Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Day 3 of the JPMorgan Healthcare Conference. I'm [ Bhavna ] and I'm Associate with the health care investment banking team. Thank you for joining us today at Vericel's presentation. We have with us Nick Colangelo, Chief Executive Officer; and in the audience is Joe Mara, Chief Financial Officer. We'll leave some time in the end for Q&A. For now, over to you, Nick.

Okay. Well, great. Thank you very much. It's a pleasure to be here today. And before I begin, I just want to remind our listeners that, this presentation contains forward-looking statements and you should refer to our documents on file with the SEC for further information. So Vericel is a leading provider of an advanced therapies for the sports medicine and the severe burn care market and we have a highly innovative portfolio of cell therapies and speciality biologics that repair damaged tissue and restore function. Our lead product is MACI, which is an autologous cell therapy product that uses a patient's own cells to repair damaged cartilage and restore function. This is a product that we launched back in 2017 for the treatment of cartilage defects in the knee, and it's become by far the leading restorative cartilage repair product on the market and the only FDA-approved product in its class. And recently, in the third quarter of last year, we also received FDA approval of the arthroscopic administration of MACI, which we think will allow us to significantly increase our penetration into the MACI addressable market. In the severe burn care market, we're really focused on hospitalized patients with severe burns. And the treatment pathway for these patients entails, first removing the burn tissue or eschar and then grafting the wound to promote healing. We have products that address both aspects of that treatment pathway. The first is NexoBrid, which is a product we launched a little over a year ago, which is indicated for removing eschar for -- from patient, pediatric and adult patients with severe burns. And it's an enzymatic debridement product that we think will really change the standard of care over time. And then again, once the eschar is removed, you have to cover the wound, and that's where Epicel comes into play. So Epicel is the only FDA-approved permanent skin replacement for patients wound with large full thickness burns. So having 2 products that address both aspects of the treatment pathway, we think positions us to have the premier portfolio in the severe burn care market. And in addition to being the only approved products in their class, we think our portfolio is very unique and that we have very strong competitive barriers to entry. So both MACI and Epicel are regulated by the FDA as combination device biologic products with the biologic component, of course, being the use of the patient's own cells. And there are no established generic pathways for combination products. And so anybody who wants to enter these markets has to run full blown clinical development programs, which are very difficult in these areas, and there really are no like competitors either currently in the market or really on the horizon for either MACI or Epicel. And similarly, NexoBrid obviously has patent protection, but also as an orphan biologic product has orphan market exclusivities as well as biologic data exclusivities that provides protection for the product as well. So we think it's a an exceptional portfolio to continue to build the company and sustain our high revenue and profit growth. And we think the company is really well positioned to do that. And it starts with our strong financial position. So in addition to generating high revenue growth over the past several years, we've also generated sustained positive adjusted earnings and operating cash flow every quarter for almost 5 years now. So really kind of turned the corner on profitability and actually achieved GAAP net income profitability as I'll talk about in a moment in 2024. We also have a very strong balance sheet, ended the year with about $167 million in cash and no debt. So a really strong financial foundation for the company. Second, we are the market leader in the cartilage repair market and have built a very high-performing, high-growth sports medicine franchise. It's really been built on the sustained high growth of MACI, where we've basically had a 20% compound annual growth rate since we've launched the product. And we think that will be amplified with the launch of MACI Arthro as we continue to expand our surgeon base and penetrate the addressable market. We've also built a second high-growth franchise in our burn care franchise, which grew 22% in 2024 based on continued uptake for NexoBrid and increased utilization as we have a larger footprint now for Epicel. And then finally, we're continuing to focus on expanding our portfolio, both in the nearer term, exploring opportunities for commercializing MACI outside the U.S., which we move into our new manufacturing facility and begin commercial production there in 2026 and initiating a MACI ankle study later this year, which we think will provide sustained growth for MACI over the longer term as well. So really well positioned to continue the strong growth that we've achieved to date. And we have the large underpenetrated markets that really support our growth, both in the near term and longer term, currently, about a $3.5 billion plus TAM for our -- both our burn care and sports medicine franchise, which we think will grow over the coming years with again OUS commercialization opportunities for MACI and adding a MACI Ankle Indication. So we come into 2025 with a great deal of momentum based on our performance in 2024. So we announced preliminary results yesterday. We had total revenue growth of 20% to over to $237 million to $237.5 million. That's our expected revenues for the year, strong MACI growth for the year of 20% to over $200 million -- or $197 million and a strong growth in the fourth quarter as well. I think one of the unique aspects of our company is the profitability profile, and we continue to significantly expand our margins with the gross margin expanding about 400 basis points to 72.5%. Our adjusted EBITDA margin grew about 400 or 500 basis points to about 22%, representing 55% growth versus 2023. So very strong profitability metrics. And as I mentioned earlier, we did achieve GAAP profitability for the year. So really strong results from a financial perspective and operationally as well with the approval of MACI Arthro in the third quarter, a pediatric label expansion for NexoBrid in the third quarter as well and completed construction on our new corporate headquarters and manufacturing facility late in the year as well. So we expect that momentum to continue into 2025. The guidance we gave yesterday was for total company growth of 20% to 23% for 2025. Really driven by the momentum in our core portfolio, the first full year of MACI Arthro and then -- which we think will again allow us to get greater penetration into our addressable market maintaining a second high-growth franchise in burn care. And as I'll talk about expanding our margins even further in 2025 and beyond. So we do expect to initiate the MACI Ankle clinical study in the second half of the year. As I mentioned, the -- after discussions with the FDA, we're on track to begin commercial production out of our new facility in 2026, which again will allow us that facility is designed to meet global manufacturing requirement so that we can support any OUS markets that we decide to commercialize MACI in down the road. So in light of these large market opportunities, the momentum of the business, we think we're very well positioned with our current portfolio and new products to do, to drive sustained high revenue growth. Obviously, our core portfolio of MACI and Epicel have demonstrated durable high growth, where we've had 20% compounded annual growth rate, since we launched MACI back in 2017, expect further strong growth this year and into beyond 2025. And again, those mid- and longer-term opportunities for OUS commercialization of MACI and the MACI ankle indication. So well positioned to sustain our high revenue growth. And again, I think what sets our company apart certainly in our scale is sort of the profitability profile. And for the second straight year, we had strong top-line growth of 20%, but actually more than double the growth in profitability with, again, the 22% adjusted EBITDA margin and GAAP net income positive for the year. So for 2025, we expect continued gross margin expansion from 72.5% this year to 73% to 74%. We expect continued adjusted EBITDA margin expansion from 22% to 25% to 26%. And really, we're at a point now where we're at -- we'll see inflecting cash generation as well. So this facility that I was talking about, it was upwards of $100 million project over the last 2 years. When we've been self-funding that, we've actually increased our cash balance by almost $30 million. So now that, that CapEx is behind us, we'd expect to kind of resume our normal CapEx rates of sort of mid-single-digit millions a year, and we'll see that cash generation actually flow onto the balance sheet. So really at an inflection point, not only for profitability but for cash generation as well. So I'll start as we turn to our products with the cartilage repair market and MACI. So cartilage defects or injuries in the knee represent a significant unmet medical need. So about 60% of knee arthroscopies reveal a cartilage injury, which is essentially like a pothole on the surface of the knee. And these injuries are significant because cartilage does not have any intrinsic healing properties. So there's no blood vessels to bring, blood or reparative cells to that injured space. There's no lymphatics, no nerves. So once you have one of these cartilage injuries and unless it's treated, you basically, obviously, in addition to pain and loss of function head down the road to osteoarthritis and ultimately, partial or knee replacements. And that's what we're trying to avoid with the MACI treatment. So given the significant incidence of cartilage injuries, there's a very large commercial opportunity. So based on a quantitative market research project that we did a few years ago, there's approximately 0.75 million cartilage injuries in the U.S. each year. When you look at the number of those injuries that fall within the MACI label, MACI has a very broad label. So no limit on the size or location of injuries in the knee. So about 40% of those injuries essentially fall within the MACI label. We departed a little bit from a normal TAM exercise and ask surgeons, while of the patients you treat, we know there are certain other options in some cases. And so how many of these patients do you actually deem to be clinically appropriate for MACI that took it to about 125,000 patients a year. And then based on sort of the size of the defects and payer coverage, about 60,000 patients a year. So at our current price point, that's a greater than $3 billion market opportunity for us and certainly supports the strong growth that we've seen for MACI. MACI itself is -- consists of a patient's own cells, as I mentioned, seeded on to a resorbable collagen membrane. So the entire process entails taking a biopsy from a patient, which a surgeon will do during an arthroscopic procedure typically in a diagnostic procedure or chondroplasty, where they're cleaning up the knee, send it to our facility in Boston. We isolate the chondrocytes, which produce cartilage. We expand those cells. We freeze them down and cryopreserve them until a surgeon and patient are ready to move forward. We thaw the cells, we further expand them. And then we see them onto that collagen membrane at a density of about 0.5 million to 1 million cells per square centimeter. Product is shipped to the surgeon at a surgical site. The surgeon prepares the defect area, cuts the membrane to the size of the defect, glues it in with fibrin glue and done. So a much simpler procedure versus earlier versions of this technology. And once the membrane is implanted, the counter cytes, which are spindle cells and kind of hold on to those collagen fibers in the membrane, migrate on to the subchondral bone. They start replicating. -- they produce the extracellular matrix that produces a hyaline like cartilage in the knee that allows patients to resume an active lifestyle. So MACI obviously has grown very strongly since we launched the product back in 2017. We think there's a number of attributes that have led to that. First of all is what I mentioned earlier, a very broad label for MACI. So MACI is indicated for the treatment of cartilage defects anywhere in the knee, no limits on the size or location, whether there's bone involvement or not. So again, very broad label, which we were very pleased to get from the FDA, and it's got unsurpassed clinical data. So MACI is the only product that's demonstrated superiority versus microfracture, which is the FDA required comparator in these kinds of studies. It demonstrated significant improvements in pain and function. So very strong clinical data. And now in the label, we have not only the 2-year endpoint, but 5-year data, there's publications now of 10-year data where you've seen lasting improvements for these patients. So once you regenerate this cartilage, unless there's another injury essentially can last a lifetime for these patients. So that obviously is a significant advancement for patients. From a surgeon perspective, as I mentioned, there was a predecessor product that was essentially the same concept, patient's own cells, but in the cells expansion. So it led to a very difficult, highly invasive surgery. So MACI essentially took that procedure made it much less invasive, much simpler and faster. And that's what's broadened out the number of surgeons who are -- have adopted MACI as part of their treatment practice. And again, we expect, as you take these invasive surgeries, and make them less and less invasive, you get broader adoption, and we expect that to continue with MACI Arthro, as I'll explain in a moment. Because it's a less invasive surgery, you have a shorter published rehab protocols for MACI, which are now in line with other cartilage repair options. And that obviously is a great benefit for patients. And then finally, MACI has really strong reimbursement. So all the major plans in the U.S. cover MACI under a medical policy. And over 95% of cases that are submitted for prior approval are approved. So really strong reimbursement that has helped the product to grow as well. So as we look back as MACI's growth over the past years, it's really been driven, as I mentioned, by this broader surgeon adoption, this -- MACI becomes a standard of care for these cartilage injuries, deeper practice penetration. So we track, obviously, the number of biopsies per surgeon, and that's really a reflection of the depth of the penetration as these surgeons identify more patients in their practice that are eligible to be treated and can benefit from MACI. And then finally, given that MACI is the only FDA-approved advanced cell therapy with the clinical benefits that I've described. The innovation for MACI has allowed us to have really strong pricing power, which has contributed to its growth as well. And we think all of these things, as I'll explain, will be amplified with the launch of MACI Arthro. So MACI Arthro, as I mentioned, we've been working on this for quite some time, and it really represents -- MACI was a significant procedural advancement versus prior generations. Even with the core MACI open procedure, we've developed custom instrumentation that helps to simplify and allow surgeons to implant MACI even faster. But MACI Arthro really represents a significant step forward. Typically, anything surgeons are doing in the knee are -- is done arthroscopically. So an ACL repair, meniscal repair, most of what's done in the cartilage repair space, whether it's chondroplasty, microfractures, et cetera, again, are done arthroscopically. So MACI Arthro really is in the wheelhouse for how surgeons are treating these patients, and we think it will allow us to again achieve deeper penetration in the MACI addressable market. When we look at sort of surgeon adoption, which again has been a significant growth driver for us, prior to the MACI launch, we had about 5,000 surgeons that we were targeting. We've reached approximately 50% penetration. We look at biopsy surgeons per year as kind of a penetration rate. And in connection with the MACI Arthro launch, we're expanding our base to include surgeons, who do high volumes of cartilage repair, but typically do that predominantly through arthroscopic procedure. So that is the expansion of our target surgeon base. And again, we would expect to achieve that same kind of 50% penetration or more over the coming years, which tells you that continued expansion is going to be of surgeon -- of the surgeon base is going to be a significant driver for MACI as we move forward. We've done a lot of market research and segmented our surgeons into a couple of groups where we have existing MACI users obviously now. So of that, roughly 2,500 surgeons that typically use MACI right now, you really can subdivide them into surgeons who look to MACI as a go-to product in patella cases or injuries on the back of the knee cap, which are difficult to treat with some of the other options that are out there or the segment. And it's pretty equally divided of those who do patella cases plus cases on the femoral condyle the end of the thigh bone, which is, you can imagine, it bears the brunt of the weight, and you have a lot of cartilage injuries on the femoral condyles. Of the targets that provide an opportunity for us to increase the base, there's the other half of our former targets, 2,500 surgeons, plus the new 2,000 surgeons we've added. So there's a lot of surgeons that we believe we can add with a MACI Arthro. And the market research we've done across all surgeons indicated a high interest in the less invasive MACI arthroscopic option as well as for current MACI users, they would expect to do more procedures with MACI with an arthroscopic option. So across multiple market research projects, the takeaway is that regardless of current usage, surgeons expect to shift a meaningful portion of their procedures to MACI Arthro as it's come to market. So we're really excited about being able to access more surgeons. And as we mentioned on our third quarter earnings call, in the initial few dozen cases that were either scheduled or completed in the fourth quarter. We actually had surgeons from each of those 4 segments, which is very encouraging for us as we think about the opportunity for MACI Arthro. When you look at the opportunity through a different lens, which is breaking down the 60,000 patient TAM that I referred to earlier, on the left-hand part of the slide, as I mentioned, MACI has really become a go-to product in patella or back of the knee cap cases. And we have double-digit penetration into that 10,000 patient segment on an annual basis. And also MACI's become kind of a go-to product for larger lesions. So a 4 square centimeter lesion is kind of referred to as a larger lesion or so that size or above. We also have double-digit penetration in that market -- part of the market as well. So that 20,000 patients continue to be a good source of growth for us and again, kind of a go-to pre-MACI Arthro product for surgeons. On the right-hand side of the slide, you look at the rest of the patient TAM and the MACI instruments were principally designed to treat 2 to 4 square centimeters of smaller lesions on the femoral condyles. That's the biggest part of our addressable market, about 20,000 patients, so 1/3 of that market or a $1 billion market opportunity. And we think MACI Arthro obviously, will be more competitive as the only restorative biologic repair product that can be delivered arthroscopically. But there's also another 20,000 patients that have smaller lesions in different parts of the knee and that represents an opportunity for us to significantly increase penetration as well. And as we mentioned on our third quarter earnings call, we've actually in the early days of MACI Arthro procedures seen not only femoral condyle defects being treated, but also defects in other parts of the knee being treated, which again points to the opportunity to penetrate other parts of our addressable market as well. So really exciting opportunity for MACI Arthro and look forward to that being a significant growth driver for the company as we move forward. As I mentioned, we plan to initiate a MACI Ankle study later this year. We've been working with the FDA on all sort of the preclinical work to do that we expect to file an IND in the first half of the year and initiate the study in the second half of the year, did a similar quantitative market research project. There's about 165,000, what I refer to as cartilage resurfacing procedures done in the ankle each year as you come down the funnel about close to 20,000 patients a year would be deemed to be clinically appropriate candidates for a MACI Ankle product by these surgeons, which again at our price point would represent another billion-dollar market opportunity. So we're looking forward to kicking off that study. And again, would position MACI potentially that to be the only product indicated for ankle cartilage repair in the market. So as we turn to the burn care franchise now. So essentially, as I mentioned, we focus on hospitalized patients with severe burns. And for these patients, if you have a full thickness burn, which means the burn goes all the way down to the muscle fat or bone of any size or a partial thickness burn that's greater than 10% of body surface area. And basically, the size of your palm is a 1% body surface area. So even a 10% burn is a very large burn. Those are the patients that are typically hospitalized. And as I mentioned, for those patients, you need to remove the burns tissue or eschar and then graft the wound so that you can promote the healing process. When we look at the addressable market in the U.S. for our burn care franchise, there's about 0.5 million burns in the U.S. each year, about 40,000 patients are hospitalized based on the American Burn Association data that is out there. Of those 40,000 patients when we think about NexoBrid, about 3/4 of those patients require some sort of eschar removal. And at the price point for NexoBrid which is roughly $10,000 per patient, it results in about a $300 million market opportunity for us. As you go down the funnel, there's fewer patients that have these catastrophic burns that are really 30% body surface area or above. And typically, Epicel is used in 40% or above burns. And there's about 600 to 800 surviving patients each year that make up the Epicel addressable market. And basically at our price point and the number of grafts that are used, it's another $300 million opportunity for us. So a pretty substantial market opportunity given that it's a relatively concentrated call point, there's about 140 burn centers in the country. And so again, it's a pretty focused commercial effort to be able to address these markets. So looking at the products themselves. As I mentioned earlier, NexoBrid is an orphan biologic product in the U.S. It's basically a mixture of proteolytic enzymes that can selectively dissolve the burned tissue, while maintaining the -- or preserving the viable tissue. So right now or prior to the NexoBrid launch, surgical excision was the standard of care. So you've got these burns. They're obviously a variable depth and they take -- surgeons take patients into the OR, and they basically just cut away the dead tissue, which is obviously very traumatic for the patient. You lose a lot of healthy tissue. There's a lot of blood loss. There are some nonsurgical options that really are sort of regarded as having limited efficacy. And so there's clearly an unmet need for a selective and effective eschar removal agent. And we think that is the opportunity for NexoBrid and NexoBrid is that product. So this is a product that is topically applied. Again, these proteolytic enzymes recognize the collagen proteins in the skin that are denatured by a thermal burn and they remove that or dissolve that tissue and leave the healthy tissue. So a great advancement for patients and we think it will become the standard of care over time. As I mentioned, once you remove the eschar, you have to graft the wound, that's where Epicel comes into play and Epicel again is a skin graft product that is made from a patient's own cells. So skin is highly immunogenic, if you -- even though it's an organ, if you try to use someone else's skin, the body will sluff it off. So really, the only option for these severe burn patients are to do autografts or use a product like Epicel, where you're using patient's own cells. And if you've got these large burns, and we're often treating patients with 70% or 80% or above of their body surface area being burned, you really don't have enough healthy skin to do these serial autografts. So Epicel is a very important, potentially life-saving product for these patients. And there's published data out there that shows the survival rates at each decile, which is how these -- a burn, which is how these patients are managed, improves with Epicel versus the standard of care. So we're very pleased to have been able to kind of continue to increase the number of patients each year that are treated with Epicel. So the opportunity for our burn care franchise going forward, as I mentioned, we've turned this into a high-growth franchise for the company with our 20% company growth. The burn care franchise was up 22% last year. And a lot of that had to do with continued -- obviously the NexoBrid uptake increased Epicel utilization and having a larger commercial footprint that we expanded in 2024. Another important sort of driver is that we now, when we first launched NexoBrid because the training on Epicel is so, it's so -- it takes a while to get reps up to speed to be able to kind of be the point on Epicel. So we had an overlay configuration where each rep we're selling one or the other products. And in the middle of the year, we basically went to a portfolio selling approach. And we think that with a larger footprint will help drive growth as we move into 2025. We had good strong underlying demand in the fourth quarter for NexoBrid, where hospital orders were up about 40%. So we expect NexoBrid uptake to continue to increase. And then what we've seen is we have more reps selling both products that you get pull through in institutions or burn centers that hadn't used Epicel previously, and we think that will continue to drive growth moving forward as well. So in addition to our current portfolio, obviously, given our sort of financial position, we have a lot of strategic flexibility to kind of think about expanding our portfolio through strategic transactions. That's typically focused on sports medicine opportunities. A little bit in burn care, where we could augment our portfolio as well as sort of leveraging our expertise in developing and commercializing advanced cell therapy. So we have a pretty broad dedicated effort to look at opportunities. But I will say it's -- we're pretty selective. Obviously, our portfolio currently consists of highly innovative products, first and only approved products in their class. And so we look, first and foremost, for innovative products that have a similar kind of financial profile. So that we maintain our revenue and profit growth, and so a pretty high hurdle, but we do spend a lot of time looking at opportunities in this space. But we're in a fortunate position, where we've got plenty of growth opportunities ahead of us. And so we'll continue to look, but be pretty selective in what we might decide to do. So just to close, the company over the last 10 years really has had a lot of successes as we built, one of the leading high-growth med-tech companies added to our portfolio. And as we move forward, we expect to continue to expand that portfolio, as I mentioned, with the launch. Strong momentum in our core portfolio, launch of our new products with NexoBrid and MACI Arthro potential expansion outside the U.S. and then, of course, the MACI Ankle potential indication in 2030 and beyond. So we think we have a really good, strong runway for sustained profit and revenue growth. And with that, I'll kind of finish up and we can take any questions.

Awesome. Thanks so much, Nick. I want to open it up to the room for questions. Yes, go ahead -- Sorry. Okay. I thought there was a mic coming, but go ahead.

[indiscernible] if my memory is correct. So for your U.S. BLA approval, you actually leverage quite lots of data from European countries and real-world data other than a large pivotal file. Am I right?

So you're talking about MACI, right?

Yes, MACI. Sorry.

The approval pathway for the BLA. So back in 2016, when MACI was approved, yes, we were pretty fortunate. We purchased this business back in 2014 from Sanofi. It was part of the Genzyme biosurgery business and they divested this plus the rest of the business. And the pivotal study that Genzyme had run was conducted in Europe. So there was a European study that supported the approval in the EU at the time we're almost coincident with when we bought the business. I think Sanofi and Genzyme assuming they were going to have to run a clinical study in the U.S. And we basically took a different approach with the FDA where we said, look, Carticel has been on the market for 20 years. It's a similar process where you take a patient cells. Again, it's a safer and less traumatic surgery, less invasive with MACI. So we think this should be a Supplemental BLA to the Carticel BLA. And the FDA said, no, we think it's a new product. But yes, you can use the pivotal study from Europe, the extension study with the 5-year data plus the Carticel data to submit your application, and that's what allowed us to get approval without having to do additional clinical work. So it was a great regulatory strategy by our team and really allowed us to get to the market probably 5 years earlier than we otherwise wouldn't leapfrog some of the companies that were working in the space. And really set us off on a great growth trajectory. Now for MACI Arthro a similar sort of great regulatory strategy, where the FDA could have said, yes, it's just a different method of administration, but we'd like to see a clinical safety study so that we can see if when you implant the membrane using an arthroscopic device that the membrane stays in place, that the defect fills like it does if it's an open procedure, but we actually ended up doing a human factor study, which is basically a study, where you bring surgeons in, demonstrate that they can use the new instruments, you've developed to effectively administer the product. And that allowed us really to not have to run a clinical study for MACI Arthro to get that administration added to the label. And again, that saved the years of time for us. So our regulatory team has done an outstanding job with respect to MACI, and we expect them to do the same with the MACI Ankle potential indication.

Congratulation. That does confirm my research, but my question is actually -- there are still quite a few things with similar idea existing in Europe. Do you foresee some of them could take the similar route to be [ registered ] here with fundings and also like specifically there's product call [indiscernible].

Yes, there are definitely some other technologies in Europe. I would say that none of them that I'm aware of have sort of done the kind of pivotal study like Genzyme ran for -- or have successfully run those kinds of studies that were done for MACI. So I'm not aware that there are products out there that have sufficient data to be able to just come into the U.S. And I think those that -- again, there's -- it's a less regulated market essentially in Europe, lot of sort of hospital exemptions with different kinds of things at the bed side. I'm not aware that any one of those has sufficient data to come into the U.S.

You foresee any competitor coming to U.S. we need to have a pivotal trial or even had to have a comparison with your product?