Revenue

3 Months Ended

Mar. 31, 2020

Revenue Recognition and Net Product Sales

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

The Company contracts with two specialty pharmacies, Orsini Pharmaceutical Services, Inc. (Orsini) and AllCare Plus Pharmacy, Inc. (AllCare) to distribute its MACI product 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 military implants. The sales directly to DMS are sold at a contracted rate. There is no expected impact of COVID-19 on the Company's distributors or third-party service providers' ability to manage patient cases.

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 or a fee schedule. 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 expected collections 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. In addition, potential credit risk exposure has been evaluated for the Company's accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses. The Company assesses risk and determines a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is based on current and historical information as well as reasonable and supportable forecasts. This loss percentage was applied to the accounts receivables as of March 31, 2020. The total allowance for uncollectible consideration was $3.5 million as of March 31, 2020 and $3.9 million at December 31, 2019. The allowance includes estimated impacts of the COVID-19 outbreak and its potential impact on collections from third-party insurers, government payers, hospitals and patients. 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 three months ended March 31, 2020.

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 $1.2 million and decrease of $0.04 million for the three months ended March 31, 2020 and 2019, respectively. The change in estimate recorded during the three-months ended March 31, 2020 was primarily due to completion of the billing claims process for implants that occurred in late 2019. Upon completion of the billing claims process, the Company concluded that it was probable that a significant reversal in the amount of revenue recognized would not occur.

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.

Revenue by Product and Customer

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



	Three Months Ended March 31,
Revenue by product (in thousands)	2020		2019
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)	$	11,338	$	9,787
Implants subject to third party reimbursement sold through a specialty pharmacy (b)	3,730		2,743
Implants sold direct based on contracted rates (c)	3,109		3,226
Implants sold direct subject to third party reimbursement (d)	436		322
Biopsy kits - direct bill	466		542
Change in estimates related to prior periods (e)	1,207		(37		)
Epicel
Direct bill (hospital)	6,392		5,227
Total revenue	$	26,678	$	21,810

(a) Represents implants sold through Orsini and AllCare in both 2020 and 2019 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 direct sales under a contract to the specialty distributor DMS.

(b) Represents implants sold through Orsini or AllCare 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.

(e) Primarily represents changes in estimates related to implants sold through Orsini or AllCare in which such specialty pharmacy does not have a direct contract with the underlying payer. The initial estimate of the amount of reimbursement is established based on a payer or state fee schedule and/or payer history. The change in estimates is a result of additional information or actual cash collections received in the current period.

Concentration of Credit Risk

The table below shows the Company’s total Epicel revenue and accounts receivable balances from customers whose revenue or accounts receivable concentration is greater than 10% in any of the periods disclosed below. The Company did not have MACI revenue or accounts receivable concentrations greater than 10% in any of the periods disclosed below.



	Revenue Concentration				Accounts Receivable Concentration
	Three Months Ended March 31,				March 31,		December 31,
	2020		2019		2020		2019
Epicel	12	%	9	%	3	%	2	%