Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Good afternoon, and thank you for coming to the 2020 Virtual UBS Global Healthcare Conference. My name is [ Ang Lee ], and I'm happy to be your host for this session. Our next presenter will be Mr. Nick Colangelo, President and Chief Executive Officer of Vericel. [Operator Instructions] We will now turn it over to Mr. Nick Colangelo. Thank you.

Well, thank you. It's a pleasure to be here today. And before I begin, I would just like to remind you that this presentation contains forward-looking statements and you should refer to our documents on file with the SEC for further information. I understand that these slides are viewer-driven, so I will prompt you as I'm moving forward through the presentation. So beginning on Slide 3, Vericel is a leader in advanced therapies for the sports medicine and severe burn care markets. We have a highly innovative advanced cell therapy platform that we acquired in 2014 from Sanofi, and we're currently marketing 2 advanced cell therapies in the United States, both of which use a patient's own cells to repair damaged tissue and restore function. Our lead product is MACI, which we launched in 2017 for the treatment of cartilage defects in the knee. MACI is the leading restorative cartilage repair product in the sports medicine market and the only FDA-approved product in its class. Epicel is our second commercial product in the U.S., which is also the only FDA-approved permanent skin replacement for adult and pediatric patients with large full-thickness burns. A focus of our business development strategy has been to build our commercial franchises around our current cell therapy products. And last year, we added an exciting new product to our portfolio when we entered into an exclusive license agreement with MediWound for North American commercial rights to NexoBrid, which is an orthobiologic product for the debridement of severe thermal burns. Turning to Slide 4. We entered 2020 with a great deal of momentum as one of the top-tier growth companies in the field. Full year revenues increased 30% over 2018 to approximately $118 million. And we believe that we have significant long-term growth ahead as the current addressable market for our products exceed $2 billion. On Slide 5, our strong 2019 revenue growth was driven by strong growth for both MACI and Epicel, which was in line with the significant revenue growth that we've seen and generated since we launched MACI in 2017. MACI revenues were up 35% in 2019. And our cartilage repair franchise revenues have more than doubled since we launched MACI back in 2017. Epicel revenue grew 13% over 2018, marking the third consecutive year of double-digit growth for Epicel. On Slide 6, our strong momentum continued into the first quarter of 2020. Total product revenues for the first quarter increased 22% to $26.7 million, marking our 12th straight quarter of record revenues for the reported quarter. MACI revenues were up 22% for the quarter despite cancellations late in the quarter due to restrictions on elective surgeries, which reduced first quarter volume by approximately 9%. So prior to those cancellations, MACI revenue growth was in line with our 2019 growth rate and was on track to exceed our initial 2020 revenue growth guidance. Epicel also delivered another strong quarter with revenues up 22% compared to the first quarter of 2019. So turning to Slide 7. Despite the COVID-19 disruption, we certainly expect long-term revenue growth will continue to drive significant gross margin and operating margin expansion, which we had seen up too this time based upon the leverage in our business model. So our marginal cost of goods are approximately 20% for MACI and Epicel. And we expect that long-term growth in volume plus higher utilization of our existing manufacturing capacity will drive gross margin improvements above the full year margins we saw in 2019 of 68%. Likewise, because our portfolio consists of premium-priced products with concentrated call points, we have significant leverage on the operating margin line as well. So in the years ahead, we expect that strong long-term revenue growth will generate gross margins in the mid-70% range and operating margins in the 20%-plus range. Turning to Slide 8. We have a very strong balance sheet as well. We ended the first quarter with $83.3 million of cash and investments, approximately $24 million in accounts receivable and no debt as of March 31. In addition, we have a very strong institutional shareholder base with approximately 90% of our outstanding shares held by institutional investors. So turning to Slide 9. As we covered in our first quarter earnings call, in response to the COVID-19 crisis, we, like many other companies, implemented a number of measures to protect our employees, their families and health care providers, while continuing to support our patients. Employees at our facility, not directly involved in the production and delivery of MACI and Epicel, are working from home. And we've implemented additional measures to protect the health and safety of our on-site workforce. We continue to make and manufacture both MACI and Epicel to meet the critical needs of our patients. And our field-based commercial and medical teams are engaging with our customers through a variety of virtual tools and have continued to provide case support as needed in compliance with governmental and facility access rules. Again, like many companies, we've updated our 2020 operating plan and implemented expense reduction measures that we believe will reduce our cash utilization by at least $20 million to preserve our strong balance sheet while maintaining operational readiness. In the short term, variable costs will drive savings of around $0.25 for every dollar in reduced revenue, with those savings being divided between cost of goods and selling and general administrative expenses. Our updated plan also includes a reduction of discretionary operating expenses across the organization, a suspension of hiring outside of the MACI sales force and deferral of nonessential capital expenditures. And all of these actions have allowed us to keep our workforce intact to ensure that we maintain operational readiness for what is now the anticipated recovery in elective surgeries. So on Slide 10, moving forward, we certainly believe that Vericel remains very well positioned for continued success, having built a strong foundation with an innovative product portfolio with great competitive barriers to entry, having achieved a number of operational and financial milestones. And having a very strong balance sheet, we believe that we're well positioned to return to rapid growth following this current situation. Turning to Slide 11. I'll start with our cartilage repair franchise. So articular cartilage is a highly specialized tissue in all of the joints that provide a smooth lubricated surface for frictionless movement. It transmits loads to the underlying bone, and protects against compressive and other forces. And chondrocytes are the resident cells that are responsible for producing cartilage. Cartilage injuries are a leading cause of musculoskeletal morbidity, and defects in knee cartilage are found on approximately 60% of arthroscopies. And these injuries are caused by either acute or repetitive traumas, degenerative conditions such as osteoarthritis and inflammatory conditions such as rheumatoid arthritis. And the issue is that cartilage has a limited capacity for intrinsic healing because it has no nerves, no blood vessels and no lymphatics to remove cellular debris. So if you have a cartilage injury and it's left untreated, it obviously leads to joint pain, dysfunction and ultimately heading down a path of osteoarthritis and partial or full knee replacement. So the treatment goals are obviously to reduce symptoms, improve function and prevent degeneration. And the treatment alternatives generally fall into 3 categories. The left-hand side of Slide 12, palliative procedures are typically procedures such as chondroplasty. So if you present to a surgeon with knee pain and they decide to do an investigative arthroscopy, while they're in there diagnosing whatever the issue happens to be, they'll clean up the cartilage if there's any fragments or floaters. And that obviously provides or can provide some pain relief, but obviously does not address the underlying cartilage defect. In the middle category, our reparative techniques, otherwise referred to as marrow stimulation techniques such as microfracture, where if you think about a cartilage injury as a pothole in the knee surface that goes down to the bone, surgeons will drill into the bone. The theory being that the bone marrow, which includes Mesenchymal stem cells will bleed into the defect. They'll differentiate into chondrocytes and produce cartilage. But in fact, they actually produce a fiber cartilage tissue, which is not like the native tissue, and there are issues of durability of repair for that tissue, particularly in larger defects. And it's a technique that really is falling out of favor in large defects. On the right-hand side, our restorative products or procedures. MACI, as I mentioned earlier, is the only FDA-approved product. And for storing cartilage injuries, the only other options available to surgeons are cadaver-based, so osteochondral allografts, which are cadaver-based products where you take a punch of cartilage and bone and fill in a defect that way; or a product called DeNovo NT, which is minced juvenile cadaver cartilage. Those are both tissue regulated products that have not demonstrated efficacy in randomized clinical trials. So we believe that MACI certainly is the superior product of choice in the restorative category. So moving to Slide 13. The image on the left-hand side of this slide shows the final MACI product. Essentially, what we do, as I'll explain on the next slide, is we take a small biopsy of a patient's healthy cartilage, isolate the chondrocytes, expand those chondrocytes and see them onto this collagen membrane that you see on the left in the middle image, you can see that the membrane has a dense side that faces into the joint, a looser portion of the membrane that faces the bone. The chondrocytes adhere to the bone, which we see at approximately 0.5 million to 1 million cells per square centimeter. When it's implanted, the chondrocytes migrate down to the subchondral bone and begin to produce extracellular matrix in the cartilage that's naturally present in the knee. The full production cycle is -- our manufacturing cycle is shown on Slide 14, where, again, we take a biopsy from a nonweight-bearing portion of the knee. These are typically 2 Tic Tacs-sized biopsies that are sent to our facility here in Cambridge. We isolate -- or digest the cartilage, isolate the chondrocytes and typically cryopreserve the cells until we receive an order from the surgeon. At that point, the cells are thawed, further expanded, seeded under the membrane, the final product is typically shipped overnight to the surgical center, where -- when the surgeon will debride the defect and essentially cut the membrane to the size of the defect, glue it in with commercially available fibrin glue. And again, the cells migrate to the subchondral bone, they begin producing the extracellular matrix and that makes up cartilage, and it basically fills the defect from the bottom-up and creates a repair tissue that allows patients to resume an active lifestyle. So on Slide 15, there's really 4 factors that we point to that are driving the strong growth we've seen from MACI since its launch. And first, start with its label. So MACI has a very broad label indicated for the repair of symptomatic full-thickness cartilage defects in the knee. It's a first-line treatment indicated to treat defects anywhere in the knee, including the patella or back of the knee cap. There's no limit on the defect size, the number of defects or whether there's bone involvement or not. So because this is a broader label than our predecessor product Carticel had, we believe it's a viable treatment option for a larger set of patients compared to earlier ACI technologies. On slide 16, you can see from a surgeon perspective, the ease of administration of MACI versus prior generations of these kind of products. So on the left-hand side is an example of a Carticel procedure, which was a highly invasive, technically demanding and time-consuming procedure. So it was a procedure where you used the patients' own cells, but the final product was in a solution form. So it made for this very difficult procedure where you had to sow in some sort of covering over the defect, inject the cells, and again, it just made for a very difficult procedure. So it was really a more of a niche product for really the high-end cartilage repair specialists. By contrast, you can see a MACI administration on the right-hand side of the slide. Basically, it's a much simpler, less-invasive, less time-consuming procedure. So it's a mini arthrotomy, again, cut the membrane to the size of the defect, glue it in with commercially available glue and you're essentially done. And so what this has done is made the product appeal into a much broader set of surgeons. And as we mentioned on our fourth quarter earnings call, we received biopsies for MACI from approximately 1,400 of our target 3,000 surgeons in 2019, which was up 25% over 2018. So clearly, in its third year of launch, the simplicity and effectiveness of the procedure was greatly expanding our surgeon customer base. On Slide 17 and 18, the clinical data for MACI is unsurpassed. So MACI was approved based on the pivotal SUMMIT study, which demonstrated statistically significantly greater improvements in pain and function versus the typical comparator of microfracture in the clinical study. And importantly, on the right-hand side of Slide 17, the response rate for MACI was nearly 90%, which is high for any therapeutic modality, and that compared to about 2/3 of the patients after 2 years that had a positive outcome for microfracture. And so said another way, that meant about 1/3 of patients treated with microfracture were in for another procedure within a short period of time. Data on the SUMMIT Extension study, which followed these patients 3 additional years out to 5 years, was published in the American Journal of Sports Medicine in 2018. And you can see that the improvements that we're seeing in 2 years were carried all the way out to 5 years. And so we believe that MACI represents a significant advancement in the treatment of patients with cartilage defects. Then finally, on Slide 19, because MACI is a much less invasive procedure, the published rehab protocols are shorter and the opportunity for patients to get back to activities is much shorter than was the case with prior generations of products. So it's that combination of a broad label, a simpler surgical procedure, unsurpassed clinical data and a shorter rehab that we believe is driving the strong growth for MACI. So on Slide 20, we also believe there is a very large commercial opportunity based on the addressable market for MACI. So in the United States, there's about 0.75 million cartilage repair procedures that are done each year. And based upon a large quantitative market assessment project we did with Health Advances in 2018, which included over 200 orthopedic surgeons, approximately 315,000 of those patients meet the -- knee [ surgeries ] meet the MACI label, but we sort of departed from a typical addressable market exercise. And we asked the surgeons of the patients you see that meet the late MACI label and therefore, are eligible, what number of those patients do you actually deem clinically appropriate for MACI based on factors such as age, the size and location and defects, the willingness of patients to do rehab that's required with any cartilage repair procedure? And it basically reduced that patient number by about 2/3 to 125,000. And then because payers typically require a defect of a certain size, typically more -- greater than 1.5 to 2 square centimeters, it cut the addressable patient population down to about 60,000 patients. So even though it's less than 10% of the procedures that are done in the U.S. each year, at our price point, it makes for a very robust $2 billion-plus addressable market. And we believe that supports the strong growth that we're seeing on an annual basis for MACI. So on Slide 21, to take advantage of this opportunity in large addressable market, we expanded our sales force for the fourth year in a row, growing from about 49 to 76 territories for 2020. And in addition to the sales force expansion, we continue to make targeted investments to support MACI demand and drive further growth by targeting new surgeons. As part of the sales force expansion, we increased our target surgeon base from 3,000 to 5,000, and that's based on data. We were able to acquire and to segment surgeons that do high volumes of cartilage repair and open knee procedures that we think are high-value targets and to develop content on platforms that surgeons use, such as VuMedi and Doximity as well as focusing on peer-to-peer programs with an emphasis on new fellows. MACI is a widely reimbursed product with great access. All the large payers in the country provide access to MACI. So about 90% of covered lives in the U.S. have access to MACI. And we have a very strong case management function. MACI is approved under a medical benefit, so it requires a lot of case management to get prior approvals. And ultimately, over 90% of submitted cases are approved for MACI procedure. So very strong access and reimbursement. And having all these pieces in place, we certainly also focus on investments in terms of connecting directly with patients through patient investor programs and so on. So a very broad and comprehensive marketing effort for MACI as well. So turning to Slide 22. Obviously, there were restrictions placed on elective surgeries in March. And while we had to withdraw, like many other companies, our 2020 financial guidance, we certainly wanted to provide some perspective on how we were viewing the second quarter as it became clear that elective surgeries were going to resume. So by the time we got to April 3, based on recommendations from the American College of Surgeons and the U.S. surgeon general, 45 of the 50 states have issued orders or guidelines to suspend elective surgeries. And so we estimate that about 10% of the U.S. population that was indicated for MACI-use reside in states that allowed elective surgeries in April. That as of today, that approximately 60% of the population indication for MACI are in states that allow elective surgeries in May, and that number will be greater than 80% by June 1. And obviously, while there's many other factors that will influence ultimately how elective surgeries recover, we believe that the recovery for MACI, using the first quarter as a base, will roughly track these trends. And so if you do the math, sort of the weighted average expected volume for MACI, if nothing else changes, would be about 50% of the volume based on this analysis for -- versus the first quarter. We expect going into the third quarter that all states will be allowing elective surgical procedures, although again, the precise timing and shape of a recovery curve remains uncertain. The pace at which these elective surgeries resume depends on a number of factors, including state and local policies that will evolve over the coming months, the readiness of individual facilities to resume elected procedures and the willingness of patients to return to the clinical setting. But as I mentioned, based on what we were seeing at the time of our earnings call, both for April and orders that were booked into May and June, we expect that MACI will recover along these trend lines. And in any event, there's a number of factors that we believe position MACI for a strong recovery as elective surgeries return. So on Slide 23, first of all, obviously, there was strong underlying demand for MACI since launch throughout 2019 and into the first quarter of 2020 prior to the COVID-19 crisis. From a clinical perspective, typical MACI patients have these painful cartilage injuries that severely limit their activities and impact their quality of life. And they're going to heal simply with the passage of time. So we believe a large percentage of these patients ultimately will seek treatment for their injuries. And MACI patients typically are young, generally active and healthy patients who are less likely to have the type of risk factors associated with COVID-19 that might cause concern, and keep patients in older demographics such as potential hip and knee replacement patients from seeking elective medical care. So we think that favors MACI recovery as well. Third, MACI procedures are performed on an outpatient basis, over 95% of the time. And they can be performed either in a hospital outpatient surgery center or in ambulatory surgery center. So we don't expect MACI procedures to be impacted by constraints around hospital bed capacity, et cetera. We know that orthopedic surgeons or surgeries are a significant source of revenue for hospitals and surgery centers. We believe that most hospitals and ASCs intend to expand operating room capacity as restrictions are lifted, and that the orthopedic surgeons are intending to increase their procedure volumes to make up for lost revenue. And MACI is well positioned in this environment, in that it has a favorable reimbursement profile for both the surgeons and facilities. And so we don't believe this should limit utilization of MACI as well. And then finally, we have a relatively unique situation where we've been able to stay connected with surgeons and patients throughout this period. So many orthopedic surgeons are connecting with patients or were connecting the patients via telemedicine and our representatives were supporting those surgeons through virtual sales calls that included digital MACI content. Our reps coordinate with our case management team who continue to work with surgeon offices and patients to move cases through the pipeline, to get prior approvals, and then to be ready to schedule or reschedule cases as soon as surgeon practices opened up. So we have a rich pipeline of cases that are ready to be scheduled, are being rescheduled as surgeons open their practices, and we believe this pool of patients could quickly move through to surgery. So overall, again, we believe that MACI is in a very strong position for a recovery. And we're excited that the states are moving forward to open up elective surgeries again. Turning to Slide 24 and turning to our burn care franchise. I'll just start with a high-level overview, in that the treatment pathway for burn patients generally is determined by the size and depth of the burn injuries. And these range from superficial first degree burns that will heal on their own, to severe deep partial and full-thickness burns that typically require hospitalization. And those are the types of patients that we focus on. And as a general matter, patients with full-thickness injuries of any size and partial thickness burns greater than 10% are most often transferred from a general hospital to a specialized burn center. And these injuries, which damage both the epidermal and dermal layers of the skin require both debridement or removal of the eschar, or nonviable burned tissue. And then grafting of that wound area, typically with either autografts or a permanent skin replacement such as Epicel. So turning to Slide 25, making sure removing the eschar as quickly as possible is critical in terms of the care of these patients for a variety of reasons. First of all, this burn tissue is a breeding ground for bacteria and leads to infections and sepsis. There's further deterioration due to inflammatory responses. And the wounds can't start healing until you remove this tissue. So it's very important to remove the eschar as early as possible. The current standard of care for removing eschar is surgical removal. So essentially, you take a 2-dimensional knife and you're slicing away at a 3-dimensional burn and burn tissue until you get to healthy tissue. And the way you know you get to healthy tissue is because there's a lot of blood loss. So essentially, there's a lot of viable tissue loss, blood loss, and it's a very traumatic procedure for the patient. So clearly, there's an unmet need for selective and effective debridement treatment for these kinds of burns. And we believe that NexoBrid, which is the product that we licensed in last year, meets that need. So on Slide 26, NexoBrid is an enzymatic debridement agent. It's approved. It's a biological orphan product in the U.S. It's been approved in Europe and other OUS markets. Early last year, the pivotal Phase III DETECT study, top line data was released, and the study met its primary end point in all secondary end points. We've been working towards a BLA submission since we licensed the product last year, and that submission remains on target for mid-2020. As I mentioned, it's an orphan biologic, so there will be orphan and biologic exclusivities for the product. And the U.S. Biomedical Advanced Research and Development Authority, or BARDA, has funded the majority of this program. As I mentioned earlier, the current standard of care is surgical. The reason BARDA is interested is if there is ever a mass casualty event in the U.S. with a significant number of burn patients, you really don't have enough surgical teams or OR space to treat hundreds or even thousands of patients at a time. So it's very important to have a product like NexoBrid, which doesn't require surgical removal or OR space in response to that kind of issue. So NexoBrid, the product itself is a biological product that contains a mixture of proteolytic enzymes. It's a topical application at bedside. So it's topically applied and 4 hours later, it is removed. And what it does is enzymatically removes the burn tissue while retaining the viable tissue. And I think that is clearly illustrated in the images on the bottom of Slide 26, where when you have a burn, like is presented on the left-hand image, it's really hard to determine the margins, the depth of the burn, et cetera. And again, you would just take a knife and start slicing away until you got to healthy tissue, whereas if the patient was treated with NexoBrid, you can see that the protected area of the skin where the patient was wearing a watch remains intact, and that wound is otherwise debrided and ready for some sort of grafting. So we believe that NexoBrid will change the standard of care, and we're very excited to have the opportunity to bring the product to the U.S. market. Slide 27, as I mentioned, top line results for the study met its primary end point of complete eschar removal as well as all secondary end points, including lower incidence of surgical eschar removal, lower blood loss during eschar removal compared to standard of care, and a shorter time to eschar removal. So all important clinical outcomes. And again, excited to be able to bring this product to market, hopefully, mid next year. Finally, moving to Slide 28. Our second commercial product in the U.S. currently is Epicel, which, as I mentioned, is the only permanent -- FDA-approved permanent skin replacement for adult and pediatric patients with large full-thickness burns. So Epicel is an extremely important and potentially life-saving treatment option for these patients with catastrophic burns. We're typically treating patients with 60%-plus burns in terms of their body surface area. And these patients typically had very little healthy skin for autografts. On Slide 29, the Epicel production process is much like MACI, where we take 2 small [ Post-it ] stand size biopsies of Epicel. They're sent to our facility here in Cambridge. We isolate the keratinocytes, which are the predominant cell in the epidermal layer of skin. When you culture these cells, they form a thin sheet to this cell -- 2 to 8 cells thick. We apply a petroleum gauze. We ship these overnight to the burn centers, where the grafts are applied 7 to 10 days later in a takedown procedure, the petroleum gauze is removed and the healthy skin is exposed. So it's a remarkable product and remarkable to think that you can take 2 small biopsies and within a few short weeks, have enough skin grafts to cover the patient's body. And the benefits of Epicel are quite profound on Slide 30, present some data that was published last year in the Journal of Burn Care & Research, basically showing that at each decile of burn, which is how these patients are managed, there was a profound survival benefit with Epicel versus standard care. Turning to Slide 31. We think our burn care portfolio provides a very substantial market opportunity for us. As I mentioned earlier, there's about 40,000 hospitalized burn patients in the U.S. each year. Only about 600 of those patients, or less than 2%, have body surface area burns greater than 40%, which is typically what we treat. So a very small percentage of those patients, but still a very robust $100 million-plus market opportunity for us with Epicel. By contrast, with NexoBrid, virtually all hospitalized patients will have to have some sort of debridement so we'll have a much broader patient population that makes up the addressable market for NexoBrid, which we believe is $200 million plus. So adding NexoBrid to our portfolio essentially triples the size of our addressable market and certainly brings what we believe will be critical mass to our burn care franchise. Finally, turning to Slide 32. Just to note that we will continue to focus on, in addition to MACI life cycle management and other life cycle management opportunities for Epicel, strategic transactions to maximize the long-term value of the company and we typically look at 3 different areas: one, adding products that would be complementary to our current sports medicine product with MACI; additional products for severe burn patients, to complement our burn care portfolio; and then, of course, given our capabilities in advanced cell therapies, new verticals that have similar kinds of characteristics to our current franchises. So I'll close there and leave the last few minutes for questions.

Thank you. We will now transition to the Q&A portion of the presentation. [Operator Instructions] Our first question is could you please speak to the aspects of your business process or cost structure that will improve going forward as a result of COVID-19? What do you see as the biggest permanent change in your business or in the industry?

Well, for our business, we do not believe that COVID-19 will have a long-lasting impact. As I mentioned earlier in the presentation in terms of the profile of our business model. So first of all, it starts with the patients we are treating. Last year, the average age of our MACI patient was about 33 years old. So these are young, healthy, active patients whose quality of life clearly is impacted with these knee cartilage injuries. And again, we believe that the majority of those patients will continue to seek treatment and certainly, post any sort of COVID-19 disruption. And likewise, for Epicel, for these severe burn patients, there are no other permanent skin replacements for these types of burns. So we think our business will remain on track, as I mentioned early on, and that we will -- with continued revenue growth, we'll remain on the path we were on, which is that we expect our margins to -- we expect double -- strong double-digit growth for our overall portfolio in the long term. Our gross margin's in the mid-70% range, that will not change with NexoBrid, which has a similar profile based on the economics of the deal. And then our operating margins will be in the 20-plus range. So we think we have a very robust business moving forward.

Thank you. Given this session will concludes at 1:10 p.m., this concludes the Q&A portion of the presentation. We will now turn it over to Mr. Nick Colangelo for any closing remarks.

Well, I just wanted to say thanks again for joining us today, thank you for your interest in Vericel, and I hope you all stay safe and healthy. Have a great day. Thanks.

To conclude, we'd like to thank Mr. Nick Colangelo of Vericel for presenting today and you all for attending the 2020 Virtual UBS Global Health Care Conference. You are now free to disconnect from the conference line. Thank you.