment. The purchase commitments represents the obligations for a long-term supply
57
agreement with Matricel GmbH for the ACI-Maix collagen membrane used in the manufacture of MACI™. See note 16 to the
consolidated financial statements for further discussion.
Future minimum payments related to our operating, capital leases and contractual obligations are as follows:
Contractual Obligations
Operating leases
Purchase commitments
Capital leases
Total
Total
27,693
300
118
28,111
$
$
$
$
2016
2017
2018
2019
2020
More than
5 Years
4,310
300
43
4,653
$
$
4,890
—
43
4,933
$
$
4,572
—
32
4,604
$
$
4,260
—
—
4,260
$
$
4,386
—
—
4,386
$
$
5,275
—
—
5,275
Payments Due by Period
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that could materially impact the consolidated financial statements
and disclosures based on varying assumptions. We believe our estimates and assumptions are reasonable; however, actual results
and the timing of the recognition of such amounts could differ from these estimates.
The following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of
operations and/or that require management’s most difficult, subjective or complex judgments.
Stock-Based Compensation — Our accounting for stock-based compensation requires us to determine the fair value of common
stock issued in the form of stock option awards. We use the value of our common stock at the date of the grant in the calculation
of the fair value of our share-based awards. The fair value of stock options held by our employees is determined using a Black-
Scholes option valuation method, which is a valuation technique that is acceptable for share-based payment accounting. Key
assumptions in determining fair value include volatility, risk-free interest rate, dividend yield and expected term. The assumptions
used in calculating the fair value of stock options represent our best estimates, however; these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the
stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those stock options expected to vest over the service period. We estimate the
forfeiture rate considering the historical experience of our stock-based awards. If the actual forfeiture rate is different from the
estimate, we adjust the expense accordingly.
Warrants — Warrants that could require cash settlement or have anti-dilution price protection provisions are recorded as
liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other
income (expense) in our statement of operations in each subsequent period. In general, warrants are measured using the Black-
Scholes valuation model. The Black-Scholes model is based, in part, upon inputs for which there is little observable market data,
requiring us to develop our own assumptions. Inherent in the model are assumptions related to expected stock-price volatility,
expected life, risk-free interest rate and dividend yield. The assumptions used in calculating the estimated fair value of the warrants
represent our best estimates; however, these estimates involve inherent uncertainties and the application of management judgment.
As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could
be materially different.
Research and Development Expenses –– Research and development costs, including internal and contract research costs, are
expensed as incurred. Research and development expenses consist mainly of clinical trial costs, manufacturing of clinical material,
process development costs, other preclinical studies, pharmacoeconomic research, grants to outside investigators including medical
education and personnel costs.
Tax Valuation Allowance — A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be
realized. We provided a full valuation allowance on our deferred tax assets that primarily consist of cumulative federal net operating
losses. Due to our three year cumulative loss position, history of operating losses and losses expected to be incurred in the foreseeable
future, a full valuation allowance against our net deferred tax assets was considered necessary.
The summary of significant accounting policies should be read in conjunction with our consolidated financial statements and
related notes and this discussion of our results of operations.
58
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial
condition.
Recent Accounting Pronouncements
See Note 3 to the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2015, 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.
We believe that the interest rate risk related to our accounts receivable is not significant. We manage the risk associated with
these accounts through periodic reviews of the carrying value for non-collectability and establishment of appropriate allowances.
We do not enter into hedging transactions and do not purchase derivative instruments.
We operate in the United States only. We are primarily exposed to foreign exchange risk with respect to recognized assets and
liabilities due to vendors in countries outside the United States which are typically paid in Euro and/or Danish Krone. We do not
enter into hedging transactions and do not purchase derivative instruments.
59
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Shareholders’ Equity from December 31, 2013 to December 31, 2015
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Page
61
62
63
64
65
66
67
60
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Vericel Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’
equity, of comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Vericel Corporation
and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control
over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in
internal control over financial reporting existed as of that date related to the design of controls to mitigate segregation of
duties conflicts in the Company’s financial management/ERP software. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred
to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered
this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated
financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does
not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on
these financial statements and on the Company's internal control over financial reporting based on our audits (which was an
Integrated audit in 2015). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 14, 2016
61
VERICEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
ASSETS
Current assets:
Cash
Accounts receivable (net of allowance for doubtful accounts of $68 and $40, respectively)
Inventory
Other current assets
Total current assets
Property and equipment, net
Intangible assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Warrant liabilities
Other
Total current liabilities
Long term debt
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 16)
Shareholders’ equity:
Series A non-voting convertible preferred stock, no par value: shares authorized and
reserved — 1; shares issued and outstanding — 1
Series B-2 voting convertible preferred stock, no par value: shares authorized and
reserved — 39, shares issued and outstanding — 12
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding
— 23,789 and 23,786, respectively
Treasury stock — 1,250 shares
Other comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2015
2014
$
$
$
14,581
10,919
1,379
464
27,343
4,049
2,917
34,309
7,588
3,603
757
160
12,108
71
12,179
30,343
8,191
1,920
1,036
41,490
2,892
3,197
47,579
5,824
4,714
1,081
210
11,829
109
11,938
3,150
—
38,389
38,389
307,766
(3,150)
—
(324,025)
22,130
34,309
$
305,008
—
(71)
(307,685)
35,641
47,579
$
$
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
62
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenues:
Product sales
Total revenues
Costs and expenses:
Cost of product sales
Gross profit
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
(Increase) decrease in fair value of warrants
Bargain purchase gain
Foreign currency translation gain (loss)
Interest income
Other income (expense)
Interest expense
Total other income (expense)
Year Ended December 31,
2015
2014
2013
$
$
51,168
51,168
$
28,796
28,796
19
19
26,470
24,698
18,890
22,479
41,369
(16,671)
324
—
(67)
36
47
(9)
331
(16,340) $
17,293
11,503
21,263
13,774
35,037
(23,534)
(27)
3,473
152
24
(2)
(6)
3,614
(19,920) $
4
15
15,104
5,875
20,979
(20,964)
5,337
—
—
16
—
(11)
5,342
(15,622)
(0.97) $
(2.23) $
(6.95)
23,760
11,642
3,016
Net loss
Net loss per share attributable to common shareholders (Basic and Diluted)
(see note 10)
Weighted average number of common shares outstanding (Basic and
Diluted)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
63
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Preferred Stock
Common Stock
Treasury Stock
Accumulated
Other
Comprehensive
Accumulated
Total
Shareholders’
Shares
Amount
Shares
Amount
Shares
Amount
Loss
Deficit
Equity
12
$ 38,389
4,723
$253,270
— $
— $
— $
(287,765) $
3,894
839
408
2,490
18,655
48,409
(19,920)
(19,920)
839
2,490
48,409
(71)
(71)
12
$ 38,389
23,786
$305,008
— $
—
(71) $
(307,685) $
35,641
(16,340)
(16,340)
1
3,150
(1,250)
(3,150)
2,747
11
3
—
2,747
11
71
71
13
$ 41,539
23,789
$307,766
(1,250) $ (3,150) $
— $
(324,025) $
22,130
BALANCE, DECEMBER 31,
2013
Net loss
Compensation expense related to
stock options granted
Exercise of stock purchase
warrants
Issuance of common stock, net of
issuance costs of $3,167
Foreign currency translation
adjustment
BALANCE, DECEMBER 31,
2014
Net loss
Common stock exchanged for
preferred stock and held in
treasury shares
Compensation expense related to
stock options granted
Stock option exercises
Foreign currency translation
adjustment
BALANCE, DECEMBER 31,
2015
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
64
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive loss
Foreign currency translation
Comprehensive loss
Year Ended December 31,
2015
2014
2013
(16,340) $
(19,920) $
(15,622)
71
(16,269) $
(71)
(19,991) $
—
(15,622)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
65
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used for operating activities:
Year Ended December 31,
2015
2014
2013
$
(16,340) $
(19,920) $
(15,622)
Depreciation and amortization
Stock compensation expense
Inventory provision
Change in fair value of warrants
Bargain purchase gain
Foreign currency translation loss (gain)
(Gain) loss on sale of fixed assets
Write down of asset retirement obligation
Changes in operating assets and liabilities:
Inventory
Accounts receivable
Other current assets
Accounts payable
Accrued expenses
Asset retirement obligation
Other non-current assets and liabilities, net
Net cash used for operating activities
Investing activities:
Acquisition of CTRM business, net of cash acquired
Expenditures for property, plant and equipment
Other
Net cash used for investing activities
Financing activities:
Net proceeds from issuance of common stock and warrants
Payments on long-term debt
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Supplemental cash flow information (non-cash):
Acquisition of business through promissory note
Accretion of convertible preferred stock
Common shares exchanged for preferred stock
Warrants exchanged for common stock
Additions to equipment in process included in accounts payable
Equipment acquired under capital lease
1,592
2,747
627
(324)
—
67
(35)
(268)
(86)
(2,728)
572
1,726
(764)
(80)
(52)
(13,346)
—
(2,427)
35
(2,392)
11
(35)
(24)
—
(15,762)
30,343
14,581
$
752
839
—
27
(3,473)
(152)
139
(1,102)
119
(8,139)
(455)
2,773
3,007
—
175
(25,410)
(1,450)
(829)
101
(2,178)
49,934
(8)
49,926
(54)
22,284
8,059
30,343
$
3,150
— $
— $
$
— $
$
42
— $
2,500
$
— $
— $
$
965
$
199
$
153
489
926
—
(5,337)
—
—
—
—
—
—
(65)
(571)
237
—
—
(19,943)
—
(40)
—
(40)
14,438
(34)
14,404
—
(5,579)
13,638
8,059
—
1,263
—
—
—
—
$
$
$
$
$
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
66
VERICEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Vericel Corporation, a Michigan corporation, which was formerly known as Aastrom Biosciences, Inc. (the Company, Vericel,
we, us or our), was incorporated in March 1989 and began employee-based operations in 1991. On May 30, 2014, Vericel completed
the acquisition of certain assets and assumed certain liabilities of Sanofi, a French société anonyme (Sanofi), including all of the
outstanding equity interests of Genzyme Biosurgery ApS (Genzyme Denmark or the Danish subsidiary) (now known as Vericel
Denmark ApS), a wholly-owned subsidiary of Sanofi, and over 250 patent applications of Sanofi and certain of its subsidiaries
for purposes of acquiring the portion of the cell therapy and regenerative medicine business (the CTRM Business), which researches,
develops, manufactures, markets and sells the Carticel®, MACI™, and Epicel® products. The Company is a fully integrated,
commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative
therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Vericel
has marketed products as well as developmental stage product candidates and the Company’s goal is to become the leader in cell
therapy and regenerative medicine by developing, manufacturing and marketing best-in-class therapies for patients with significant
unmet medical needs.
The Company operates its business primarily in the U.S. in one reportable segment — the research, product development,
manufacture and distribution of patient-specific, expanded cellular therapies for use in the treatment of specific diseases.
Successful future operations are subject to several technical hurdles and risk factors, including satisfactory product development,
timely initiation and completion of clinical trials, regulatory approval and market acceptance of the Company’s products.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Vericel and its wholly-owned subsidiaries, Marrow Donation,
LLC, located in San Diego, California, and Vericel Denmark ApS, in Kastrup, Demark (collectively, the Company). All inter-
company transactions and accounts have been eliminated in consolidation. Aastrom Biosciences GmbH ceased operations in 2014
and Marrow Donation, LLC and Vericel Denmark ApS ceased operations in 2015.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reported period. Actual results could differ from those estimates.
Inventory
Inventories are measured at the lower of cost or market value. Cost is calculated based upon standard-cost which approximates
costs determined on the first-in, first-out method. Utilization reserves are established for estimated obsolescence or un-marketable
inventory in an amount equal to the cost of inventory.
Accounts Receivable
Accounts receivable are initially recorded at the contractual amount owed by the customer. Allowances for doubtful accounts
are established when the facts and circumstances indicate that a receivable may not be collectible.
Property, Plant and Equipment
Property, plant and equipment are initially measured and recognized at acquisition cost, including any directly attributable cost
of preparing the asset for its intended use or, in the case of assets acquired in a business combination, at fair value as at the date
of the combination. After initial measurement, property, plant and equipment are carried at cost less accumulated depreciation and
impairment. Repair and maintenance costs of property, plant and equipment are expensed as incurred.
67
The depreciable value of property, plant and equipment, net of any residual value, is depreciated on a straight line basis over
the useful life of the asset. The useful life of an asset is usually equivalent to its economic life. The useful lives of property, plant
and equipment are as follows:
• Equipment and computers: 3 to 5 years
•
• Building improvements and leasehold improvements: Shorter of the remaining life of the lease or 7 years
Furniture and fixtures: 5 years
The costs of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts,
with any gain or loss realized upon sale or disposal credited or charged to operations.
Intangible Assets and Other Long Lived Assets
Intangible assets are initially measured at acquisition cost, including any directly attributable costs of preparing the asset for
its intended use or, in the case of assets acquired in a business combination at fair value as at the date of the combination. Identifiable
intangible assets related to commercial rights are amortized on a straight line basis over their expected useful lives. Amortization
of intangible assets is recognized in these financial statements under Costs of product sales.
Intangible assets and long-lived assets are assessed for potential impairment when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss would be recognized when
an asset’s fair value, determined based on undiscounted cash flows expected to be generated by the asset, is less than its carrying
amount. The impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value and
recognized in these financial statements. Intangible assets are carried at cost less accumulated amortization and impairment.
Revenue Recognition
Total revenues are comprised of product sales of Carticel, Epicel, MACI, bone marrow and surgical kits. Revenue is recognized
when persuasive evidence of an arrangement exists, the goods are shipped or delivered, depending on shipping terms, title and
risk of loss pass to the customer and collectability is reasonably assured. Shipping and handling costs are included as a component
of revenue.
Revenue is recorded net of a provision for rebates and cash discounts. These rebates and cash discounts are established by the
Company at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such
reserves. For instance, distributors are entitled to chargeback incentives for services that are provided for based on the selling
price to the end customer, under specific contractual arrangements. Cash discounts may also be granted for prompt payment.
Research and Development Expense
Research and development activities represent a significant part of the Company’s business. These expenditures relate to the
development of new products, improvement of existing products, technical support of products and compliance with governmental
regulations for the protection of consumers and patients. Research and development expenses are expensed as incurred.
Diversity of Credit Risk
The Company has established guidelines relative to diversification in an effort to limit risk. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Stock-Based Compensation
The Company’s accounting for stock-based compensation requires it to determine the fair value of common stock issued in
the form of stock option awards. The Company uses the value of its common stock at the date of the grant in the calculation of
the fair value of its share-based awards. The fair value of stock options held by the employees is determined using a Black-Scholes
option valuation method, which is a valuation technique that is acceptable for share-based payment accounting. Key assumptions
in determining fair value include volatility, risk-free interest rate, dividend yield and expected term. The assumptions used in
calculating the fair value of stock options represent the Company’s best estimates, however; these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the
stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate
the expected forfeiture rate and only recognize expense for those stock options expected to vest over the service period. The
68
estimated forfeiture rate considers the historical experience of the Company’s stock-based awards. If the actual forfeiture rate is
different from the estimate, expense is adjusted accordingly.
The Company also has an Employee Stock Purchase Plan (ESPP) which is a compensatory plan. Compensation expense is
recorded based on the fair value of the purchase options at the grant date, which corresponds to the first day of each purchase
period, and is amortized over the purchase period.
Comprehensive Loss
Comprehensive loss is the change in common stockholders’ equity during a period arising from any gain or loss realized related
to foreign currency translation.
Income Taxes
Deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Net Loss Per Share Attributable to Common Shareholders
Basic earnings (loss) per share is calculated using the two-class method, which is an earnings allocation formula that determines
earnings (loss) per share for the holders of the Company’s common shares and holders of the Series B preferred stock. The Series B
preferred stock shares contain participation rights in undistributed earnings, but do not share in the losses of the Company. The
accumulated but undeclared dividends on the Series B preferred stock of $6.7 million are treated as a reduction of earnings
attributable to common shareholders.
Financial Instruments
The Company’s financial instruments include receivables for which the current carrying amounts approximate market value
based upon their short-term nature.
Warrants
Warrants that could be cash settled or have anti-dilution price protection provisions are recorded as liabilities at their estimated
fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in our
statement of operations in each subsequent period. In general, warrants are measured using the Black-Scholes valuation model.
The methodology is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to
develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best
estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if
factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially
different.
3. Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued authoritative guidance requiring entities to apply a
new model for recognizing revenue from contracts with customers. The guidance will supersede the current revenue recognition
guidance and require entities to evaluate their revenue recognition arrangements using a five step model to determine when a
customer obtains control of a transferred good or service. The guidance is currently effective for annual reporting periods beginning
after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016, and may
be adopted using a full or modified retrospective application. The Company is currently in the process of evaluating its revenue
arrangements under the issued guidance and has not yet determined the impact to its consolidated financial statements.
Going Concern Assessment
The FASB has issued authoritative guidance for management on how to assess whether substantial doubt exists regarding an
entity’s ability to continue as a going concern and guidance on how to prepare related footnote disclosures. The guidance will
require management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to
69
continue as a going concern for one year from the date the financial statements are issued. The guidance is effective for annual
reporting periods beginning after December 15, 2016. As of December 31, 2015, the Company does not expect the guidance to
impact future disclosures.
Balance Sheet Classification of Deferred Taxes
The FASB simplified the balance sheet classification of deferred taxes guidance to require all deferred tax assets and liabilities,
along with any related valuation allowance, be classified as noncurrent on the balance sheet. The new guidance eliminates the
requirement to classify deferred taxes between current and noncurrent and is expected to simplify financial reporting. The guidance
is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted for interim or annual
reporting periods beginning after December 15, 2015. The guidance may be applied either prospectively, for all deferred tax assets
and liabilities, or retrospectively by reclassifying the comparative balance sheet for prior periods. The Company has early adopted
the guidance beginning for the year ended December 31, 2015 on a prospective basis. The guidance did not have a material impact
for the year ended December 31, 2015.
Presentation and Subsequent Measurement of Debt Issuance Costs
The FASB issued guidance which requires entities to present debt issuance costs related to a recognized debt liability as a direct
deduction from the carrying amount of that debt liability. For debt issuance costs related to line-of-credit arrangements, companies
are able to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. The guidance is effective for annual reporting periods beginning after December 15, 2015. The Company is currently
determining the impact on future periods.
Accounting for Leases
The FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In accordance with the updated
guidance, lessees are required to recognize the assets and liabilities arising from operating leases on the balance sheet. The guidance
is effective for annual reporting periods beginning after December 15, 2018, including interim periods including interim periods
within 2018. The Company is currently determining the impact on future periods.
4. Acquisitions
CTRM Business acquisition
On May 30, 2014, Vericel completed its acquisition of certain assets of Sanofi, including all of the outstanding equity interests
of Genzyme Denmark, a wholly-owned subsidiary of Sanofi, and over 250 patents and patent applications and assumed certain
liabilities for purposes of acquiring portions of the CTRM Business. Vericel is a leader in developing patient-specific expanded
cellular therapies for use in the treatment of patients with severe diseases and conditions and the CTRM Business expands the
Company’s portfolio of cellular therapies to include products which treat severe burns and as well as cartilage defects. Pursuant
to the terms of the asset purchase agreement, the Company paid a total purchase price of $6.5 million, including $4.0 million in
cash and a $2.5 million promissory note which was repaid on July 30, 2014.
The total purchase price consideration was as follows:
Acquisition consideration (In thousands):
Cash payment
Promissory note
Total acquisition consideration
Fair Value
$
$
4,000
2,500
6,500
The Company recognized tangible and intangible assets and liabilities acquired based upon their respective estimated fair
values as of the acquisition date. The table below shows the fair values assigned to the assets acquired and liabilities assumed.
Based on this analysis, the transaction resulted in a bargain purchase gain.
The final purchase price allocation was as follows:
70
Purchase price allocation (In thousands):
Cash
Accounts receivable
Inventory
Other current assets
Accounts payable and accrued expenses
Asset retirement obligation
Property and equipment
Intangible assets
Bargain purchase gain
Total consideration
Fair Value
5,050
53
2,039
192
(939)
(1,600)
1,818
3,360
(3,473)
6,500
$
$
As part of the acquisition, $5.0 million in cash was received from Sanofi in order to fund the restructuring of the Denmark
operations and close the facility. In 2014, the Company implemented its restructuring plans for the Danish subsidiary after the
consummation of the acquisition of the CTRM Business and recorded restructuring charges in the U.S. and Denmark of $3.0
million. See Note 5 “Restructuring” below for additional information.
The intangible assets acquired represent commercial use rights for certain products acquired in the transaction. The fair value
of $3.4 million was determined using the income approach based on projected cash flows attributed to the commercial rights. The
calculated value of the commercial rights intangible assets are amortized using the straight line method over an estimated useful
life of 12 years
Pro forma Financial Information
The following pro forma condensed combined information for the year ended December 31, 2014, and 2013, respectively are
presented as if the acquisition of the CTRM Business had occurred on January 1, 2013.
In management’s opinion, all adjustments necessary to reflect the significant effects of this transaction have been made. These
statements are based on assumptions and estimates considered appropriate by management; however, they are not necessarily, and
should not be assumed to be, an indication of Vericel’s financial position or results of operations that would have been achieved
had the acquisitions been completed as of the dates indicated or that may be achieved in the future.
(in thousands)
Pro forma revenue
Pro forma net loss
Pro forma net loss per share - basic and diluted
Year Ended December 31,
$
2014
44,906
(30,115)
(3.10)
$
2013
43,863
(49,124)
(18.06)
An error was identified in the December 31, 2014 acquisition disclosure with respect to the amount recorded for pro forma
condensed combined information for the year ended December 31, 2014. The pro forma revenue, net loss and net loss per share
(basic and diluted) was understated by $0.1 million, $4.0 million and $0.33 per share, respectively. In accordance with the guidance
set forth by the SEC, we evaluated the error and, based on an analysis of quantitative and qualitative factors determined that the
error was immaterial to the prior reporting periods affected. As the error has no impact on any amounts presented in a previously
issued balance sheet, statement of operations or statement of cash flows for any prior periods, we determined that it is appropriate
to revise the 2014 prior year amounts presented above to reflect the corrected disclosure.
5. Restructuring
Acquisition Restructuring
In June 2014, the Company announced a strategic plan to maximize the profitability and growth potential of the CTRM Business
(the Plan). Under the Plan, the Company discontinued manufacturing MACI in Denmark and temporarily suspended sales of
MACI in Europe. Furthermore, the Company eliminated approximately 80 full time employee positions, which represented
approximately 30% of the Company’s current total workforce. Employees terminated as part the Plan were provided with severance
payments and outplacement assistance.
71
As a result of the Plan, the Company recorded a restructuring charge of $3.0 million for the year ended December 31, 2014,
related to the operations in the United States and Denmark, primarily representing cash payments for severance and other personnel-
related expenses. Of the total restructuring charge, $2.5 million was recorded in cost of product sales, and $0.5 million was
recorded in selling, general and administrative expenses. There was no restructuring reserve as of December 31, 2014 or 2015 as
a result of cash payments made for severance and other personnel-related expenses.
R&D Restructuring
In 2013, the Company changed its strategy for research and development programs to focus on the clinical development of
ixmyelocel-T for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy (DCM). As a result of the strategic
change, the Company stopped enrollment of the Phase 3 REVIVE clinical trial in patients with critical limb ischemia (CLI) and
the Company recorded a one-time restructuring charge of $0.4 million in 2013 in research and development expenses. The
restructuring accrual for the strategic changes decreased to less than $0.1 million as of December 31, 2013 as a result of cash
payments made for severance and other personnel-related expenses. There was no restructuring reserve related to the strategic
change in 2014 or 2015.
6. Selected Balance Sheet Components
Inventory as of December 31, 2015 and 2014:
(In thousands)
Raw materials
Work-in-process
Finished goods
Inventory
Property and Equipment, net as of December 31, 2015 and 2014:
(In thousands)
Machinery and equipment
Furniture, fixtures and office equipment
Computer equipment and software
Leasehold improvements
Construction in process
Less accumulated depreciation
Property and Equipment
2015
2014
$
$
$
$
1,228
131
20
1,379
2015
3,280
931
2,662
2,393
421
9,687
(5,638)
4,049
$
$
$
$
1,078
458
384
1,920
2014
3,135
777
667
1,691
1,019
7,289
(4,397)
2,892
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 were $1.3 million , $0.8 million, and $0.5 million,
respectively.
Intangible assets, net as of December 31, 2015 and 2014:
(In thousands)
Commercial rights
Less accumulated amortization
Intangible assets
2015
2014
3,360
(443)
2,917
$
$
3,360
(163)
3,197
$
$
Amortization expense was $0.3 million and $0.2 million for the years ended December 31, 2015 and 2014, respectively. There
was no amortization expense in 2013.
Estimated future amortization expense is as follows:
72
Calendar Years Ending December 31, (In thousands)
2016
2017
2018
2019
2020
Thereafter
Total
Accrued Expenses as of December 31, 2015 and 2014:
(In thousands)
Bonus
Employee related accruals
Accrued expenses
Asset retirement obligation(a)
Other
Accrued expenses
$
$
$
$
280
280
280
280
280
1,517
2,917
2,044
1,281
605
348
436
4,714
2014
2015
1,956
1,341
75
—
231
3,603
$
$
(a) The reduction in the asset retirement obligation is based on a change to the estimate of the obligation to restore the
Denmark facility to its original state and final payment of the obligation.
7. Stock-Based Compensation
Stock Option and Equity Incentive Plans
The Company has historically had various stock incentive plans and agreements that provide for the issuance of nonqualified
and incentive stock options as well as other equity awards. Such awards may be granted by the Company’s Board of Directors
to certain of the Company’s employees, directors and consultants. Options granted under these plans expire no later than ten years
from the date of grant, and other than those granted to non-employee directors, generally become exercisable over a four period,
under a graded-vesting methodology, following the date of grant. The Company generally issues new shares upon the exercise
of stock options.
The 2009 Second Amended and Restated Omnibus Incentive Plan (2009 Plan) provides incentives through the grant of stock
options, stock appreciation rights, restricted stock awards and restricted stock units. The exercise price of stock options granted
under the 2009 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2009
Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan and the Amended and Restated 2004 Equity Incentive Plan
(Prior Plans), and no new awards have been granted under the Prior Plans. However, the expiration or forfeiture of options
previously granted under the Prior Plans will increase the awards available for issuance under the 2009 Plan.
As of December 31, 2015, there were 1,962,168 shares available for future grant under the 2009 Plan.
Employee Stock Purchase Plan
In May 2015, the board of directors and shareholders approved the Vericel Corporation Employee Stock Purchase Plan (ESPP),
which was implemented effective October 1, 2015 for the first offering period. The ESPP allows for the issuance of an aggregate
of 1,000,000 shares of common stock. Participation in this plan is available to substantially all employees. The ESPP is a
compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards.
Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to
the first day of each purchase period and is amortized over the purchase period. In January 2016, employees purchased 63,193
shares resulting in proceeds from the sale of common stock of $0.1 million under the ESPP for the first offering period. The total
share-based compensation expense for the ESPP for the year ended December 31, 2015 was less than $0.1 million.
73
Service-Based Stock Options
During the year ended December 31, 2015, the Company granted 2,216,600 service-based options to purchase common stock.
The exercise price of the options is the fair market value per share of common stock on the grant date, generally vest over four
years (other than 136,000 non-employee options which vest over one year) and have a term of ten years. The weighted average
grant-date fair value of service-based options granted during the years ended December 31, 2015, 2014, and 2013 was $2.22,
$2.85 and $14.07, respectively.
The net compensation costs recorded for the service-based stock options related to employees and directors (including the
impact of the forfeitures) for the years ended December 31, 2015, 2014, and 2013 were $2.7 million, $0.8 million and $0.9 million,
respectively.
The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the
Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.
Service-Based Stock Options
Expected dividend rate
Expected stock price volatility
Risk-free interest rate
Expected life (years)
2015
—%
77.4 – 88.1%
1.5 – 2.0%
5.5 – 6.3
Year Ended December 31,
2014
—%
82.4 – 88.2%
1.7 – 2.2%
5.5 – 6.3
2013
—%
74.0 – 87.9%
0.1 – 2.1%
5.0 – 6.3
The following table summarizes the activity for service-based stock options for the indicated periods:
Service-Based Stock Options
Outstanding at December 31, 2012
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2013
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2014
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Options
Weighted Average
Exercise Price
499,374
75,751
$
$
— $
(164,189) $
(113,076) $
$
297,860
$
242,029
— $
(32,012) $
(30,347) $
$
477,530
$
2,216,600
(3,566) $
(17,791) $
(149,373) $
$
2,523,400
$
661,229
47.60
21.32
—
51.76
45.38
39.53
3.91
—
42.63
32.13
36.43
3.11
3.02
40.02
3.35
6.36
14.27
Weighted Average
Remaining
Contractual Term
7.5
$
$
7.9
$
$
8.0
8.7
7.9
$
$
$
$
Aggregate
Intrinsic
Value
—
—
—
—
—
1,000
5,000
—
As of December 31, 2015 there was approximately $2.7 million, of total unrecognized compensation cost related to non-vested
service-based stock options granted under the 2009 Plan and the Prior Plans. That cost is expected to be recognized over a weighted-
average period of 3.0 years.
The total fair value of stock options vested for the years ended December 31, 2015, 2014, and 2013 was $1.7 million, $1.5
million and $2.3 million, respectively.
8. Shareholders’ Equity
2013 Stock and Warrant Sale
74
On August 16, 2013, the Company completed the sale of 1.5 million shares of common stock and warrants to purchase up to
an aggregate of 1.5 million shares of common stock (including 50,000 shares of common stock and warrants sold to the underwriter
pursuant to the exercise of its over-allotment option). Each share of common stock and its associated warrant was sold at a public
offering price of $6.00 per share. The Company received $8.2 million in net proceeds from the sale of the shares of common stock
and warrants (including the partial exercise of the over-allotment option), after underwriting discounts, commissions and other
offering expenses. The total fair market value of the warrants at the date of issuance was $5.9 million. The sales proceeds were
first allocated to the warrants based on the total fair market value and the residual amount of the sales proceeds were allocated to
common stock.
2014 Warrant Exercise Agreement
On July 9, 2014, the Company entered into a Warrant Exercise Agreement with one holder of warrants issued by the Company
on August 16, 2013 (the 2013 Warrants) to purchase an aggregate of 362,500 shares of the Company’s common stock, no par
value. Pursuant to the Warrant Exercise Agreement, the holder agreed to exercise the 2013 Warrants at the existing exercise price
of $4.80. The net proceeds to the Company in connection with the exercise of the 2013 Warrants, after deducting a warrant
inducement payment and expenses, were approximately $1.5 million.
2014 Stock Purchase Agreement
On January 21, 2014, the Company entered into a purchase agreement (Purchase Agreement), together with a registration rights
agreement, for the sale of up to $15.0 million of shares of its common stock to Lincoln Park, subject to certain limitations, from
time to time over a 30-month period, which began on April 3, 2014 and ends on October 3, 2016. The Company may direct Lincoln
Park, at its sole discretion, to purchase up to 50,000 shares of common stock in regular purchases, increasing to amounts of up to
100,000 shares depending upon the closing sale price of the common stock. In addition, the Company may direct Lincoln Park
to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common
stock equals or exceeds $3.00 per share. The purchase price of shares of common stock related to the future funding will be based
on the prevailing market prices of such shares at the time of sales (or over a period of up to 10 business days leading up to such
time), but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price of
$2.50, subject to adjustment. The Company controls the timing and amount of any sales of common stock to Lincoln Park. The
Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number
of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than
9.99% of the then outstanding shares of the common stock. For the year ended December 31, 2014, the Company issued 935,499
shares of common stock to Lincoln Park and raised gross proceeds of $3.7 million (with the ability to sell up to an additional
$11.3 million more in common stock). No shares were issued in 2015.
At-the-Market Sales Agreement
During the years ended December 31, 2014 and 2013, the Company raised net proceeds of $7.1 million and $4.8 million
utilizing the At-the-Market Sales Agreement (ATM) with MLV & Co. LLC (formerly McNicoll, Lewis & Vlak) (MLV). The
Company originally entered into the ATM with MLV in June 2011 in which the Company may sell shares of its common stock
through MLV, as sales agent, in registered transactions from its shelf registration statement filed in July 2011, for aggregate proceeds
of up to $20.3 million. The Form S-3 registration statement filed in June 2011 expired in July 2014. Shares of common stock sold
under the ATM are to be sold at market prices. The Company will pay up to 3% of the gross proceeds to MLV as a commission.
At December 31, 2015 there was approximately $7.8 million of net capacity remaining on the ATM.
2014 Public Equity Offering
On September 17, 2014, the Company closed on a public equity offering whereby it sold 15,784,313 shares of common stock
at an offering price of $2.55 per share. The proceeds of $37.5 million, net of $2.4 million of underwriters’ discount and $0.3
million of issuance costs consisting primarily of legal and accounting fees, were recorded as a common stock issuance.
Treasury Stock
On December 23, 2015 Stonepine Capital, LLC (Stonepine) exchanged 1,250,000 shares of the Company's common stock
held by Stonepine for 1,250 shares of Series A Convertible Preferred Stock. The common stock transferred from Stonepine to the
Company during the share exchange is reserved as treasury shares. The value transferred to Series A Convertible Preferred Stock
of $3.2 million is equal to the fair market value of the common stock as of December 23, 2015. See further discussion in note 9
of the consolidated financial statements.
75
Dividends
No cash dividends have been declared or paid by the Company since its inception.
9. Preferred Stock
Shareholder Rights Plan
In August 2011, the Board of Directors of the Company adopted a Shareholder Rights Plan, as set forth in the Shareholder
Rights Agreement between the Company and the rights agent, the purpose of which is, among other things, to enhance the Board’s
ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover
attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a third party to acquire,
or could discourage a third party from acquiring, the Company or a large block of the Company’s common stock. In March 2012,
the Board approved an amendment to the Shareholder Rights Plan to enable Eastern Capital Limited and its affiliates to purchase
up to 49.9% of the shares of common stock of the Company without becoming an “acquiring person” and thereby triggering the
stockholder rights, with the limitations under the Shareholder Rights Plan remaining in effect for all other stockholders of the
Company.
In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right (Right) for each outstanding share of common stock to stockholders of record
as of the close of business on August 15, 2011. In addition, one Right will automatically attach to each share of common stock
issued between August 15, 2011 and the distribution date. As a result of the October 2013 reverse stock split, the number of Rights
associated with each share of common stock was automatically proportionately adjusted so that (i) twenty rights were then
associated with each outstanding share of common stock and (ii) so long as the Rights are attached to the common stock, twenty
rights shall be deemed to be delivered for each share of common stock issued or transferred by the Company in the future. The
Rights currently are not exercisable and are attached to and trade with the outstanding shares of common stock. Each Right entitles
the registered holder of common stock to purchase from the Company a unit consisting of one ten-thousandth of a share (Unit) of
Series A Junior Participating Preferred Stock, no par value per share, at a cash exercise prices of $30.00 per Unit. There are
currently 45,000 shares authorized and zero issued and outstanding. Under the Shareholder Rights Plan, the Rights become
exercisable if a person or group becomes an “acquiring person” by acquiring 15% or more of the outstanding shares of common
stock or if a person or group commences a tender offer that would result in that person owning 15% or more of the common stock.
If a person or group becomes an “acquiring person,” each holder of a Right (other than the acquiring person and its affiliates,
associates and transferees) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s
preferred stock which are equivalent to shares of common stock having a value of twice the exercise price of the Right. If the
Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would
then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value
of twice the exercise price of the Right.
The Rights may be redeemed in whole, but not in part, at a price of $0.001 per Right (payable in cash, common stock or other
consideration deemed appropriate by the Board of Directors) by the Board of Directors only until the earlier of (i) the time at
which any person becomes an “acquiring person” or (ii) the expiration date of the Rights Agreement. Immediately upon the action
of the Board of Directors ordering redemption of the Rights, the Right will terminate and thereafter the only right of the holders
of Rights will be to receive the redemption price. The Rights will expire at the close of business on August 15, 2021, unless
previously redeemed or exchanged by the Company as described above.
Series B Convertible Preferred Stock
On March 9, 2012, the Company completed the sale of 12,308 shares of Series B-1 Non-Voting Convertible Preferred Stock
(Series B-1 preferred stock) at an offering price of $3,250 per share. In addition to the Series B-1 preferred stock, which was
issued at the closing, the Company also authorized Series B-2 Voting Convertible preferred Stock (Series B-2 preferred stock).
The Series B-1 preferred stock and Series B-2 preferred stock collectively are referred to as the Series B preferred stock. The
Series B preferred stock is convertible, at the option of the holder thereof at any time after the five year anniversary of the closing
of the offering, into shares of common stock at a conversion price of $3.25 per share of common stock, at a conversion ratio of
one share of preferred stock for fifty shares of common stock. At any time after the five year anniversary of issuance, the Company
may elect to convert any or all outstanding shares of Series B preferred stock into shares of common stock, subject to certain
limitations. Dividends on the Series B preferred stock will be cumulative and compound daily, at a rate of 11.5% per annum,
payable upon conversion, liquidation, redemption or other similar events, and payable in cash or Series B-1 preferred stock until
the five year anniversary of issuance. As of December 31, 2015, there are 338,710 accumulated but undeclared Series B-1
dividends. Unless prohibited by Michigan law governing distributions to shareholders, the Series B-1 preferred stock shall be
76
redeemable at the option of holder of the Series B-1 preferred stock commencing at any time after the five year anniversary of
issuance, liquidation, winding up, dissolution or other similar events, subject to certain terms and limitations.
The Series B preferred stock does not, in its entirety, require liability classification and was evaluated for embedded features
to determine if those features require bifurcation and separate classification as derivative liabilities. The Series B preferred stock
host contract was evaluated for equity or mezzanine classification based upon the nature of the redemption and conversion features.
Generally, any feature that could require cash redemption for matters not within the Company’s control, irrespective of probability
of the event occurring, requires classification outside of shareholders’ equity. The Series B preferred stock was initially recorded
as mezzanine in the Consolidated Balance Sheets and was accreted to its redemption value through charges to accumulated deficit
using the effective interest method.
On August 12, 2013, the Company amended the Series B preferred stock agreement to remove the cash redemption provision,
modify the liquidation preferences for the Series B-2 preferred stock and to increase the redemption price for the Series B-1
preferred stock. The redemption price, prior to the five year anniversary, is now equal to $7,430 multiplied by the number of
Series B-1 preferred shares redeemed minus the Company’s closing stock price multiplied by the number of common shares into
which the outstanding Series B-2 preferred stock are convertible. The redemption price, after the five year anniversary, is the
amount equal to the greater of the Series B offering price plus accrued dividends or the conversion value in common stock. As a
result of the amendment to the agreement, the total amount of $38.4 million Series B preferred stock was reclassified from
mezzanine into shareholders’ equity.
Series A Convertible Preferred Stock
On December 18, 2015, Vericel entered into a Securities Exchange Agreement (Exchange Agreement) with Stonepine pursuant
to which Stonepine exchanged an aggregate of 1,250,000 shares of its common stock held by Stonepine for 1,250 shares of the
Company’s Series A Convertible Preferred Stock (the Exchange). The Exchange closed on December 23, 2015. In connection
with the Exchange, the Company designated 1,250 shares of its authorized and unissued preferred stock as Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into 1,000 shares of its common stock at any
time at the holder’s option. The holder, however, will be prohibited from converting Series A Convertible Preferred Stock into
shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of
the shares of the Company's common stock then issued and outstanding or, upon such holder’s written election, 14.99% of the
shares of our common stock then issued and outstanding. In the event of our liquidation, dissolution, or winding up, holders of
Series A Convertible Preferred Stock will receive a payment equal to any declared but unpaid dividends before any proceeds are
distributed to the holders of common stock, after any proceeds are distributed to the holder of our Series B-1 Non-Voting Convertible
Preferred Stock and Series B-2 Voting Convertible Preferred Stock (together, the Series B Convertible Preferred Stock) and pari
passu with any distributions to the holders of the Company's common stock. Shares of Series A Convertible Preferred Stock have
no voting rights, except as required by law and except where the consent of holders of a majority of the outstanding Series A
Convertible Preferred Stock would be required to amend the terms of the Series A Convertible Preferred Stock. Shares of Series
A Convertible Preferred Stock are entitled to receive dividends at the same time as the shares of Common Stock.
10. Net Loss Per Common Share
The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings
per share computations using the two class method:
(Amounts in thousands, except per share amounts)
Numerator:
Net loss
Less: earnings attributable to convertible preferred stock
Numerator of basic and diluted EPS
Denominator:
Denominator for basic and diluted EPS: weighted-average
common shares outstanding
Net loss per share attributable to common shareholders (basic
and diluted)
Year Ended December 31,
2015
2014
2013
$
$
$
(16,340) $
6,736
(23,076) $
(19,920) $
6,005
(25,925) $
23,760
11,642
(0.97) $
(2.23) $
(15,622)
5,352
(20,974)
3,016
(6.95)
Common equivalent shares and treasury stock are not included in the diluted per share calculation where the effect of their
inclusion would be anti-dilutive. The aggregate number of common equivalent shares (related to options, warrants, preferred
77
stock and treasury stock) that have been excluded from the computations of diluted net loss per common share for the years ended
December 31, 2015, 2014 and 2013 was 6.7 million, 2.3 million and 2.4 million, respectively.
11. Stock Purchase Warrants
The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain
common stock offerings. The following warrants were outstanding during the year ended December 31, 2015, and include
provisions that could require cash settlement of the warrants or have anti-dilution price protection provisions requiring the warrants
to be recorded as liabilities of the Company at the estimated fair value at the date of issuance, with changes in estimated fair value
recorded as income or expense (non-cash) in the Company’s statement of operations in each subsequent period:
Exercise price
Expiration date
Total shares issuable on exercise
August 2013
Warrants
$4.80
August 16, 2018
724,950
In July and December 2015, the January and December 2010 Class A warrants convertible into 226,299 and 15,405 shares of
common stock, respectively, expired unexercised. The fair value of the remaining August 2013 warrants are measured using the
Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price
volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based
on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S.
Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The
expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend yield is based on the
historical rate, which the Company anticipates to remain at zero.
The assumptions used by the Company are summarized in the following table:
August 2013 Warrants
Closing stock price
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life (years)
12. Fair Value Measurements
December 31, 2015
December 31, 2014
$
2.58
$
—%
91.4%
1.31%
2.63
3.04
—%
83.2%
1.20%
3.63
The Company’s fair value measurements are classified and disclosed in one of the following three categories:
• Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities;
• Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
• Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a
recurring basis:
(In thousands)
Liabilities:
Warrant liabilities
December 31, 2015
Fair value measurement category
December 31, 2014
Fair value measurement category
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
$
757
$
— $
757
$
— $
1,081
$
— $
1,061
$
20
The fair values of the warrants are measured using the Black-Scholes valuation model. See Note 11 for further discussion of
the significant observable inputs use to measure the warrant liabilities.
78
The following table summarizes the change in the estimated fair value of the Company’s warrant liabilities:
Warrant Liabilities (In thousands)
Balance at December 31, 2013
Warrant exercises
Increase in fair value
Balance at December 31, 2014
Decrease in fair value
Balance at December 31, 2015
$
$
2,019
(965)
27
1,081
(324)
757
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as
follows:
(In thousands)
Beginning balance
Decrease in fair value
Ending balance
13. Income Taxes
Year Ended December 31,
2015
2014
$
$
$
20
(20)
— $
85
(65)
20
Income (loss) before income taxes for U.S and non-U.S operations was as follows:
U.S. loss
Non U.S. loss
Year Ended December 31,
2015
2014
2013
$
$
(16,235) $
(105)
(16,340) $
(18,078) $
(1,842)
(19,920) $
(15,622)
—
(15,622)
A reconciliation of income taxes computed using the federal statutory rate to the taxes reported in the consolidated statements
of operations is as follows:
(In thousands)
Loss before income taxes
Federal statutory rate
Taxes computed at federal statutory rate
State taxes (net of federal benefit)
Warrants
Nondeductible stock compensation
Michigan NOL benefit
Net operating loss expirations
Write-off of Section 382 limited NOL’s
Write-off of Section 383 limited R&D credits
Other
Adjustment to prior year filed returns
Change in valuation allowance
Reported income taxes
Year Ended December 31,
2015
2014
2013
$
$
(16,340)
34%
(5,556)
(392)
(118)
543
—
—
—
—
57
(5,203)
10,669
$
(19,920)
34%
(6,773)
(463)
(10)
48
—
655
67,781
1,600
352
—
(63,190)
$
— $
— $
(15,622)
34%
(5,311)
—
(1,815)
81
(791)
612
—
—
(27)
—
7,251
—
79
Deferred tax assets consist of the following:
(In thousands)
Net operating loss carryforwards
Employee benefits and stock compensation
Research and development costs
Fixed assets
Intangible assets
Asset retirement obligation
Inventory reserve
Other, net
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Year Ended December 31,
2015
2014
$
$
13,998
2,485
4,903
453
(477)
—
510
143
22,015
(22,015)
$
— $
7,092
1,897
2,184
254
(510)
127
186
115
11,345
(11,345)
—
In 2014, the Company underwent a change in control as defined by Section 382 of the Internal Revenue Code. A change in
control is generally defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a
rolling three year period. This change in control resulted in substantial limitations being placed on certain tax attributes including
net operating losses and tax credit carryforwards. The limitations are computed based upon several variable factors including the
value of the Company on the date of the change in control. The projected annual limitation on the use of the net operating losses
that existed prior to September 17, 2014 is $0.8 million. As a result, a significant portion of the net operating losses and tax credit
carryforwards will expire prior to their utilization, regardless of the level of future profitability. Accordingly, the Company reduced
its net operating losses and tax credit carryforwards in 2014 (with a corresponding adjustment to the valuation allowance) to reflect
the amount available to offset future profits. There was not a change of control in 2015.
During the finalization of the 2014 federal tax return, the Company determined there was a net unrealized built-in gain of $8.9
million, which increases pre-ownership change net operating losses available to the Company to offset taxable income in the
future. This results in a partial restoration of the net operating losses previously written-off as discussed above. A corresponding
valuation allowance was recorded for the increase in deferred tax asset.
As of December 31, 2015, the Company’s U.S. federal, and state tax net operating loss carryforwards available to offset future
profits, after considering the aforementioned annual Section 382 limit, are $39.3 million and $17.0 million, respectively. These
net operating loss carryforwards will expire between 2016 and 2035.
In accordance with the accounting guidance for income taxes, the Company estimated whether recoverability of its deferred
tax assets is “more likely than not,” based on forecasts of taxable income in the related tax jurisdictions. In this estimate, the
Company uses historical results, projected future operating results based upon approved business plans, eligible carry forward
periods, tax planning opportunities and other relevant considerations. Based on these factors, including historical losses incurred
by the Company, a full valuation allowance for the deferred tax assets, including the deferred tax assets for the aforementioned
net operating losses and credits, has been provided since they are not more likely than not to be realized. If the Company achieves
profitability, these deferred tax assets may be available to offset future income taxes. The change in the valuation allowance was
an increase of $10.7 million and decrease of $63.2 million for the years ended December 31, 2015 and 2014, respectively.
The Company assesses uncertain tax positions in accordance with the guidance for accounting for uncertain tax positions. This
pronouncement prescribes a recognition threshold and measurement methodology for recording within the financial statements
uncertain tax positions taken, or expected to be taken, in the Company’s income tax returns. To the extent the uncertain tax
positions do not meet the “more likely than not” threshold, the Company has derecognized such positions. To the extent the
uncertain tax positions meet the “more likely than not” threshold, the Company has measured and recorded the highest probable
benefit, and have established appropriate reserves for benefits that exceed the amount likely to be sustained upon examination.
80
A reconciliation of the beginning and ending amounts of uncertain tax provision is as follows:
(In thousands)
Balance at December 31, 2013
Decrease in prior year tax positions
Balance at December 31, 2014 and 2015
Unrecognized
Income Tax
Benefits
$
$
900
(900)
—
It is not anticipated that the unrecognized tax benefits will significantly increase or decrease within the next twelve months.
The Company files U.S. federal, Michigan, Massachusetts, Colorado, Illinois and California income tax returns. Due to the
Company’s net operating loss carryforwards, Federal income tax returns from incorporation are still subject to examination.
Michigan tax returns for the year ended December 31, 2013 and forward are subject to examination. California tax returns for the
year ended December 31, 2013 and forward are subject to examination.
14. Employee Savings Plan
The Company has a 401(k) savings plan that allows participating employees to contribute a portion of their salary, subject
to annual limits and minimum qualifications. The Board may, at its sole discretion, approve Company matching contributions
to the plan. The Company made contributions of $0.5 million, $0.3 million and $0.1 million for the years ended December 31,
2015, 2014 and 2013, respectively.
15. Concentration of Credit
Revenue from one customer, a distributor in the U.S., represented 66% and 76% of total revenue during the years ended
December 31, 2015 and 2014, respectively. Accounts receivable from the same customer accounted for 76% and 71% of the
outstanding accounts receivable as of December 31, 2015 and 2014, respectively. The next largest customer represented 12% and
10% of revenue for the year ended December 31, 2015 and 2014, respectively. Accounts receivable from the next largest customer
accounted for 8% and 14% of the outstanding accounts receivable as of December 31, 2015 and 2014, respectively.
16. Commitments and Contingencies
Licenses, Royalties and Collaborative Agreements
Corning Incorporated — In December 2002, the Company entered into an agreement with Corning Incorporated (Corning)
that granted Corning an exclusive sublicense relating to the Company’s cell transfection technology. Under the terms of the
agreement, the Company retains exclusive rights to the applications of the technologies involving cells for therapeutic applications.
In addition, the agreement provides for future royalty payments on net sales of licensed products sold under the sublicense amounting
to 5% of such sales up to $50.0 million. However, the Company does not expect to receive material revenue from this source for
several years, if ever.
RealBio Technologies — In May 2009, the Company entered into an agreement with RealBio Technologies, Inc. (RealBio)
that granted RealBio an exclusive license to utilize our technology outside of the Company’s core area of focus - human regenerative
medicine. In return for this license, the Company received a minority equity interest in RealBio, which was not material as of
December 31, 2015 or 2014.
Matricel — In October 2015, the Company signed a long-term supply agreement with Matricel GmbH for the ACI-Maix
collagen membrane used in the manufacture of MACI™. Matricel supplied ACI-Maix membranes used in the production of MACI
when it was previously marketed outside the U.S. by Genzyme Corporation, a Sanofi company. Under the agreement, the Company
has committed to purchase $0.3 million of material in 2016. In the event that the Biologics License Application is approved for
MACI, annual purchase commitments would equal approximately $0.6 million per year. The agreement is effective until December
31, 2022 and contains a 5-year renewal option by the Company and an additional 5-year automatic renewal, unless otherwise
terminated.
Manufacture, Supply and Other Agreements — The Company has entered into various agreements relating to the manufacture
of its products and the supply of certain components. If the manufacturing or supply agreements expire or are otherwise terminated,
the Company may not be able to identify and obtain ancillary materials that are necessary to develop its product and such expiration
and termination could have a material effect on the Company’s business.
81
Contractual Obligations
The Company leases facilities in Ann Arbor, Michigan; Cambridge, Massachusetts and Kastrup, Denmark. In March 2016, the
Company amended its current lease in Cambridge to extend the terms until March 2022. In addition to the property leases, the
Company also leases an offsite warehouse, various vehicles and computer equipment.
Future minimum payments related to Vericel’s operating and capital leases are as follows:
Contractual Obligations
Operating leases
Purchase commitments
Capital leases
Total
Total
27,693
300
118
28,111
$
$
$
$
2016
2017
2018
2019
2020
More than
5 Years
4,310
300
43
4,653
$
$
4,890
—
43
4,933
$
$
4,572
—
32
4,604
$
$
4,260
—
—
4,260
$
$
4,386
—
—
4,386
$
$
5,275
—
—
5,275
Payments Due by Period
Rent expense for the years ended December 31, 2015, 2014 and 2013, was $4.9 million, $2.5 million and $1.0 million,
respectively.
17. Subsequent Events
On March 8, 2016, Vericel entered into a $15.0 million debt financing with Silicon Valley Bank (SVB). The debt financing
consists of a $3.0 million term loan available immediately upon the closing, $2.0 million term loan available upon the FDA's
approval of the MACI BLA and up to $10.0 million revolving line of credit. The term loans are interest only (indexed to Wall
Street Journal (WSJ) Prime plus 0.75%) until March 1, 2017 followed by 36 equal monthly payments of principal plus interest
maturing February 1, 2020. The revolving credit is limited to a borrowing base calculated using eligible accounts receivable and
maturing March 8, 2018 with an interest rate indexed to WSJ Prime plus 0.25% up to 0.75%. Monthly, the Company must remain
in compliance with an adjusted quick ratio greater than or equal to 1.10 to 1.0. The adjusted quick ratio is the ratio of (a) unrestricted
cash and cash equivalents and net billed accounts receivable to (b) current liabilities minus the current portion of deferred revenue
and warrant liabilities.
18. Supplementary Quarterly Financial Information (unaudited)
Quarterly earnings per share amounts may not sum to the totals for each of the years, since quarterly computations are based
on weighted average common shares outstanding during each quarter.
In thousands, except per share data)
2015
Revenues
Gross profit
Loss from operations
Net loss
Net loss per share (Basic and Diluted)
2014
Revenues(a)
Gross profit (loss)
Loss from operations
Net loss(b)
Net loss per share (Basic and Diluted)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
$
$
10,849
5,281
(4,572)
(4,862)
(0.27)
— $
—
(4,645)
(5,995)
(1.26)
$
$
13,590
6,689
(2,265)
(2,152)
(0.16)
4,432
(577)
(8,522)
(4,638)
(0.94)
$
$
11,309
4,537
(4,877)
(4,416)
(0.26)
9,658
4,126
(8,022)
(6,917)
(0.82)
$
$
15,420
8,191
(4,957)
(4,910)
(0.28)
14,706
7,954
(2,345)
(2,370)
(0.17)
51,168
24,698
(16,671)
(16,340)
(0.97)
28,796
11,503
(23,534)
(19,920)
(2.23)
(a) Revenue from commercial operations began in June 2014 following the acquisition of the CTRM business. Prior to June
2014, Vericel was a development stage entity.
(b) The net loss in the second quarter of 2014 includes a $3.5 million bargain purchase gain as a result of the CTRM business
acquisition.
82
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There are none to report.
Item 9A. Controls and Procedures
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 Securities and Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within the time periods specified in the Commission’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 December 31, 2015, our Certifying Officers concluded that the Company’s disclosure controls and procedures were not
effective because of the material weakness in our internal control over financial reporting as described below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Rule l3a-l5(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision
of our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our
financial statements for external purposes in accordance with generally accepted accounting principles. Management evaluated
the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Management, under the
supervision and with the participation of the CEO and CFO, assessed the effectiveness of our internal control over financial
reporting as of December 31, 2015.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness relates to the design of controls to mitigate segregation of duties
conflicts in our financial management/ERP software. Specifically, our Controller had access to modules in the financial management
software beyond necessary to perform the job of Controller, and the controls that were designed and implemented to be performed
by the Controller to mitigate the incompatible duties of other financial personnel were ineffective. Thus, the material weakness
impacted substantially all financial statement accounts and all financial statement assertions. While the material weakness did not
result in any financial statement adjustments during the year ended December 31, 2015, it could result in misstatements to
substantially all accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency
constitutes a material weakness.
Because of this material weakness, management concluded that the Company did not maintain effective internal control over
financial reporting as of December 31, 2015, based on criteria in Internal Control - Integrated Framework issued by COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8
of this form 10-K.
Plan for Remediation of Material Weakness
With the oversight of senior management and our audit committee, we have taken steps to remediate the material weakness
noted above. Beginning in January 2016, we have modified and removed the Controller's access to modules in the financial
management software.
In January 2016, with the oversight of senior management and our audit committee, we have taken steps to begin to design a
remediation plan. Plan steps and actions taken thus far are below.
83
1) Remove inappropriate permissions. When the permissions error was located in January 2016, inappropriate access
was immediately removed. IT staff responsible for the maintenance of Active Directory Group assignments made
changes to the Controller’s permissions and by January 25, 2016, the Controller’s permissions were corrected to
remove the incompatible access.
2) Enable and/or design reporting functionality that provides an audit trail for journal entries, module access and other
relevant user actions. In addition to the corrections to the Controller’s permissions, the FastPath software vendor
was contacted to customize an additional report that is needed to document the audit trail / life cycle of each journal
entry in the ERP. The new report captures journal entries that originate in the general ledger together with the user
that initiated each journal entry, the user the changed each journal entry, and the user that posted each journal entry
in the ERP.
3) Review remaining conflicts and confirm whether Controller’s review would effectively mitigate the risk
associated with the permissions.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2015 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
On March 8, 2016, we entered into amendments to our 2005 and 2008 lease agreements for our Cambridge, Massachusetts
headquarters. The amendment to the 2008 lease agreement provides for an additional 306 rentable square feet of space, extends
the term of the lease for an additional five years through February 28, 2022, and gives us an option to extend the term for one
additional period of five years. In addition, the amendment provides us with a right of first offer to rent an additional 12,795
rentable square feet of space, subject to availability and the satisfaction of certain other conditions specified in the amendment.
The annual lease rate will range from $71 per rentable square foot commencing on March 1, 2017 to $79.91 per rentable square
foot for the period commencing on March 1, 2021. In addition, the landlord has agreed to provide us a leasehold improvement
allowance under this lease agreement of $0.4 million.
The amendment to the 2005 lease agreement also extends the term of our lease through February 28, 2022, and provides us
with an option to the extend the term for one additional period of five years. Similar to the amendment to the 2008 lease agreement,
the annual lease rate will range from $71 per rentable square foot commencing on March 1, 2017 to $79.91 per rentable square
foot for the period commencing on March 1, 2021. In addition, the landlord has agreed to provide us a leasehold improvement
allowance under this lease agreement of $1.6 million.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K, and is incorporated by reference
to our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection
with our 2015 Annual Meeting of Shareholders scheduled for May 4, 2016.
Item 10. Directors, Executive Officers and Corporate Governance
The information relating to our directors is incorporated by reference to the Proxy Statement as set forth under the caption
“Election of Directors.” Information relating to our executive officers is set forth in Part I of this Report under the caption
“Executive Officers.”
Information with respect to delinquent filings pursuant to Item 405 of Regulation S-K is incorporated by reference to the Proxy
Statement as set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information relating to executive compensation is incorporated by reference to the Proxy Statement under the caption
“Executive Compensation and Related Information.”
84
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters
The information relating to ownership of our equity securities by certain beneficial owners and management is incorporated
by reference to the Proxy Statement as set forth under the caption “Stock Ownership of Certain Beneficial Owners and
Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information relating to certain relationships and related person transactions is incorporated by reference to the Proxy
Statement under the caption “Certain Relationships and Related Party Transactions.”
Item 14. Principal Accountant Fees and Services
The information relating to principal accountant fees and services is incorporated by reference to the Proxy Statement under
the caption “Ratification of Appointment of Independent Registered Public Accounting Firm.”
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements (see Item 8).
2. All information is included in the Financial Statements or Notes thereto.
3. Exhibits:
See Exhibit Index.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 14, 2016
Vericel Corporation
/s/ DOMINICK C. COLANGELO
Dominick C. Colangelo
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed
on behalf of the registrant on March 14, 2016 by the following persons in the capacities indicated.
Signature
Title
/s/ DOMINICK C. COLANGELO
Dominick C. Colangelo
President and Chief Executive Officer, Director
(Principal Executive Officer)
/s/ GERARD J. MICHEL
Gerard J. Michel
/s/ ROBERT L. ZERBE, M.D.
Robert L. Zerbe, M.D.
/s/ ALAN L. RUBINO
Alan L. Rubino
/s/ HEIDI M. HAGEN
Heidi M. Hagen
/s/ STEVEN C. GILMAN
Steven C. Gilman
/s/ KEVIN F. MCLAUGHLIN
Kevin F. McLaughlin
/s/ PAUL K. WOTTON
Paul K. Wotton
Chief Financial Officer and Vice President
of Corporate Development
(Principal Financial and Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
86
Exhibit No.
Description
EXHIBIT INDEX
3.1
3.2
3.3
3.4
3.5
3.6
Restated Articles of Incorporation of the Company, filed as Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed on December 17, 2009, incorporated herein by reference.
Certificate of Amendment to Restated Articles of Incorporation of the Company dated February 9, 2010,
filed as Exhibit 3.2 to the Company’s Post-Effective Amendment No. 1 to Form S-1 filed on March 31,
2010, incorporated herein by reference.
Certificate of Amendment to Restated Articles of Incorporation of the Company dated March 22, 2011,
attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 25, 2011, incorporated
herein by reference.
Certificate of Amendment to the Restated Articles of Incorporation of the Company, dated November 21,
2014, attached as Exhibit 3.1 to Vericel’s Current Report on Form 8-K filed on November 24, 2014,
incorporated herein by reference.
Certificate of Designation, Preferences and Rights, of the Company classifying and designating the Series A
Junior Participating Cumulative Preferred Stock, attached as Exhibit 3.1 to the Company’s Current Report
on Form 8-A filed on August 12, 2011, incorporated herein by reference.
Amended and Restated Certificate of Designations, Preferences and Rights, of the Company classifying
and designating the Series B-1 Non-Voting Convertible Preferred Stock and the Series B-2 Voting
Convertible Preferred Stock, attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed
on August 12, 2013, incorporated herein by reference.
3.7**
Certificate of Designations, Preferences and Rights and Limitations of Series A Convertible Preferred Stock.
3.8
4.1
4.2
4.3
4.4
10.1 #
10.2 #
Bylaws, as amended, attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on
November 12, 2010, incorporated herein by reference.
Form of Senior Indenture for Senior Debt Securities, filed as Exhibit 4.1 to the Company’s Registration
Statement on Form S-3 filed on June 29, 2015 and incorporated herein by reference.
Form of Indenture for Subordinated Debt Securities, filed as Exhibit 4.3 to the Company’s Registration
Statement on Form S-3 filed on June 29, 2015 and incorporated herein by reference.
Shareholder Rights Agreement, dated as of August 11, 2011, between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent, attached as Exhibit 4.3 to the Company’s Current Report on
Form 8-A filed on August 12, 2011, incorporated herein by reference.
Amendment to Shareholder Rights Agreement, dated as of March 9, 2012, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent, attached as Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed on March 9, 2012, incorporated herein by reference.
Form of Indemnification Agreement, attached as Exhibit 10.1 to the Company’s Registration Statement on
Form S-1 (No. 333-15415), filed on November 1, 1996, incorporated herein by reference.
Amended and Restated 1992 Incentive and Non-Qualified Stock Option Plan and forms of agreements
thereunder, attached as Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (No. 333-15415),
filed on November 1, 1996, incorporated herein by reference.
87
Exhibit No.
Description
10.4
10.5 #
10.6 #
10.7 #
10.8
10.9 #
10.10 #
10.11
10.12
10.13
10.15
10.16
10.17
License Agreement, dated March 13, 1992, between the Company and the University of Michigan and
amendments thereto dated March 13, 1992, October 8, 1993 and June 21, 1995, attached as Exhibit 10.17
to the Company’s Registration Statement on Form S-1 (No. 333-15415), filed on November 1, 1996,
incorporated herein by reference.
2001 Stock Option Plan, attached as Exhibit 10.72 to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2002, incorporated herein by reference.
2004 Equity Incentive Plan, attached as Exhibit 10.82 to Amendment No. 1 to the Company’s Quarterly
Report on Form 10-Q/A for the quarter ended September 30, 2004, incorporated herein by reference.
Form of Option and Restricted Stock Award Agreements for Grants under 2004 Equity Incentive Plan,
attached as Exhibit 10.84 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2005,
incorporated herein by reference.
Amendment dated December 5, 2002 to License Agreement with the University of Michigan, attached as
Exhibit 10.87 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2005, incorporated
herein by reference.
2004 Equity Incentive Plan, as amended, attached as Exhibit 99.1 to the Company’s Current Report on
Form 8-K filed on November 8, 2006, incorporated herein by reference.
Forms of Grant Notice and Stock Option Agreement for Grants under 2004 Equity Incentive Plan, as
amended, attached as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on November 8,
2006, incorporated herein by reference.
Form of Purchase Agreement, attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
on October 16, 2007, incorporated herein by reference.
Form of Warrant, attached as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on
October 16, 2007, incorporated herein by reference.
Standard Lease between the Company and Domino’s Farms Office Park, L.L.C. dated January 31, 2007, as
amended, (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the SEC on April 9, 2013).
Class A Warrant Agreement, dated as of January 21, 2010, by and between the Registrant and Continental
Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed with the SEC on January 27, 2010).
Class B Warrant Agreement, dated as of January 21, 2010, by and between the Registrant and Continental
Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 4.2 to the Company’s Current
Report on Form 8-K filed with the SEC on January 27, 2010).
Underwriting Agreement, dated as of January 15, 2010, and between the Registrant and Oppenheimer &
Co. Inc. (incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K
filed with the SEC on January 15, 2010).
10.18 #
Form of indemnification agreement entered into between the Company and each of its directors, attached
as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 31, 2010, incorporated herein
by reference.
88
Exhibit No.
10.19
10.20*
10.21
10.22
10.26#
10.27
10.28
10.29
10.3
10.31
10.32#
10.35
10.36#
10.37#
Description
Amended Code of Business Conduct and Ethics, attached as Exhibit 14.1 to the Company’s Current Report
on Form 8-K filed on August 31, 2010, incorporated herein by reference.
Contract Manufacturing and Supply Agreement, dated as of November 8, 2010, by and between Vention
Medical (formerly ATEK Medical, LLC) and the Company (incorporated herein by reference to
Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
Warrant agreement, dated as of December 15, 2010, by and between the Registrant and Continental Stock
Transfer & Trust Company (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed with the SEC on December 16, 2010).
Underwriting Agreement, dated as of December 10, 2010, and between the Registrant and Stifel, Nicolaus &
Company, Incorporated, Needham & Company, LLC and Roth Capital Partners (incorporated herein by
reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 10,
2010).
Senior Executive Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K, filed on March 25, 2011).
At Market Issuance Sales Agreement, dated June 16, 2011, by and among the Company and MLV & Co.
LLC (“MLV”) (formerly McNicoll, Lewis & Vlak LLC),(incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on June 16, 2011).
Master Services Agreement by and between the Company and PPD, made and entered into as of
September 23, 2011 (the “Master Services Agreement”) (incorporated herein by reference to Exhibit 10.28
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012).
Project Addendum to the Master Services Agreement, dated as of November 16, 2011 (incorporated herein
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC November 22,
2011).
Registration Rights Agreement, dated March 9, 2012, between the Company and Eastern Capital Limited,
attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 9, 2012, incorporated
herein by reference.
Securities Purchase Agreement, dated as of March 9, 2012, by and between the Company and Eastern Capital
Limited (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on March 9, 2012).
Employment Agreement, dated as of April 3, 2013, by and between the Company and Daniel R. Orlando
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
April 9, 2013).
Form of Warrant Exchange Agreement, dated June 27, 2012 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Report on Form 8-K, filed on June 27, 2012).
Executive Resignation Agreement, executed on December 14, 2012, by and between the Company and Tim
M. Mayleben (incorporated herein by reference to Exhibit 10.36 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2012, filed on March 18, 2013).
Executive Employment Agreement, executed March 4, 2013 and effective March 1, 2013, by and between
the Company and Dominick C. Colangelo (incorporated herein by reference to Exhibit 10.1 to the Company’s
Report on Form 8-K, filed on March 9, 2013).
89
Exhibit No.
10.38
Description
Form of Warrant Exercise Agreement, dated September 24, 2013 (incorporated herein by reference to
Exhibit 10 to the Company’s Report on Form 8-K, filed on September 27, 2013).
10.39
10.4
10.41
10.42
10.43
10.44
Consulting Services Agreement, executed January 9, 2014 and effective January 1, 2014, by and between
the Company and Ronnda L. Bartel (incorporated herein by reference to Exhibit 10.1 to the Company’s
Report on Form 8-K, filed on January 14, 2014).
Underwriting Agreement, dated as of August 13, 2013, by and between the Company and Aegis Capital
Corp. (incorporated herein by reference to Exhibit 1.1 to the Company’s Registration Statement on Form S-1
(File No. 333-188186) filed on August 13, 2013).
Amendment No.1 to At Market Issuance Sales Agreement, dated November 29, 2013, by and between the
Company and MLV (incorporated herein by reference to Exhibit 1.1 to the Company’s Report on Form 8-
K, filed on November 29, 2013).
Purchase Agreement, dated as of January 21, 2014, by and between the Company and Lincoln Park Capital
Fund, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-
K filed on January 27, 2014).
Registration Rights Agreement, dated as of January 21, 2014, by and between the Company and Lincoln
Park Capital Fund, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on January 27, 2014).
Asset Purchase Agreement, dated as of April 19, 2014, by and between the Company and Sanofi
(incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on
June 2, 2014).
10.45#
Employment Agreement, dated May 13, 2014, by and between the Company and Gerard J. Michel
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
June 4, 2014).
10.46**
Transition Services Agreement, dated as of May 30, 2014, by and between the Company and Genzyme
Corporation, as amended.
10.47**
Transition Supply Agreement, dated as of May 30, 2014, by and between the Company and Genzyme
Corporation, as amended.
10.48
10.51#
10.52#
10.53#
Form of Warrant Exercise Agreement, dated July 9, 2014 (incorporated herein by reference to Exhibit 10
to the Company’s Report on Form 8-K, filed on July 11, 2014).
Employment Agreement, dated September 25, 2014, by and between the Company and Ross Tubo
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
September 25, 2014).
Employment Agreement, dated September 25, 2014, by and between the Company and David Recker
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
September 25, 2014).
Second Amended and Restated 2009 Omnibus Incentive Plan (previously filed as Appendix II to the
Company’s definitive proxy statement on Schedule 14A, filed on October 21, 2014 and incorporated herein
by reference).
90
Exhibit No.
10.54#
Description
Employment Agreement, dated November 6, 2014, by and between the Company and Gerard Michael
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
November 12, 2014).
10.55#
Amended and Restated Non-employee Director Compensation Guidelines.
10.56
10.57**
10.58**
10.61*
10.62
Securities Exchange Agreement, dated December 18, 2015, by and between the Company and Stonepine
Capital, LP (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-
K filed on December 18, 2015).
Lease Agreement, dated November 30, 2005, by and between the Company and Up 64 Sidney Street, LLC,
as amended.
Lease Agreement, dated January 23, 2008, by and between the Company and Up 64 Sidney Street, LLC,
as amended.
ACI-Maix Supply Agreement, dated October 20, 2015, by and between the Company and Matricel GmbH
(incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2015 filed on November 11, 2015).
Vericel Corporation 2015 Employee Stock Purchase Plan (incorporated herein by reference to Appendix I
of the Company’s Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2014, filed on
March 25, 2015).
10.63**
Third Amendment to Standard Lease between the Company and Domino's Farms Office Park, L.L.C., dated
March 2, 2015.
21.1**
Subsidiaries of Registrant.
23.1**
Consent of Independent Registered Public Accounting Firm.
31.1**
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
# Management contract or compensatory plan or arrangement covering executive officers or directors of Vericel.
91
* Confidential treatment status has been granted as to certain portions thereto, which portions are omitted and filed separately
with the Securities and Exchange Commission.
** Filed herewith.
92
TERM
Adverse Event
Autologous (Patient Specific)
BLA — Biologics License Application
CLI — Critical Limb Ischemia
CMC — Chemistry, Manufacturing, and
Control
Controlled Clinical Trial
DCM — Dilated Cardiomyopathy
Double-Blind Clinical Trial
FDA — Food & Drug Administration
GMP — Good Manufacturing Practice
Hematopoietic Stem Cells
GLOSSARY
DEFINITION
Any adverse change in health or “side-effect” that occurs in a person
participating in a clinical trial, from the time they consent to joining the trial
until a pre-specified period of time after their treatment has been completed.
Originating from the patient receiving treatment. (Vericel uses only autologous
cells)
An application containing product safety, efficacy and manufacturing
information required by the FDA to market biologics products in the U.S.
A vascular disease characterized by insufficient blood flow in the lower
extremities that causes severe pain, tissue loss or both.
The composition, manufacture, and control of the drug substance and the drug
product. It is information on the identification, quality, purity, and strength of
the investigational product.
A clinical study that compares patients receiving a specific treatment to
patients receiving an alternate treatment for the condition of interest. The
alternate treatment may be another active treatment, standard of care for the
condition and/or a placebo (inactive) treatment.
A chronic cardiac disease where expansion of the patient’s heart reduces the
pumping function to a point that the normal circulation of blood cannot be
maintained.
Clinical trials in which neither the patient nor the physician know if the patient
received the experimental treatment or a control/placebo.
The U.S. FDA ensures that medicines, medical devices, and radiation-emitting
consumer products are safe and effective. Authorized by Congress to enforce
the Federal Food, Drug, and Cosmetic Act and several other public health
laws, the agency monitors the manufacture, import, transport, storage, and
sale of $1 trillion worth of goods annually.
GMP regulations require that manufacturers, processors, and packagers of
drugs, medical devices, some food, and blood take proactive steps to ensure
that their products are safe, pure, and effective. GMP regulations require a
quality approach to manufacturing, enabling companies to minimize or
eliminate instances of contamination, mix-ups, and errors.
Stem cells that give rise to all the blood cell types including myeloid
(monocytes and macrophages, neutrophils, basophils, eosinophils,
erythrocytes, megakaryocytes/platelets, dendritic cells), and lymphoid
lineages (T-cells, B-cells, NK-cells).
IMPACT-DCM
Vericel’s U.S. Phase 2 dilated cardiomyopathy clinical trial.
IND — Investigational New Drug
Ischemia
LVEF — Left Ventricular Ejection Fraction
Mesenchymal stromal cells
M2 anti-inflammatory macrophages
Open-label Clinical Trial
Orphan Drug Designation
An application submitted to the FDA for a new drug or biologic that, if allowed,
will be used in a clinical trial.
A shortage or inadequate flow of blood to a body part (commonly an organ
or tissue) caused by a constriction or obstruction of the blood vessels supplying
it.
The fraction of blood pumped out of the left ventricle with each heartbeat.
Connective tissue cells that, in the case of bone marrow derived MSC, function
to support blood forming cells and secrete anti-inflammatory factors.
Specialized blood cells that remove damaged tissue and bacteria and secrete
anti-inflammatory factors.
A trial in which both the treating physician and the patient know whether they
are receiving the experimental treatment or control/placebo treatment.
“Orphan drug” refers to a drug or biologic that is intended for use in the
treatment of a rare disease or condition. Orphan drug designation from the
U.S. Food and Drug Association (FDA) qualifies the sponsor to receive certain
benefits from the Government in exchange for developing the drug for a rare
disease or condition. The drug must then go through the FDA marketing
approval process like any other drug or biologic which evaluates for safety
and efficacy. Usually a sponsor receives a quicker review time and lower
application fees for an orphan product.
93
TERM
Phase 1 Clinical Trial
Phase 2 Clinical Trial
Phase 2b Clinical Trial
Phase 3 Clinical Trial
Prospective Clinical Trial
Randomized Clinical Trial
Somatic Cell
Stem Cell
DEFINITION
A Phase 1 trial represents an initial study in a small group of patients to test
for safety and other relevant factors.
A Phase 2 trial represents a study in a moderate number of patients to assess
the safety and efficacy of a product.
A Phase 2b trial is a moderately-sized Phase 2 trial that is more specifically
designed assess the efficacy of a product than a Phase 2a trial.
Phase 3 studies are initiated to establish safety and efficacy in an expanded
patient population at multiple clinical trial sites and are generally larger
than trials in earlier phases of development.
A clinical trial in which participants are identified and then followed
throughout the study going forward in time.
A clinical trial in which the participants are assigned randomly to different
treatment groups.
Any of the cells responsible for forming the body of an organism such as
internal organs, bones, skin, connective tissues and blood.
Unspecialized (undifferentiated) cells that retain the ability to divide
throughout a lifetime and give rise to more specialized (differentiated) cells
which take the place of cells that die or are lost. In culture, these
undifferentiated cells possess the ability to divide for indefinite periods in
culture and may give rise to highly specialized cells.
94
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)