Revenue

12 Months Ended

Dec. 31, 2019

Revenue Recognition and Net Product Sales

As disclosed in note 2, the Company recognizes product revenue from sales of MACI Kits, MACI implants and Epicel grafts following the five-step model in Accounting Standards Codification 606, Revenue Recognition, (ASC 606).

MACI Kits

MACI kits are sold directly to hospitals based on contracted rates in the approved contract or sales order. The Company recognizes MACI kit revenue upon delivery of the biopsy kit at which time the customer (the facility) is in control of the kit. The kit provides the doctor the ability to biopsy a sampling of cells to provide to the Company that can be used later to manufacture the implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cell tissue. The customer’s order of an implant is separate from the process of ordering the kit. Therefore, the sale of the kit and any subsequent sale of an implant are distinct contracts and are accounted for separately.

MACI Implants

From July 1, 2017 until June 15, 2018 the Company sold MACI primarily to distributors and directly to hospitals or patients at contracted rates. Beginning on June 16, 2018, the Company contracted with a specialty pharmacy, Orsini Pharmaceutical Services, Inc. (Orsini) to distribute its MACI product in arrangements whereby the Company retains the credit and collection risk from the end customer. Since July 26, 2018, the Company has also contracted with AllCare Plus Pharmacy, Inc. (AllCare), a specialty pharmacy, in arrangements whereby the Company retains the credit and collection risk from the end customer. The Company pays both specialty pharmacies a fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to receive payment from customers. The Company has engaged a third-party to provide services in connection with a patient support program to manage patient cases and to ensure complete and correct billing information is provided to the insurers and hospitals.

In addition, the Company also sells MACI directly to DMS Pharmaceutical (DMS) for all military implants in 2019 and 2018. The Company sold MACI directly to UsBio Services (UsBio) for all military implants in 2017. The sales directly to DMS and UsBio are sold at a contracted rate.

Prior authorization and confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. The Company recognizes product revenues from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which the Company expects to collect in exchange for MACI implants (the transaction price) may be fixed or variable. Direct sales to hospitals or distributors are recorded at a contracted price, and other than customary prompt pay discounts, there are typically no forms of variable consideration.

When the Company sells MACI the patient is responsible for payment, however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, government fee schedules or past payer precedents. Net product revenue is recognized net of contractual allowances, which considers historical collection experience from both the payer and patient and the terms of the Company’s contractual arrangements. The Company estimates the amount of consideration it expects to receive for these transactions using the portfolio approach. These estimates include the impact of contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements. The Company records a reduction to revenue at the time of sale for its estimate of the amount of consideration that will not be collected. The allowance for uncollectible consideration was $3.9 million and $2.0 million as of December 31, 2019, and 2018, respectively. Changes to the estimate of the amount of consideration that will not be collected could have a material impact to the revenue recognized. A 0.5% change to the estimated uncollectible percentage could result in approximately a $0.5 million decrease or increase in the revenue recognized for the year ended December 31, 2019.

Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs. Changes in estimates related to prior period sales resulted in an increase to revenue of $0.7 million and decrease of $0.2 million and $0.4 million for the years ended December 31, 2019, 2018, and 2017 respectively.

Epicel

The Company sells Epicel directly to hospitals based on contracted rates stated in the approved contract or purchase order. Similar to MACI, there is no obligation to manufacture skin grafts upon receipt of a skin biopsy, and Vericel has no contractual right to receive payment until the product is delivered to the hospital. The Company recognizes product revenues from sales of Epicel upon delivery to the hospital at which time the customer is in control of the skin grafts and the claim is billable to the hospital.

Other Revenue

The Company recognizes other revenue from contracts with customers related to license grants, milestone related payments and royalty-based payments by following the five-step model described in note 2.

On May 10, 2017, the Company announced that it entered into a License Agreement (License Agreement) with Innovative Cellular Therapeutics CO., LTD. (ICT), a leading cell therapy company and developer of CAR-T cell therapy for cancer treatment, for the development, manufacturing and commercialization of the Company’s product portfolio in Greater China, South Korea, Singapore, and other countries in Asia. ICT acquired an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel for the purpose of developing, manufacturing and commercializing the Company's products in the territory described above. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase were contingent upon the Company’s receipt of the upfront payment. ICT will be responsible for funding the development of the programs and manufacturing of the products for commercialization in China and the rest of the territory. On December 21, 2017, the Company received $5.2 million (gross of withholding tax), of which $4.0 million was allocated to the warrant based on the fair value on the date of grant as described in note 12 and the remaining $1.2 million was recognized as described below.

The license was delivered in December 2017, and revenue of $1.2 million was recorded in 2017 under the then applicable revenue accounting standard ASC 605. Based upon the Company’s evaluation under ASC 606 there was no change in amount or timing of revenue recognized for the agreement, and therefore no cumulative change adjustment was recorded upon adoption of the new revenue standard on January 1, 2018. The Company has no significant performance obligations remaining under the agreement.

The License Agreement provides for future milestone payments due to the Company upon the achievement of certain developmental and commercial events. The Company evaluates these milestones under the new revenue recognition standard at contract inception and at each reporting period date. Based on the Company’s evaluations to date, the Company has not included any of the future milestones in its determination of the transaction price because the criteria for including these variable payments have not yet been met. This evaluation was based on 1) the pace and eventual achievement of the milestones are largely dependent on ICT’s performance of its contractual obligations and the Company has no prior experience to determine the likelihood of ICT performing those obligations, and 2) the transfer of the funds for each of the milestone payments by ICT to the Company, if achieved, is subject to approval by the State Administration of Foreign Exchange of the People’s Republic of China.

The License Agreement contains future sales-based royalties to the Company in the low-to-mid double digits. These royalties meet the exception for sales-based or usage-based royalties because they predominantly relate to the license and will be recognized when and if the subsequent sales occur. As of December 31, 2019, we have not received any payments under the License Agreement.

Revenue by Product and Customer

The following table and description below shows the products from which the Company generated its revenue:



	Year Ended December 31,
Revenue by product (in thousands)	2019		2018			2017
MACI and Carticel implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)	$	56,185	$	42,926		$	37,796
Implants subject to third party reimbursement sold through a specialty pharmacy (b)	17,076		8,621			1,299
Implants sold direct based on contracted rates (c)	13,933		12,122			3,393
Implants sold direct subject to third party reimbursement (d)	1,529		2,257			—
Biopsy kits - direct bill	2,243		1,997			1,764
Change in estimates related to prior periods	654		(182		)	(350		)
Epicel
Direct bill (hospital)	26,230		23,116			18,858
Other revenue	—		—			1,164
Total revenue	$	117,850	$	90,857		$	63,924

(a) Represents implants sold through Orsini and AllCare in both 2019 and 2018 and Dohmen Life Science Services, LLC (DLSS) and Vital Care, Inc (Vital Care) in 2017 in which such specialty pharmacies have entered into a direct contract with the underlying insurance provider. The amount of reimbursement is based on contracted rates at the time of sale supported by the pharmacy's direct contracts. Also represents sales with DMS and UsBio, based on direct contracts the Company holds with the facilities. The Company sold implants through DLSS and Vital Care through June 2017 and began selling directly to Orsini based on a fixed transfer price under a distribution model until June 2018.

(b) Represents implants sold through Orsini, AllCare or DLSS in which such specialty pharmacy does not have a direct contract with the underlying payer. The amount of reimbursement is established based on a payer or state fee schedule and/or payer history.

(c) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date.

(d) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date. The payment terms are subject to third-party reimbursement from an underlying insurance provider.

Concentration of Credit Risk

From July 2016 through June 2017, the Company utilized a direct sales model and contracted with Dohmen Life Science Services, LLC (DLSS) to also provide administrative services associated with case management and reimbursement support and to provide billing and collection services for MACI. The Company also utilized Vital Care, Inc. (Vital Care) to provide similar billing and collection services for a subset of insurance payers and patients. In the second quarter of 2017, the Company and DLSS mutually terminated their agreement effective June 30, 2017. On May 15, 2017, the Company entered into a distribution agreement with Orsini Pharmaceutical Services, Inc. as a specialty pharmacy distributor of MACI and has engaged a third party services provider to provide the patient support program previously provided by DLSS and to manage patient cases for MACI. The Company’s receivables risk and credit risk became more concentrated from June 30, 2017 through June 15, 2018 due to the shift from DLSS to Orsini. Beginning June 16, 2018, the concentration of risk decreased because the Company retains the credit and collection risk from the end customer on implants after June 15, 2018. The Company sells Epicel directly to hospitals and not through a distributor.

The Company’s total revenue and accounts receivable balances were comprised of the following concentrations from its largest customer of MACI and Epicel based on customers whose revenue or accounts receivable concentration is greater than 10% of total revenue or total accounts receivable in any of the periods disclosed below and are as follows:



	Revenue Concentration						Accounts Receivable Concentration
	Year Ended December 31,						December 31,
	2019		2018		2017		2019		2018
MACI (a)	8	%	16	%	35	%	8	%	2	%
Epicel	7	%	7	%	10	%	2	%	4	%
(a) For MACI net revenue, the concentration of credit risk in 2018 and 2017 represents sales directly to Orsini. The comparable concentration in 2019 represents a different end customer under the sales model where the Company retains the credit and collection risk from the end customer.