Revenue

9 Months Ended

Sep. 30, 2020

Revenue Recognition of Net Product Sales and Other Revenue

The Company recognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and other revenue following the five-step model in Accounting Standards Codification 606, Revenue Recognition, (ASC 606).

Product Sales

MACI Biopsy Kits

MACI biopsy kits are sold directly to hospitals based on contracted rates in an 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 is used by the doctor to provide a sample of cartilage tissue to the Company, which can later be used to manufacture a MACI implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cartilage tissue. The customer’s order of an implant is separate from the process of ordering the biopsy kit. Therefore, the sale of the biopsy 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 MACI in a manner in which 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 collect 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 patients. The sales directly to DMS are made 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 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 estimated 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 estimates expected collections for these transactions using the portfolio approach. 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 September 30, 2020. The total allowance for uncollectible consideration as of September 30, 2020 and December 31, 2019 was $4.6 million and $3.9 million, respectively. The allowance includes less than $0.1 million related to COVID-19 potential impacts on accounts receivable 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% increase to the estimated uncollectible percentage could result in approximately a $0.2 million decrease in the revenue recognized for the nine months ended September 30, 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 for the three and nine months ended September 30, 2020 resulted in an increase to revenue of less than $0.01 million and $0.7 million, respectively. During the same periods in 2019, the changes in estimates related to prior period sales resulted in an increase to revenue of $0.7 million and $0.4 million, respectively. The changes in estimates recorded during the three and nine months ended September 30, 2020, were primarily due to completion of the billing claims process for implants that occurred in 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 an approved contract or purchase order. Similar to MACI, there is no obligation to manufacture Epicel 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 Epicel grafts and the claim is billable to the hospital.

Other Revenue

NexoBrid

The Company entered into exclusive license and supply agreements with MediWound, under which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreement. The U.S. Biomedical Advanced Research and Development Authority (BARDA) has committed to procure NexoBrid. As of September 30, 2020, the Company does not hold a direct contract or distribution agreement with BARDA, or take title to the product. The Company recognizes income from sales of NexoBrid to BARDA upon delivery, at which time BARDA is in control of the product. During the three months ended September 30, 2020, the first order of NexoBrid was delivered and the Company recognized $1.2 million of revenue. See note 11 for further discussion of the NexoBrid license and supply agreements.

Revenue by Product and Customer

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


	Three Months Ended September 30,				Nine Months Ended September 30,
Revenue by product (in thousands)	2020		2019		2020		2019
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)	$	14,897	$	11,779	$	36,084	$	34,555
Implants subject to third party reimbursement sold through a specialty pharmacy (b)	3,529		4,030		10,299		10,584
Implants sold direct based on contracted rates (c)	4,602		3,039		9,528		9,715
Implants sold direct subject to third party reimbursement (d)	782		573		1,793		1,176
Biopsy kits - direct bill	539		533		1,348		1,632
Change in estimates related to prior periods (e)	8		656		695		353
Epicel
Direct bill (hospital)	6,663		9,889		17,965		20,445

Total product revenue	$	31,020	$	30,499	$	77,712	$	78,460
Other revenue (f)	1,238		—		1,238		—
Total net revenue	$	32,258	$	30,499	$	78,950	$	78,460

(a) Represents implants sold through Orsini and AllCare in both 2020 and 2019 whereby such specialty pharmacies have 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.

(b) Represents implants sold through Orsini or AllCare whereby 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. Also represents direct sales under a contract to the specialty distributor DMS.

(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.

(f) Represents income from sales of NexoBrid to BARDA, pursuant to the license agreement between the Company and MediWound.

Concentration of Credit Risk

The Company's total Epicel revenue concentration from a customer for the three months ended September 30, 2019 was 10%. For the Company's total Epicel and MACI revenue and accounts receivable balances there were no other customers for the three and nine months ended September 30, 2020, and for the nine months ended September 30, 2019, with a concentration greater than 10%.