Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to the third day of the 41st JPMorgan Conference. Here we go. We're thrilled to have you here, and we're thrilled to have the Vericel team as well. We've got Nick Colangelo, President and CEO, here to present. I'll go ahead and pass it over to Nick.

Okay. Well, thanks, [ James ]. It's great to be here today. And before I begin, I just want to remind everyone that this presentation contains forward-looking statements, and you should refer to our documents on file with the SEC for further information. So for those of you who are not as familiar with our company, Vericel is a leader in advanced therapies for the sports medicine and the severe burn care markets. We have a portfolio of highly innovative advanced cell therapies and specialty biologics that are really focused on changing the standard of care for patients with cartilage injuries and severe burns. We currently market 2 products in the United States. They're both advanced cell therapies, MACI and Epicel that are regulated by the FDA as combination device biologic products. And obviously, the biologic portion being the use of a patient's own cells to repair tissue and restore function. So MACI is our lead product. We launched MACI in 2017 for the repair of knee cartilage defects. And it's become the leading restorative cartilage repair brand in the market. Epicel is our second product. It's indicated for the -- it's a permanent skin replacement for the -- for patients with large severe burns. And we're really excited that our third product, NexoBrid was approved by the FDA in December. It's an orphan biologic product that's highly synergistic with Epicel in that it's indicated for the removal of eschar or burn tissue, which is the first process in treating severe burn patients, and then you cover the wound with a product like Epicel. So really excited about that product. And one of the unique parts about our portfolio is that we have significant barriers to entry. So for MACI and Epicel, because the FDA regulates these products as combination device and biologics, there's no established generic pathway, no biosimilar pathway, no 510(k) pathway for these products. So if another company wants to enter the market, they have to run full-blown development programs, and that's very difficult for these indications, and that's why there's no near-term like competitors for either MACI or Epicel. And similarly, for NexoBrid, obviously, in addition to its patent protection, will also have 12 years of data exclusivity as a biologic. So we think that's an exceptionally strong foundation, this portfolio that will allow us to continue to deliver sustained long-term growth. And when we look out kind of where the company is positioned and how we're going to sustain that growth, it really begins with a strong financial profile that the company has. So we've generated strong revenue, profit and cash flow growth over the past years. And as we look forward, we're really focused on maximizing the key growth drivers for MACI for its current indication for the repair of cartilage defects in the knee, advancing our pipeline, which is really focused on MACI life cycle initiatives and then expand our burn care franchise with the launch of NexoBrid. So those are the factors that we are focused on to maintain our strong growth profile. And we really do have a strong track record of profit and revenue growth since we launched MACI in 2017. So from a revenue perspective, we've delivered 20-plus percent compounded annual growth rate, really driven by strong growth for both MACI and Epicel. We did preannounce 2022 full year revenues last year. So revenues are expected to be in the $164 million to $165 million range, driven by MACI, which we expect to be approximately $132 million in revenue, which is at the high end of our guidance range. And the burn care franchise, which includes both Epicel revenue and some BARDA stockpiling revenue for NexoBrid at about $32.5 million. And that was -- Epicel was a little below expectations, really driven by a bit of a decline in the large burn market and some dynamics at one of our large customers that we think impacted volume. We've also delivered a -- have a strong track record of profit growth. So we expect to announce our 10th straight quarter of positive cash flow and adjusted EBITDA. And we ended the year with about $140 million in cash and no debt. So a really strong profile for the company. And as we look forward, based on our current portfolio, plus new product launches, we expect to continue to drive strong revenue and profit growth with 20% compounded annual growth rate as we go forward. For 2023, as we mentioned in our preannouncement yesterday, we expect accelerating growth led by MACI, with Epicel growth over its second half run rate and then, of course, NexoBrid revenue in the second half of the year. And then as we look into 2024, of course, we expect further acceleration of growth given that it will be the first full year of NexoBrid revenue and hopefully launching Arthroscopic MACI in 2024 as well. This revenue growth will continue to enhance our profitability profile. So with growing revenue, we expect that our gross margins will from sort of the mid- to high 60s into the 70-plus range. And then our adjusted EBITDA margin will cross up over 30%. So really excited about the outlook for the company from a financial perspective as we move forward. So I'll start with MACI and just talk about the cartilage repair market opportunity before talking about the growth drivers that we're focused on. So knee cartilage injuries represent a significant unmet medical need. Cartilage defects are found on about 60% of knee arthroscopies. And those defects, which are like a pothole on the surface of the knee are caused by either acute or repetitive trauma or degenerative conditions. And the issue with cartilage injuries is that cartilage has limited intrinsic healing properties. So there's no blood vessels that bring repair cells. There's no lymphatics that take away cellular debris, and there's no nerves. So once you have an injury, unless it's treated, you're ending up, obviously, with pain, dysfunction, osteoarthritis and ultimately, partial or full knee replacements. And data was published recently for MACI patients that showed the longer you waited between a biopsy and implant, actually, those lesions got larger and you actually had new high-grade lesions forming. So clearly, you want to try to treat these injuries as quickly as possible. And what ends up happening and the reason why it's such a big clinical need is that patients just basically are not able to do the activities that they enjoyed prior and end up scaling back their activities. So the incidence of cartilage injuries is very large in the U.S. There's about 750,000 cartilage repair procedures that are done each year. We did a big quantitative market assessment with health advances a few years ago. And based on the MACI label, which is very broad, as I'll talk about in a moment, about 300,000 of those patients fall within the MACI label. And we took a little bit of a different approach to this because we know orthopedic surgeons or sports medicine surgeons kind of have different patient profiles for different treatment algorithms. And we asked of the patients you see that fit within the label, how many would you deem to be clinically appropriate for MACI. And about 125,000 of those patients were deemed to be clinically appropriate. And that's based on the age of the patient, the size and location of the defect, whether they think they can do rehab associated with these procedures and so on. And then because insurance companies typically require that the defect be 1.5 to 2 square centimeters or greater, do another cut for that, and we end up with about 60,000 patients a year, which at our current price point results in an addressable market of about $3 billion and obviously, certainly supports the strong growth that we've seen with MACI over the past several years. So MACI itself just quickly is comprised of a patient's own cells that are taken during an arthroscopic procedure. So a tic-tac-sized biopsy, we isolate the chondrocytes, expand them, seed them onto a resorbable collagen membrane at about 0.5 million to 1 million cells per square centimeter. And that's what's implanted surgically. And when the membrane is implanted, the cells migrate down to the subchondral bone, they begin to replicate, produce extracellular matrix that becomes hyaline like cartilage that's naturally present in the knee. So that's how the MACI product works. And we think the strong growth has really been driven by 4 attributes of MACI. First is, as I mentioned, a very broad label. So the FDA label, the indication is for defects anywhere in the knee, no limits on the size, location, whether there's bone involvement or not. So obviously, it makes a lot of patients eligible for treatment with MACI, and it's the only product that's ever demonstrated superiority versus the comparator, which is microfracture in a Phase III pivotal trial. From a surgeon perspective, MACI is a dramatically less invasive, faster and simpler procedure than earlier versions of this technology, which were basically a patient cells in a cell suspension. So it's very hard to fill a pothole with a liquid suspension. So it was a very tedious and technically demanding surgical procedure. And MACI made that much more simpler, and that's why you see this widespread adoption by a broader group of orthopedic surgeons. Because it's less invasive, rehab protocols are shorter, so very much in line now with other options with Carticel, which was the prior product, because you had to open up the knee, it was a much more invasive procedure and resulted in a longer rehab time line. So that obviously is an advantage from a patient perspective. And then the reimbursement profile is very strong. So every major plan has a medical policy that covers MACI. So it requires a prior authorization. Patients have to meet certain criteria. And over 90% of the time, those cases are approved. So very strong reimbursement profile for MACI. As we look at sort of the key drivers that drove a pretty strong result for MACI, it was up 24% in the fourth quarter and about 17% or 18% for the year. Really, the first important driver is surgeons taking biopsies, and that continued to grow in 2022. So we target about 5,000 orthopedic surgeons and about 2,000 of those surgeons sent in biopsies in 2022. And we expect that to remain a strong growth driver in 2023 and beyond. Secondly, we saw continued growth in biopsies. Over the launch period, we've had about a 20-plus percent CAGR in terms of biopsy growth that we saw continued growth in 2022, and we expect that in 2023 and beyond that. Biopsy growth will outpace sort of the general market growth for cartilage repair procedures. And then finally, the conversion rate. So when you take a biopsy, does it turn into an implant? That took a bit of a dip during the COVID period. It was pretty steady for a long time as we added new surgeons who have lower conversion rates and our experienced surgeon's conversion rates go up. When we hit COVID, that was a bit disrupted as we mentioned in our earnings call and then other times, that's basically stabilized in 2022. And as we go forward, we expect that to at least remain stable and over time back to the historical levels and beyond as the product matures. So excited about the MACI growth ahead, and those are the drivers that we are focused on. When we look at our pipeline, obviously, our current portfolio will support this long-term growth, but we're really excited about some of the MACI life cycle initiatives that we talked about, starting with a MACI arthroscopic delivery. So we announced yesterday that we expect to have an accelerated launch time line for MACI arthroscopic option for these patients. It's really another sort of major technical logical advantage. I mentioned going from Carticel to MACI was a big step. Even since we've launched MACI, we've developed custom cutters, so surgeons can score the cartilage defect and then stamp out the membrane, you get an exact fit. That's proven to be very popular. And an arthroscopic delivery option is the next major advancement. After meeting with the FDA and the Type C meeting last month, we will be moving forward in 2023 with a human factors validation study. So instead of a clinical study, essentially demonstrating that surgeons can follow the instructions on how to deliver MACI arthroscopically, we expect to complete that study in 2023, submit for an approval to expand the label to add arthroscopic MACI delivery to the label, which we would expect to happen in 2024. So pretty excited about that. And we think it will be a very attractive option for patients so -- or for surgeons. So this -- if I can turn -- you can see from this short video, why this would be attractive to surgeons. So essentially, what you do is place a cannula in an operating portal, take an arthroscopic sizer, measure the size of the defect, both the length and the width. We have a set of custom arthroscopic cutters that allow you to score the cartilage proceed, cartilage defect, take a curette and prepare that defect, then you end up draining the joint. You take a MACI cutter that's the exact same size as the defect. It's placed on the end of what we call a v-shuttle delivery device with the cell side up, remove the cannula dam, insert the v-shuttle and place the membrane in the defect. After its sealed, you apply Fibrin sealant, place the defect, and as I mentioned -- or the membrane. As I mentioned earlier, the chondrocytes migrate down to the subchondral bone and end up filling the defect. So we think this will be a very attractive option for surgeons moving forward, and we're really excited about the opportunity. And we had done some preliminary market research back when we did the market assessment, and there were really 2 main upsides that surgeons were interested in. That was arthroscopic MACI, and so I'll get to in a moment, ankle indication for MACI as well. So surgeons obviously had high interest in an arthroscopic MACI option. About 90% of them said they'd be interested in a MACI arthro option and about 90% of them current users had indicated that they would expect to increase their MACI volume. So now you've got sort of new surgeons who either principally or prefer arthroscopic procedure, and you've got current users who you'd expect to do more procedures. So we think it will have a significant impact, upside potential for the business. And really, the whole program is focused on a certain segment of the defect. So for MACI, it's really a go-to product if you have a cartilage defect on the patella or the knee cap or the patellofemoral joint behind the knee cap. When you have a defect on the femoral condyles, the end of the thigh bone, there are other options like osteochondral allografts, and so on. But with a MACI arthroscopic option, it would be the only restorative cartilage repair product that could be arthroscopically because you can't do an osteochondral allograft arthroscopically. So we do think we'll be able to take share in that segment of the cartilage defects as well. So as I mentioned, we've also, in addition to procedural advancements, we've been looking at the use of MACI and other joints. Ankle represents the next largest opportunity. The knee obviously, is the greatest weight-bearing joint in the body. That's where the majority of cartilage injuries occur, but the ankle is essentially the second most common source of cartilage injuries. And we did, like we did for the knee indication, quantitative market research to size the opportunity. And essentially, there's about 165,000 cartilage resurfacing procedures in the ankle that are done each year. When we talk to orthopedic surgeons and then other surgeons that do ankle resurfacing procedures and ask them, again, based on the size, location, age of the patient, et cetera, how many of the patients they see would be eligible for MACI, it's about 40%. And then again, this whole concept of it gets used typically in larger lesions, about 18,000 patients per year form the addressable market for MACI, which at our current price point would be a $1 billion opportunity for us. And together with MACI and the knee, about a $4 billion opportunity overall. So we're really excited about the ankle opportunity. We'll be meeting with the FDA for a pre-IND meeting in the first half of this year and look forward to sharing with investors sort of the path forward for a MACI indication in the ankle. So turning to our burn care franchise. Just in terms of the treatment pathway, the way severe burn patients are treated is basically if you have a full thickness burn, which means that burn goes all the way through the epidermal and dermal layer of the skin, or you have a partial thickness burn, which means there will be some remaining dermal components that's greater than 10%, you're essentially admitted to burn centers around the U.S. And that's -- those are the patients that we focus on. And for those patients, there's 2 steps in the treatment. First, you need to remove the burn tissue or the eschar and then you need to figure out how you're going to cover and close the wound. And so NexoBrid obviously plays in the area of eschar removal. Epicel, again, is the only full thickness burn permanent skin replacement on the market. So when we look at the opportunity, there's about 0.5 million burns in the U.S. each year, about 40,000 of those patients are hospitalized. And about 3/4 of those or more, so 30-some-thousand of those patients have some sort of eschar removal. So that's what makes up the addressable market for NexoBrid. At our launch pricing, that represents about a $300 million opportunity for NexoBrid. And then as you go further down the funnel for the more severe burns, that's where Epicel is used. So typically in patients that have 40% or greater body surface area burns and at the pricing, and these are very large burns. And obviously, we price the product on a per graft basis and a lot of grafts are used, but it's also about a $300 million opportunity for Epicel. So bringing on and having NexoBrid approved obviously doubles the market opportunity for our burn care franchise. And we think has a lot of synergistic benefits. Epicel is used typically in about 70 of the 140 burn centers around the country. We expect NexoBrid will be used in every burn center, so we'll be adding about half a dozen reps to our commercial team. And certainly, we'll have a larger footprint and a larger presence in all the burn centers in the country, which we think will obviously help drive NexoBrid uptake, but also have a pull-through effect for Epicel. So in terms of the clinical benefits of these products, so with respect to NexoBrid, as you can imagine, when you have a burn, getting rid of that dead tissue and eschar early is very important and doing an assessment of the burn and how you're going to treat it. So removing the eschar is important because, obviously, your body reacts to the burn, you have inflammation, and it reduces the inflammation, reduces further burn progression and reduces infections. And then obviously, starting to treat the wound more quickly results in better healing, less scarring and reduced overall morbidity and mortality. Currently, the standard of care for removing eschar is surgical. So as you can imagine, when you take a 2-dimensional knife and you're slicing into a 3-dimensional burn, you have a lot of blood loss, a lot of healthy tissue loss, and so it's very dramatic for the patient. There are some nonsurgical options out there, but they have not shown much efficacy at all and have not shown that they reduce the need for surgical excision. So there's clearly an unmet need for a selective and effective nonsurgical option. And we think that's what NexoBrid is. So NexoBrid is, as I mentioned, an orphan biologic product in the U.S. It contains proteolytic enzymes that are derived from pineapple stems. And basically, it's indicated for eschar removal for adult patients with large or deep partial thickness and full thickness burns. And it can be applied in up to 2 applications to up to 20% of total body surface area for these patients. And 90% of the hospitalized burn patients in the U.S. have 20% or lower burns. So typically, and 80% have 10% or less TBSA burns, and that's still a large burn. Your palm is about 1% of your TBSA. So 10% even is a rather large burn. So we think this will have an opportunity to be used in the majority of the hospitalized burn patients. And essentially, what it does is that it dissolves the eschar and leaves the healthy tissue. So it's really a remarkable product. Very easy to use topical application at the bedside as opposed to being -- going in OR for the surgical excision. So you apply pain management, as you would do for any kind of extensive dressing change. The wound is cleaned, you soak the wound in an antibacterial solution, and then you create a petrolatum border and apply NexoBrid. So it's -- the product itself is a lyophilized powder with a gel vehicle. You mix it up 15 minutes before you apply it. It's applied. You put a dressing on top, you leave it in place for 4 hours and then you simply scrape away the eschar and remove the eschar and leave the healthy tissue. So we think because of the compelling results that you can see on this slide, that NexoBrid has the opportunity to change the standard of care of how these patients are treated in the U.S. So we're really excited about the launch opportunity. So as I mentioned, NexoBrid was approved in December. Obviously, our commercial launch activities are underway, principally relating to promotional material rollout because NexoBrid will be dispensed in the hospital pharmacy. You have to go through a P&T Committee approval to be added to the formulary. So that work is under as well. Obviously, focused on customer training. There are a number of large burn conferences in the spring that we'll be attending and training folks at the burn centers as well, then, of course, adding our sales reps, training and deploying them. So there's a lot going on, and we expect commercial availability of the product because it's manufactured by our partner, MediWound, that product will be available in Q2 of this year. So excited about the launch of NexoBrid. And then just quickly on Epicel. So as I mentioned, Epicel is a product that we've -- that has been on the market for about 25 years, and it's the only FDA-approved permanent skin replacement for adult and pediatric patients with greater than 30% body surface area burns. And it's a really important product because the only other option for these patients are basically autografts. Skin is highly immunogenic, you can't do transplants. So it's either autografts or Epicel when you have full thickness burn. And the issue is when we're treating patients with 80% burn, 70% burns, there's really not a lot of healthy tissue to do autograft. So that's why Epicel is so important and potentially life-saving for patients, and that was demonstrated in the data that was published a couple of years ago in the Journal of Burn Care & Research that basically shows that at every decile burn, which is how these patients are treated, you see a profound survival benefit for patients that are treated with Epicel. So in addition to our current portfolio and our pipeline, which, again, we think will drive strong growth in the years ahead, we obviously focus on business development. That's kind of how we've built the company. And so we are always looking for additional products that are innovative, meet our financial hurdles, and that can be added to our sports medicine or burn care franchises. We also look because we have a particular expertise in cell therapies for additional opportunities there as well. It can maximize the value of the company. And so I'll end there, James, and just say, obviously, based on our current portfolio and pipeline, we think we have -- we're well positioned to continue our strong growth in the years ahead.

Thanks a lot. Thanks so much, Nick. Okay, awesome. So much for getting this back on. So we're going to turn to Q&A now. I've got some prepared questions, Nick, I'd like to go through. So on the burn care, now that you've received FDA approval for NexoBrid, what are the most important -- what are those key activities that you're focused on early in the launch?

Well, as I mentioned, obviously, we're focused on rolling out promotional materials, engaging with surgeons and burn centers, deploying and training -- training and deploying our sales force, but really kind of the 2 critical path items are P&T Committee approval process and training the burn centers. So obviously, until you have a final label, you can't finalize a dossier that goes to the P&T Committee. So as much work as we could do ahead of the approval was done, updated those with the new label, those -- so all those activities, the outreach to the champions of the burn centers who will schedule those meetings is all underway now. And that takes several months to get through that process. So we think it will sync up well with product availability in Q2. And then as I mentioned, obviously, we're focused on training. We have an advantage that, again, there's 140 burn centers in the U.S. BARDA, which is stockpiling this product in case there's a mass casualty event has funded an expanded access study. So during the time -- between the time of finishing the pivotal study and getting to approval and product availability, we have about 25 burn centers now that are routinely using NexoBrid. So we hope that will sort of speed the process because we do have a number of high-volume experienced centers already in the U.S.

That's great to hear. And what -- so maybe it's from the experience of those burn centers, but what gives you confidence in the ability to change the standard of care for burn eschar removal?

Yes. So that's kind of what we do. So with MACI, that was a novel product that we introduced in 2017 that's become the leading cartilage repair product on the market. Same thing with Epicel. Typically, prior to Epicel, the only option was autografts. And so we think we -- it's kind of -- we're good at changing standard of care. And in this case, because it's such a synergistic product, obviously, we have relationships with many of the burn centers, there's very high awareness for NexoBrid. So this product is approved in I think 43 other countries around the world. So in all the major meetings, it has a pretty prominent place. So surgeons are aware, they're excited, and we have an experienced burn team that we think will be drive uptake.

Got it. And with Epicel and NexoBrid now together, what do you view as the next step for the burn franchise beyond the launch of NexoBrid?

Well, I think certainly, we expect, as I mentioned earlier, Epicel to grow off its current second quarter or second half run rate. I think adding another -- there's such a small patient population for Epicel, right? We're treating 100-something patients a year. So it's very volatile. And that makes it a little hard to forecast and manage both for us and for investors. I think adding a product like NexoBrid, which will have a much more consistent revenue stream, much broader adoption will help both build critical mass in our burn care franchise. It will allow it to become a second strong growth driver for the company and then sort of reduce a little bit of that variability that we see quarter-to-quarter with Epicel alone.

That's very helpful. Turning to MACI, a couple of questions there. How were trends in the fourth quarter compared to your expectations?

Yes. So MACI obviously, is top of mind for lots of investors. And I think it matched up with what I talked about earlier for the year as a whole. So we continue to see growth in -- which is great, right? We're 5 years into a launch and we continue to see strong growth in the number of surgeons that are taking biopsies. We had increased our target surgeons from about 3,000 to 5,000 surgeons. And before that we did that, we were at about 50% penetration rate in terms of the number of surgeons taking biopsies. Cumulatively, it was higher than that, and we'd expect to get to the same place with MACI in terms of our 5,000 current targets. And so, the fourth quarter trends were similar. We saw continued growth in biopsying surgeons, continued growth in biopsies, stabilization of that conversion rate, and that's what led to coming in at the top end of the guidance range for MACI. And it was 24% growth in the fourth quarter over the prior year and about a 50% step up from the third quarter. So really strong performance for MACI.

That's awesome. And how do you think about continuing that momentum within 2023 and what else you need to do to keep that going?

Yes. We mentioned in our preannouncement that for 2023 and as I mentioned earlier, we expect MACI to lead the growth in 2023. So there are a number of growth drivers for MACI. It's adding surgeons, taking biopsies, more biopsies per surgeon, the conversion rate and then pricing. And we mentioned after our third quarter earnings call that basically based on price and growth in surgeons and biopsies, you get to kind of mid-teens growth even if you don't see any change in sort of the conversion rate or sort of market dynamics of patients getting back to their normal cadence. So we think MACI will sort of lead the growth in 2023. Again, Epicel will grow off its current base and then you add NexoBrid revenue. And as I mentioned earlier, '24, we should see further acceleration of growth with a full year of NexoBrid revenue and then hopefully MACI arthroscopic option.

That's where I was going next, is how meaningful is that arthroscopic option in 2024?