Table of Contents

Rpt. 61753225
22-Dec-2016

VERICEL CORP-INITIATING COVERAGE

PIPER JAFFRAY - COMPANY REPORT
- TENTHOFF, EDWARD, ET AL

2 - 20

Rpt. 61712012
14-Dec-2016

VERICEL CORP
LADENBURG, THALMANN & CO. INC.
- DEGEETER, KEVIN, ET AL

21 - 30

These reports were compiled using a product of Thomson Reuters

www.thomsonreuters.com

C O M PA N Y N O T E
December 22, 2016

Vericel Corporation (VCEL)

Overweight

Preparing to Launch MACI Knee Cartilage Repair in U.S.; Initiating Overweight

CONCLUSION
Vericel is a commercial regenerative medicine company that is developing cell therapies
for knee cartilage repair, severe burns and heart failure. The company just received FDA
approval of MACI (Matrix-induced Autologous Chondrocyte Implant) to repair cartilage
in the knee. Vericel is preparing to launch MACI in the U.S. to replace Carticel, which
we forecast will sell $36 million this year. MACI can be implanted with an easier, miniarthrotomy procedure that has faster recovery for patients. Vericel will launch MACI at price
parity and we project rapid cannibalization of Carticel by 2H:17 with total ACI sales growth
of 23% to $44.5 million in 2017. Vericel also sells Epicel for severe burns. The company
recently reported positive ixmylocel-T data in dialted cardiomyopathy and could partner for
Phase III. Vericel just raised $19.6 million bringing proforma cash to ~$27 million. We are
initiating coverage with an Overweight rating and $6 price target.

PRICE: US$2.90
TARGET: US$6.00
3x 2018E Product Sales less SVB/MidCap
debt incl. exercise of warrants and Series B
Preferred stock & dividends
Edward A. Tenthoff
Sr Research Analyst, Piper Jaffray & Co.
212 284-9403, edward.a.tenthoff@pjc.com
Jordyn P. Fantuzzi
Research Analyst, Piper Jaffray & Co.
212 284-9458, jordyn.p.fantuzzi@pjc.com
Changes
Rating
Price Tgt
FY17E Rev (mil)
FY18E Rev (mil)
FY17E EPS
FY18E EPS

MACI to Drive Cartilage Repair Growth. There are more than 800,000 knee cartilage

repair procedures in the U.S. every year, of which approximately 20,000 are appropriate
for MACI or Carticel transplant. Approximately 1,050 Carticel transplants were performed
in 2015 generating sales of $35.2 million at a price of ~$33,500 per procedure. We
forecast only modest Carticel sales growth of 2.6% to $36 million this year. With the
launch of MACI in late January, we forecast rapid cannibalization of Carticel resulting
in combined knee ACI sales growth of 23.3% to $44.5 million in 2017 and then MACI
growth of 21% to $54 million in 2018.

replacement of burns covering >30% of a patients body. In 2015, fewer than 100
burn patients were treated with Epicel in the U.S. generating sales of $15.2 million.
On February 18, the FDA approved Vericels HDE supplement to revise the labeled
indications of Epicel to include pediatric use. Due to the change in the label, Epicel is
no longer subject to the HDE profit restrictions and can now charge for the product. We
forecast modest Epicel sales growth of 6.6% to $16.2 million this year, 16% to $18.9
million in 2017 and 11% to $21.0 million in 2018.

Potential CellRx Partnership. Ixmyelocel-T is a CellRx product being developed for

Price Performance - 1 Year

Heart Failure caused by Dilated Cardiomyopathy (DCM). Vericel reported positive Phase
IIb data at the American Heart Association (AHA) meeting on 126 DCM patients showing
ixmyelocel-T achieved a 37% reduction in all-cause deaths, CV hospitalizations or
outpatient ER visits for acute decompensated heart failure compared to placebo over 12
months following treatment. (p=0.0344) Vericel will meet with the FDA and likely partner
ixmyelocel-T prior to initiating pivotal trials

USD

7
6
5
4
3

R I S K S TO A C H I E V E M E N T O F P T & R E C O M M E N D AT I O N
MACI and Epicel may not achieve our sales forecast. Vericel may be unable to partner
ixmyelocel-T. Vericel may require additional funding from the capital markets.

2
1
Dec-15

C O M PA N Y D E S C R I P T I O N
Vericel is a commercial RegenMed company that markets MACI, Carticel and Epicel.
REVENUE (US$ m)

Current
Overweight
US$6.00
US$62.3
US$73.9
US$(0.61)
US$(0.45)

52-Week High / Low

US$6.69 / US$1.76
Shares Out (mil)
32.8
Includes recent offering, excl. Series B
Convertible shares & dividends
Market Cap. (mil)
US$95.1
Total Assets ($mil)
NA
Avg Daily Vol (000)
1,510
Book Value/Share
NA
Tang. Book/Share
NA
Net Cash Per Share
US$0.64
Includes recent offering less SVB/MidCap
debt
Debt to Total Capital
NA
Yield
0.00%
Fiscal Year End
Dec

Epicel Also Growing. Epicel is a cultured epidermal autograft for full thickness skin

YEAR

Previous

Feb-16

Apr-16

Jun-16 Aug-16 Oct-16

Dec-16

Source: Bloomberg

EARNINGS PER SHARE (US$)

2016E

Mar

Jun

Sep

Dec

FY

FY RM

Mar

Jun

Sep

Dec

FY

FY P/E

14.1A

12.8A

10.9A

14.0

51.9

1.8x

(0.24)A

(0.13)A

(0.29)A

(0.22)

(0.89)

NM

2017E

15.0

15.2

13.1

19.0

62.3

1.5x

(0.15)

(0.16)

(0.19)

(0.12)

(0.61)

NM

2018E

18.0

18.1

15.4

22.5

73.9

1.3x

(0.11)

(0.11)

(0.16)

(0.06)

(0.45)

NM

Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only
a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information,
including an attestation under Regulation Analyst certification, found on pages 18 - 19 of this report or at the following site:
http://www.piperjaffray.com/researchdisclosures.
Vericel Corporation

Page 1 of 19

Commercial RegenMed Play with U.S. MACI Launch in January

Vericel is a commercial-stage regenerative medicine company that develops and markets cellular
therapies. In May 2014, then Aastrom Biosciences acquired the RegenMed business of Sanofi/
Genzyme for Carticel, an autologous chondrocyte implant (ACI) to repair knee cartilage defects,
and Epicel to treat serious burns. The company only paid $4 million in cash and a $2.5 million note
for these products, which sold $44 million in 2013. The gem of the deal, in our view, was improved
cartilage repair product MACI.
On December 13, Vericel received FDA approval of MACI for first-line repair of symptomatic, fullthickness cartilage defects of the knee with or without bone involvement. MACI was approved
based on the 141-patient Phase III SUMMIT trial showing statistically significant improvements in
the KOOS pain and function scores over microfracture at 2 years. (p<0.001) This was the first time
an ACI was shown to be superior over standard-of-care microfracture.
Vericel is preparing to launch MACI directly in the U.S. in January through its existing Carticel
sales infrastructure. MACI uses the same biopsy and manufacturing process of autologous
cultured chondrocytes. This is important because any existing banked chondrocyte samples can
now be produced and implanted as MACI. Beyond this, MACI offers several advantages over
Carticel. MACI cells are placed on a porcine collagen membrane that can be implanted via a lessinvasive procedure and secured into the chondral defect using fibrin glue. This dramatically
facilitates the surgery and results in a shorter recovery time for patients.
There are more than 800,000 knee cartilage repair procedures in the U.S. every year, of which
~20,000 are large, full thickness defects in active, insured patients and appropriate for MACI or
Carticel. In 2015, approximately 1,050 Carticel transplants were performed generating sales of
$35.2 million and at a price around $33,500 per procedure. We project Carticel sales of $10 million
in 4Q:16 totaling $36.1 million this year. Vericel will launch MACI at price parity and we project
rapid cannibalization of Carticel by 2H:17 with total ACI sales growth of 23% to $44.5 million in
2017. We then project continued MACI growth of 21% to $53.9 million in 2018. With increased ACI
volumes, we project product margins to improve from 45% this year to >50% in 2018.
Epicel is a cultured epidermal autograft (CEA) for full thickness skin replacement of burns covering
>30% of a patients body. In 2015, fewer than 100 burn patients were treated with Epicel
generating sales of $15.2 million. On February 18, the FDA approved Vericels HDE supplement to
include pediatric use on the label. As a result, Vericel can now generate profit on Epicel and we
project sales of $15.7 million this year to grow to $17.7 million in 2017 and $20.0 million in 2018.
Vericel is also developing ixmyelocel-T, an autologous multi-cell therapy processed using a
proprietary, closed system. Vericel recently reported positive Phase IIb ixCELL-DCM data on 114
dilated cardiomyopathy (DCM) heart failure patients showing a 37% reduction in the composite
endpoint of all-cause death, cardiovascular hospitalization and outpatient ER visit for acute
decompensation over placebo during the 12 months following treatment. (p=0.0344) Due to the
size and cost of pivotal trials, we anticipate Vericel will seek a partner for ixmyelocel-T.
On December 15, Vericel issued 7.1 million shares at $2.75 raising gross proceeds of $19.6
million to strengthen the balance sheet ahead of the MACI launch. We estimate Vericel now holds
proforma cash of ~$27 million. We project this current cash position should fund the company into
2019. In September, Vericel entered into an expanded $20 million credit facility with Silicon Valley
Bank and MidCap Financial, of which $6 million has been drawn.

Vericel Corporation

Page 2 of 19

Investment Recommendation
We are initiating coverage of Vericel with an Overweight rating and a 12-month price target of
$6.00. We value Vericels RegenMed business at $222 million by applying a 3x multiple to 2018
product sales of $74 million. We view this 3x forward multiple to be low for a company with
projected sales growth of 20% over the next 2 years. We presently add no value for ixmyelocel-T
despite positive Phase IIb data, which could add positive upside upon a partnership.
Vericel ended 3Q:16 with cash and marketable securities of $8.9 million and subsequently issued
7.1 million VCEL shares at $2.75 raising gross proceeds of $19.6 million. We estimate Vericel now
holds pro forma cash of ~$27 million. Vericel has drawn $6 million in debt from its existing $20
million credit facility with SVB and MidCap. Vericel presently has 724,950 warrants with an
exercise price of $4.80 and 117,074 warrants with an exercise price of $2.48. There are 615,400
VCEL shares for the Series B Preferred Stock and 478,492 VCEL shares in dividends issuable in
March 2017. Including the warrants, debt and conversion of the Series B Preferred Stock, we
subtract out YE:17E net debt of $2 million and divide our projected $220 million market cap by 35
million YE:17E shares to arrive at our $6 price target.
Vericel is trading at a current market cap of $95.3 million; <2x 2016 revenues of $51.9 million.
With proforma cash of $27.1 million and $6.0 million in debt owed SVB and MidCap, Vericel is
trading at an enterprise value of $74.1 million. Vericels CellRx/RegenMed comp group trades at
an average market cap of $286 million and an enterprise value of $254 million. (Please see Exhibit
1 below.) We see the opportunity for Vericel to create shareholder value by growing MACI and
Epicel sales, potentially partnering Ixmyelocel-T and ultimately acquiring new RegenMed products
to sell through its existing commercial infrastructure.
Exhibit 1

VERICEL CELL RX/REGENMED COMP ANALYSIS

Price
Shares Market
Company
Ticker
12/21/16
Out.
Cap.
MiMedx Group
Mesoblast
Athersys
Capricor
FATE Therapeutics
Caldrius
Average

MDXG
MESO
ATHX
CAPR
FATE
CLBS

$8.77
$4.98
$1.58
$2.55
$2.77
$3.07

109.5
76.3
85.5
24.7
55.5
8.2

TOTAL
Vericel

VCEL

$2.90

32.8

Cash

LTD

$960.4
$380.1
$135.1
$63.0
$153.7
$25.1
$286.2

$18.3
$60.4
$19.4
$18.0
$103.6
$18.6
$39.7

$1,717.5

$238.3

$44.8 $1,523.9

$27.1

$6.0

$95.3

$0.0
$0.0
$0.0
$19.8
$10.0
$15.0
$7.5

Ent.
Value
$942.1
$319.8
$115.7
$64.8
$60.1
$21.5
$254.0

$74.1

Source: FactSet, Company reports and Piper Jaffray Research

CAPR cash includes recent grant received in October, debt includes principal value of CIRM loan.
FATE shares and cash reflect private placement with RedMile in November, debt includes principal value of the Term B Loan.
CLBS debt includes principal value of loan from Oxford Finance LLC.
Vericel figures include recent offering of 7.1 common shares and $6.0 million of debt.

Vericel Corporation

Page 3 of 19

Articular Cartilage
Hyaline cartilage forms a dense, low friction covering of articulating or moveable joints that is
typically 2 to 4mm thick in diameter. Highly specialized cells called chondrocytes originating from
mesenchymal stem cells produce and maintain the extracellular matrix (ECM) that composes
articular cartilage. The ECM is predominately made up of water, type II collagen and
proteoglycans. Articular cartilage is classified by four zones: the superficial, the middle, the deep
zone and the calcified zones. (Please see Exhibit 2 below) The unique spatial distribution of
chondrocytes, type II collagen and proteoglycans in each zone is what produces the specific
physio-chemical properties of articular cartilage. For example, the superficial zone contains tightly
organized collagen fibers and flattened chondrocytes resulting in a dense structure that acts as the
primary protective layer. Furthermore, water contributes 80% of the weight of cartilage to generate
a smooth, lubricated surface. It is the interplay of strength and lubrication that produces a low
friction surface for articulation and shock absorption of the joint. (Fox eat al. Sports Health. 2009
Nov; 1(6): 461-468)
Exhibit 2

COMPOSITION OF CHONDROCYTES AND ECM IN ARTICULAR CARTILAGE

Source: Company Reports

Changes in chondrocytes can produce cartilage deterioration, leading to osteoarthritis (OA). OA is

the most common joint disease, yet the cause for chondrocyte dysfunction and pathogenesis
remains poorly understood. Age is the most frequently risk factor cited largely attributed to wear
and tear of the joint, but the severity and location of defect is multi-factorial. The interaction
between the ECM and chondrocytes is critical to regulating metabolism and functional cellsignaling. Aging changes the organization of chondrocytes and composition of collagen and
proteoglycans in the ECM. Miscommunication between the ECM and chondrocytes can lead to
upregulation of matrix degrading enzymes, such as matrix metalloproteinases and aggrecanases.
Aging chondrocytes themselves exhibit higher degree of senescence, limiting cell replication, as
well as susceptibility to apoptotic pathways. Chondrocytes typically have a low turnover rate,
limiting the bodys ability to self-repair cartilage deterioration.

Vericel Corporation

Page 4 of 19

OA is a slow, degenerative process that produces symptoms of pain, joint disability and swelling.
Articular cartilage itself does not have nerves and degradation exposes nerve endings from the
underlying bone. Thus, there is a clear need for a treatment to repair cartilage knee defects to
prevent exacerbation of symptoms, making common daily activities, such as walking, unbearable.
Anderson et al. Best Prac Res Clin Rheumatol. 2010 Feb; 24(1): 15.
Small fragments of free cartilage floating in the knee and persistent pain may mark the onset of
cartilage deterioration. Physical examination can determine the cause of pain. Magnetic
resonance imaging (MRI) is the preferred modality over radiograph for diagnosing articular
cartilage lesions because it provides excellent contrast and morphological analysis of the surface,
thickness, volume and subchondral bone. However, diagnostic arthroscopy is the gold standard to
classify and locate lesions with high accuracy. The International Cartilage Repair Society (ICRS)
chondral lesion classification system is commonly used in practice to define cartilage lesion
severity on a scale ranging from Grade I to IV. (Please See Exhibit 3 below)
Exhibit 3

ICRS CRITERIA FOR THE DIAGNOSIS OF CHONDRAL CARTILADGE LESIONS

Source: ICRS Clinical Cartilage Injury Evaluation System

Articular cartilage defects are defined as either focal or degenerative lesions. Focal lesions are
well-defined and typically caused by trauma, osteochondritis dissecans or osteonecrosis. Trauma
injuries most commonly affect younger patients aged 20-40 years.
Degenerative lesions, by contrast, are poorly delineated and result from OA, ligament instability or
meniscal injuries. The incidence and prevalence of OA are increasing with the aging of the
population. The pivotal Framingham Osteoarthritis Study evaluated 1,424 knee radiographs in
individuals aged 63-94 years showing that 27% of subjects younger than 70 years had evidence of
OA compared to 44% of subjects >80 years. (Felson et al. Arthritis Rheum. 1987 Aug; 30(8): 914918) These data confirm the relationship exists between OA and age. OA of the knee is a
particularly common ailment in an aging population. A population-based survey from 1991-1994
revealed a 12.1% annualized prevalence of Americans aged 60 years and older with symptomatic
knee OA, confirmed by radiography.( Dillon et al. J Rheumatol. 2006 Nov; 33(11): 2271-2279) In
fact, half of elderly people over 85 develop symptomatic OA of the knee and 2/3 of obese people
develop symptomatic knee OA in their lifetime. (Murphy et al., Arthritis Rheum. 2008 Sept 15;
59(9): 1207-1213)

Vericel Corporation

Page 5 of 19

Current Treatment
Landscape

Orthopedic surgeons have several options for treating articular cartilage defects in the knee
ranging from conservative, palliative techniques to reparative marrow-stimulation or autologous
chondrocyte implant (ACI). Palliative treatment and recommended weight loss and physical
therapy can alleviate pain, but does not repair the underlying cartilage defect. A 14-year study of
28 young athletes with arthroscopically diagnosed severe chondral knee lesions showed only five
(18%) patients required surgical intervention or diagnostic arthroscopy due to pain over the followup period. However, 12 (43%) patient radiographs showed joint space reductions <50%, indicating
deterioration without improvement over time. (Messner and Maletius. Acta Orthop Scand. 1996
Apr; 67(3): 165-168) Progressive decline observed in this study may demonstrated the low
replicative/regenerative properties of chondrocytes, underscoring the need for alternative
treatments for cartilage lesions.
The biggest challenge of surgical intervention is to restore the biomechanical complexity of
cartilage to provide natural flexibility and absorb compression. Beyond total knee replacement, the
standard surgical alternative is marrow stimulation techniques (MST). Microfracture involves
drilling several holes 3mm-4mm apart to access the subchondral bone beneath cartilage defect in
order to stimulate healing. Exposing the subchondral bone enables bone marrow progenitor cells
and growth factors to clot in the defect and generate healthy cartilage. (Steadman et al. Cartilage.
2010 Apr; 1(2): 78-86)
Although microfracture is suitable for full-thickness defects of most lesion sizes, the procedure
does not produce hyaline cartilage, necessary for articulation. A three-year study of microfracture
in 85 patients with mean age of 39 years showed variable results between younger and elderly
subjects. Despite overall score improvement during the study period (p<0.05), patients aged 40
years and older had significant decline in ICRS scores between 1.5 and 3 years after microfracture
surgery. At the end of the study period, MR imaging confirmed younger patients had a better
overall outcome in ICRS scoring than elderly. (p<0.05) (Kreuz et al. Arthroscopy. 2006 Nov;
22(11): 1180-1186)
Osteochondral autografts (mosaicplasty) and allografts are also used to repair cartilage injuries
that expose the underlying subchondral bone. Autografts regenerate cartilage tissue from a
patients own cells, whereas an allograft is comprised of donor cells. The graft is expanded to fit
into the chondral defect. Autografts have the advantages of being non-immunogenic without risk of
disease transmission. In contrast, allografts do not require a chondrocyte harvest for processing.
These approaches are limited to treating smaller cartilage defects and cannot restore
degenerative lesions such as those caused by OA. Moreover there is no long-term data to
conclusively prove efficacy. (Falah et al. Int Orthop. 2010 Jun; 34(5): 621-630)
Autologous cell implant (ACI) was first attempted in 1994 and demonstrated early success in a
cohort of 37 patients with a median age of 39 years and deep cartilage knee lesions. After a 4year period, patients were assessed by multiple scoring systems and 30 (86%) had good or
excellent outcomes, most notably citing pain relief. (Brittberg et al. Clin Orthop Relat Res. 1994
Oct; (307): 155-164)

Vericel Corporation

Page 6 of 19

CARTICEL
Carticel is a first-generation autologous chondrocyte implant (ACI) to treat cartilage defects of the
knee including OA. Carticel is specifically targeted towards a younger, more active patient
population with large cartilage defects that do not resolve with microfracture intervention.
First, a surgeon takes a biopsy of non-load bearing cartilage in suitable patients typically during
diagnostic arthroscopy in order to extract living chondrocytes. The sample is sent to Vericels
manufacturing facility where the cells are cultured and expanded 10-20 fold. Each Carticel vial
contains roughly 10-12 million autologous cartilage cells and the final product retains at least 80%
viability. The cells are then cryopreserved and Carticel is returned to the surgeon where the cells
are injected directly into the articular defect through an open knee procedure. The surgeon sutures
on a small periosteal flap over the defect in order to hold the cells in place; which is difficult and
time consuming. (Please see Exhibit 4 below)
Exhibit 4

CARTICEL PROCEDURE

Source: Company reports

Carticel generates hyaline-like cartilage, which is more natural and over time matures into
chondrocytes (5%) and extracellular matrix (95%). Carticel is believed to take up to six months to
engraft and start to mature. As a result, patients require immobilization for several weeks and
several months before return to regular activity.
The Swedish Series

Vericel Corporation

The Swedish Series consisted of two open-label, observational studies of a total of 153 patients
with variable cartilage damage including femoral condyle, patella, tibia, a combination or
osteochondritis dissecans. In this series, Carticel was safe with 22% (34/153) patients
experiencing AEs, most commonly intra-articular adhesions (8% including 1% with serious
adhesions resulting in frozen knee), superficial wound infection (3%) and hypertrophic synovitis
(3%). Clinical outcomes were characterized as either 1) resumed all activities, 2) some
improvement or 3) no improvement after at least 18 months of follow-up. Of the 40 evaluable
patients with femoral condyle lesions, 28 (70%) either resumed all activities or had some
improvement. Of the 12 patients with osteochondritis dissecans, 10 (83%) resumed all activities
or had some improvement. Further13/22 (59%) patient who failed earlier procedures either
resumed all activities or had some improvement.

Page 7 of 19

Preliminary Launch

Genzyme Tissue Repair first began marketing Carticel in March 1995 based on indications from
the FDA that as an autologous cell therapy, Carticel would not be regulated. Later that year,
however, the Center for Biologics Evaluation and Research (CBER) notified Genzyme that the
agency had reconsidered Carticel to be a somatic cell therapy, and as such regulatory approval
would be required. At the time, FDA allowed Genzyme to continue to market Carticel while the
agency considered the appropriate regulatory pathway for the product. In May 1996, the FDA
issued a document entitled Guidance on Applications for Products Comprised of Living
Autologous Cells Manipulated Ex Vivo and Intended for Structural Repair or Reconstitution
requiring Biologic License Application (BLA) clearance by November 1997.
Upon launch, Genzyme initiated the Cartilage Repair Registry (CRR) in order to track safety and
efficacy of Carticel. Patients with chondral lesions in the knee were enrolled in the registry, which
evaluated functional outcomes based on the Cincinnati Knee Rating System at 6 and 12 months.
The 38 evaluable subjects had a baseline functional score of 3.2 (fair/poor condition) and reported
scores of 6.4 (good condition) after Carticel treatment.
Based on the Swedish Series and the CRR dataset, Genzyme Tissue Repair submitted a BLA
filing. On March 6, 1997 the FDA convened a meeting of the Orthopedics and Rehabilitation
Devices Advisory Committee, which indicated Carticel was reasonably likely to provide clinical
benefit. As such, Genzyme received Accelerated approval of Carticel on August 22, 1997.

Post-Approval STAR
Study

Vericel Corporation

As a post-approval commitment, the FDA required Genzyme to conduct a double-blind, placebocontrolled study of periosteal flap with and without concomitant autologous cultured chondrocytes,
in patients with femoral cartilage defects. The Study of the Treatment of Articular Repair (STAR)
enrolled 154 patients followed for 4 years. Patients were young with a mean age of 34.5 years and
1.5 prior cartilage repair procedures. The majority (88%) of patients reported poor to fair baseline
knee condition. Defects were large with mean size 4.6 of cm2 and 19% had Carticel implanted in
more than 1 defect. Most common SAEs in STAR were arthrofibrosis/ joint adhesions, graft
overgrowth, chondromalacia or chondrosis, cartilage injury, graft complication, meniscal lesion,
graft delamination and OA. At 48 months, 77% of evaluable patients reported good to excellent
overall knee condition (6 or better on the Modified Cincinnati Knee Rating System) and 50% of all
evaluable patients reported very good or excellent results, indicating few or no limitations
participating in sports.

Page 8 of 19

MACI
Matrix-induced Autologous Chondrocyte Implant, or MACI for short, are autologous cultured
chondrocytes similar to Carticel however delivered to a porcine collagen matrix. The procedure
begins with the same biopsy and proprietary manufacturing process to isolate and expand healthy
chondrocytes. As the name implies, in MACI the cells are seeded onto a bioabsorbable Type I/III
collagen matrix. Each MACI implant is 3cm x 5cm in size and contains 500,000 to 1,000,000 cells
per cm2. MACI can be trimmed to the size of the cartilage defect and secured using fibrin glue.
This surgery is significantly easier with no time-consuming periosteum harvest or suturing.
Moreover, the procedure is performed as a mini-arthrotomy, which is less invasive than an open
procedure and requires shorter patient recovery time. (Please See Exhibit 5).
Exhibit 5

MACI PRODUCT AND IMPLANTATION PROCEDURE

Source: Company reports

Phase III SUMMIT

Trial

The Phase III SUMMIT trial, completed in 2012, randomized 144 patients with one or more
symptomatic focal articular cartilage defect(s) of the knee and baseline Knee Injury and
Osteoarthritis Outcome Score (KOOS) pain score 55 points to either MACI or microfracture.
Co-primary endpoints were improvement in KOOS pain and function at two years. Specifically,
MACI achieved a mean improvement in KOOS pains score of 45.5 vs. 35.2 with microfracture and
in KOOS function score of 46.0 vs. 35.8. (p<0.001) (Please See Exhibit 6) Further, data showed
significantly better improvements for KOOS activities of daily living (p<0.001), quality of life
(p=0.29) and symptoms (p<0.001).
An extension study in 128 patients continued to show statistically significant response at 3 years of
81.5% for MACI vs. 66.7% for microfracture. (p=0.046). Further, this extension study produced
safety data showing comparability in AEs between the groups. In conclusion, MACI showed
superior efficacy over microfracture with sustained benefit out to 3 years.

Vericel Corporation

Page 9 of 19

10

Exhibit 6

SUMMIT STUDY SHOWS IMPROVEMENT WITH MACI VS. MICROFRATURE AT YEAR 2

Source: Company reports, The American Journal of Sports Medicine (2014) 42(6), 1384-1394.

Genzyme launched MACI in Europe in 1998; however, Vericel discontinued marketing after it
acquired the business due to low patient uptake and unfavorable pricing. Vericel shifted its focus
to the U.S. where the company could achieve better reimbursement. Vericel discussed the positive
SUMMIT data with the FDA and was able to convince the agency that Carticel and MACI are in
fact the same cells and manufacturing process. As such, Vericel filed a BLA on MACI that was
accepted by the FDA on March 4. Just last week on December 13, the FDA approved MACI to
treat adults with symptomatic, full-thickness cartilage defects of the knee with or without bone
involvement ahead of the January 3 PDUFA date.
MACIs label includes two improvements over Carticel that expand the applicable patient
population. First, MACI was approved to treat any part of the knee, whereas Carticel was limited to
repair of the medial, lateral or trochlea femoral condyle. The femoral condyle consists of medial
and lateral regions that project from the femur and the trochlea, which is the groove on the femur
that is the undersurface of the patella. Both tibia and patella sections of the knee are included in
MACIs label. Secondly, Carticel was only approved for second-line therapy or patients who had
inadequate response to prior arthroscopic or other cartilage repair procedure. MACI is indicated to
repair first-line patients who have not undergone prior surgery, significantly expanding the
addressable patient pool.
MACI is the first ACI to show superior clinical effect over standard-of-care microfracture. The
MACI procedure is significantly easier and faster that does not require suturing the periosteal flap.
As a mini-arthrotomy surgical technique, MACI has a shorter recovery than Carticel. Also the
biopsy procedure for MACI is the same as Carticel so that any presently banker samples can be
immediately processed as MACI upon launch.

Vericel Corporation

Page 10 of 19

11

ACI Market Opportunity

There are more than 800,000 cartilage repair procedures of the knee performed in the U.S. every
year, of which the vast majority (>600,000) are microfracture. Some 44,000 of these procedures
are for large >2cm2 full-thickness chondral defects (Hjelle et al. Arthroscopy, 2002,18(7):7304)
and half of which or approximately 20,000 have ACI insurance coverage.
In 2015, 1,050 Carticel implants were performed at an approximate price of $33,500 per procedure
generating product sales of $35.2 million. Vericel instituted a 9.9% Carticel price increase this
year; however, we forecast sales growth of only 2.6% to $36.1 million in 2016 ahead of MACI
approval. (Please see Exhibit 7 below)
Ahead of MACI launch, Vericel expanded sales directors from 2 to 4, and sales reps from 20 to 26.
Vericel hired a director to oversee payor contracting and facilitate reimbursement. Finally, the
company plans to hire a medical sales science liaison to support further customer growth.
The U.S. ACI market is concentrated with 60% of Carticel implants performed by some 110
surgeons. Vericel intends to first train these high volume Carticel surgeons to convert to MACI.
Vericel will bring leading European and Australian surgeons with prior MACI experience to
educate American physicians. Second, the company will focus on educating physicians with prior
Carticel experience on the easier surgical technique and faster patient recovery. Over time, Vericel
will reach out to physicians who presently perform microfracture on the improved clinical outcomes
with MACI from the SUMMIT trial.
Vericel intends to launch MACI in January at price parity to Carticel. Importantly any currently
banked samples can immediately be processed and implanted as MACI. We forecast rapid
cannibalization of Carticel by 2H:17 resulting in total ACI sales growth of 23% to $44.5 million in
2017 and then MACI growth of 21% to $54.0 million in 2019 and sales of $96.8 million in 2022.
Exhibit 7

VERICEL PRODUCT SALES FORECAST

$140,000

MACI
$120,000

Carticel
$100,000

Epicel
$80,000
$60,000
$40,000
$20,000
$0
2014A

2015A

2016E

2017E

2018E

2019E

2020E

2021E

2022E

Product Sales:

2014A

2015A

2016E

Carticel

$22,267

$35,203

$36,117

$9,961

$0

$0

$0

$0

$0

186

34,571

53,929

63,637

73,819

84,891

96,776

$22,453

$35,212

$36,117

$44,532

$53,929

$63,637

$73,819

$84,891

$96,776

$5,989

$15,242

$16,243

$18,860

$21,009

$23,110

$25,189

$27,205

$29,245

$354

$714

$0

$0

$0

$0

$0

$0

MACI
Total Knee ACI Sales
Epicel
Bone Marrow
Total Product Sales
Annual Growth (%)

$28,796

$51,168
77.7%

2017E

$52,360
2.3%

$63,392
21.1%

2018E

$74,938
18.2%

2019E

$86,746
15.8%

2020E

$99,008
14.1%

2021E

$112,096
13.2%

2022E

$0
$126,021
12.4%

Source: Company reports and Piper Jaffray & Co. analysis.

Note: Bone Marrow and EU MACI sales discontinued in 2015. Expect U.S. MACI launch in January.

Vericel Corporation

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12

EPICEL
In severe burns that exceed 30% of total body surface area (TBSA), a patient generally does not
have enough remaining skin to produce a graft. Epicel is a cultured epidermal autograft (CEA)
generated from a patients own keratinocytes. Epicel is cultured over a 2-3 week period to produce
a graft 2-8 cell layers thick. Of note, the patients cells are grown on a bed of 3T3 mouse
fibroblasts for optimal expansion and irradiated to eliminate infectious agents. The graft is placed
over the epidermis to facilitate wound closure over large burns and decrease infection.
Genzyme initially began supplying Epicel in 1988 as a banked human tissue. The company
maintained the Epicel Clinical Experience Database with results from 552 treated burn patients
from 1989-1996. Third degree burn subjects had mean TBSA burns of 68.6% and Epicel achieved
a survival rate of 86.6% (478/552) at 3 months. In the 205 enrolled pediatric patients, 89.3%
survived at 3 months. Regarding safety in this dataset, the highest adverse events were death
(13%), infection (14%), and graft tear (8%) or graft blister (4%).
In 1996, a comprehensive physician-sponsored study called the Munster Study randomized 44
patients with extensive burns. Epicel achieved a 90.0% (18/20, TBSA burns 69.1%) survival rate in
treated versus 37.5% (9/24, TBSA burns 62.9%) for patients receiving standard of care of excision
plus allografting and/or split thickness autografting. Regarding safety, deaths were observed in
10% (2/20) of Epicel treated and 62.5% (15/24) in the SOC group. Importantly, this study showed
Epicel is superior to conventional wound healing with split thickness skin grafts in a severe burn
population.
In the most recent Epicel Medical Device Tracker, 402 patients received Epicel from October 2007
to June 2015 demonstrating a total survival rate of 81.3% among all patients and 88.3% in a
subgroup analysis of 120 pediatric burn patients. Notably, subjects had average TBSA burns of
68.6%.
In 1996, the FDA concluded Epicel should be regulated as a combination product. This
designation was based on the definition of autologous keratinocytes as a biologic and the
petroleum gauze backing as a medical device. 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 American each year. Under an HDE, an HUD cannot be sold for an amount that
exceeds the cost of R&D, fabrication and distribution unless certain conditions are met. An HUD
can only be sold for profit after receiving HDE approval.
In 2015, fewer than 100 patients were treated with Epicel in the U.S. generating sales of $15.2
million. On February 18, the FDA approved Vericels HDE supplement to revise the Epicel label
specifically to include pediatric patients. The revised product label includes the probable survival
benefit of Epicel as demonstrated in two Epicel clinical experience databases and the Munster
study.
Vericel currently employs a five-person sales force in the field who call dedicated burn centers to
sell Epicel. We forecast modest Epicel sales growth of 3.3% to $15.7 million in 2016 and 12.7%
growth to $17.7 million in 2017 and to $20 million in 2018. Epicel sales are seasonal stronger in
winter months (4Q & 1Q) when heating devices lead to more burns.

Vericel Corporation

Page 12 of 19

13

IXMYELOCEL-T
Dilated Cardiomyopathy (DCM) is an enlargement of the heart muscle. Specifically, pumping
inefficiencies in the heart result in successive rounds of hypertrophy and tissue remodeling; the
hallmarks of heart failure. As more patients survive heart attacks, heart failure is a growing
problem in the developing world.
Ixmyelocel-T is an autologous cell product that is culture expanded and enriched for two primary
cell types: mesenchymal stem cells (MSCs) and Type 2 macrophages. Both cell types have been
studied for anti-inflammatory properties, but Type 2 macrophages also play key roles in resolving
the inflammation of remodeling of wound healing. Although CellRx in heart failure has had a poor
track record, ixmyelocel-T utilizes a unique mechanism of action and recently achieved positive
proof-of-concept data in the Phase IIb ixCELL-DCM study.

The Phase IIb

ixCELL-DCM Trial

The ixCELL-DCM trial randomized 109 NYHA Class III/IV patients with 58 receiving
transendocardial ixmyelocel-T or 51 receiving placebo. The primary efficacy endpoint was a
composite measure incorporating all-cause mortality, cardiovascular hospitalizations, and acute
decompensation at 12 months. Secondary endpoints included measures of cardiac remodeling,
change in NYHA class, 6MWD, and time to first event.
In April, Vericel reported top-line data that ixCELL-DCM met the primary endpoint at showing
ixmyelocel-T treated patients experienced 69.76 events/100 patient years compared to 109.97
events/100 patient years for control. (HR=0.63 p=0.034). This equates to a statistically significant
37% reduction on the primary endpoint. Treated patients also showed trends of delayed time to
first event. Ixmyelocel-T had a good safety profile with 52.5% of treated patients experiencing an
SAE versus 74.5% of placebo patients. Major adverse cardiac events (MACE), were seen in
41.8% of placebo patients compared to only 27.1% of Ixmyelocel-T treated patients.
Despite the reduction in events suggestive of a clinical benefit, treated patients saw no
improvement in ejection fraction (LVEF) or ventricular volumes. It is broadly assumed that effective
treatment for heart failure reverses pathological remodeling, thereby improving health. The lack of
a mechanistic link between treatment and the reduction in cardiac events confounded otherwise
positive ixCELL-DCM results.
Vericel will meet with the FDA for an end of Phase II meeting and design pivotal trials. We expect
Vericel will seek a partner for ixmyelocel-T due to the size and cost of Phase III trial(s). Not only
would a partner validate ixmyelocel-T, but also could bring in non-dilutive financing to the
company. Vericel currently produces ixmyelocel-T cells for the on-going ixCELL-DCM extension
study in a cell manufacturing facility in Ann Arbor, Michigan. The company has stated it has
enough supply to support early commercialization requirements.

Vericel Corporation

Page 13 of 19

14

Management
Dominick Colangelo,
President & CEO

Nick Colangelo joined Vericel as President and CEO in 2013. Prior to joining Vericel, Mr.
Colangelo was President and CEO at Promedior. Before that, Mr. Colangelo was Director of
Strategy and Business Development for the Diabetes Product Group at Eli Lilly, and served as a
founding Managing Director of Lilly Ventures. Mr. Colangelo received his B.S.B.A. in Accounting
from the State University of New York at Buffalo and a J.D. degree from the Duke University
School of Law.

Gerard Michel,
CFO

Gerard Michel assumed the position of CFO and VP of Corporate Development in 2014. Prior Mr.
Michel was CFO and VP of Corporate Development of Biodel. Before this, he served as CFO and
VP of Corporate Development of NPS Pharmaceuticals. Mr. Michel holds a 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.

Daniel Orlando,
COO

Daniel Orlando joined Vericel as Chief Operating Officer in 2012. Prior Mr. Orlando held executive
level positons at Takeda Pharmaceuticals in sales, marketing and business development. Prior to
Takeda, Mr. Orlando began his career at Abbott Laboratories. Mr. Orlando holds an M.B.A. from
Florida Atlantic University, as well as a B.A. in Economics from the University of Florida.

Dr. David Recker

CMO

Dr. David Recker is the Chief Medical Officer of Vericel. Dr. Recker was most recently Senior Vice
President for Clinical Science at Takeda Global Research and Development. Dr. Recker is a
Fellow of both the American College of Physicians and the American College of Rheumatology.
He received an M.D. from the University of Michigan, where he served as Chief Resident in
Internal Medicine. He completed his fellowship in training at the National Institutes of Health.

Dr. Ross Tubo

CSO

Dr. Ross Tubo joined Vericel as the Chief Scientific Officer in 2014. Previously, Dr. Tubo was the
Vice President of Stem Cell and Chemokine Biology at Genzyme where he studied mesenchymal
stem cells in autoimmune disease and cancer. Dr. Tubo earned a Ph.D. in Cell and Molecular
Biology from State University of New York at Buffalo and completed postdoctoral studies at
Harvard Medical School.

Vericel Corporation

Page 14 of 19

15

Financials
Revenues

In May 2014, Vericel acquired Carticel, Epicel and MACI from Genzyme/Sanofi. The company
recognized first product sales in 2Q:14. In 2015, some 1,050 Carticel transplants were performed
at a price of ~$33,500 per procedure generating sales of $35.2 million. Vericel instituted a 9.9%
Carticel price increase earlier this year. Vericel sold $8.3 million in Carticel in 3Q:16 and we
forecast modest growth of 2.6% to $36.1 million in 2016.
We anticipate MACI launch in January at price parity with Carticel. We forecast Carticel sales of
$7.5 million and MACI sales of $2.5 million in 1Q:17. We forecast cannibalization of Carticel sales
to $2.5 million and MACI sales of $8.1 million in 2Q:17. By 2H:17, we expect complete transition of
the ACI franchise to MACI. We forecast total ACI sales growth of 23% to $44.5 million in 2017,
and then MACI sales growth of 21% to $54.0 million in 2018.
Fewer than 100 burn patients were treated with Epicel in 2015 generating sales of $15.2 million.
Epicel is seasonal with increased sales during winter months (4Q & 1Q) when heating elements
cause more burns. Epicel sales were $2.6 million in 3Q:16 and we forecast annual sales growth of
3.3% to $15.7 million in 2016, 12.7% to $17.7 million in 2017 and 12.8% to $20.0 million in 2018.
We thus forecast total product sales of $51.9 million this year to grow 201% to $62.3 million in
2017 and 18.7% to $73.9 million in 2018.

Gross Margins

Gross product margins were 48.3% in 2015, decreasing to 37.3% in 3Q:16 due to lower
manufacturing volumes. We project decreasing product costs as a percentage of sales resulting in
increased gross product sales margins from 45.2% in 2016 to 47.6% in 2017 and 50.9% in 2018
with the launch of MACI.

Operating Expenses

Vericel invested $18.9 million in R&D in 2015 including $2.2 million in regulatory consulting
expenses and a $2.4 million PDUFA filing fee for MACI in 4Q:15. R&D expense was $3.4 million in
3Q:16 and we project total R&D investment of $15.0 million this year to be relatively flat at $16.0
million in 2017 and $17 million in 2018.
SG&A expense was $22.5 million in 2015 and $7.0 million in 3Q:16. We budget total SG&A
expense of $27.0 million this year growing to $34 million in 2017 with the launch of MACI and to
$36 million in 2018.

Net Loss

Vericel lost $16.3 million or ($0.97) per share in 2015 and $6.7 million or ($0.29) in 3Q:16. We
estimate Vericel will lose $18.7 million or ($0.89) this year, $20.9 million or ($0.61) in 2017 and
$16.1 million or ($0.45) in 2018.

Balance Sheet

Vericel ended 3Q:16 with cash of $8.9 million. On December 15th, Vericel issued 7.1 million
shares at $2.75 raising gross proceeds of $19.6 million bringing pro forma cash to ~$27 million.
We project this current cash will fund Vericel into 2019 excluding a potential ixmyelocel-T
partnership. On September 12th, Vericel entered into an expanded $20 million credit facility with
Silicon Valley Bank and MidCap Financial, of which $6 million has been drawn.

Vericel Corporation

Page 15 of 19

16

Investment Risks
Risks associated with Vericel are common to other CellRx/RegenMed companies including
clinical, regulatory and commercial. Now that MACI is approved, Vericel may face challenges upon
product launch. The company may be unable to grow MACI or Epicel to reach our sales forecast.
Vericel may be unable to partner ixmyelocel-T or successfully acquire new products to sell through
its existing commercial infrastructure thereby limiting future operating leverage. The company will
likely require additional capital beyond the proceeds of this offering and could face future litigation.

Vericel Corporation

Page 16 of 19

17

Edward A. Tenthoff
Piper Jaffray Co.

(212) 284-9403
edward.a.tenthoff@pjc.com

Vericel
Quarterly Earnings Estimates
($ in thousands except per share)
December 22, 2016
Product Sales:
Carticel

1QA

2QA

7,118

3QA

9,063

4QA

7,736

2015A

11,286

1QA

35,203

2QA

8,811

3QA

8,987

4QE

8,319

2016E

10,000

1QE

36,117

2QE

7,489

3QE

2,471

4QE

2017E

1QE

9,961

2QE

3QE

4QE

2018E

MACI

2,500

8,088

9,983

14,000

34,571

12,500

13,000

11,979

16,450

53,929

Epicel

3,639

4,274

3,246

4,083

15,242

5,297

3,836

2,610

4,000

15,743

5,000

4,603

3,132

5,000

17,735

5,500

5,064

3,445

6,000

20,009

Bone Marrow
Total Product Sales
Cost of Products Sold
Gross Profit
Product Sales Gross Margin (%)

92

253

327

42

714

$10,849
5,568

$13,590
6,901

$11,309
6,772

$15,420
7,229

$51,168
26,470

$14,108
6,560

$12,823
7,300

$10,929
6,856

$14,000
7,700

$51,860
28,416

$14,989
8,244

$15,163
7,961

$13,115
6,951

$19,000
9,500

$62,267
32,656

$18,000
9,360

$18,064
8,670

$15,425
7,712

$22,450
10,552

$73,938
36,294

$5,281

$6,689

$4,537

$8,191

$24,698

$7,548

$5,523

$4,073

$6,300

$23,444

$6,745

$7,202

$6,164

$9,500

$29,612

$8,640

$9,393

$7,712

$11,899

$37,644

48.7%

49.2%

40.1%

53.1%

48.3%

53.5%

43.1%

37.3%

45.0%

45.2%

45.0%

47.5%

47.0%

50.0%

47.6%

48.0%

52.0%

50.0%

53.0%

50.9%

Operating Expenses:
Research and Development
Selling, General and Administrative
Total Operating Expenses
Operating Income/(Loss)
Operating Margin
(Increase)/decrease in fair value of warrants
Foreign currency translation (loss) gain
Bargain Purchase Gain
Other Income (Expense)

4,377

3,369

3,740

7,404

18,890

3,536

4,058

3,443

4,000

15,037

3,500

4,000

4,000

4,500

16,000

4,000

4,250

4,250

4,500

17,000

5,476

5,585

5,674

5,744

22,479

6,004

6,449

7,010

7,500

26,963

8,000

8,500

8,500

9,000

34,000

8,500

9,000

9,000

9,500

36,000

$9,853

$8,954

$9,414

$13,148

$41,369

$9,540

$10,507

$10,453

$11,500

$42,000

$11,500

$12,500

$12,500

$13,500

$50,000

$12,500

$13,250

$13,250

$14,000

$53,000

($4,572)

($2,265)

($4,877)

($4,957)

($16,671)

($1,992)

($4,984)

($6,380)

($5,200)

($18,556)

($4,755)

($5,298)

($6,336)

($4,000)

($20,388)

($3,860)

($3,857)

($5,538)

($2,102)

($15,356)

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

(203)

99

(317)

112

461

68

324

(1,640)

1,942

16

(6)

(72)

(62)

(10)

(1)

(6)

(17)

(5)

47

42

(10)

(10)

Interest Income

13

36

12

15

Interest (Expense)

(2)

(2)

(2)

(3)

(9)

(3)

(3)

(86)

(100)

(192)

(115)

(130)

(145)

(160)

(550)

(175)

(190)

(205)

(220)

(790)

($4,862)

($2,152)

($4,416)

($4,910)

($16,340)

($3,650)

($3,044)

($6,675)

($5,295)

($18,664)

($4,862)

($5,423)

($6,479)

($4,160)

($20,923)

($4,035)

($4,047)

($5,743)

($2,322)

($16,146)

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

($4,862)

($2,152)

($4,416)

($4,910)

($16,340)

($3,650)

($3,044)

($6,675)

($5,295)

($18,664)

($4,862)

($5,423)

($6,479)

($4,160)

($20,923)

($4,035)

($4,047)

($5,743)

($2,322)

($16,146)

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

NM

Basic Net Income/(Loss) per Share

($0.27)

($0.16)

($0.26)

($0.28)

($0.97)

($0.24)

($0.13)

($0.29)

($0.22)

($0.89)

($0.15)

($0.16)

($0.19)

($0.12)

($0.61)

($0.11)

($0.11)

($0.16)

($0.06)

($0.45)

Basic Shares Outstanding

23,786

23,789

23,788

23,681

23,760

22,604

22,684

22,744

24,000

23,008

33,000

34,250

34,500

35,000

34,188

35,250

35,500

35,750

36,000

35,625

PreTax Income/(Loss)
Pre Tax Margin
Income Tax Expense/(Benefit)
Tax Rate
Net Income/(Loss)
Net Margin

0
0

Source: Company reports and Piper Jaffray & Co. analysis.

Note: Bone Marrow business discontinued in 2015. European MACI sales discontinued in 2015. MACI gained FDA approved on Dec. 14, 2016 with U.S. launch anticipated in 1Q:17.
Note: Vericel issued 7.13M shares on December 15, 2016. Will issue 478,492 shares of common stock for Series B Preferred dividends on March 9, 2017.

For up-to-date disclosure info on this company, please visit

http://www.piperjaffray.com/researchdisclosures

Vericel Corporation

Page 17 of 19

18

C O M PA N Y N O T E
December 22, 2016

IMPORTANT RESEARCH DISCLOSURES

Notes: The boxes on the Rating and Price Target History chart above indicate the date of the fundamental Equity Research Note, the rating and the price
target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the
first Note written during the past three years.
Legend:
I: Initiating Coverage
R: Resuming Coverage
T: Transferring Coverage
D: Discontinuing Coverage
S: Suspending Coverage
OW: Overweight
N: Neutral
UW: Underweight
NA: Not Available
UR: Under Review
Distribution of Ratings/IB Services
Piper Jaffray
IB Serv./Past 12 Mos.
Rating

Count

Percent

Count

Percent

BUY [OW]

397

54.91

97

24.43

HOLD [N]

296

40.94

24

8.11

30

4.15

6.67

SELL [UW]

Note: Distribution of Ratings/IB Services shows the number of companies currently covered by fundamental equity research in each rating category from
which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. FINRA rules require disclosure
of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell,
but instead represent recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight
with sell. See Stock Rating definitions below.

Analyst Certification Edward A. Tenthoff, Sr Research Analyst

The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my
compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.
Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.
Time of dissemination: 22 December 2016 07:54EST.

Vericel Corporation

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19

C O M PA N Y N O T E
December 22, 2016

Research Disclosures
Piper Jaffray was making a market in the securities of Vericel Corporation at the time this research report was published. Piper Jaffray will buy and sell
Vericel Corporation securities on a principal basis.
Piper Jaffray expects to receive or intends to seek compensation for investment banking services from Vericel Corporation in the next 3 months.
Piper Jaffray has received compensation for investment banking services from or has had a client relationship with Vericel Corporation within the past
12 months.
Within the past 12 months Piper Jaffray was a managing underwriter of a public offering of, or dealer manager of a tender offer for, the securities of Vericel
Corporation or the securities of an affiliate.
Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, Vericel Corporation securities.
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Vericel Corporation

Page 19 of 19

20

Biotechnology and Diagnostics

Company Update
December 14, 2016

BUY

Kevin DeGeeter; kdegeeter@ladenburg.com 212.409.2027

James Colby; jcolby@ladenburg.com 212.409.2058

VERICEL CORPORATION

MACI Approval Unlocks Next Leg for Growth: Maintain Buy and $11.60 PT
VCEL (NASDAQ)
Company & Market Data
Closing Price (as of 12/13/2016):
Rating:
Price Target:
52 Week Range:
Shares Outstanding (MM):
Market Capitalization (MM):
Cash (MM):
Debt (MM):
Fiscal Year End:
Estimates
EPS
1Q
2Q
3Q
4Q
Full Year
Revenue (MM)
1Q
2Q
3Q
4Q
Full Year

$2.60
BUY
$11.60
$1.76 - $6.69
24.1
$63
$8.9
$5.6
Dec

2015A
$(0.19)
$(0.09)
$(0.20)
$(0.21)
$(0.70)
2015A
$10.8
$13.6
$11.3
$15.4
$51.2

2016E
$(0.08)A
$(0.21)A
$(0.27)A
$(0.05)
$(0.62)
2016E
$14.1A
$12.8A
$10.9A
$17.7
$55.6

2017E
$(0.14)
$(0.13)
$(0.25)
$0.02
$(0.49)
2017E
$15.8
$17.3
$14.1
$20.7
$67.9

Vericel is a commercial-stage biotech company

selling cell-based therapeutics for treatment of
orthopedic and dermatologic conditions. The
company sells two products: Carticel for treatment
of large cartilage defects in the knee and Epicel
for treatment of full thickness burns. Vericel is also
in Phase III development of MACI for treatment of
large cartilage defects in the knee and Phase IIb
development of ixmyelocel-T for advanced heart
failure due to ischemic dilated cardiomyopathy.
Carticel, Epicel and MACI were acquired in May
2014 from Sanofi. The company is headquartered
in Cambridge, MA.

On 12/14/16, FDA approved MACI for the repair of cartilage defects of the knee.
Importantly, launch of MACI should support re-acceleration in revenue growth and
sustainable profitability beginning in 4Q17, in our view. Based on this improving growth
outlook and adequate cash balances to fund the path to profitability without the need to
raise additional equity capital, we expect shares of VCEL to enjoy a steady re-valuation
during the course of 2017. In terms of differentiation from the company's legacy cartilage
repair product, Carticel, MACI requires 1) less surgical time, 2) improved ease of use
for the surgeon (removes need for periosteal flap and suture), 3) potential for less
intensive rehabilitation and 4) faster recovery time. Additionally, the label indication is
broader - Carticel approved for patients with inadequate response to a prior surgical
repair procedure; no prior cartilage repair surgery requirement for MACI. Management
expects to price MACI at parity with Carticel. While MACI will be sold by the same sale
reps as Carticel, VCEL expects to invest in an expanded field force - increasing sales
territories from 21 to 28 beginning in 1Q17. We expect these reps to take 6 months
before generating material revenue, which suggests acceleration of growth beginning in
2H17. Depending on strength of near term adoption, impact of KOL training programs
and pace of sales rep hiring, we believe there may be an opportunity for upside to our
above-consensus revenue estimate of $67.9M (cartilage revenue of $43.2M). Reiterate
Buy and $11.60 PT.

Whats New? FDA approved MACI (autologous cultured chondrocytes on porcine

collagen membrane) for the repair of symptomatic single or multiple full-thickness
cartilage defects of the knee with or without bone involvement ahead of the January 3,
2017 PDUFA date. Importantly, the label requires neither prior cartilage repair surgery,
according to management, nor are there limitations to the number or size of cartilage
defects. We view this label as a best-case outcome for VCEL. The company expects to
begin tissue processing in mid-January. List price of MACI will be at parity with Carticel,
in line with our estimates. VCEL will use existing CPT and J codes for Carticel to
support MACI reimbursement. Our 2017 revenue forecast for VCELs cartilage repair
franchise of $43.2M, (13%+ y-o-y), represents a modest acceleration from 8%+ growth
in 2016. However, we expect most of the growth to be in 2H17 and to accelerate further
in 2018.

MACI Data Package: Approval was based on data from the SUMMIT study, a 2year randomized, open-label, parallel group study conducted in Europe to evaluate
superiority of MACI versus microfracture in patients with symptomatic articular
cartilage defects of the femoral condyle, including the trochlea. The study enrolled
144 adult patients. At the 2-year analysis, MACI-treated patients demonstrated
improvements in KOOS Pain and Function subscales from baseline that were
significantly greater than improvements observed in microfracture cohort (p<0.001).
MACI continued to demonstrate superiority over microfracture at post treatment year
3 (details on P. 2).

European KOLs to Drive Early Adoption of U.S. Surgeon: In addition to in-person

and on-line training from VCEl sales reps, the company plans to work with KOLs based
in Europe that have previously used MACI. We expect these interactions to help train
U.S. surgeons and provides insights regarding rehabilitation strategies. We view these
KOL interactions as critical to maximizing the quality of the MACI experience for early
adopters in the U.S. and drive potential market expansion.

DisclosuresandAnalystCertificationscanbefoundinAppendixA.
570 Lexington Avenue 11th Floor New York, New York 10022 Telephone: 212-409-2000 800-LAD-THAL

Member: NYSE, NYSE MKT, FINRA, all other principal exchanges and SIPC

21

Kevin DeGeeter 212.409.2027

Vericel Corporation (VCEL)

SUMMIT Study Background

Genzyme completed the SUMMIT study in 2012 to support European regulatory approval.
The randomized open-label Phase III study enrolled 144 patients randomized 1:1 to
receive either microfracture surgery or MACI for treatment of articular cartilage defects in
the knee. Patients were treated at 14 sites in 7 European countries. Patients were ages 18
to 55 years with a mean age of 33.8 years. About 51% were male and the average lesion
2
size was 4.8cm . We would note that the lesion size is somewhat larger than some
contemporary studies of autologous chondrocyte implant (ACI) products.
Inclusion criteria included; 1) at least 1 symptomatic focal articular cartilage defect
2
(Outerbridge grade III or IV; 3 or more cm ) of the femoral condyles and/or trochlea and 2)
a baseline KOOS pain score of at least 55, which is defined as moderate to severe pain.
Patients with osteoarthritis, defined as Kellgren-Lawrence grade 3 or 4, were excluded
from the study.
The co-primary efficacy endpoint was defined as the change from baseline to 2 years for
the KOOS pain and function subscales (sports and recreational activities). Clinical efficacy
endpoints were evaluated at baseline and throughout the study at 6-month intervals up to
2 years. The remaining 3 KOOS subscales were recorded as secondary endpoints.
2-Year Pivotal Data
Of the total 144 patients enrolled and treated, 7 patients (5%) withdrew after
randomization (two from MACI cohort and five from microfracture). Mean changes from
baseline to 2 years for KOOS pain subscale was 45.5 and 35.2 for MACI and
microfracture, respectively (p=0.001). For the KOOS function subscale, the changes at 2
years were 46.0 and 36.1 for MACI and microfracture, respectively (p=0.001). Patients
receiving MACI also achieved significantly more improvement at 2 years for secondary
endpoints including KOOS subscales for activities of daily living (p<0.001), quality of life
(p=0.029) and symptoms (p<0.001). Additionally, at 2 years, patients in the MACI
treatment arm had improved Modified Cincinnati scores (p=0.002) compared to
microfracture. However, the two treatment arms had similar scores for the IKDC scores
(P=0.069).
2

Lastly, when stratified by lesion characteristics, patients with lesions greater than 4cm
and lesions on the medial femoral condyle that were not of osteochondritis origin had
significantly greater response rates with MACI compared to microfracture. However,
patient response rates were statistically similar in those with lesions of the lateral femoral
condyle, trochlea and of osteochondritis origin.

Additionally, certain subgroups of patients treated with MACI had a significantly higher
KOOS response rate than those treated by microfracture defined as those patients
achieving at least a 10-point improvement over baseline in the co-primary endpoints of
KOOS pain and function subscales (overall p=0.011).
Treatment failure rates were lower than expected for both arms. A total of 2 patients
treated with microfracture were deemed treatment failures while no patients treated with
the MACI failed treatment. The incidence of adverse events was comparable between the
treatment groups at 2 years and no unexpected safety findings were reported.
3-Year Extension Data
VCEL reported 3-year results for MACI at the AAOS meeting from 128 evaluable patients
in the SUMMIT study (poster 169). The results demonstrated superiority over
microfracture as measured by KOOS pain scale and functional measures (P=0.046).
Mean changes from baseline on KOOS pain score was 46.14 and 36.13 for MACI and
microfracture patients, respectively. The changes in KOOS function scores were 46.67
and 36.33, respectively (p=0.046).
Analysis of KOOS subscales demonstrated treatment with MACI resulted in improvements
over microfracture for activities of daily living (p=0.014), quality of life (p=0.007) and other
symptoms (p<0.001). The results of the KOOS subscales were supported by statistically

Page 2

22

Kevin DeGeeter 212.409.2027

Vericel Corporation (VCEL)

significant improvements in the Modified Cincinnati Score (p=0.03) and IKDC overall score
(p=0.027).
About 81.5% of MACI-treated patients and 66% of microfracture-treated patients were
responders defined as a 10 point improvement from baseline in KOOS pain and function
subscales at year 3 (p=0.65).
A total of 1 patient in the MACI arm and 3 patients in the microfracture arm met the
definition of treatment failure, up from 0 and 2 patients at 2 years. The incidence of
adverse events at year 3 was similar between treatment groups. A total of 9 MACI and 8
microfracture patients had 1 subsequent surgical procedures at 3 years.
Table 1.
(in $ millions)

Vericel Corporation Income Statement

2015A
1Q16 A 2Q16 A 3Q16 A 4Q16 E

2016E

1Q17 E

2Q17 E

3Q17 E

4Q17 E

2017E

- Carticel Revenues
- Epicel Revenues
Product revenues
Other product revenue
License revenue
Total Revenue

$35.2
15.2
$50.4
0.0
0.7
$51.2

$38.2
17.4
$55.6
0.0
0.0
$55.6

$9.2
6.5
$15.8
0.0
0.0
$15.8

$10.5
6.8
$17.3
0.0
0.0
$17.3

$9.1
5.0
$14.1
0.0
0.0
$14.1

$14.4
6.3
$20.7
0.0
0.0
$20.7

$43.2
24.7
$67.9
0.0
0.0
$67.9

COGS
Gross Profit
SG&A
Research & Development
Operating Profit (loss)
Interest Income
Interest Expense
Other
Taxes

$8.8
5.3
$14.1
0.0
0.0
$14.1

$9.0
3.8
$12.8
0.0
0.0
$12.8

$8.3
2.6
$10.9
0.0
0.0
$10.9

$12.1
5.6
$17.7
0.0
0.0
$17.7

26.5

6.6

7.3

6.9

8.0

28.7

8.1

8.8

8.2

9.0

34.2

$24.7

$7.5

$5.5

$4.1

$9.7

$26.8

$7.7

$8.5

$5.9

$11.7

$33.7

22.5
18.9
($16.7)

6.0
3.5
($2.0)

6.4
4.1
($5.0)

7.0
3.4
($6.4)

6.7
4.0
($1.0)

26.2
15.0
($14.4)

6.9
4.0
($3.2)

7.4
4.0
($2.9)

8.0
3.5
($5.6)

7.5
3.7
$0.4

29.8
15.2
($11.3)

0.0
(0.0)
0.0

0.0
(0.0)
(0.0)

0.0
(0.0)
0.0

0.0
(0.1)
0.0

0.0
(0.0)
0.0

0.0
(0.1)
(0.0)

0.0
(0.0)
0.0

0.0
(0.0)
0.0

0.0
(0.0)
0.0

(0.0)
(0.0)
0.0

0.0
(0.0)
0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(16.6)

(2.0)

(5.0)

(6.5)

(1.0)

(14.5)

(3.2)

(2.9)

(5.6)

0.4

(11.3)

Non-GAAP earnings (loss) per share excluding stock dividend

($0.70)

($0.08)

($0.21)

($0.27)

($0.05)

($0.62)

($0.14)

($0.13)

($0.25)

$0.02

($0.49)

Allocation to preferred stock holders

($0.28)

($0.08)

($0.08)

($0.08)

($0.08)

($0.32)

($0.08)

$0.00

$0.00

$0.00

($0.08)

Non-GAAP earnings (loss) per share including stock dividend

($0.98)

($0.16)

($0.29)

($0.36)

($0.13)

($0.94)

($0.22)

($0.13)

($0.25)

$0.02

($0.57)

One-time Items
Warrant revaluation

($0.00)
$0.01

$0.00
($0.07)

$0.00
$0.08

$0.00
($0.01)

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

Net Profit (loss)

Net Income as reported

Earnings (loss) per share as reported
Weighted average common shares - GAAP
Weighted average common shares - Non-GAAP

(16.3)

(3.7)

(3.0)

(6.7)

(1.0)

(14.4)

(3.2)

(2.9)

(5.6)

($0.97)

($0.22)

($0.19)

($0.38)

($0.13)

($0.91)

($0.21)

($0.20)

($0.31)

($0.06)

0.4

($0.77)

(11.3)

23.8
23.8

23.9
25.1

23.9
25.2

22.7
24.0

22.7
24.0

23.3
24.6

22.7
24.0

22.7
24.0

22.7
24.0

22.7
24.0

22.7
24.0

48.3%
-32.6%
-32.4%

53.5%
-14.1%
-14.2%

43.1%
-38.9%
-38.9%

37.3%
-58.4%
-59.2%

54.7%
-5.9%
-5.9%

48.3%
-25.9%
-26.1%

48.6%
-20.4%
-20.3%

49.0%
-16.7%
-16.7%

41.9%
-39.6%
-39.6%

56.4%
2.1%
2.1%

49.7%
-16.6%
-16.6%

Source: Company reports and Ladenburg Thalmann estimates

Margin Analysis
Gross Margin
Operating Margin
Net Margin

Page 3

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Kevin DeGeeter 212.409.2027

Vericel Corporation (VCEL)

Company and Industry-Specific Risks

We think the primary risks of an investment in VCEL shares include, but are not limited to:
Financing: In September 2014 the company completed a $40.2M equity financing, which
we expect to fund the business at least into 2018. However, depending on the pace of
clinical development for MACI Phase III studies in the U.S. and design of any future
studies of ixCell-DCM VCEL may require additional capital to fund operations through to
profitability. There can be no assurance VCEL will have access to capital in the future on
adequate terms, or at all. In January 2014, the company entered into a Purchase
Agreement with Lincoln Park Capital to raise up to $15M in direct common stock sales to
Lincoln Park over a 30-month period. There can be no assurance VCELs common stock
will maintain adequate trading volume, share price and certain other metrics to draw on
the equity credit line.
Merger Integration: In May 2014, VCEL acquired a portfolio of commercial and
development-stage cell therapy assets and related manufacturing and commercial
infrastructure from Sanofi. There can be no assurance VCEL will successfully integrate
the assets, recognize expected cost savings from elimination of staff and a manufacturing
facility in Europe, or accelerate revenue growth through new selling initiatives. If VCEL is
unable to recognize these merger synergies, the company may not achieve its target of
achieving positive cash flow from the acquired assets beginning in 2H15. Additionally, the
acquisition provided VCEL three marketed products and increased employee head count
from 38 employees as of 3/31/14, to approximately 190 as of 12/31/14. There can be no
assurance VCEL will successfully integrate and manage this expanded infrastructure.
Regulatory: VCEL is subject to oversight by regulators in several jurisdictions including,
U.S. FDA and EMEA in Europe, for oversight of biologic product candidates. VCEL will
need to satisfy safety, purity and potency standards required of BLA submissions for FDA
approval. There can be no assurance any future registration studies will be adequate to
support regulatory filing in the U.S. for MACI, or for ixCell in the U.S. and other
geographies. Additionally, VCELs Carticel and Epicel products are approved by FDA
under an abbreviated regulatory review. There can be no assurance the companys
commercial products, including Epicel, will not be subject to additional post-approval
studies or new regulatory requirements.
Clinical: VCEL has completed enrollment the Phase IIb ixCell-DCM study evaluating
ixmyelocel-T in patients with ischemic DCM. There can be no assurance the program will
demonstrate clinical superiority over existing therapies and standards of care.
Reimbursement: Carticel is currently reimbursed by medical plans with 132 million
covered lives, including the 15 largest U.S. payers. Epicel is approved by FDA as a
Humanitarian Use Device and until 2012, could not be sold for profit. Given the relatively
small patient volumes, most health plans do not have a formal reimbursement policy for
Epicel and reimbursement is negotiated on a case-by-case basis for most patients. There
can be no assurance third-party reimbursement will cover either product, will accept any
future price increases or that future legislation will not limit reimbursement. Additionally,
there can be no assurance third-party payers will agree to reimburse any new VCEL
product, including MACI, at a commercially reasonable rate, or at all.
Manufacturing: The company currently manufactures Carticel and Epicel at its
Cambridge, MA manufacturing facility. Additionally, upon regulatory approval, VCEL
expects to manufacture MACI at the same facility. Ixmyelocel-T is produced at a separate
facility in Ann Arbor, MI. The Cambridge facility was inspected by FDA in 2014, and
received notification of several deficiencies, commonly unknown as 483 deficiencies.
There can be no assurance VCEL will adequately address the outstanding 483
deficiencies, continue to provide adequate commercial supplies of Carticel and Epicel or
support production of drug product for future clinical trials of MACI or ixmyelocel-T.
Additionally, the company recently closed a production facility in Denmark that supplied
MACI for the European market. There can be no assurance VCELs plan to produce MACI
in its Cambridge facility for export to select European markets will be accepted by EMEA
regulators or support timely reintroduction of MACI in Europe. Additionally, all of VCELs

Page 4

24

Kevin DeGeeter 212.409.2027

Vericel Corporation (VCEL)

commercial and pipeline programs require production of autologous cell therapies, which
typically are more challenging to produce than other classes of pharmaceutical products
and are often subjects to high variability in production yields. There can be no assurance
VCEL will be able to produce enough drug product, or any drug product at all, for each
specific patient.
Competition: There are currently established procedures for patients diagnosed with
cartilage defects including, arthroscopic debridement and chondroplasty and various
marrow stimulation techniques such as microfracture and osteochondralautografts for
smaller injuries and allografts and autologous chondrocyte implants for larger injuries. In
the U.S., Carticel and MACI, upon approval, compete with microfracture and DeNovo NT,
a juvenile donor-derived allograft product from Zimmer Holdings. Epicel competes with the
meshed split-thickness auto-grafting procedure. However, as the percentage of total body
surface area burn increases meshed split-thickness auto-grafting becomes less applicable
and Epicel faces little direct competition. There can be no assurance VCEL will effectively
market its FDA approved products against current therapies or potential new market
entrants.
Intellectual Property: VCEL does not have any patent protection for Epicel and the
companys U.S. patents pertaining to Carticel and MACI will expire beginning in August
2016. The company's patents relating to Carticel and MACI will expire soon and may be
insufficient to protect their business. While we believe intellectual property is not a primary
barrier to entry for autologous cell therapies and consider manufacturing know-how,
regulatory clearance and long-term clinical data to be the primary barriers to entry, there
can be no assurance VCEL will not face increased near term competition due to expiration
of its patents for Carticel and MACI, if approved. Patents covering ixmyelocel-T, which are
licensed from University of Michigan, are to expire in 2029. There can be no assurance
these patents will be upheld if challenged in U.S. court or will be adequate to prevent
potential future competition.
Concentration of Suppliers: VCEL relies on third-parties to supply equipment, certain
components and other disposable products. Vention Medical is the sole supplier of cell
cassettes used in ixmyelocel-T. Most other components are available from two or more
suppliers. Disruption in the supply of cell cassettes or any other product provided by thirdparties could adversely impact the timing of future clinical trials or commercial sales.
Animal Products May Impact Supply Chain: The company uses fetal bovine serum in
production of its commercial products. While there are no known cases of so-called "mad
cow disease" in fetal bovine serum, risk of transmission may drive up production costs,
limit available commercial supplies and result in disruption of commercial supplies.
Product Liability: Therapeutics companies may face potential product liability lawsuits
associated with adverse events both currently identified and identified through future
clinical trials and commercial experience. The companys commercial manufacturing
facilities are subject to significant environmental, health and safety regulation. Additionally,
the companys commercial practices are subject to Department of Justice regulations
prohibiting promotion of therapeutics for indications beyond the intended use described in
the package insert. Product liability claims may result in limiting future product promotion,
removal of one or more products from the market and potential for financial penalties and
fines that may adversely impact VCELs cash flow and financial position, including cash
balance.
Acceptance of Cell Therapy: All of VCELs products are based on cell therapy. While
products such as Carticel have been available for over a decade, there are few other
approved cell therapy products and the class of products are not widely used in common
clinical practices. None of VCELs products use embryonic stem cells or fetal tissue.
However, public attitude toward embryonic stem cells may impact future patient
acceptance of all cell therapy products. There can be no assurance that doctors will
accept the safety and efficacy of new cell therapies, such as MACI and ixmyelocel-T,
without large clinical trials with extended follow up, if at all. Additionally, cell therapies are
often complex and costly to manufacture. There can be no assurance payers will

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Vericel Corporation (VCEL)

reimburse cell therapies at an adequate rate to earn a reasonable commercial profit, if at

all.
Healthcare Reform: Healthcare reform and its restrictions on coverage and
reimbursement may adversely affect VCELs business.
Shareholder Concentration: Eastern Capital holds a large percentage of the company's
outstanding capital stock and has significant influence over the outcome of corporate
actions requiring shareholder approval.
Going Concern and Internal Controls: The company has identified a material weakness
in their internal control over financial reporting. If the company fails to remediate this
material weakness and implement and maintain proper and effective internal controls over
financial reporting in the future, the company's ability to produce accurate and timely
financial statements could be impaired, which could harm their operating results and the
value of the company's stock. Additionally, the company received a report from their
independent registered public accounting firm with an explanatory paragraph for yearend
December 31, 2013 with respect to their ability to continue as a growing concern. The
existence of such a report may adversely affect the company's stock price and their ability
to raise capital. The company raised $40.2M through a common stock offering in
September 2014, The company did not receive a similar report for year ended December
31, 2014.

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Vericel Corporation (VCEL)

APPENDIX A: IMPORTANT RESEARCH DISCLOSURES

ANALYST CERTIFICATION
I, Kevin DeGeeter, attest that the views expressed in this research report accurately reflect my personal views about the subject security
and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views
expressed in this research report, provided, however, that:
The research analyst primarily responsible for the preparation of this research report has or will receive compensation based upon various
factors, including the volume of trading at the firm in the subject security, as well as the firms total revenues, a portion of which is generated
by investment banking activities.
Additional information regarding the contents of this publication will be furnished upon request. Please contact Ladenburg Thalmann,
Compliance Department, 570 Lexington Avenue, 11th floor, New York, New York 10022 (or call 212-409-2000) for any information regarding
current disclosures, and where applicable, relevant price charts, in regard to companies that are the subject of this research report.
COMPANY BACKGROUND
Vericel is a commercial-stage biotech company selling cell-based therapeutics for treatment of orthopedic and dermatologic conditions. The
company sells two products: Carticel for treatment of large cartilage defects in the knee and Epicel for treatment of full thickness burns. Vericel
is also in Phase III development of MACI for treatment of large cartilage defects in the knee and Phase IIb development of ixmyelocel-T
for advanced heart failure due to ischemic dilated cardiomyopathy. Carticel, Epicel and MACI were acquired in May 2014 from Sanofi. The
company is headquartered in Cambridge, MA.
VALUATION METHODOLOGY
We currently rate VCEL shares at Buy with a price target of $11.60 based on sum-of-the-parts analysis including 3.5x multiple on our 2016
revenue estimate of $55.6M divided by shares outstanding of 24.0 million ($8.60/share) and NPV of projected future ixmyelocel-T royalty
streams through 2025, discounted back by 32% (NPV of $89M), and divided by fully diluted shares outstanding of 29 million ($3.00/share).
RISKS
These risk factors (intellectual property, regulatory, reimbursement, partnership, and financing) do not constitute all the potential risks of
investing in the subject companys shares. Investors should refer to the companys SEC filings including the most recent forms 10-K and 10Q for further details on the risks associated with an investment in the subject companys shares.
STOCK RATING DEFINITIONS
Buy: The stocks return is expected to exceed 12.5% over the next twelve months.
Neutral: The stocks return is expected to be plus or minus 12.5% over the next twelve months.
Sell: The stocks return is expected to be negative 12.5% or more over the next twelve months.
Investment Ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk, or a change in target
price. At other times, the expected returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations
from specified ranges will be permitted but will become subject to review.
RATINGS DISPERSION AND BANKING RELATIONSHIPS AS OF (December 14, 2016)
Rating
BUY
NEUTRAL
SELL

%
67.8
28.2
4.0

IB %
67.8
57.1
28.6

COMPANIES UNDER KEVIN'S COVERAGE

ADMA Biologics, Inc. (ADMA)
BioTime, Inc. (BTX)
Codexis, Inc. (CDXS)
Exact Sciences Corporation (EXAS)
Kindred Biosciences, Inc. (KIN)
Myriad Genetics Inc. (MYGN)
Novavax, Inc. (NVAX)
Paratek Pharmaceuticals, Inc. (PRTK)

Aviragen Therapeutics, Inc. (AVIR)

CombiMatrix Corporation (CBMX)
Cempra Inc. (CEMP)
Genomic Health Inc. (GHDX)
Mesoblast Ltd. (MESO)
Navidea Biopharmaceuticals Inc. (NAVB)
Opko Health, Inc. (OPK)
Ignyta, Inc. (RXDX)

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Kevin DeGeeter 212.409.2027

Vericel Corporation (VCEL)

VBI Vaccines, Inc. (VBIV)

Vericel Corporation (VCEL)

COMPANY SPECIFIC DISCLOSURES

Ladenburg Thalmann & Co. Inc. makes a market in Vericel Corporation.
Ladenburg Thalmann & Co. Inc. intends to seek compensation for investment banking and/or advisory services from Vericel Corporation within
the next 3 months.
INVESTMENT RATING AND PRICE TARGET HISTORY
Vericel Corporation Rating History as of 12/13/2016
powered by: BlueMatrix

I:B:$5.50
10/27/14

B:$6.25
03/24/15

B:$7.80
06/10/15

B:$8.70
08/12/15

B:$8.45
02/23/16

B:$11.45
04/05/16

B:$11.60
05/10/16

12
10
8
6
4
2
0
Jan 2014

Apr 2014

Jul 2014

Oct 2014

Jan 2015

Apr 2015

Jul 2015

Oct 2015

Jan 2016

Apr 2016

Jul 2016

Oct 2016

B=Buy N=Neutral S=Sell D=Drop Coverage I=Initiate NR=Not Rated

GENERAL DISCLAIMERS
Information and opinions presented in this report have been obtained or derived from sources believed by Ladenburg Thalmann & Co. Inc.
to be reliable. The opinions, estimates and projections contained in this report are those of Ladenburg Thalmann as of the date of this report
and are subject to change without notice.
Ladenburg Thalmann & Co. Inc. accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion
of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Ladenburg Thalmann & Co.
Inc. This report is not to be relied upon in substitution for the exercise of independent judgment. Ladenburg Thalmann & Co. Inc. may have
issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in
this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and Ladenburg
Thalmann & Co. Inc. is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. Investors
should consider this report as only a single factor in making their investment decisions.
Some companies that Ladenburg Thalmann & Co. Inc. follows are emerging growth companies whose securities typically involve a higher
degree of risk and more volatility than the securities of more established companies. The securities discussed in Ladenburg Thalmann & Co.
Inc. research reports may not be suitable for some investors. Investors must make their own determination as to the appropriateness of an
investment in any securities referred to herein, based on their specific investment objectives, financial status and risk tolerance.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or
implied, is made regarding future performance. The price, value of and income from any of the securities mentioned in this report can fall as
well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income
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Securities recommended, offered or sold by Ladenburg Thalmann & Co. Inc. (1) are not insured by the Federal Deposit Insurance Company;
(2) are not deposits or other obligations of any insured depository institution; and (3) are subject to investment risks, including the possible loss
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and, in such circumstances; you may be required to pay more money to support these losses.
The information and material presented in this report are provided to you for information purposes only and are not to be used or considered
as an offer or the solicitation of an offer to sell or to buy any securities mentioned herein. This publication is confidential for the information of
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consent of Ladenburg Thalmann & Co. Inc.
Investing in low priced securities is speculative and carries a high degree of risk. You should independently investigate and understand all
risks before making any investment. The markets for small cap stocks are highly speculative and this level of risk may not be appropriate for

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Vericel Corporation (VCEL)

all investors. Some of the companies listed may be subject to the Penny Stock Rule. Under this rule, the SEC has defined a penny stock
to be an equity security which has a market price of less than $5.00 a share, subject to certain exemptions. Such exemptions include equity
listed on NASDAQ and an equity security issued by an issuers which has (i) net tangible assets of at least $2,000,000, if such issuers has
been in continuous operational for (3) years; (ii) net tangible assets of $5,000,000, if such issuer has been in continuous operation for less
than (3) years; or (iii) average revenue of at least $6,000,000 for the preceding three (3) years. Unless such exemption is available, regulations
require delivery of a risk disclosure document explaining the penny stock market and the risks associated therewith prior to any transaction
involving a penny stock. For stock not quoted on NASDAQ or at any time that the company has less than $2,000,000 in net tangible assets, the
trading in common stock is covered under Rule 15g-9 under the Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed
securities. Under such rule, broker-dealers who recommend covered securities to persons other than established customers and accredited
investors must make a written suitability determination for the purchaser and receive the purchasers written agreement to a transaction prior
to sale. Some securities may not be cleared for sale in all states or other jurisdictions and LTCO assumes no responsibility to apprise you of
individual states and jurisdictions regulatory restrictions. Stocks in the microcap segment of market have risks that are not as common in other
segments of market. These risks include, but are not limited to, liquidity risk, which can lead to higher volatility and low trade volume, company
specific risks that contribute to lower valuation, higher probability of financial default and distress.
Member: NYSE, NYSE MKT, FINRA, all other principal exchanges and SIPC
Additional Information Available Upon Request
2016 - Ladenburg Thalmann & Co. Inc. All Rights Reserved

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________________________________________________________________
EQUITY RESEARCH
ENERGY, POWER & INFRASTRUCTURE
Power & Electric Utilities
Brian J. Russo, CFA
(646) 432-6312
Tanner James
(212) 409-2071
Energy Exploration & Production, Upstream
Michael Schmitz, CFA
(212) 409-2028
Master Limited Partnerships, Midstream
Michael Schmitz, CFA
(212) 409-2028
Hilary Cauley
(212) 409-2072

brusso@ladenburg.com
tjames@ladenburg.com
mschmitz@ladenburg.com
mschmitz@ladenburg.com
hcauley@ladenburg.com

HEALTHCARE
Biotechnology
Matthew L. Kaplan
Wangzhi Li, PhD

(212) 891-5247
(212) 409-2051

Biotechnology (Personalized Medicine)

Kevin DeGeeter
(212) 409-2027
James Colby
(212) 409-2058
Healthcare Equipment & Medical Technologies
Jeffrey S. Cohen
(305) 572-4110

mkaplan@ladenburg.com
wli@ladenburg.com
kdegeeter@ladenburg.com
jcolby@ladenburg.com
jcohen@ladenburg.com

FINANCIAL INSTITUTIONS
Financial Services Business Development Co. & Specialty Finance
Mickey M. Schleien, CFA
(305) 572-4131
mschleien@ladenburg.com
Financial Services Equity REITs
Daniel P. Donlan
(212) 409-2056
ddonlan@ladenburg.com
John J. Massocca
(212) 409-2543
jmassocca@ladenburg.com

TECHNOLOGY
Internet & Software Services
Jon R. Hickman

(510) 918-4045

jhickman@ladenburg.com

Software and Services

Glenn G. Mattson

(212) 409-2073

gmattson@ladenburg.com

(212) 409-2011
(212) 409-2011

kbrush@ladenburg.com
enovotny@ladenburg.com

ADDITIONAL CONTACTS
Kenneth Brush, Head of Trading
Eric Novotny

570 Lexington Avenue

NEW YORK, MELVILLE, NY

BOSTON, MA

11th Floor

New York, NY 10022

MIAMI, NAPLES, AND BOCA RATON, FL

(212) 409-2000
SAN FRANCISCO, CA

HOUSTON, TX

30