Vericel Corporation (NASDAQ:VCEL) Q1 2024 Earnings Call Transcript

Vericel Corporation (NASDAQ:VCEL) Q1 2024 Earnings Call Transcript May 8, 2024

Vericel Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Vericel’s First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now 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. Joining me on today’s call are Vericel’s President and Chief Executive Officer, Nick Colangelo and our Chief Financial Officer, Joe Mara. Before we begin, let me remind you that 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. 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 in a short presentation with highlights from today’s call are available in the Investor Relations section of our website. I will now turn it over to Nick.

Nick Colangelo: Thank you, Eric, and good morning, everyone. I’ll 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 results and guidance for 2024 before opening the call to Q&A. We entered the year with a great deal of momentum after an outstanding close to 2023 and that momentum continued through the first quarter as we delivered another quarter of top tier revenue growth, including record first quarter total revenue and significant growth in profitability. Total revenue for the quarter increased 25% to more than $51 million which was above the top end of our guidance range with record first quarter MACI revenues and more than 60% growth in Burn Care revenue.

This strong top line growth translated into significant margin expansion and profit growth as we generated record first quarter gross margin, which increased more than 400 basis points compared to last year and adjusted EBITDA growth of more than 300% as the company’s profit growth continues to outpace our high revenue growth. Based on the strong start to the year, we’re increasing our full-year revenue guidance to $238 million to $242 million. MACI had another excellent quarter with revenue growing 18% to more than $40 million which was above the top end of our guidance range for the quarter. MACI’s first quarter performance was driven by strong underlying business fundamentals, as we continue to expand the MACI Surgeon customer base and drive growth in biopsies.

While the first quarter typically is the seasonally lowest quarter of the year, we had the second highest number of MACI biopsies and surgeon taking biopsies in any quarter since launch behind only the fourth quarter of last year, making the last two quarters the highest quarters ever on both of those metrics as our sales and marketing teams continue to execute at a very high level in building a strong foundation for continued MACI growth. To that end, surgeon interest and engagement with MACI remains high as the number of peer-to-peer programs and training labs for MACI more than doubled and overall program attendance more than tripled in the first quarter compared to last year. The high level of surgeon interest is driven by the strength of MACI’s long-term clinical outcomes, which were highlighted in a study published in the American Journal of Sports Medicine in the first quarter.

This prospective study showed excellent long-term results for MACI patients treated for both patellofemoral defects, where we currently have our highest penetration rates as well as femoral condyle defects, which is the focus of the MACI Arthro program. Pre-launch commercial activities for MACI Arthro continue to progress in advance of our anticipated launch in the third quarter of this year. In connection with the launch we’re expanding our target surgeon base from 5,000 to 7,000 surgeons to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures. Based on our experience to date, we’d expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for MACI in the years ahead.

In addition, MACI Arthro instruments target smaller cartilage defects that comprise the largest segment of our addressable market representing approximately 20,000 patients per year or one-third of the $3 billion addressable market for MACI. We believe that MACI Arthro will take a greater share of these procedures and provide significant upside growth opportunity for the company. We also continue to advance the MACI development program to treat cartilage defects in the ankle and remain on track to initiate the MACI Ankle clinical study in 2025. Cartilage defects in the ankle represent the second largest market opportunity for MACI. We believe that potential ankle indication with an estimated $1 billion addressable market could be another significant growth driver for MACI in the next decade and beyond.

Turning to our Burn Care franchise, first quarter revenue increased more than 60% to over $11 million as we delivered another quarter of high revenue growth with total Burn Care revenue above the high end of our guidance range. Epicel revenue grew 56% to over $10.5 million in the first quarter, representing the second highest quarterly revenue ever for Epicel. Epicel continues to benefit from our expanded sales force and a higher share of voice in the care market as there was a meaningful contribution to Epicel revenue in the quarter from new or dormant accounts. NexoBrid launch momentum continued during the quarter as we made significant progress with respect to burn center key performance indicators and growth in underlying NexoBrid demand metrics.

Through the end of the first quarter, more than 60 burn centers have completed P&T committee submissions, approximately 40 centers have gained P&T committee approval and more than 30 centers have placed an initial product order. In addition, there was a significant increase in the number of patients treated with NexoBrid in the first quarter and significant growth in the number of burn center orders and NexoBrid units ordered by hospitals versus the prior quarter. We remain very pleased with the strong surge in interest in NexoBrid as was demonstrated by the high level of attendance and engagement at NexoBrid events at the recent American Burn Association Annual Meeting, the progress in onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients and the clear impact that our broader burn care portfolio and expanded sales team is having on Epicel performance.

We believe that these factors will enable the company to build a strong foundation for NexoBrid in 2024 and that the company is now very well positioned to deliver sustained growth with the second high growth franchise in place. Overall, the company delivered another strong quarter and based on the strength of our core portfolio and the expected contributions from our new product launches, we believe the company is very well positioned for continued high revenue and profit growth in 2024 and beyond. I’ll now turn the call over to Joe.

Joe Mara: Thanks, Nick, and good morning, everyone. Starting with our first quarter results. Total net revenue for the quarter was $51.3 million representing 25% growth over the prior year, which was above the top end of our guidance range for the quarter. MACI revenue increased 18% to $40.2 million and total Burn Care revenue increased 63% to $11.1 million both of which exceeded our guidance for the quarter. Epicel revenue was $10.7 million, an increase of 56% versus the prior year, which represented the second highest quarterly revenue for Epicel to date. NexoBrid revenue was $0.4 million which as anticipated was similar to revenue in the fourth quarter. While underlying arthro orders and units grew significantly versus the prior quarter, As previously noted, specialty distributor and ordering patterns as well as inventory dynamics can impact quarterly revenue results.

Gross profit for the quarter was $35.4 million or 69% of net revenue, an increase of more than 400 basis points versus the prior year and the company’s highest first quarter gross margin to date. Pull through of incremental revenue to gross profit also remained very strong in the first quarter at more than 85%. Total operating expenses for the quarter were $40.8 million compared to $34.7 million for the same period in 2023. The increase in operating expenses was primarily due to development activities for MACI arthroscopic instruments, increased headcount and related employee expenses and lease expense associated with the company’s new facility that is under construction. Net loss for the quarter was $3.9 million or $0.08 per share compared to $7.5 million or $0.16 per share for the first quarter of 2023.

Non-GAAP adjusted EBITDA for the quarter increased 325% to $7.2 or 14% of net revenue compared to $1.7 million or 4% of net revenue in 2023. As adjusted EBITDA growth continued to significantly outpace our high revenue growth. This increase in adjusted EBITDA margin of approximately 1,000 basis points and what typically is our seasonally lowest quarter of the year clearly demonstrates the strong P&L leverage and the top tier profitability profile for the company. Finally, the company generated $7.2 million of operating cash flow in the quarter and ended the first quarter with $148 million in cash, restricted cash, investments and no debt. Turning to our financial guidance. After a very strong start to the year, we are increasing our full-year total revenue guidance to $238 million to $242 million or 20% to 23% total revenue growth.

For the quarter, we expect MACI revenue to be approximately $42.5 million. For Burn Care, we expect total revenue in the second quarter to be approximately $10 million with another strong Epicel quarter above our 2023 quarterly run rate and sequentially higher NexoBrid revenue. Based on our second quarter guidance, the trailing 12-month revenue growth rate will be above 20% for MACI, Burn Care and total company revenue as we continue to drive high top line growth across both of our franchises. For the full-year, we continue to expect gross margin of approximately 70%, adjusted EBITDA margin of approximately 20% and operating expenses to be approximately $165 million. For the second quarter, we expect gross and adjusted EBITDA margins to be in a similar range to first quarter margins.

The company had a very strong start to the year with 25% top-line growth in the first quarter and significant profitability growth and margin expansion. In addition, on its trailing 12 month basis, the company has delivered 23% total revenue growth and 74% adjusted EBITDA growth, demonstrating sustained high growth in the top line and the bottom line as we continue to significantly enhance the company’s financial profile. Overall, we believe that the company is very well positioned for another strong year in 2024 and has a solid foundation in place for continued strong growth in the years ahead. This now concludes our prepared remarks, and we will open the call to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. First question comes from Ryan Zimmerman with BTIG. Go ahead, Ryan. Your line is open.

Ryan Zimmerman: Thank you, and good morning, and congrats on strong start here. I want to ask a couple of questions in a multipart manner. First on guidance, I want to understand two things. Do you still expect I think you had mentioned before that you could do NexoBrid sales in the range of and correct me if I’m wrong here, Joe, $7 million to $8 million or $8 million to $9 million, I can’t remember exactly what it was. But do you still expect that level of NexoBrid sales this year? And the second component of the guidance question is you beat by about $2 million, you kind of — if you split that between the two franchises, guidance is moving up about $1 million. So just talk to us about kind of where you think you’re “holding back” between MACI and Epicel for the guidance for the year? And then I have a second question.

Joe Mara: All right. Well, I’ll start with those. Good morning, Ryan, and thanks for the question. So I may start on the total guidance and then talk a little bit how we’re thinking about kind of the Burn Care on a full-year basis. So in terms of the total guide, we had a very strong start to the year in Q1. We’re raising our guidance to $238 million to $242 million. So if you look at the midpoint there, which is where our focus, we’re up $1 million, so $239 million was our midpoint coming into the quarter. We’ve increased that to 240. In terms of kind of the mix on franchises to start, I would assume the $1 million increase is on the MACI side and that kind of flows through the MACI. Given MACI was roughly $1 million ahead in Q1 in terms of our expectations and guidance, our metrics are very strong into Q2.

I think relative to the estimate we gave last quarter, which again, there’s multiple scenarios, but the framework we gave, which the starting point for MACI was in the high teens and I had referenced $194 million. I think you can assume that comes up in our base case, if you will to $195 million and the range picks up as well, call it $193 million to $197 million, if you think about a kind of high teens range. The remaining $45 million would stay on Burn Care and that gets you to the $240 million total. A couple of things kind of around your question. So one, we don’t typically adjust our Burn Care guidance, particularly after the first quarter. We don’t adjust it rather after the first quarter of the year. We had a very similar situation last year where we had a run rate expectation going into the first quarter, we were ahead of that, we did not adjust.

And then if you just think about kind of our Burn Care portfolio, where Epicel can still vary, although clearly it’s doing quite well and benefiting from the higher share of voice, it still can vary on a quarterly basis. And I would say it’s still difficult to predict exactly what the shape of the NexoBrid launch uptake curve looks like. So it’s still early in the year there. So kind of holding guidance there, it is important to recognize that in the Burn Care total, this is still kind of well above at $45 million, well above the company growth at nearly 40% on a full-year basis. So we have a very so high expectations on the Burn Care side for both franchises and of course we had a very strong start from a profitability perspective in the first quarter as well.

In terms of your question on the mix, if you will, for the balance of the year. I would say, obviously, Epicel had a great start to the year with its second highest quarter to date and nearly $11 million kind of on its own. And so as we think about Burn Care, I think there’s a number of scenarios. To your point, what I referenced last quarter, where numbers kind of in the call $38 million range $7 million-ish range that got you to $45 million in total on Burn Care. If for example, we maintain the higher run rate in Epicel that we call for at the start of the year, throughout the balance of the year, that probably gets us closer to $40 million on Epicel and the balance would be cost $5 million on NexoBrid. Again, I think it’s still early in the year.

I think both products could shift a little bit, but I think there’s multiple scenarios to get it to $45 million. I think at this point, it’s still difficult to predict exactly what it looks like, but we expect both products to contribute, but NexoBrid is in a build year and clearly Epicel is operating at a higher run rate.

Ryan Zimmerman: Yes. That’s very helpful, Joe. I appreciate all the color. The second question, I should say, and not — again, not to take anything away from profitability, it was nice to see. On MACI, I want to ask about MACI and the launch of MACI Arthro a little bit. As you think about the broader segment of doctors that you can target; One, are you thinking about expanding your sales force? I mean, should we think about that from an operating expense standpoint? And then two, you talked about 50% penetration over time. By my estimates, I have you at maybe 2,400 docs today. So call it 7,000 docs, that’s 1,000 more. Why 50%? Why not higher? Why not 75% or so? I’m just curious kind of what’s driving that thinking?

Nick Colangelo: Yes. Hey, Ryan. This is Nick. So, first of all, on sort of sales force expansion, I think we’ve discussed it before that this will not the launch of MACI Arthro adding a couple of 1,000 targets over 76 territories, that’s something that we think we can absorb without having to realign territories, which as you know can be disruptive. What we will do as volumes continue to increase its add of some of the territory development managers that we had, for instance, last year as well in high volume territories. And then arthroscopic specialists who can really help surgeons who are new to MACI Arthro or MACI in general. And so all in call it half a dozen to a dozen folks maybe. So kind of obviously not a very significant expansion but one that we think will aid with the MACI Arthro uptake.

The 50% reference that we kind of talk about as you know historically we launched MACI with 3,000 targets and we got up to sort of 50% penetration and it was increasing pretty dramatically at the time. From 2018 to 2019, the number of biopsy surgeons was up 25% to call it roughly 1,400 for the year but higher than that cumulatively. And then we increased the sales force. So we never got to sort of a terminal sort of penetration rate with the initial size target universe. Obviously, we then increased to 5,000. We continue to grow strongly approaching 50% penetration and we’ll expand again. So again we will not have gotten to an ultimate penetration rate. But the point is, it will drive in our view continued surgeon adoption and growth. And yes, ultimately there’s no reason it can’t go above 50%.