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Bull of the Day: Vericel (VCEL)

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Vericel (VCEL) is an $800 million provider of advanced cell therapies for the sports medicine and severe burn care markets. The goal of their therapies is to repair or restore a patient’s damaged tissues or organs using their own cells.

The company markets two autologous cell therapy products in the United States: Carticel for the treatment of cartilage defects in the knee, and Epicel for the treatment of severe burns. It is also developing MACI (TM) for the treatment of cartilage defects in the knee, and ixmyelocel-T for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy.

Sales for this small-cap are projected to launch 40% to over $170 million next year and profits are expected to vault more than 400% after a rough 2020 due to the massive hold on elective medical procedures during the COVID-19 shutdown.

In late June, the company revealed their next pipeline candidate for FDA approval...

Vericel Announces Submission of Biologics License Application to the FDA for NexoBrid for the Treatment of Severe Thermal Burns

Below I share some explanations of the science of Vericel therapies and analyst views. But before you listen to them, or me, check out this warrior's story...


What is cell therapy?

Cell therapy is the infusion, injection or transplantation of whole cells back into a patient for treatment of a condition. In autologous therapy the patient is the source (donor) of their own therapy. With the patient acting as their own donor, the risk of rejection and the use of immunosuppressive therapy is minimized.

How does autologous cell therapy work?

The goal of cell therapy is to repair or restore damaged tissues using cells. For Vericel therapies, tissue from the patient is collected by a qualified and trained surgeon, and then processed and expanded by Vericel into a specific cell type or multicellular therapy. The patient’s own cells are then returned to the surgeon for implantation.

The Vericel Process

Vericel uses a proprietary cell-processing technology to expand naturally occurring populations of cells derived from the patient’s own tissue. Specific to the type of therapy needed, a small sample of tissue is taken from the patient. The sample is then sent to their laboratory in Cambridge Massachusetts for cellular expansion. Rigorous testing ensures the quality and viability of cells before they are delivered back to health care professionals. These cells, in conjunction with rehabilitation regimes, have demonstrated the ability to restore function to patients with serious medical conditions.

Why I Bought Vericel in July

After the company's May 5 quarterly report where they removed 2020 guidance due to the pandemic, analysts were so excited about the pipeline, with new FDA submissions coming in knee treatments, that they raised their price targets above $20, on average.

SVB Leerink analysts hosted virtual meetings with VCEL senior management in June and here's what they had to say...

"We view VCEL as a virtual monopoly in a highly underpenetrated cartilage repair market with MACI, and a continued leader in the severe burn market with both Epicel and NexoBrid, with the company reiterating plans for a mid-2020 submission of the NexoBrid Biologics License Application to the FDA."

Meanwhile, the high Street target has rested with Oppenheimer for over a year, and here was that call from last year...

Vericel price target raised to $32 from $23 at Oppenheimer: Analyst Kevin Degeeter raised his price target on Vericel (VCEL) to $32 from $23 after the company reported Q1 results, raised its 2019 revenue guidance and announced a deal to license North American rights for NexoBrid from MediWound.

I'm sharing this long-standing call because it exemplifies the true growth trajectory of the company in cell therapy, despite the current shutdown on elective procedures. Here was the Oppenheimer update on May 6...

On 5/5, VCEL reported 1Q20 results in-line with pre-announced levels and noted 1) early rebound in MACI demand from states eliminating elective surgery restrictions, 2) stable Epicel biopsy rate since late March, and 3) delay for NexoBrid procurement revenue into 2021. While not providing financial guidance, we view management's comments on correlation between near-term demand growth and lifting of elective surgery restrictions as a measuring stick for 2Q20 implying a 40-50% potential reduction in MACI revenues. Furthermore, VCEL provided metrics for thinking about operating leverage ($0.25 reduction in expenses for every $1 decline in revenue) and discretionary spending reductions ($1.5M per quarter). On net, guidance implies lower operating expense than we'd modeled resulting in 2020E EPS revision from ($0.25) to ($0.03).

Then on October 14, Vericel pre-announced impressive Q3 results. The Oppenheimer analyst Kevin Degeeter and his team welcomed the good news as VCEL pre-announced 3Q20 revenues above their estimates and the Street driven by MACI growth. 3Q20 revenues are expected to be $32M vs. their prior estimate of $29.0M and consensus of $28.6M.

The Oppy team noted that upside was across all three product lines: MACI (+$2.25M vs their estimate), Epicel (+$0.55M) and NexoBrid (+$0.20M). The company also generated $4.6M in cash flow during the quarter, which they believe may have benefited from working capital adjustments. They raised their 3Q20E EPS to ($0.03) from ($0.07) and stated their belief that "investors are currently assigning little-to-no value for launch of NexoBrid in 2H21."

They also noted that the company's planned investor event on 10/16 would be a first step in raising the profile of NexoBrid with investors and as a potential catalyst for VCEL shares.

Vericel Analyst & Investor Day Reactions

On October 16, Vericel hosted analysts and investors for a deep-dive on their science and sales outlook. The 80+ slide presentation is a clinic on tissue damage and regeneration technologies. Afterwards, we saw several analysts raise their view of the pipeline, and their price targets...

Vericel price target raised to $30 from $23 at BTIG: Analyst Ryan Zimmerman cited the company's recent investor event that mainly focused on NexoBrid - its "recently licensed" burn enzymatic debridement product from MediWound (MDWD) - leaving him "encouraged" about its potential following numerous clinical studies showing its efficacy. NexoBrid will become "highly utilized" within the burn space as it fills a clear unmet need, Zimmerman told investors in a research note.

SVB Leerink: VCEL hosted a NexoBrid-focused virtual analyst event that: (1) Affirmed our view that the burn market is massively underpenetrated overall, even for current standard of care for surgical debridement; and (2) highlighted NexoBrid as a game-changing advance in burn debridement to sustain strong double-digit growth for the company for the foreseeable future and supplement ongoing double-digit growth from the core cartilage defect business. The SVBLeerink analysts had already raised their PT to $30 before the event, and they were confident to reiterate that call.

Bottom line: As Vericel achieves several milestones with their pipeline and increased sales, I would continue to be a buyer of the stock between $18 and $20 for the long-term market potential of their restorative cartilage and skin technologies.

The Hottest Tech Mega-Trend of All

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