Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Hello, everyone. Good morning. My name is Raphael Taubenfeld. I'm a member of the Healthcare Investment Banking team here at JPMorgan. Welcome to the final day of the Virtual JPMorgan Healthcare Conference. We have the pleasure here with us today to have Nick Colangelo, President and CEO of Vericel here with us. We'll be going through the presentation in a moment. [Operator Instructions] And with that, I'll hand it over to Nick.

Well, thank you, Raphael. It is great to be here today, and we really appreciate the opportunity to present for the first time at the JPMorgan conference. And before I begin, I'll just remind those in attendance that this presentation contains forward-looking statements, so you should refer to our documents on file with the SEC for further information. So starting at Slide 3. Vericel is a leader in advanced therapies for the sports medicine and the severe burn care market. We have a portfolio of innovative cell therapies and specialty biologics that have significant barriers to entry. So we currently commercialize 2 products in the United States, MACI and Epicel. And these are products that we acquired from Sanofi back in 2014 when they divested part of what was the former Genzyme biosurgery business following the acquisition. And these products are both regulated by the FDA as combination device biologic products that use patient's own cells to repair tissue and restore function. So MACI is our leading product. We launched MACI in 2017 for the treatment of cartilage defects in the knee. It's the leading restorative cartilage repair product on the market and the only FDA-approved product in its class. Epicel is our second commercial product, and it is the only FDA permanent skin replacement for patients with large total body surface area burns. And as part of our corporate development strategy, our goal has been to build around these cell therapy products and our commercial franchises. And to that end, we added an exciting new product called NexoBrid back in 2019, which is a product that removes eschar from these severe burned patients or the tissue that's been burned prior to covering those wounds, which is what you do with Epicel. So a great strategic fit for us. And our portfolio is very unique in that we have, as I mentioned, significant barriers to entry. So because MACI and Epicel are regulated as combination device and biologics, there is no biosimilar pathway that's been established. Likewise, there's no 510(k) pathway. So -- and with NexoBrid, it's an orphan biologic product, which will have 12 years of exclusivity upon approval. So we believe that we have a very long runway with these products to continue generating sustainable top-tier revenue growth, as shown on the next Slide 4. So these are very large markets. We've been growing prior to COVID disruption in 2020 at a 30% compound annual growth rate in terms of total revenues. Even with COVID in 2020 as we announced -- preannounced earlier this week, both products had grown for the year, certainly not at the rate we would have expected absent COVID. But even taking that into account, we've generated a 20% CAGR in terms of revenue growth over the past 3 or 4 years since we launched MACI. And again, these are very large underpenetrated markets, and we believe we'll be able to sustain this top-tier revenue growth for many years to come. One of the very unique aspects of our business is that it's a highly attractive business model with a robust profitability profile. So at the current time for MACI and Epicel, our marginal cost of goods is about 20%. So about 80% of incremental revenue falls to the gross margin or gross profit line. And you can see that as we've generated pretty close to 70% margins over the past year or so, and we expect that to move into the mid-70s with increasing volumes over the coming years. These are premium-priced products. MACI implant generates about $40,000 in revenue for us. And Epicel order on average is about $200,000. So high-value products, and very concentrated call points. So we expanded to 76 territories and sales reps for MACI in 2020. And we have about 10 commercial folks in the field for Epicel. So that gives us a lot of leverage on the operating margin line and about 50% of incremental revenue falls to the adjusted EBITDA line. And we expect that to continue going forward. That's allowed us to have -- essentially turn the corner on becoming cash flow positive. Last year, in 2020, our cash and investments increased by $21 million, and we ended the year at about $100 million in cash and investments and no debt. And one of the other things that's been great is over the past few years, we've really brought on a great group of institutional shareholders, and now about 90-plus percent of our shares are held by institutional shareholders. This slide just shows -- the next slide, Slide 7, shows the revenue progression over the past several years. And again, obviously, it was -- growth rates were camped down during COVID-19 in 2020. But nonetheless, we generated record MACI implants and record Epicel graphs that drove full year revenue growth for both products despite the impact of COVID-19. In our pre-announcement this week, we highlighted a number of financial highlights as well as business highlights as set forth on Slide 8. The financial results, as I mentioned, we had record fourth quarter revenues and full year total net revenues for the combined portfolio. We had record quarterly and full year MACI revenue, and we had record fourth quarter and full year Epicel revenue, which was the second highest quarter in history for Epicel. And again, generated about -- an increase of about $14.5 million in cash and investments in the fourth quarter and about $21 million for the year as a whole. In terms of business updates and highlights, the underlying growth drivers for MACI were -- remain intact, in line with our expectations. We had said on our third quarter earnings call that we expected to receive biopsies for MACI from about 1,500 surgeons, and that's exactly what we ended up doing for the year. We had a record quarterly high in terms of the number of surgeons taking MACI biopsies in the fourth quarter. We had double-digit growth in MACI biopsies in the quarter, a record quarterly high. And we also had a record number of biopsies for a month in December. And of course, we generated additional revenue from BARDA procurement of NexoBrid for national response preparedness. So on to Slide 9. We believe that Vericel is very well positioned for significant revenue growth in 2021 and continued robust financial results. So as I mentioned, those key drivers, underlying drivers of MACI growth are expected to accelerate throughout 2021 as we expanded our sales force, and there'll be in place for the full year, for the first time in 2021. And of course, assuming that the COVID headwinds ease as we move out of the first quarter. Epicel, given its strong performance in the quarter, which it was up 65% versus the fourth quarter of 2019, we expect Epicel on an annual basis to return to high single-digit growth. And again, additional close to $4 million of NexoBrid revenue from continued BARDA procurement. And we expect that this significant revenue growth will allow us to maintain the marginal revenue contribution to the gross profit line and the adjusted EBITDA line that I mentioned earlier. So turning to our cartilage repair franchise on Slide 10. Just by way of background. So articular cartilage is present at the end of the bones and all the joints. And it's a highly specialized connective tissue in the joints. The function of cartilage is to provide a smooth lubricated surface so that you have virtually frictionless movement within the joint, facilitates transmission of loads to the underlying bone and prevents against shearing and other kinds of forces. And chondrocytes are the resident cells that are responsible for producing cartilage. Slide 11 talks about defects to the cartilage and what the treatments are. So articular cartilage injuries are a significant cause of musculoskeletal morbidity. And cartilage defects are found on approximately 60% of knee arthroscopies. And the damage occurs from either an acute injury, repetitive trauma or degenerative or inflammatory conditions like osteoarthritis and rheumatoid arthritis. And the issue with cartilage injuries is that cartilage, unlike most every other tissue in your body, does not have intrinsical healing properties. So there are no blood vessels that bring repair cells to the cartilage. There's no lymphatics that take away cellular and other debris, and there's no nerves. So once you have a cartilage injury or defect, and the kinds of defects that we treat are focal defects that go all the way down to the bone so it's like a pothole on the surface of the knee. You're basically -- obviously, you have pain, joint dysfunction, but you're heading down a road to osteoarthritis and ultimately, partial and full knee replacements. So that's what we're trying to prevent. On the bottom of Slide 11, we show sort of the 3 buckets of treatment options for patients. So when you present to your orthopedic surgeon with knee pain, often, you'll get an x-ray and an MRI. And if there's a suspected cartilage injury, it's very difficult to tell the magnitude of the injury through those diagnostic methods. And typically, what will happen is the patient will be brought in for a diagnostic arthroscopy. And at that time, surgeons will typically do what's called the chondroplasty, where if you have fragments of cartilage, freight cartilage or floaters in the joint, they'll clean it up in the chondroplasty procedure. And that's the time when they actually take a biopsy for MACI most often. So that's a palliative treatment. It can provide some pain relief, but it obviously doesn't fix the underlying defect. In the middle bucket of procedures are what are called marrow stimulation procedures, typically microfracture is one that many people have heard of. And again, because the defect goes all the way down to the bone, what the surgeon will do is essentially drill into the bone so that the bone marrow bleeds into the defect, essentially forming a fibrocartilage scab. The theory is that the mesenchymal stem cells within the bone marrow, which are the precursor cells, the chondrocytes will differentiate into chondrocytes and start producing cartilage. But in reality, that fiber cartilage tissue doesn't have the same properties as the native tissue, and that's why there are issues with durability of repair. And it's really falling on a favor, especially in larger defects. The final bucket on the right are the restorative techniques. And again, MACI is the only FDA-approved product in that class. The only other options for surgeons are cadaver based, so they'll take a cadaver knee and basically implant in what is called osteochondral allograft. So they take a plug of bone and cartilage and implant it in the knee. Bone will typically integrate, but the cartilage does not. And so the only other product out there is called DeNovo NT, where it's a product that's made from midst juvenile cadaver cartilage. It's made into a paste and inserted into the defect. Those latter to our tissue regulated products. They really haven't gone through the BLA process as MACI has, but they are available for surgeons to use. So moving on to Slide 12, just to give you an overview of the MACI product itself. It consists of a patient's own cells seeded at a density of 0.5 million to 1 million cells per square centimeter onto a resorbable collagen membrane that's shown on the left. And again, the overall procedure is that during an arthroscopic diagnostic procedure, a biopsy, a Tic-Tac size piece of a patient's cartilage will be taken from a non-weight-bearing portion of the knee, sent to our facility here in Cambridge where we isolate the chondrocytes, expand them, typically cryopreserve the cells until a patient and surgeon are ready to move forward with the surgery, at which time we -- all the cells, further expand them, see them onto the membrane, and you can see in the middle image on the left, counter sites are spindle cells. They hold on to the collagen of membrane during the production process and afterwards. And then we put it in final containers, ship it out overnight to the surgical site. At the surgical site, the surgeon will de breed the wound, clean it up. They'll cut the membrane to the size of the defect, glue it in with commercially available fiber and glue. And then those cells will migrate down the collagen fibers to the subchondral bone, where they'll start to expand, produce extracellular matrix. And basically fill that defect with the hyaline cartilage that's naturally present in the knee. So on the next slide, just I wanted to cover the sort of growth drivers, the reasons we believe that MACI is growing so strongly. The first starts with the label. So there was a prior generation of this technology called Carticel. It was made essentially the same way in early stages, taking a biopsy of the patient's cartilage, expanding the cells and then it was finished in a cell suspension. So it made for a difficult surgical procedure, as we'll talk about in a moment, but it also had a more limited label. It was indicated only for defects on certain parts of the knee. You had to have failed the prior surgical procedure before it would be covered by payers. And with MACI, we actually have a very broad label. So MACI is indicated as a first-line treatment to treat cartilage defects anywhere in the knee. There's no limitation on the size of the defect, the location of the defect, whether there's bone involvement or not. So what that means is that MACI is available for a larger group of patients, as we've seen in its growth rate. Onto the next slide. From a surgeon's perspective, this slide really tells the entire story. So on the left-hand side is an image of the Carticel procedure. And because, again, it was a product that was finished into cell suspension, it made for a very difficult procedure. It was highly invasive. You had to open up the whole knee. By label, you take a periosteal harvest off the shinbone typically into micro suture in place, make sure there was a watertight seal and then inject the cells. And we liken that to trying to spackle a wall with water. So it was very difficult, and it really became somewhat of a niche product for sort of the top cartilage repair surgeons. But they use the product because we have durability of repair data out to 20 years. So once you regenerate the cartilage, it can last the lifetime, barring another injury. On the right-hand side, you can see just how simple and less invasive a MACI procedure is. So it's administered through a mini arthrotomy. So that has a small 1- to 2-centimeter incision. Again, the membrane is cut to the size of the defect. Simply glued in place and done. So it reduced, obviously, the invasiveness of the procedure as well as the time it takes and the complexity of doing the procedure. And I think we've all seen examples like this where you've taken a highly invasive surgery, made it a minimally invasive surgery, and you see how products take off, which is the case with MACI. In terms of clinical data, MACI is the only product, as I mentioned, that's been approved by the FDA in its class. It's the only product that demonstrated superiority versus microfracture in a 2-year outcome in the pivotal SUMMIT study. And that data on the left -- is on the left -- on the right-hand side is the impressive response data that you see with MACI. So nearly 90% of patients treated with MACI had what was deemed clinically appropriate or a meaningful response, which meant a 10-point improvement on the KOOS, both the KOOS pain and function scale. And that compares to microfracture, where about 1/3 of patients did not have a positive response, and therefore, likely ended up having another surgery. And we published data a couple of years ago. There was a 3-year extension study. So we followed the patients out to 5 years. And as you can see from these graphs, on both the pain and function scores, you see that the improvements that we're seeing with MACI at 2 years carried all the way up to 5 years. So on a similar path to Carticel, where you get this durability of repair once you regenerate the cartilage. Finally, the MACI rehab, because it's a less invasive surgery, is much shorter than was the case with Carticel. And the graphs below just show some published data showing that you're back to full weight bearing within 6 to 8 weeks versus about 12 weeks with Carticel, which obviously carries through the whole rehab protocol. So it's a combination of a broader label, a much simpler, less invasive surgery, great clinical data and a shorter rehab that we believe is driving the strong growth that we're seeing with MACI. And there's a large market opportunity out there for us. A couple of years ago, we did a very large quantitative market assessment project with a group called Health Advances, who had also worked with Genzyme when they owned the business. And so I had a good familiarity with the business. And it's well understood that about 0.75 million cartilage repair procedures are done each year. The vast majority of those are chondroplasty and microfractures. But we did a quantitative survey with over 200 orthopedic surgeons and sports medicine surgeons. And we asked them, all the patients you see, what percentage of those patients fall within the MACI label. And obviously, it's a very broad label. So a very large number of patients meet the MACI label requirements, over 300,000 patients. But then we asked another question, and this is where we sort of departed from a normal TAM analysis and said, but we know you profile patients based on a number of factors. And so how many of these patients that are eligible to be treated with MACI, do you actually deem to be clinically appropriate. And they make those decisions based on the size of the defect, the location of the defect, the age of the patient, whether they have the ability to engage with in rehab that you have to do with any of these procedures. And based on those factors, reduced the addressable market by about 2/3 down to 125,000 patients. And then, of course, because insurance plans require that the defect be 1.5 to 2 square centimeters or greater, we took a cut for that, and it came down to about 60,000 patients per year. So it's less than 10% of all the procedures that are done each year. But obviously, at a 40,000 price point, it makes for a very large market. And certainly, supports the growth that we've seen since we've launched the product. We do -- as we've gone through this past year with the COVID disruptions, do like to make the point that we think MACI is very well positioned to perform in these kind of challenging environments and ultimately return to its prior growth trajectory. And there are a number of reasons for that. First and foremost, the underlying market demand for the product. Obviously, we saw strong adoption of MACI over the past couple of years. We saw a very strong recovery even in the middle of 2020 once the first wave of COVID had subsided. So we are very well positioned from that standpoint. MACI patients are typically young. The average age of the clinical study was about 35, and we recently published a paper on the first 1,000 patients treated in the U.S. And the age distribution was the same, where it's a bell curve around sort of the mid- 30s. So from the teens up into the 50s, but centered around the 30- and 40-year-old range. So these are patients that are young, healthy. They obviously had a disabling knee injury and they want to get it fixed, so they can return to activity. And they don't have sort of the risk factors for serious COVID-19 disease. Importantly, more than 95% of the time, MACI patients are treated in an outpatient setting, an ASC or an outpatient surgery center in a hospital. The only reason they wouldn't be is if they're having another concomitant procedure alongside that. So that, obviously, when hospitals become worried about utilizing inpatient beds that really doesn't impact MACI, which is obviously an important factor. And then finally, orthopedic procedures are an important part of hospital practices and group practices. MACI is a well-reimbursed procedure, and that obviously offers a lot of advantages as well. So overall, again, MACI is very well positioned to do well in these challenging environments and then resume its growth once we move beyond it. Just quickly in terms of where we make investments around MACI besides the sales force expansion that we implemented in 2020. Obviously, with this new environment, we use a lot of new virtual tools to engage with surgeons. Support peer-to-peer program on portals like VuMedi and Doximity. We continue to focus on making sure there is broad access for MACI. MACI's covered by all top 30 plans. The success rate in terms of MACI submissions being approved is in the high 80s to low 90%. We announced last week that UnitedHealthcare, the largest payer in the U.S., had expanded its MACI policy to include patella defects. It was the last of the top 10 or top 5 payers to have added that -- patella to the policy to reflect the MACI label. So that was obviously very important for us. And of course, we continue to engage with patients through a variety of social media outlets, including Google search engines, Facebook, Instagram, et cetera. So I think we have a pretty comprehensive marketing effort to support MACI as well. So I'm going to quickly turn to the burn franchise on Slide 21. So just by way of background, so the treatment pathway for severe burns is typically determined by the burn size and the burn depth. And the general practice is that if you have -- a patient has a full-thickness burn of any size or a partial-thickness burn, which means it goes down to the dermal layer but not through the dermal layer, they will be admitted to one of the 140 burn centers in the United States. And those are the types of patients we treat with Epicel, and those are the types of patients that we'll be treating with NexoBrid. So the treatment pathway is essentially, when you have these burns, you have to remove the nonviable tissue, which is called eschar, and then you figure out how you're going to cover the wounds. And again, that's where Epicel comes into play. The reason it's so important, on Slide 22, to remove the eschar as early as possible is that, obviously, it's a breeding ground for bacteria and causes a lot of infections, et cetera. Also, the body has an inflammatory response to this tissue. And so there's something called burn progression where you continue to damage the tissue. So it's very -- and obviously, you can't start healing until you remove that nonviable tissue. So very important to remove it quickly so that you can begin the healing process. Currently in the United States, the standard of care is surgical removal. So essentially, you take a knife and the surgeon will do -- basically just slice away the skin until they get to healthy tissue. And the way you know you're at healthy tissue is that there's blood loss. And so obviously, because burns are 3-dimensional, of variable depths and you are removing that with a 2-dimensional blade, you have a lot of blood loss and healthy tissue loss. So there's clearly a need for a selected and effective way to remove this eschar, and we believe that NexoBrid is the product to do that. So NexoBrid is a bromelin-based biological product that contains a sterile mixture of proteolytic enzymes that are topically applied into gel that's topically applied. And basically, these enzymes are able to recognize proteins that are denatured through thermal burns. And essentially, it dissolves away the eschar and preserves the nonviable -- the viable tissue. And you can see that in the images on the bottom. On the left-hand side of the screen, that's what a patient would present with. It's very hard to understand where the margins are, how deep the burn is, et cetera. When the patient was treated with NexoBrid, you can see that it removed the necrotic or eschar tissue, and preserve the viable tissue, which you can tell the patient was wearing a watch. And so we think this is going to change the standard of care of how these patients are treated. NexoBrid has been approved in the European Union and other countries outside of the United States. In the United States, it has an orphan biologic designation. Our partner, MediWound presented the pivotal Phase III study early in 2019. The study met all its primary and secondary endpoints. We -- MediWound submitted the BLA in June of 2020. The FDA accepted the BLA for review. And assigned a PDUFA goal date of June 29 of this year. Like our products, and as I mentioned earlier, upon approval, NexoBrid would have both orphan and biologic exclusivities. And this is a product that the U.S. Biomedical Advanced Research and Development Authority or BARDA has funded because of the concern around a mass burn casualty event. If the standard of care is surgical removal of eschar, and you have hundreds or thousands of patients at a time who have burn injuries due to a mass casualty event of any type, you really don't have the OR space. You don't have enough surgical teams to treat those patients. And that's why BARDA has begun stockpiling NexoBrid for emergency response preparedness. So I'll turn to Epicel quickly. As I mentioned, it's our second commercial product. It is the only FDA-approved permanent skin replacement for full-thickness burns greater than 30% in adult and pediatric patients. And as I mentioned, first thing you do for these patients is remove the eschar. And then you have to determine how you're going to cover the wound. And for these full-thickness wounds, really, the only option for patients are because skin is highly immunogenic, you either have to use autographs where you scrape off a layer of skin of the patient, usually run it through a split thickness measure so you can cover more area or you have to use Epicel. And when you get into the catastrophic burn category where we treat patients that can be 60%, 70%, 80% or 90% of --have that magnitude of their body surface area burned. You really don't have enough healthy skin to do these serial autographs. Epicel has made much the same way as MACI, where we take a small postage stamp-sized biopsy sent here to our facility in Cambridge. We isolate the keratinocytes, which are the predominant cell in the epidermal layer of the skin. When we culture those cells in our proprietary media, they form a sheet, 8 to -- 2 to 8 cells thick. We apply a petroleum gauss. It is shipped out typically overnight to a burn center where the product is applied. And 7 to 10 days later, in a takedown procedure, the petroleum backing is removed and the new skin is exposed. So it's a remarkably important product and a life-saving product for these patients who really don't have any other options. And this data was published, on Slide 26, a couple of years ago that showed by decile, which is how these patients are treated, the profound survival effect that Epicel has for these patients. So it's a great product, and we're very proud to be able to bring it to patients. In terms of the market opportunity, there's about 0.5 million burns in the U.S. each year, and I'm on Slide 27. About 40,000 patients are hospitalized. When you look at the number of patients that are comprised of addressable market for Epicel, there's about 1,500 patients that have 30% or greater burns and Epicel typically is used in 40% or above burns. And there's roughly 600 to 700 patients each year that fall into that category, so less than 2% of the hospitalized burn patients are -- comprise the addressable market for Epicel. But again, at the price point and the revenue per order, it's actually a nice $100 million-plus market opportunity. The wonderful thing about being able to bring NexoBrid in addition to as sort of the strategic fit from a patient treatment perspective, 3/4 or more of patients who are admitted to hospital are going to need some sort of debridement. And so it's actually a much larger market opportunity. We estimate about a $200 million market opportunity for NexoBrid. And so it nearly triples the market opportunity for us. We'll be expanding our sales force ahead of a potential NexoBrid launch to make sure we're able to capture that opportunity, and we'll have a much broader presence in the 140 burn centers in the country, and we think it will have a pull-through effect for Epicel as well. So having achieved a number of operational and financial milestones over the past several years, we're really excited about what lies ahead for Vericel as we continue to look forward to strong revenue growth, margins moving up into the 70s and operating margins moving into the 20-plus range over the next couple of years, just based on our existing portfolio. In addition to that, on Slide 30, we also obviously spend a lot of time on business development efforts. We're looking for products in the sports medicine space and the burn space. And because we have particular expertise in commercializing and developing cell therapies in the U.S. to the extent there are new verticals that have the same kind of profile as our current cell therapies, we spend time looking at those types of opportunities as well. So I will end there and allow time for some questions. And so I think Raphael, you'll be joining. And if there are any questions, we'll be happy to take them.

Great. Thanks, Nick. Very insightful presentation. And I guess to start, congrats on a strong fourth quarter, with total revenue growth of around 15% for the quarter. Maybe starting with MACI. I know you noted in the pre-announcement press release that $2 million of revenue that you would have expected in the last 2 weeks of December was likely pushed due to COVID. Can you just give us a sense and discuss how MACI performed versus your expectations as the quarter progressed?

Yes. As we mentioned in the pre-announcement, MACI was in line with expectations, essentially through all of the fourth quarter other than those last 2 weeks. And for those who are familiar with our story, we typically look at biopsy, the implant conversion rates as a long -- mid-to-longer term forecasting tool. But once we're in a quarter, it's really about how many cases have been activated and are poised to be scheduled, and that really becomes the more predictive model for us as we progress through a quarter. And because it takes us 2 weeks to manufacture the product, surgeons and patients will select a surgery date. 2 weeks before then, we start the manufacturing process. So cases tend to slot in, in those 2 weeks and the following week and the week after that. And that what's just happening as it usually does throughout the fourth quarter. After Thanksgiving, there was, obviously, cases continued to get scheduled. We hit an all-time high in terms of volume. But it didn't have quite the crescendo we had seen before. And there's really no reason we can look to based on our field intelligence and surveys we do with our key opinion leaders. It could -- a number of factors, where, again, in normal years, patients are at the office working, at their home for a week or 2 around the holidays. There's always a fight to see you can get the cases scheduled then. And in this year, that wasn't the case. They're home in November. They're home in December. They're going to be home in January, February and March. And I just think that sort of urgency to take those late-stage pipeline cases and schedule them into the holidays just was a little different dynamic than we normally see. But as we experienced after the initial surge of COVID-19, once a patient is committed to surgery and addressing the pain and symptoms that they have, those cases typically end up moving forward. So we expect that to be the case as well.

Great. And then moving to the commercial side. I know you touched on this during the presentation. But -- and you mentioned you're in the process of implementing a sales force expansion for MACI right as COVID hit last year. So can you touch on what was your average MACI sales rep productivity before the expansion? And what your expectations are regarding that productivity? And any additional sales force expansions going forward for the product?

Yes. So the history there is that prior to the launch of MACI, we basically had 21 territories for the Carticel business. And when we launched in 2017, we went to 28, pretty good uptake. So we went to 40 in 2018, filled in a few white spaces in 2019 and went to 49. And then we did a very comprehensive target surgeon and sales force sizing exercise with CS associates, and determined that based on the number of high-value surgeon targets that we wanted to commercialize to. We increased the target surgeons from 3,000 to 5,000, we increased our sales reps from 49 to 76. And we think that's the right number for us moving forward. And prior to that, each year, we had increase the sales force. We went from about $1.7 million in revenue per rep up to about $2 million in 2019. And we said we'll probably take a step back to the lower end of that range when we do a 50% expansion like we did. But we had expected to come out of 2020, prior to COVID, sort of right back at the same run rate. So we think we'll get there pretty quickly. We've tracked our cohorts of reps by year. And typically, what you see is the first full year they're in the field, which will be 2021 for the recently expanded territories, they tend to have the highest growth rate and ultimately catch up on a volume basis. And so we expect that same dynamic to occur with this 2020 expansion as well.

Great. And I guess along those lines, in terms of the COVID impact, I mean, have you seen any pent-up demand by surgeons looking to be trained on MACI? And sort of how do we -- how should we think about the cadence of new surgeons being trained in 2021?

Yes. So we gave a metric that we use -- that we said early in 2020 is a pretty good proxy for growth rate going forward. And that's in 2019, we added about 25% more biopsy surgeons. So the training is sort of not particularly relevant in terms of -- they can go online and train. They can train with a rep on an iPad. It's not like you have to go through some extensive process to be trained. What we look at in terms of is a surgeon engaged with MACI when they start taking biopsies because then there's an intent to treat the patients. So in 2019, we had grown the biopsying surgeons, about 25% over 2018. Obviously, that was impacted by COVID this past year. But we said on our third quarter earnings call that we expect it to grow from 1,400 to 15 -- approximately 1,500 surgeons in 2020, and that's what we did. And then get back to that sort of same growth rate 20%-plus for 2021. So that's our expectation going forward, especially given that, again, this is the first time that the expanded sales force will be in the field for the full year.

Great. And looks like we're wrapping up on time. So maybe I'll give you a last one here. You mentioned sort of the cash on the balance sheet, ending the year at approximately $100 million. No debt on the balance sheet. So -- and you're obviously generating significant free cash flow as we move forward. So how should we think about capital allocation for the company going forward?

Yes. Well, obviously, as I mentioned, we have a unique model, and we get -- the profitability increases pretty quickly, and that's a good proxy for how the cash flow is going to follow, right? So we have been faced with a question of, are we considering buybacks? And I think it's a little premature for that as a use of capital. But principally, what we do is we want to make sure we have adequate dry powder for business development transactions. And given our growth rates, at some point over the next 3 to 5 years, we're going to have to do some capacity expansion. And I'd say those are probably the principal sort of near-term uses of capital for the company.

Great. Well, thank you very much again for joining us.

Well, thank you very much for allowing us to be here today. It's a great pleasure and privilege. Thanks.