Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Hi. Good afternoon, everybody, and thanks so much for joining us. I'm here -- I'm very pleased to be here with Nick Colangelo, President and CEO of Vericel. And I'm going to turn it over to Nick to give a brief introduction. Take as much time as you like, but optimally enough time to leave the majority of the session for questions. But -- so with that, Nick, thank you, and I'll turn it over to you.

Well, thanks, Matt. It's a pleasure to be here today. So I was just going to review a few introductory slides regarding the company. That's maybe 5 to 10 minutes, and then we'll leave the rest of the session for question and answers. And before I begin, I'd just like to remind everyone that this presentation and my comments contain forward-looking statements, so you should refer to our documents on file with the SEC for further information. So Vericel, by way of background, for those who are not as familiar with the company, is a leader in advanced therapies for the sports medicine and the severe burn care market. And we have a portfolio of highly innovative cell therapies and specialty biologics that for the reasons I'll mention, have significant barriers to entry. So we currently market 2 products in the United States, MACI and Epicel, which we acquired when we purchased this business from Sanofi back in 2014. And these products, MACI and Epicel, are both regulated as combination device biologics by the FDA, with the biologic component being the use of the patient's own cells to restore tissue and function. So our lead product is MACI. It's the leading cartilage repair -- restorative repair brand on the market, and the only FDA-approved product that we launched back in 2017 for the treatment of cartilage defects of the knee. Epicel, our second commercial product, is the only FDA permanent skin replacement for patients with total body surface area burns, greater than 30%. And part of our business development strategy has been to build our commercial franchises around these anchor cell therapy products. And to that end, we added an exciting new product to our portfolio last year called NexoBrid, which when you think about burn care, the first thing you do is you want to debride the wound or get rid of the dead tissue or scar, and then you want to close the wound, which is where Epicel comes in. So a highly synergistic product for us. And the beauty of our portfolio is that for our current commercial products, MACI and Epicel, because they're combination device biologics, there's no established generic pathway to enter the market. So no biosimilar pathway, no ANDA pathway. And from a device perspective, there's no 510(k) pathway or similar entry for market. So anybody who wants to come in to our markets essentially has to run a full-blown clinical development to join the market. And likewise, with NexoBrid, when it's approved, given it's an orphan biologic enzymatic debridement product, it will have 12 years of biologics exclusivity. So these are products with a very long runway. We've established the company as one of the top-tier growth companies in medtech. Our compounded annual growth rate has been about 30-plus percent since we launched MACI into 2017, and we think we have sustainable long-term growth, strong double-digit growth in these markets that are very large and under penetrated in sports medicine and severe burns. One of the most attractive parts of the company is that we have a very attractive business model with a robust profitability profile. So we manufacture both of our products, MACI and Epicel, here in our facility in Cambridge, Massachusetts. And our incremental cost of goods is about 20%. So about 80% of every incremental revenue dollar falls to the gross margin line. And because these are premium-priced products and concentrated call points, about 50% of every incremental revenue dollar will fall to the operating margin or the adjusted EBITDA line over the coming years, as was the case back in 2019 before our disruption this year. So very profitable profile for the company. And then finally, we have a very clean balance sheet, about $85 million in cash, and no debt. And essentially, cash flow positive at this time, and we have a very strong institutional shareholder base as well. So that's sort of the high-level view of the company. We just reported our Q3 earnings last week, and we ended up having record third quarter MACI and total revenues. Epicel, we had the highest quarterly Epicel revenue, second highest in history. Gross margins of 70%. Record net income of $3.6 million for the quarter. Adjusted EBITDA of $6.7 million, and generated positive operating cash flow of $4.6 million. And from an operational standpoint, again, very strong performance for MACI, with double-digit growth in biopsies, implants and revenue. We received or announced the first delivery of our NexoBrid product to BARDA, so the U.S. Biomedical Advanced Research and Development Authority. So BARDA is stockpiling NexoBrid for emergency response preparedness in the case of a mass casualty event. And we delivered and generated our first revenue from that arrangement this quarter -- or third quarter as well. And then finally, we submitted the BLA for NexoBrid in the United States at the end of June, and the FDA filed that BLA for review and assigned a PDUFA goal date of June 29, 2021. So lots of progress amid all the challenging times we've experienced. One of the reasons for our strong growth in the third quarter was the continued momentum in MACI. We had a strong V-shaped recovery in the second quarter, where we -- while revenues were down in April and May, we were up about 20% in June, and that carried through into the third quarter. So a very strong result for MACI, and we can talk about reasons why MACI's bounced back so quickly. And then finally, we did expand the sales force for MACI this year, and we'll be doing the same ahead of the NexoBrid launch. And we feel that with these expansions, which are driving growth that we've certainly got a broad footprint to drive sustainable double-digit growth, as I mentioned, and that is supported by a leadership team with expertise in the development and commercialization of these kinds of advanced therapies. So we think we've positioned the company well, having developed an innovative portfolio. Achieved a number of operational and financial milestones. Next year, we expect to be a pretty exciting year for the company with the launch of NexoBrid. We believe we'll be back to our strong double-digit growth, and on the path that we've been on for 70-plus percent gross margins, 20-plus percent operating margins over the coming years. So exciting times with our current portfolio. We do focus as well on adding to our current portfolio, both in the sports medicine or the severe burn care area, and we'll continue to look at products that meet our innovation and financial hurdles in that regard. And then as the only company in the world with 2 autologous cell therapies that are approved in the United States, we also look at opportunities for similar kinds of products opportunities. And while a little -- probably less likely than the first 2 categories, it is something that we spend a little bit of time on from a business development perspective as well. So I'll end there, Matt, and I think that hopefully just gives folks a bit of an overview of the company and our recent performance, and I'll open it up to your questions.

Great. Thank you, Nick. That's terrific. Maybe one question on just the bounce back of MACI. And just what this environment has done, if anything, to sort of uptake or utilization or anything like that, whether it's site of care or level of acuity of these patients? What, if anything, has COVID had to do with the way MACI's growing?

Well, I'll just start by saying MACI is a "elective surgery", right? So when those restrictions were put in place in the second quarter, obviously, there was a pretty significant impact for MACI. And we sort of tracked available surgical capacity, and we certainly outperformed available surgical capacity even in the second quarter and came out, as I mentioned, in June, with a strong 20%-plus growth for MACI as it bounced back. And we think there's a number of reasons that MACI had such a strong recovery. Some of them are from a more macro perspective. So I think elective surgeries generally bounced back faster than folks had anticipated. I think when it first started, there was kind of a sort of conventional wisdom that when elective surgeries do come back, probably likely to favor cardiovascular and oncology and maybe things like ortho and GI might lag. And I think we've seen maybe the opposite, and you've seen some large diversified companies talk about a V-shaped recovery and that ortho is leading the way. And you hear that from folks at ASCs as well, leadership from those kinds of institutions. So I think against that general macro backdrop, then you have MACI. And as you alluded to, first of all, the MACI patient population are young, active patients. I think our -- in our clinical studies and even in our first experience in the U.S., the average age of the MACI patient is about 35. So anywhere from the teens into the 50s, but centered around sort of that 30- to 40-year-old patient. So weekend warriors, active. These are symptomatic injuries. So when you we have a cartilage injury in your knee, it's painful. You lose function. And cartilage doesn't heal on its own. It's one of the only tissue in your body that doesn't have intrinsic healing property. So they're not going to get better on their own. So we think that patient population is less likely to defer surgical procedures compared to, say, hip and knee replacement, older patient population. So that's number one. Number two, MACI is an outpatient procedure. It's performed in an ASC or a hospital outpatient surgical center more than 95% of the time. So even when there are restrictions, those typically relate to in hospital bed utilization, and that just doesn't apply for MACI. It's well reimbursed. We have case managers who help move these cases through the pipeline and get surgery scheduled. So we think that has played a very significant role in MACI's strong recovery since the pandemic began.

That's helpful. Yes, certainly, ASCs were a factor. And I guess the same question for Epicel. What's the -- what has been, if anything, the sort of impact, trauma as a profile in the COVID pandemic world? But where does a Epicel fit in?

Yes. Well, as we mentioned on our third quarter earnings call, since May, Epicel has been pretty consistent on a monthly basis. And we posted about $6.7 million in revenue for the third quarter, second highest quarter all-time for Epicel. So we think the performance has been pretty strong. Now these are obviously catastrophic burn patients, with burns typically over 40% and anywhere up to 90-plus percent of body surface area that's burned. So it's an emergent issue, and these patients need to be treated. So it's a little less about sort of hospital bed availability, and it's more about treating these patients. Now I'll say back in April, we did see sort of below normal activity for Epicel, and I just think there was almost paralysis of the system back then before it became known, sort of what was going to happen. But since that time, we saw essentially the top of the funnel, patient biopsies remained sort of in the normal range. And now it's performing very well, and we expect that to continue. We mentioned on our third quarter earnings call that the trends we had seen in the third quarter had moved into the fourth quarter as well.

And you also mentioned the bounce back of orthopedic procedures. I mean a pain-oriented patient is a motivated patient is part of it, but I think there's also this recognition that these are the kinds of procedures that really mattered financially to a lot of these centers. And so their absence left a big -- they made a pain oriented hospital network, a pain motivated hospital network. How does MACI fit into that in terms of just profitability? It's hard to match cardiac surgery and orthopedics, but how does it line up?

Yes. Well, I think that's an important point and one that we often mention that, obviously, these facilities and these practices are trying to make up for lost revenue. And we, as I mentioned earlier, think that MACI is pretty well positioned in that regard as well. It's a well-reimbursed product. So MACI has its own J-code. And so all major plans provide access for MACI. So from that standpoint, it's a positive. From a reimbursement for the procedure itself, it's one of the top reimbursed cartilage repair procedures. So that works well. And then, of course, there's an accompanying facility fee, which we spend a little less -- that's a little -- not really our part of the world, but our understanding is that it's a pretty attractive reimbursement as well. So in normal times, I think people think, hey, this is great for patients. We're well paid and well reimbursed. Why wouldn't you do MACI procedures? And I think that sort of translates into this world as well.

Okay. And these are also patients that you're not really -- you're not taking away a knee -- an arthritic knee patient that's indicated for a hip or knee replacement? This is a different patient group. So this has upside or...

Yes. Agreed.

So with that in mind, what's the -- you mentioned a fair amount of payer coverage, but what what is the -- what are the constraints or the key catalysts or the things holding back the growth, if anything, education? Or is there incremental coverage and reimbursement that's needed? Is it -- what's crowding out in these centers? What would you say is the biggest challenge? Not that you're having much of a challenge, is it?

Yes, it's not having much of a challenge, but there certainly are levers for growth that we focus on. And so I'll just sort of address and then -- the reimbursement issue. I mean, we have widespread coverage. It's really well covered. And so we really don't have a lot left to do on that front at this stage, which was great. We had a predecessor product, and we were able to sort of convert those policies over to MACI in pretty short order. So coverage has really been good. It's really, over the last couple of years, making sure that the coverage for MACI in the medical policies reflects the broader label that MACI has compared to the predecessor product. And that's essentially done with one exception at this point that hopefully will be done soon. So really, it's really more a focus on the other growth drivers for MACI. So number one, and we laid this out on our third quarter earnings call, relates to increasing the number of surgeons that send biopsies in. And we had given a few metrics that in 2019, the number of orthopedic surgeons sending in a biopsy for MACI had increased about 25% to 1,400 surgeons out of our target universe of about 3,000 at the time. And that even this year, while there was a lot of disruption, obviously, we expect that number of biopsying surgeons to grow to about 1,500 surgeons. So that's been a prime driver for us. And as we've increased our sales force to call on 5,000 orthopedic surgeons who do high volumes of cartilage repair. We still got a ways to go to add new surgeons that are engaged with the brand. And we said on our call that we expect that in 2021, we'll get back to those growth rates we saw in 2019, which were sort of 20-plus percent growth in surgeons sending in biopsies. And that's a pretty good baseline growth rate for the company. There are levers on top of that, incremental price increases. And then really the second driver is each surgeon sending in more biopsies on average, which is really a proxy for saying, I've identified more patients in my practice that I think MACI is applicable for. And we've seen each year prior to this disruption that, that average biopsy per surgeon grows. And it has a multiplicative effect, right, because you're getting more surgeons, sending in more biopsies. And if the conversion rate, which is the last driver of biopsies converting into implants remains the same, then you've obviously got strong growth. And we focus on each one of those levers, and we believe they have a pretty powerful cumulative and multiplier effect.

Okay. Fair enough. And then maybe just on sort of like the way clinicians are looking at this procedure, is this -- oftentimes, there's an element of like how much time or bed space or OR is it taking versus other things I could be doing? How does it stack up in that regard?

Well, I don't have great visibility into -- and there was a lot of discussion when we sort of entered this environment around, first of all, again, which therapeutic areas would be prioritized coming out of the COVID-19 restrictions? And then within orthopedics, how would things be prioritized? And to be honest with you, that's really not a discussion point. So I don't think there's any sort of, I'd rather do, because the folks doing hips and knees are different than the ones who are typically doing MACI procedures. And so there's no trade-off that I'm aware of that would say something would get prioritized over MACI. I do think for the reasons we talked about that MACI's had a pretty robust recovery because there are a lot of motivated patients that are in a lot of pain. They've got some time right now, where many people are working from home to go through that initial rehab. So I think we're -- it stacks up pretty well, and I think we've seen that in the volume growth.

And maybe just finally on this category, just so we could talk a little bit about, as I'm sure you have in the past, is just what the market drivers are? And where you are in terms of penetration? And there's obviously a lot of demographic drivers that go into spine and orthopedics and muscular, skeletal surgery in general, but what are some of those that are driving this particular indication? And -- so how do you think about market growth and penetration?

Yes. Well, we talk about our addressable market quite frequently. There's a large number of cartilage repair procedures that are done each year, about 0.75 million. We did a very large quantitative market assessment a couple of years ago with over 200 orthopedic surgeons and payers. And kind of started with the traditional hay of the patients you see, how many fit within the MACI label. It's a pretty broad label, as I mentioned earlier, defects anywhere in the knee, no limits on the size, location, et cetera. So a good portion of that -- those procedures fit within the MACI label, about 300,000. But we know that physicians have certain profiles in mind. And in this regard, we differed a little from a typical TAM and said, okay, but of those that fit within the label, who would you deem to be clinically appropriate based on the size of the defect, the location, the age of the patient, whether they can do the rehab required with any cartilage repair procedure. And that cut it down to about 100,000-plus patients. And then because all the plans -- while the plans typically require that a defect be either 1.5 or 2 square centimeters or larger, that took it down to about 60,000 patients per year. But at a $40,000 price point, it makes for a pretty robust market opportunity for us. So we've -- I think people can sort of calculate the number of implants that are done each year and the number of biopsies we've received in 2019 just based on sort of the conversion rates. And we're probably about 10% penetrated from a biopsy perspective into the market and less than that on an implant perspective, probably about half of that or less. So there's a long runway ahead of us with, as I mentioned, significant barriers to entry, no near-term like competitors. So I think this is a market where we expect to see strong double-digit growth for years to come.

That's great. Maybe not to skip over Epicel, but maybe talk a little bit about the future and your NexoBrid pending approval. Maybe if you think about the growth equation for this year for Vericel and ex, I know it's hard to say this, but ex the COVID impact, how does that change, say, I guess, assuming that you're able to get approval and you're ready to launch sometime in the back half of the year, how does that change, that growth equation heading into the end of next year and the following year?

Yes. Well, we believe that NexoBrid will be a growth driver in 2022 and beyond. So we submitted the BLA for NexoBrid in June of this year. And so the -- with the standard review, it means the PDUFA date is June 29 of next year. And then once you go through the P&T Committee process and launch process, we've said we'll probably start to recognize commercial revenues from NexoBrid in the fourth quarter of next year. And then beyond -- '22 beyond is where we'd really see the impact of NexoBrid. Of course, BARDA does have a procurement contract for NexoBrid. We get about $1 million of revenue a quarter from now through the end of 2021, but then it really will be commercial focused. And if you think about the addressable market for severe burn patients. These are hospitalized patients. So there's about 0.5 million burns in the U.S. each year, about 40,000 patients are hospitalized. And the ABA guidelines are essentially that if you have a full-thickness burn of any size or a partial thickness burn greater than 10%, you should be admitted to one of the specialized -- 140 specialized burn centers around the country. Of those patients, there's probably only 600 to 800 who have 30% or greater body surface area burns that Epicel is used for. So it's very small percentage, less than 2% of patients are the sort of addressable market for Epicel. But again, the average order's a couple of hundred thousand dollars for each Epicel order. So it's a pretty robust $100 million-plus market opportunity. The difference with NexoBrid is that you sort of play at the top of the funnel. So most of those patients, the 40,000 that are admitted to hospitals are going to have to have some sort of debridement right now, it's surgical. You basically take the dead tissue from the burn and cut it away with a knife, NexoBrid is an enzymatic debridement agent where this mixture of proteolytic enzymes can recognize proteins that are denatured through thermal burns, and it essentially dissolves the dead tissue and leaves the viable tissue. So it's a great advancement, we believe, in the standard of care. And again, because you're playing sort of at the top of the funnel, it'll give us a much broader access to all of the 140 burn centers. We believe it's a couple of hundred million-dollar-plus market opportunity. So essentially triples our market opportunity in the burn care area.

Okay. So then a nice add to growth, certainly, it sounds like. And anything, I guess, how do we think about coverage and that aspect of growth, and particularly for NexoBrid?

Yes. In terms of reimbursement coverage?