Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Thanks for joining us for day 2 of the MS Healthcare Conference. I'll point to teleconference website for the requisite legal disclaimer. I'm pleased to welcome Nick Colangelo from Vericel. Nick, maybe we can start off with a little bit of general information, particularly for investors who are less familiar with Vericel.

Can you provide a little bit of background on the profile of the company and going forward?

Yes. Certainly and I want to, first of all, say thanks for having us here. We're really excited to be part of the conference. And as always, we say that this discussion will contain forward-looking statements until investors should refer to our documents on file with the SEC for further information. So Vericel is a leader in advanced therapies for the sports medicine and the severe burn care market. We have a portfolio of highly innovative advanced therapies that -- advanced cell therapies and specialty biologics that are really focused on changing the standard of care for patients with knee cartilage injuries and severe burns. So we currently market 2 products in the U.S., MACI and Epicel, which are regulated by the FDA as combination device biologic products with obviously the biologic component of those products being the use of the patient's own cells to repair tissue and restore function. Our lead product is MACI, which we launched in 2017 for the repair of cartilage injuries of the knee, and MACI is the leading restorative cartilage repair product on the market and the only FDA-approved product in its class. Our second product is Epicel, which also is the only FDA-approved permanent skin replacement for patients with large body surface area burns, both pediatric and adult patients. So we recently expanded our burn care portfolio with the FDA approval of NexoBrid, which is highly synergistic with Epicel. So NexoBrid is indicated for the removal of the burn tissue or eschar, which is done before you cover the wound with a product like Epicel. So a really exciting portfolio and I think one of the defining characteristics of our company is that this is a unique portfolio with significant competitive barriers to entry. So because MACI and Epicel are a combination device biologic products, there is no established biosimilar or 510(k) pathway. So any other products or companies that want to enter these markets have to go through some pretty substantial, clinical development programs, and it's hard to do in this area. So there's no near-term like competitors for either MACI or Epicel. And because NexoBrid is an orphan biologic product in the U.S., obviously, in addition to its patent coverage, it also has biologics data and orphan market exclusivity as well. So we think it's an exceptional foundation for the company to be able to sustain long-term revenue and profit growth as we move forward. And what we're really focused on is, first of all, maximizing the growth drivers for MACI in the current indication for the treatment of cartilage defects in the knee advancing our pipeline, which is really focused on MACI life cycle management initiative, arthroscopic delivery and an ankle indication and then expanding our commercial burn franchise with the launch of NexoBrid, which hopefully will be happening in the very near future.

Great. And can you talk a little bit about the financial profile of the company?

Yes. Well, we have a very strong track record of success in terms of our financial profile since we launched MACI from a revenue perspective. Since 2017, we've generated 20-plus percent compounded revenue growth and that's really based on strong growth for both MACI and Epicel. We've had -- we just reported our 12th straight quarter of positive adjusted earnings and operating cash flow. And we ended the second quarter with $150 million in cash and no debt. So a really strong financial profile. In terms of our Q2 results, we kind of continued that trend. We had very significant revenue growth, 24% revenue growth overall, sustained profitability and operating cash flow and really strong underlying fundamentals for both MACI and Epicel in the quarter. So again, revenues were up 24% to about $46 million. Adjusted earnings was up 60%. We had about $10 million in operating cash flow. So again, very strong results. And importantly, we expect -- we ended up raising guidance for the year in terms of revenue to $190 million to $197 million for the year. And importantly, we actually expect continued momentum in the business. And with the addition of a full year of NexoBrid next year and the launch of our arthroscopic MACI, we actually expect growth to accelerate next year. And really over the next several years, we believe we'll maintain our high revenue growth profile. And because of the operating leverage in our business, where we have premium-priced products, concentrated call points, we expect our margins to expand with gross margins growing to over 70% and adjusted EBITDA margin to over 30%. So really excited about the outlook for the company as we move forward.

That's great. Maybe we spend a little bit of time going through the product portfolio and starting with MACI. Can you provide a little bit of a background on the cartilage repair market and why you see MACI as a differentiated treatment option versus other?

Yes. So cartilage injuries of the knee represent a significant issue. About 60% of knee arthroscopies identify a cartilage defect, which is really like a pothole on the surface of the knee. And these injuries occur through kind of acute or repetitive trauma or other degenerative conditions. And the issue with cartilage is that there really are -- it doesn't have like most other tissues in your body, intrinsic healing properties. There's no blood vessels that bring in repair cells. There's no lymphatics, there's no nerve cell. Once you have one of these injuries, you basically develop osteoarthritis, obviously, pain and dysfunction and then often move on to partial or full knee replacements. And that's what we're trying to prevent. And there are a significant number of these injuries that are treated each year, upwards of [ 1 billion ] of those. So the MACI itself is basically produced by taking a small biopsy of the patient's own cartilage from a non-weightbearing portion of the knee. We expand the cells. We see them at a density of about 0.5 million to 1 million cells per square centimeter on cartilage -- resorbable cartilage and membrane that's surgically implanted and when the membrane is implanted, the cells migrate down to the subchondral bone, they start to replicate, they produce the cartilage that's naturally present in the knee, fill the defect and allows patients to kind of resume their active lifestyle. So a very important product. And again, when these injuries don't heal on their own, MACI presents a really compelling opportunity. And of those upwards of [ 1 million ] procedures that are done each year, many of those are chondroplasties where a surgeon will go in and endoscope the knee and clean it out for microfracture. And those may provide pain relief for smaller defects, but we're typically focused on the larger, greater than 2 square centimeter defects in the knee and so it's a very large opportunity for us. There's about 60,000 patients a year that have those larger defects and at our price point it's about a $3 billion market opportunity. So really, really exciting growth opportunity for the company.

Great. And it seems like results lately have been phenomenal. What do you think has been driving this?

Well, clearly, as we mentioned on our second quarter earnings call, the growth this year has been driven principally by a continued expansion of the number of surgeons that are utilizing MACI and the resulting biopsies that they bring in. So we reported on our second quarter earnings call that we had the highest number of surgeons taking biopsies in the second quarter since we launched the product 6 or 7 years ago. So really compelling growth there, and we had essentially the highest or almost within a handful of the highest number of biopsies that we've ever had. So that was really our third straight quarter starting in the fourth quarter of last year, where we've had a record number of surgeons taking biopsies in the quarter, our 3 highest biopsy quarters since we launched the product and so there's this huge momentum, which we're really excited to see kind of post COVID headwinds that MACI has resumed its high-growth profile. So the -- we kind of tend to look at things over a longer period and over the last -- the trailing 12-month revenue growth rate for MACI is about 28%. So really strong growth, driven by the expansion of the surgeon base.

Yes. And what do you think is driving the surgeon adoption?

Well, we're really focused on it because we know it's a near-term driver for us, right, always expanding the penetration into our target surgeon universe is going to drive longer term growth. So our commercial team is hyper-focused on that. And before we expanded our sales force in 2020, we went from about 50 territories to 76 from about 3,000 surgeons to 5,000 target surgeons, more than half of those initial targets had taken MACI biopsies and basically, we're using MACI as part of their treatment algorithm then. So we expect the same to occur in our new 5,000 surgeon universe. We had last year 2,000 -- approximately 2,000 surgeons taking biopsies. Obviously, we're continuing to have strong surgeon growth there. So over time, we'd expect kind of a similar kind of penetration and potentially with the launch of arthroscopic MACI to expand that surgeon universe further. And I think from a surgeon perspective, they basically -- they certainly understand that MACI is an important treatment option, particularly for these larger defects. And based on its clinical profile, the fact that it's a much faster, simpler, less invasive procedure, you often see in med tech that is as these surgeries become less invasive and simpler to do, we get broader adoption in a community. And that's what we've seen. And then MACI has got a great reimbursement profile. So it's kind of all of those factors that led to a pretty significant expansion of our customer base.

Great. Yes. And you touched on it a little bit, but how meaningful do you think the arthroscopic delivery option and the indication from the MACI would be?

Yes, we've been, as I said, our pipeline is really focused around these sort of MACI life cycle management initiatives. And we hope to be able to launch the arthroscopy -- we've designed a set of arthroscopic instruments specifically for MACI. We hope to be able to launch those instruments in the first half of next year. And we think we'll have a big upside for us for a couple of reasons. First of all, the instrument set is focused on 2 to 4 square centimeter defects on the femoral condyles or the end of the thigh bone. And those are the most common defects in our addressable market. So of those 60,000 patients that I mentioned, about 20,000 of those or third each year have those 2 to 4 square centimeter defects on the femoral condyles. And that's because it's kind of the greatest weight nearing part of the knee. So you get a lot of injuries there and while we get a lot of business there, our business is probably split 50:50-ish between patella, which is the kneecap and the cartilage on the back of the kneecap and femoral condyle defects, but there are so many more femoral condyle defects, so of our 60,000 patient TAM, about 10,000 of those patients have patella defects. We have double-digit penetration there. But we have single-digit penetration in the femoral condyle defects just because it's obviously the greater patient population. So we had said on our second quarter earnings call that if we were able to get an equal penetration over the coming years in those femoral condyle defects, that we'd essentially double our business. So it's a huge opportunity for us, and we're really excited about it. We also talked about on our earnings call the fact that we've done extensive market research around the opportunity, and that market research confirms what we believe, again, is that a large opportunity. So first of all, there's high surgeon interest in an arthroscopic delivery option across surgeon groups, whether they're current MACI users or not. And that's really driven by the benefits that are obvious to the surgeons. It's a less invasive procedure, less postoperative pain, faster recovery, better aesthetics and so those are sort of the product -- the attributes of the arthroscopic delivery that surgeons recognize and whether they, again, were current MACI users or not, they would expect to shift a meaningful portion of the procedures from current options to MACI arthroscopic. So we really think this is going to expand our penetration within the current TAM. Surgeons will now have both an open -- mini open arthrotomy option and an arthroscopic option. And so we think it really will expand our penetration in the MACI addressable market.

Okay. Great. Yes. Look, a huge kind of expansion of your TAM. And I think the other question that has been on people's minds over the last few months has been all the GLP-1 news. I would be remiss not to ask that. So how do you think about the implications of GLP-1s taking off on MACI?

Yes. Look, we actually don't think it will have an adverse impact on MACI, the MACI indication. And that's really because our patients tend to be kind of younger active patients. So like if you look at our pivotal clinical study and even the publication of the first 1,000 patients we've treated in the U.S., basically, the average age was in the 30s, kind of a bell curve from the teens into the early 50s. And these are, again, kind of weekend warriors that want to get back to the activities they love. So typically, they do not have high BMIs. There typically are though requirements from payers that require a BMI of less than 35. So if anything, it would be a tailwind and that maybe some additional patients would be eligible for treatment. But again, we don't expect it to have any impact -- adverse impact on MACI.

Okay. Makes sense. Maybe we pivot to the burn side of your portfolio. With the approval of NexoBrid, you now have 2 products in your portfolio. How do you think that changes your kind of overall strategy going forward?

Yes. Well, I think with NexoBrid and Epicel that we have the premier burn care portfolio in the industry. And that's really because it allows us to have meaningful products and leading products and sort of the entire treatment algorithm for these patients. So when you have patients with severe burns that are hospitalized, which are the patients that we focus on, the treatment pathway is really determined by the size and depth of the burn. So if you have a full thickness burn, which means it goes all the way through all the layers of the skin, any sized burn, you're going to be admitted to one of the specialty -- 140 specialty burn centers in the country. If you have a partial thickness burn, which means there's some dermal components left, greater than 10%, you're also going to be transferred to one of these burn centers and again, the treatment sort of algorithm is that, first of all, you have to remove the burn tissue or eschar, right, that obviously, if you leave it on, you have burn progression because the body has an inflammatory response to the damaged tissue. There's -- it's a cause of infections, et cetera. So very important to remove the eschar initially. And then you have to figure out how you're going to cover the wound with NexoBrid, removes the eschar. Epicel is covering for the full thickness burns. And when you look at the overall market size, there's about 40,000 patients that are hospitalized each year for Epicel. Obviously, it's a very important product and life-saving product in that when you have these large burns and we'll routinely treat patients with 60% to 80%, 90% of their body surface area burned, you really only have a couple of options. One, our autographs. Skin is highly immunogenic. The body -- you can't do an organ transplant from someone else because the body won't slough it off. So you either have to do autographs or they'll take some -- the patient's own skin, typically run it through a measure, so they can cover more or use a product like Epicel. Of those 40,000 patients that are admitted into hospitals each year, there's really less than 1,000 that are surviving patients with these large burns. So it's a smaller patient population for Epicel. But given our pricing, it ends up being about a $300 million opportunity. For NexoBrid, kind of play is at the top of the funnel. So virtually, the majority of patients who are admitted to the hospital are going to have some kind of eschar removal. So about 30,000 of those products at our launch pricing for NexoBrid, that's another $300 million opportunity. So combined, it's a meaningful opportunity for us. And they're highly synergistic. It's a very concentrated call point. There's 140 burn centers. Our current Epicel sales force focus is really on 70-ish of those burn centers that routinely see Epicel patients. We have added about half a dozen NexoBrid reps that will focus on the other institutions and as we mentioned on our second quarter earnings call, we're actually seeing kind of a pull-through for Epicel from those NexoBrid reps in the NexoBrid accounts. And so that's kind of what we expected would happen and it's nice to see that it's already started to happen.

Yes. No, that's great unless burn surgeons are one. So I think you're dealing with a really traumatic situation. They want the products that they want. And so when they have that kind of trust with Epicel, the conversion factor, I'm sure you're seeing a little bit of data around that front, too.

Yes. That's what we expect to see when we launched NexoBrid.

So how will NexoBrid change the standard of care for treatment and severe burns? And how do you think about the penetration over the market over the long term?

Yes. Well, right now, the standard of care for removing eschar is typically surgical removal. So we'll end up taking these patients into the operating room and really basically surgically excising the skin. So they take a knife and they slice it away. Obviously, when you've got sort of variable depth burns and the 2-dimensional knife, there's a lot of trauma because you're taking a lot of healthy tissue. There's a lot of blood loss. And so very traumatic for the patient. There are some nonsurgical options that are -- have not demonstrated particularly strong efficacy and don't read or have not shown that they reduce surgical excision. So there's clearly a need for kind of a selective and effective eschar removal product. And we think NexoBrid is that product. So NexoBrid is a mixture of proteolytic enzymes that somehow are able to identify the collagens in skin that's been denatured or the proteins have been denatured through thermal burns. So it doesn't work if it's an electric burn. It's just thermal burns. The way the proteins are degraded. Those enzymes recognize that. And basically, you topically apply NexoBrid, it dissolves way over 4 hours that those -- that burn tissue and leaves the healthy tissue. So obviously, great advancement for patients. And we think over time, it will change the standard of care from surgical excision to the use of NexoBrid, and we should have a very high penetration rate just because it's so much better for patients.

Great. Now you ended the second quarter with nearly $150 million in cash and investments and no debt and you continue to be cash flow positive. How do you plan on deploying the capital?

Right. So yes, I think, again, the financial profile of the company is really strong. And as you kind of project out over the coming years, given sort of our current operating cash flow and how that will grow as revenues continue to increase and profitability increases, we think we're in a really sort of enviable position from that perspective. And all the initiatives that we've talked about already today, whether it's expanding the sales force to support these new product launches or just sort of the clinical development of our life cycle management initiatives, those are things that we just sort of include in our normal operating P&L. So it isn't -- it doesn't require -- or they're not part of our capital allocation strategy. I'd say the 2 uses of capital going forward for us is, one, we're building a new manufacturing and headquarter facility and that will require some meaningful investment over the next couple of years, but that's something we can fund from our current balance sheet and our operating cash flow. And that should be online and operational for us beginning in 2026, which is great. We're really excited about that. Second use obviously would be around strategic transactions as we look at opportunities to add products to our sports medicine franchise as well as our burn care franchise. And kind of a third vertical that we look at is given our expertise in cell therapy development, manufacture and commercialization, are there kind of MACI and Epicel like opportunities out there. And so we spent some time looking at those as well. So between sort of our balance sheet, our operating cash flow, we have an ATM that is available, but we haven't used. We have $150 million credit facility that we haven't used. So I mean -- I think we have a lot of strategic flexibility to look at these business development transactions. Now that being said, we're hyper-focused on maintaining our revenue growth rate, our profitability profile and really maintaining a portfolio of innovative products like we have now. And so the hurdles are pretty high, but we're certainly in a position to do transactions, be it tuck-in acquisitions of companies, whatever sort of makes sense if we find the right products that we're interested in.

Okay. Perfect. Well, look, there's definitely an MBS position to be in and not many can say that, but there is a lot of opportunity ahead of you. I guess are there any kind of closing remarks you want to leave people with?

Well, no. I mean, I think, again, we -- or I should say yes. Again, I think the company is really well positioned as we move forward. I guess, we didn't touch on the ankle MACI expansion opportunity, but if we -- if you think about sort of the rest of this decade and beyond, obviously, we have a really strong growth based on the current product attributes of MACI for the current knee cartilage repair indication and then you kind of layer mid-decade on this arthroscopic delivery option, which we think will expand the growth opportunities for MACI pretty substantially. The ankle opportunity is another -- there's about 20,000 of those procedures that would be eligible for MACI each year. So another $1 billion market opportunity making a $4 billion market opportunity overall for MACI. It's more of an end of decade, but you can kind of see paint this picture of continued strong growth through the decade and beyond, especially because there's no near-term competition. So between the growth opportunities there, expanding our burn franchise which we think will become a second high-growth franchise with the addition of NexoBrid, we just think the company is really well positioned as we move forward.

Okay. Great. Well, thank you for taking the time and walking us through the story.

All right. Well, great. Thanks for having us. Thanks, everyone.