Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Thank you all for joining. I'm Neha Begwani who is moderating today's session. I'll read out one disclosure. Please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. And with that out of the way, I'm pleased to welcome back the Vericel team with Nick Colangelo, CEO; and Joe Mara, CFO.

Maybe we start off by providing a high-level overview of the company and the markets you participate in.

Yes, and thanks. And before we begin, I'll do the second disclosure, which is that we will be making 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 Vericel, so we're a leading provider of advanced cell therapies and specialty biologics for the sports medicine and the severe burn care market. Our lead product is called MACI, which is an advanced cell therapy that uses the patient's own cartilage producing cells to repair tissue and restore function. So MACI is the leading restorative cartilage repair product on the market and the only FDA-approved product in its class. And just last week, we actually got approval from the FDA for a label expansion to include arthroscopic delivery for MACI for cartilage defects up to 4 square centimeters using our custom-designed MACI Arthro instrument. So MACI Arthro, as you might expect, provides a less invasive procedure and is the only restorative biologic cartilage repair market that's been -- a product that's been approved for use by the FDA. In the burn care side of our business, we're really focused on hospitalized burn patients. And for these patients, the treatment pathway entails, first, removing the burned tissue or eschar and then grafting the wound to promote healing. So we have 2 products in this space. The first is NexoBrid, which we recently launched, which is an orphan biologic product that enzymatically removes the eschar and originally indicated for treatment of adult patients. And just last month, we also got a pediatric indication for NexoBrid. And then Epicel, which is a product that uses a patient's own cells to create skin grafts that then cover the wound. And Epicel is the only FDA-approved permanent skin replacement for patients with large full-thickness burns. So a really innovative portfolio. I'd say each of these products are the only FDA-approved products in their class. And a unique part of our story is that they have -- we have pretty significant competitive barriers to entry. So MACI and Epicel are regulated by the FDA as combination device biologic products. So there's no sort of generic pathway for others to be on the market and really no other like products on the market or on the horizon to enter the marketplace. And NexoBrid, as an orphan product, has not only patent protection, but also orphan exclusivity and 12-year data exclusivity. So we think this is just an exceptional portfolio that will support our continued strong growth for many years ahead. And we have a very strong track record, just turning to the financial side of things for a moment, of both profit and revenue growth since we launched MACI back in 2017. So from a revenue perspective, we've had 20-plus percent compounded annual revenue growth over that period of time, really driven by both -- significant growth for both MACI and Epicel. We've had positive operating cash flow as well as adjusted earnings for each quarter over the past 4 years, and we ended the second quarter with over $150 million in cash. So a really strong profile for the company. And as we've kind of moved into 2024, first half of the year, we had 20-plus -- or 20% revenue growth for the total company. For MACI, for the burn care franchise have increased, as Joe will explain, our gross margin and adjusted earnings margin pretty substantially versus last year. So again, we think our portfolio has really translated into strong financial results that we expect will continue for many years ahead.

That's great. And a very broad portfolio, as you mentioned, and you touched on this quite briefly, the MACI Arthro approval that you got last week. How do you think about that impact on growth and kind of the future outlook for the company?

Yes. So obviously, we're very excited about getting the MACI Arthro approval. Again, it's on -- it's part of -- it's another milestone in our strategy of taking this technology and making it less and less invasive and now essentially a minimally invasive procedure. And we think it will provide a significant growth opportunity for the company in the years ahead. If you think about the cartilage repair market generally, most of the repair procedures are done arthroscopically. So it kind of fits right into sort of the wheelhouse of how surgeons are treating cartilage injuries. When you look at our addressable market, which is comprised of about 60,000 patients a year, a $3 billion market opportunity for us given our current pricing. And as you break down sort of the kind of the types of location of defects that patients have, right now, MACI's kind of a go-to procedure if you have a cartilage injury on the back of the knee cap or patella, just because it's harder to do other procedures on the patella, or in larger defects on the femoral condyle. So the whole MACI arthroscopic instrument approach is really designed to treat 2 to 4 square centimeter defects, which are medium to smaller-sized defects on the femoral condyles or the end of the thigh bone, and that comprises about 1/3 of our addressable markets. So 20,000 patients each year that have 2 to 4 square centimeter defects and procedures to treat those defects. And so we have a much higher penetration in treating patella defects, larger defects. And the great opportunity for us is if we can kind of grow penetration into the largest part of the market, it will have a substantial impact on the growth of our overall business.

Got it. And for MACI Arthro, what is the go-to-market strategy? Where do you see early adoption coming from? How do you think that will -- especially on the volume side, where do you think that will come from initially?

Yes. So the go-to-market strategy is pretty straightforward. Right now, we have about 5,000 target surgeons that we call on. And these are surgeons that do high volumes of cartilage repair and also do open knee procedures. As I mentioned, most of what's done in the cartilage repair space is done arthroscopically. And really when these orthopedic or sports medicine surgeons are doing other procedures on the knee, be it meniscal procedures, ACL tears, things like that, those are done arthroscopically as well. So again, we've concentrated to date on surgeons that do high volumes of cartilage repair and open procedures, but there's a group of several thousand surgeons out there that do high volumes of cartilage repair, and those are the surgeons we will be adding to our target list. So right now, we call on 5,000 surgeons. We've added 2,000 high-volume arthroscopists who will be calling on as well. And so, again, it will be a meaningful opportunity, not just from a patient addressable market perspective, but also a much larger surgeon base. And really expanding our surgeon base has been a big growth driver. That's been the primary. We kind of think of 4 growth drivers for the business. How many biopsying surgeons do we have which is, again, a measure of the breadth of penetration into your target surgeon base; how many biopsies per surgeon, which is the depth into their practices; how those biopsies convert into implants and then pricing. And really pricing and growth in the surgeon base has driven a lot of our recent growth, but we believe, over time, these other growth drivers will be important as well. So when you think about, okay, now you're going to expand the surgeon base. Over time, we would expect the penetration. Right now, probably our penetration rate into the surgeon base is around 50%. We expect when we add new surgeons, we'll get to that same rate or more by the time the customer base matures and they gain experience with MACI. In the early days, we expect MACI Arthro business to come from the existing MACI surgeons. So you have 2 groups, existing MACI surgeons and what will be new users within the MACI current users. We have a pool of biopsies that haven't yet converted. And so that's a fertile ground to go out and say, when we get a biopsy, we get a biopsy transmittal form that has the information about the patient, the size and location of the defects. And so that's obviously low-hanging fruit to be able to go to the surgeons and say, you have these patients who have a defect that might be appropriate for arthroscopic MACI. Are they potential candidates? And so early days, you would expect that's where the business would come from. And sure enough, we announced the approval last Monday, we did our first case on Thursday. So that was a case where it was already scheduled to go, but it was a defect that was appropriate for the new MACI instruments, and that patient was treated. The typical -- the median time from biopsy to an implant is about 4 months. So our existing surgeons have a pool of biopsies that may be appropriate for MACI Arthro. As our market research has indicated, they'll start taking biopsies for appropriate patients going forward and those will convert along presumably similar timelines. And then you'll have the new surgeons who are taking their biopsies for the first time, and those will convert over similar timelines as well. So early business will come from existing MACI users, probably a pool of biopsies they already have. And then over time, we believe there will be strong contribution both from existing users based on our market research that said, we would expect, if you have a MACI Arthro option, to shift some of our current procedures over to MACI Arthro. And then, of course, with the new users who do high volumes of cartilage repair, they would expect to shift procedures to MACI Arthro as well. So over time, both will be significant contributors to not only MACI Arthro utilization, but MACI utilization overall.

That's a really helpful walk-through and obviously, a very exciting opportunity. But I do want to note that the approval came on the heels of another strong quarter for MACI overall, which has been kind of sustainably growing in the 20% range for several quarters now. What's been driving the continued growth here outside of Arthro? And what else do you see growing this part of the business over the next few years?

Yes. MACI did have a really strong second quarter. So it was up about 21% versus the prior year, over $44 million in revenue. So we have had, as you mentioned, very strong MACI growth for quite some time. And really, the driver for that is, as we mentioned earlier, is this expanded surgeon base. And with that comes more surgeons taking more biopsies. And so we've seen a real strength in biopsy growth. And as we said, the second quarter was the second highest quarter ever. And there's a bit of a seasonality to our business where fourth quarters are, like much of medtech, the really large quarters. But the second quarter of this year was the second highest number of biopsies and biopsying surgeons that we've ever had in any quarter since launch. And in the month of May, we had the highest biopsies we've ever had in a month since the launch of the product. So really strong growth there. And we -- as I alluded to earlier, not only are we seeing sort of the growth based on the expanded surgeons and the biopsies they bring in, but those other drivers where, as you're adding a lot of new surgeons, your experienced surgeons do more biopsies, do more procedures. The new surgeons start at a much lower rate and over, say, call it, 1 year to 2 kind of catch up to the average. So some of these other drivers don't move as much when you've got that kind of mix dynamic between new customers and experienced surgeons, but we did mention on our second quarter earnings call that we did see a meaningful uptick in the biopsies per surgeon in the quarter, and that contributed to the biopsy growth. And then conversion rates that we saw an uptick as well. And we've always said as our surgeon base matures that we would expect you would get more biopsies per surgeon on average because that's what you see as they gain experience, and that conversion rates actually go up pretty meaningfully over time as their experience and their utilization increases. So good growth with the core business, the open MACI procedures. We expect that to continue. And then layering on growth with MACI Arthro.

Right. And then maybe we take it to the next leg. And if you think about kind of the longer-term MACI opportunity, you've talked about expanding into ankle as well. How do you think about the timing of that program, the size of the opportunity and the initial how-you-would-go-to-market strategy?

Yes. So with MACI Ankle, I mean, just generally, our life cycle management approach for MACI has been, we have this core business. Again, MACI itself was a big procedural advancement versus earlier technologies. It was a much simpler, less-invasive, faster surgery and that's why this adoption has grown from kind of a niche high-end cartilage repair product to kind of a broader customer base initially. And then MACI Arthro was, again, another procedural advancement that continues that trend. In addition to that, we've also been evaluating opportunities for MACI and other joints and getting formal labeled indications for that. MACI is done in the ankles, once in a while in the shoulders or hips. But obviously, that's -- we're not out there promoting that. So MACI Ankle, the knee opportunity is much -- a significantly larger opportunity, the largest opportunity just because of the knee is the greatest weight-bearing joint in the body. You get a lot more injuries in the knee. Ankle is by far the second largest opportunity. So we did a similar market assessment. There's about 165,000 cartilage resurfacing procedures that are done each year in the ankle. As you go through the kind of addressable market funnel, about 20,000 patients a year would be eligible from a surgeon's perspective for MACI treatment in the ankle, tending like they do into knee to slightly larger injuries and so on. And at our price point, it's another $1 billion market opportunity. So we're really excited about that. We've been doing the preclinical work that we need to do, meeting with the FDA. And right now, we would expect to initiate that study in 2025. It would be a pivotal study like the SUMMIT study was in the knee. So a 2-year enrollment, 2-year follow-up, call it 18-month regulatory process. So this is something that would be kind of a 2030 and beyond launch opportunity for us. But as we look at MACI, given that there's no like competition, and we have a really strong core business. You're adding Arthro for the second half of the decade, potentially Ankle in 2030 and beyond. We think there's a really long runway, for really strong growth as MACI becomes the standard of care, not only in knees, but hopefully ankles as well. And just to your question about go-to-market strategy, it's a little early for that since we haven't started the clinical study yet. But we do have a number of sports medicine surgeons who do both knee and ankle surgeries. But there are folks, podiatrists who do surgical procedures and then folks who focus on foot and ankle that we definitely would think about adding more target surgeons. And in terms of sales reps, if it was a dozen or two kind of additional sales reps to cover an additional target surgeon base, that's kind of the magnitude of the scale that we would expect to be thinking about.

Got it. Thanks for walking us through that. And maybe before we shift over to burn care, we'll take a pause to talk a bit about the financial aspects. You have a strong profitability profile, which is very unique in medtech to deliver both on, I'd say, on 3 things: scale, growth and profitability. So can you talk a little bit? And for Joe, can you talk a little bit about the financial profile? What's your longer-term view of where margins can go and also key targets that you're focused on for reaching those long-term profitability targets?

Sure. So I think for us, it's really twofold. We're continuing to focus on driving top line growth. So a lot of conversation about MACI and its potential there. Obviously, that remains the key engine along with the burn care franchise. But what we do think makes us unique as a company is really our profitability profile, again, at the scale we're at. So for us, I think as we go forward, it's kind of the revenue growth and those profitability metrics and profitability growth. If you look back at last year, we were able to grow the top line of the company 20%, but we were also able to grow our adjusted EBITDA at double that rate to 40%. And if you look at the first half of the year, as Nick mentioned earlier, we grew 20%, we actually more than doubled our adjusted EBITDA and also expanded our gross margin by over 400 basis points. So the profitability metrics are definitely moving in the right direction. We expect to be GAAP profitable this year and are actually GAAP profitable over -- on a trailing 12-month basis. So we feel like we've hit an inflection point and we're in the midst of that from a profitability perspective. And as we look forward, based on the strength of our core portfolio, layering in some of these new product launches and indications, if we continue to drive that top line growth, our expectation is our profitability metrics will also continue to improve. In terms of kind of targets and numbers, from a gross margin perspective, we laid out a couple of years ago that we thought we could get to 70% plus on a gross margin basis. We're actually at 70% in the second quarter. We've been higher than that in the last couple of fourth quarters, which gives you a sense of the company at scale of where we can be. So certainly, our expectation is to get kind of north of that 70% number in the years to come. So we continue to focus on that. The number of operating efficiencies we're also focused on, I think, are helping to drive some of that gross margin expansion. And then lastly, from a bottom line perspective on the adjusted EBITDA side, we've talked about kind of getting to, call it 30% plus in the coming years. Last year, on a full year basis, we were in the high teens on an adjusted EBITDA margin perspective. This year, our guidance calls for over 20%. So we think that can continue to expand over the next couple of years or a few years into that 30% plus range. And again, if you look back at the fourth quarter, which I think is always a good sense of kind of getting a sense of where the company is at scale, we've been over that 30% number. So we'll continue to focus, I think, on both the top line and the bottom line moving forward.

Great. Maybe we shift to burn care next. So you recently launched NexoBrid, and now you have 2 products available. How has your selling approach changed compared to when you just had Epicel available on the market? And are you seeing any impact from having both products on the market?

Yes. So prior to the NexoBrid approval, as you noted, we had Epicel on the market in. When you think about the addressable market, first of all, for both of the products, and then I'll talk about sort of our selling approach there, there's about 40,000 hospitalized burn patients each year. When you think about the number of those patients that need to have some kind of scar removal, it's about 3/4 of those or about 30,000 which forms the addressable market for NexoBrid. At the current price point, it's about a $300 million market opportunity for us. As you go down the funnel to the number of patients that have 40%-plus burns and those are huge burns, I mean, 1% TBSA is the size of the palm of your hand. So if you have a 40% burn, it is a catastrophic burn. And the number of surviving patients because they have a number of other injuries is about 600 to 800 patients a year. So it's a much smaller patient population. But again, these are patients that need a large number of skin grafts and at the current pricing and revenue per patient, it's about a $300 million market opportunity as well, but a much smaller patient population. So prior to having NexoBrid, of the 140 burn centers in the country, about 70 of those centers would routinely see Epicel-appropriate patients. So it was a more concentrated. If you're at one of the smaller accredited burn centers, and you're not used to treating an 85% burn patient, they typically get transferred to the bigger regional centers. So we had 7 territories with 7 reps, 7 clinical support specialists that covered, call it, 10 hospitals each, right? And that was our footprint. When we added NexoBrid, we added about half a dozen reps to cover the other, call it, 70 potential burn centers across the country, kind of an overlay geographically with kind of the current reps, with the plan being that Epicel reps would sell both products and that NexoBrid reps would start with NexoBrid, get trained on Epicel, which takes a bit of time because it's a much more complicated treatment paradigm. And then eventually, all reps would be selling both products, and that's really the point we're at now. So we, as of the start of the third quarter, kind of transitioned. We added a few extra territories. We'll have 17 territories. All of the reps will cover both products or sell both products. So it will be more of a kind of portfolio sell. And then we'll have, obviously, those clinical support specialists who help with those Epicel cases because the treatments are -- there are multiple treatment for each patient and it's a pretty heavy lift on the clinical support side. And so that's the structure of our sales force going forward. So when you think about the revenue we generate in this franchise, which we think will be in the $40-plus million range, it's a pretty -- it's a relatively small commercial team that's able to generate a pretty meaningful amount of revenue for the company. And having both products has really been beneficial to us because not only are we able to drive the NexoBrid uptake, but we're also seeing pull-through from those hospitals that we call dormant hospitals that either hadn't used Epicel before or hadn't taken a biopsy or treated a patient for 2-plus years, we're seeing a meaningful amount of business now coming from those. So just having a bigger share of voice, selling both products, being in hospitals on a more frequent basis has really helped the overall Burn Care business, which, again, grew 20% in the first half of the year.

Right. And you recently got approval for the pediatric indication for NexoBrid.

Right.

So what -- how much of the market does that open up? Can you generally talk about progress on that with the overall launch so far?

Yes. So it was a good month for us in August from a regulatory perspective, getting not only the MACI Arthro approval from the FDA, but the NexoBrid pediatric indication. And of the 140 burn centers that I mentioned, there are about 20 dedicated pediatric burn centers in the country that we'll now start calling on. Roughly, our estimate is about 20% to 30% of hospitalized patients are pediatric patients. So it's a meaningful part of the market that we'll now have better access to. These patients can be treated in the larger burn centers that aren't dedicated centers -- pediatric centers. So there's no doubt pediatric patients were being treated in some cases. And there were a few pediatric centers that did treat patients, but there were a number that were waiting for the label expansion. So we'll be adding those to the 17 territories. It's essentially one-ish new center per territory. So obviously, something that can easily be covered. And again, could end up providing meaningful tailwinds for the uptick in NexoBrid over time.

That's great. And obviously, as U.S. investors that are mainly focused on the U.S., it would be remiss not to ask though about the outside of the U.S. opportunity. How do you guys think about that evolving over time?

Yes. So that relates particularly to -- we have commercial. On the Burn Care side, we're really focused on the U.S. with Epicel. There's a relatively short -- these are graphs that are made from a patient's own cells, and there's a 24- to 48-hour shelf life. So we make the product, we ship it out overnight and it's basically administered the next day. So it's hard to take a plant in the U.S. and think you're going to supply global markets. And then with NexoBrid, we just licensed North American. So we're really focused with Burn Care and the U.S. and NexoBrid North America. For MACI, that's where you can think more broadly from a global perspective. And when we bought this business from Sanofi, it was part of the Genzyme company. They are a biosurgery group. And they actually had approval for MACI in Europe and in Australia previously as well. And when we bought the business, they had a facility in Denmark, and it was not a profitable endeavor to have a stand-alone facility in Europe. And the pivotal clinical study was run in Europe, but that was supplied from what is now our Cambridge, Massachusetts facility. And so we just said, this doesn't make sense for us to have a dedicated facility there. So we kind of said, we'll go back into Europe. We suspended the marketing authorization and said, once we kind of have our new facility here in the U.S. that we're building, we can think about going back to Europe and potentially other geographies. And so that's clearly on the table for us to evaluate now. We'll be in our new manufacturing facility in the next year or so. And certainly, we'll have an opportunity to evaluate not only select European countries, but other North American and South American countries as well.

Got it. That's very helpful. And then Joe, maybe back to you. On the balance sheet, as mentioned a couple of times, the company is obviously very well positioned. You're using a portion of your cash to construct a new facility, as Nick just mentioned. What is the -- once that is completed, how should investors think about your cash flow generation and your capital allocation strategy going forward?

Yes. So I think we feel very well positioned with our financial profile, and I think we have a very strong balance sheet. So we ended the second quarter with over $150 million in cash and investments and no debt. And so as kind of moving forward, as we talked a little bit on the P&L side, the company is generating significant adjusted EBITDA and expect that to continue in the years ahead. That's a good proxy for operating cash flow. And so kind of this year and into next year, we'll be kind of completing and funding our new facility, but that's generally funded out of our operating cash flow and any investments you want to make, kind of win in our operating P&L and things like product launches and the life cycle management, again, that's within our P&L. So the last piece of that on capital allocation is potential business development. We're always going to be active there, looking at opportunities, whether that's in Sports Medicine, on the Burn Care side, potentially new therapeutic area that leverages our cell therapy kind of manufacturing expertise. So we'll always be looking there. But we have a -- as we talked about, a very strong financial profile, a very innovative portfolio. So I think I would expect us to also remain pretty disciplined there as well. But as we look forward, that's certainly something that we'll consider if we think it makes sense to add to the business and the portfolio.

Right. And maybe as the last question, you guys recently celebrated your 10-year anniversary as a company. So congratulations on that. As you reflect on the last decade, what do you think were some of the key components of your success? And as you look forward, what do you want the company to look like 10 years out?

Yes. So we kind of celebrated the anniversary of when we purchased the business, it sort of transformed the company from a clinical stage development company and catapulted into a commercial company. And we did that, we really had kind of 2 strategic imperatives at the time. The first was, we bought for $6.5 million, a business that was doing about $40 million in revenue, but it was kind of flat to declining. And the first thing was get back on to a growth trajectory, which we were able to do. And so within a very short time, we were growing sort of high single digits, which was better than the industry average, but we knew the real growth drivers for the company we're going to be to expand the Epicel label to include a pediatric indication, which we've done. And so we've taken that from a low teens million-dollar product a year to $30 million to $40 million, which is where it is now. And then getting MACI approved in the U.S. because Genzyme and Sanofi assumed they were going to have to run a clinical study in the U.S. We kind of had a different regulatory strategy, got the product approved. And it's really those 2 regulatory initiatives that really drove the growth we've seen over the past decade essentially. We think with the approval of MACI Arthro, the approval of NexoBrid in December of 2022, and then launch last year and then approval of NexoBrid pediatric, we've set ourselves up well to have not only a core business growth that's kind of at the top end of the industry, but then another set of growth drivers in the years ahead. So what we would expect over the next number of years is that we're going to continue to build a company that will maintain a high-growth profile, increase profitability, give us a lot of strategic flexibility about bringing in new products. And at the end of the day, we'll continue to treat many, many more patients than we currently do with a set of products that are just -- they're life changing for our patients, which is great.

Yes, no, I mean we've been doing this for a couple of years at this conference, and so it was exciting to hear about the progress that you've made. And as you said, it's life-changing for patients. So it's always -- it's an important initiative that you guys have.

Agreed.

Congrats on the success to date and the decade and looking forward to seeing what comes over the next decade as well.

Well, thank you very much.

Appreciate it.

Appreciate it.

Yes. So thanks for coming to our conference. And with that, we'll end it here.

All right. Thank you very much.

Thank you.