Vericel Corporation (NASDAQ:VCEL) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Vericel’s First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. I would also like remind you that this call is being recorded for replay. I would now like to turn the conference call over to Eric Burns, Vericel’s Vice President of Finance and Investor Relations.

Eric Burns: Thank you, Operator, and good morning everyone. Welcome to Vericel’s first quarter 2023 conference call to discuss our financial results and business highlights. Before we begin, let me remind you on today’s call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are available on our website. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copy of our first quarter financial results press release is available in the Investor Relations section of our website.

We also have a short presentation with highlights from today’s call that can be viewed directly on the webcast or accessed on our website. I am joined on this call by Vericel’s President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. I will now turn the call over to Nick.

Nick Colangelo: Thank you, Eric, and good morning, everyone. I will begin today’s call by discussing our financial and business highlights for the first quarter, as well as our expectations for the remainder of the year. Joe will then provide a more detailed review of our first quarter financial performance and our updated guidance for 2023 before opening the call to Q&A. We entered 2023 with a great deal of momentum as we generated strong MACI growth in the second half of last year and achieve significant regulatory milestones, including an accelerated regulatory pathway for the arthroscopic MACI program and the FDA approval of NexoBrid. That momentum continued through the first quarter as we had a very strong start to the year from both a financial and overall business perspective, delivering record MACI and total revenue for the first quarter, and making significant progress on our MACI Lifecycle Management programs and NexoBrid commercial launch activities.

From a financial perspective, we generated total revenue of $41 million for the quarter, with both MACI and Epicel ahead of our first quarter guidance. We also continued to generate strong profitability as we delivered our 11th straight quarter of positive adjusted EBITDA and operating cash flow, ending the quarter with nearly $140 million in cash and investments and no debt. Based on our positive first quarter results and underlying business fundamentals, we are increasing our 2023 full year revenue guidance to $184 million to $192 million. Our financial results for the quarter were driven by record first quarter MACI revenue of $34.2 million, representing growth of 32% compared to the prior year. This strong revenue growth was driven by continued significant increases in surgeon engagement and utilization of MACI.

In addition to generating record first quarter revenue in implants, we had the highest number of surgeons taking biopsies in any quarter since we have launched MACI and a record number of first quarter biopsies. The last two quarters were our highest biopsy quarters ever with first quarter biopsies nearly matching the record number of MACI biopsies taken in the fourth quarter of last year. This is a noteworthy performance in that we typically see a seasonal step down in biopsy surgeons and biopsies in the first quarter. It’s also a reflection of the fact that our sales and marketing teams continue to execute at a high level and that the operating environment continues to improve. MACI clearly has resumed its high growth profile, as we have had year-over-year growth of 30%, 24% and 32% over the last three quarters, representing a trailing nine-month growth rate of 28%.

Based on the continued momentum that we have seen to start this quarter, we also expect strong MACI growth in the second quarter and we are increasing our full year MACI revenue guidance to $156 million to $160 million. This updated guidance implies 20% full year MACI growth at the midpoint and reflects strong sales rep productivity that surpasses our historical high of $2 million per rep achieved prior to our last sales force expansion. With respect to our MACI Lifecycle Management initiatives, the MACI arthroscopic delivery program remains on track as we continue to progress with our plans to conduct a human factors validation study this year with an anticipated potential launch in 2024. We believe that the arthroscopic delivery of MACI will be a very attractive potential option for many patients and surgeons, and importantly, the MACI arthroscopic instrument kit is designed to treat the most common defects in the MACI addressable market, which are 2 to 4 square centimeter defects on the femoral condyles, a segment which represents approximately one-third of the overall MACI addressable market or 20,000 patients per year.

If approved, MACI would be the only arthroscopic restorative cartilage repair product on the market to treat these defects. We believe that this would allow MACI to take a greater share of these procedures and provide a significant upside growth opportunity for MACI and the company in the years ahead. We also continue to advance the MACI Clinical Development program for the treatment of cartilage defects in the ankle and recently conducted an initial pre-IND meeting with the FDA. We believe that a potential ankle indication with an estimated $1 billion addressable market could be a significant growth driver for MACI over the long-term. Turning to our burn care franchise, we reported first quarter Epicel revenue of approximately $7 million, which was an increase over the prior quarter and ahead of our guidance for the first quarter.

Importantly, as compared to the fourth quarter, we saw a higher proportion of biopsy patients moving onto treatment with Epicel, as well as an increase towards previous levels in the average number of grafts per patient. With respect to NexoBrid, our commercial launch activities remain on track and interest from burn surgeons and healthcare providers remains very high. From an access perspective, P&T committee packages have been submitted at about one-third of the 90 centers we are targeting this year and we are tracking ahead of our initial goals for the P&T Committee submissions and approvals. Strong surgeon interest is also reflected by the fact that NexoBrid was selected for inclusion in the pre-conference healthcare professional education sessions at the upcoming American Burn Association Annual Meeting next week with hands on lab demonstrations by leading burn surgeons.

In terms of NexoBrid product availability, our initial expectation was that we would receive commercial product from MediWound and generate some initial stocking revenue towards the end of the second quarter based on the projected timelines to complete the additional manufacturing updates required by the FDA in connection with the NexoBrid BLA approval. We now believe that assuming timely successful completion of these manufacturing updates, commercial product availability is more likely to occur early in the third quarter, which did not impact our full year burn care revenue guidance of $28 million to $32 million for the year. I will now turn the call over to Joe to discuss our first quarter financial results.

Joe Mara: Thank you, Nick, and good morning, everyone. Starting with the income statement, total net revenue for the quarter was $41 million driven by strong MACI revenue of $34.2 million and $6.8 million of Epicel revenue. Gross profit for the quarter was $26.5 million or 65% of net revenue, consistent with the prior year. Total operating expenses for the quarter were $34.7 million, compared to $30.7 million for the same period in 2022. The increase in operating expenses was primarily due to higher employee-related expenses, variable expenses due to higher MACI sales volumes and increase in-person and conference-related activity compared to last year. Net loss for the quarter was $7.5 million or $0.16 per share, compared to $7.1 million or $0.15 per share for the first quarter of 2022.

Non-GAAP adjusted EBITDA for the quarter was $1.7 million, and importantly, this is now the 11th consecutive quarter that we have generated positive adjusted EBITDA. Finally, we generated approximately $8 million of operating cash flow in the quarter and we ended Q1 with approximately $139 million in cash and investments and no debt. Note that during the quarter, we paid MediWound the $7.5 million NexoBrid approval milestones after the approval of NexoBrid and net of this payment our cash and investments increased by approximately $6.5 million during the quarter. Turning to our financial guidance, we are increasing our full year revenue guidance for 2023. We now expect total revenue of $184 million to $192 million, compared to our prior revenue guidance of $180 million to $188 million.

We are maintaining our profitability guidance and expect gross margin to be in the high 60% range and adjusted EBITDA in the mid-teens percentage range. For MACI, we now expect full year revenue of $156 million to $160 million, an increase versus our prior guidance of $152 million to $156 million, with growth expected to be approximately 20% for the full year. As Nick highlighted earlier, our MACI momentum has continued into the second quarter and we expect MACI growth in the quarter to remain strong in the low 20% range with revenue of approximately $34.5 million in Q2. For our burn care franchise, we are maintaining our full year revenue guidance of $28 million to $32 million. For the second quarter, based on a continuation of the improved trends we saw for Epicel in Q1, we expect another quarter of approximately $7 million of Epicel revenue in Q2.

And for NexoBrid, our guidance assumes product availability and the first commercial sales of NexoBrid in the third quarter. Overall for the company, we are very pleased that MACI’s strong first quarter performance and outlook for the year, coupled with our burn care revenue growing off of our Q4 quarterly run rate, has brought the company back to our high growth profile in 2023. And importantly, as we move into 2024, we would also anticipate continued acceleration of our total company revenue growth with a full year of NexoBrid in the market and the anticipated launch of arthroscopic MACI. This now concludes our prepared remarks. We will open the call to your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from the line of Ryan Zimmerman with BTIG. Your line is open.

Operator: And one moment for our next question. That will come from the line of Sam Brodovsky with Truist Securities. Your line is open.

Operator: Thank you. One moment for our next question. And that will come from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Operator: Thank you. One moment for our next question. And that will come from the line of George Sellers with Stephens. Your line is open.

Operator: Thank you. One moment for our next question. And that will come from the line of Sean Lee with H.C. Wainwright. Your line is open.

Operator: I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Nick Colangelo for any closing remarks.

Nick Colangelo: Okay. Well, thank you, Operator, and thanks to everyone for your questions and your continued interest in Vericel. Obviously, the company executed well in the first and had a great start to the year. We expect to deliver another year of strong financial and operating results in 2023 and we look forward to providing further updates on our next call. So thanks again and have a great day.

Operator: Thank you all for participating. This concludes today’s program. You may now disconnect.