Vericel Corporation (VCEL) Earnings Call Transcript & Summary

Thank you very much. This is Peter Harrison from Morgan Stanley's Investment Banking Group. I'd like to welcome you to the Vericel chat. Today with us is Nick Colangelo, the CEO; and Joe Mara, the CFO. With that, we'll get started. Thank you very much for attending the conference. We greatly appreciate it.

Happy to be here. Thank you.

Thanks for having us.

Let's start with MACI, of course. It's your lead product for cartilage repair in the knee. TAM is $4 billion in the U.S. You're currently preparing to launch it outside the U.S. and conducting a trial for the product in ankle. Can you provide an update on these 2 initiatives and how they will continue to drive what's been an extremely impressive growth profile for MACI?

Yes. And I'll just start by taking kind of a step back for those who are less familiar. So MACI is our lead product, as you mentioned. It's an advanced cell therapy that's used to restore cartilage -- repair cartilage and restore function that we launched in 2017 for the treatment of knee cartilage injuries. And since that time, it's become far and away the leading restorative cartilage repair brand on the market and the only FDA-approved product in its class. And I'm sure we'll talk a little bit about sort of the growth drivers for MACI over time, which really had to do with -- it was a kind of tech procedural advancement from a technology standpoint versus the prior product that was on the market at the time. So it made it a much simpler, faster clinically effective product for surgeons, which expanded the use in the U.S. So there's a bunch of sort of growth drivers that we talk about in the short term, but the ones you mentioned are really the longer-term growth drivers for MACI. So immediately after launch, we started to think about how do we continue down the pathway of sort of procedural advancements to continue to make it less invasive, simpler, faster procedure, and that's kind of the launch of MACI Arthro that I'm sure we'll talk about a little later. In addition, you have articular cartilage in all joints. The knee is the greatest opportunity since it's the greatest weight-bearing joint, and that's why all the injuries occur in the knee. But ankle is a second opportunity for us. And so moving into other joints has been a long-term growth driver and initiative for the company as has OUS expansion. So I'll start there. Just by way of background, MACI was actually developed in Europe by a German company there before Genzyme purchased that company back in the 2010. It -- the pivotal study for MACI both in Europe and in the U.S. was conducted in Europe. So there's a long history -- and it was marketed in Europe. So long history of MACI in Europe. Once we completed our manufacturing facility in the U.S. that allows us to go back into Europe because we design that facility with global CMC requirements in mind, so that facility was completed and approved by the FDA for MACI production earlier this year. And we announced last year that we intended to go back into Europe and in a staged manner and that we would start with the U.K. And we did that for a number of reasons. Number one, there's a high degree of brand awareness and surgeon advocacy for MACI in the U.K. So because the clinical study was conducted in Europe, U.S. surgeons when we launched in 2017 didn't really have experience with the product. And it was surgeons from the U.K. that came over and trained our trainers who then went out and trained other surgeons in the U.S. So long history there. Number two, there's an expedited approval and reimbursement pathway in the U.K. So if you have a product that's approved in the U.S., Japan, Europe, other countries, then the U.K. has a mutual recognition procedure, which we qualify for and we're following. So it's an expedited approval process. And then from a commercial standpoint, there really are, if you're in the national health system there, which most patients are, there are 12 or 13 Centers of Excellence, joint restoration or preservation, Centers of Excellence in the U.K. where these patients will be treated. So a very sort of concentrated call point for us. So we're really excited about the opportunity there. We submitted our marketing application in the second quarter. The processes that you have to go through a validation of that application. You have to have facility inspection, just like we did by the FDA earlier this year. And then the clock starts ticking. And so hopefully, sometime next year, we'll be in a position where the product is approved, and we can launch in the U.K. So really excited. And then we would move beyond that to other countries in Europe, potentially Canada and so on. So a really nice opportunity for us in the back half of this decade to sort of continue to drive growth for MACI outside the U.S. MACI ankle, as I mentioned, we've always been focused on other joints and MACI ankle really -- the ankle represents the second largest opportunity behind the knee. So just like we did in terms of the opportunity for knee cartilage repair in the U.S., a quantitative market assessment, we did the same thing for ankles. There's about 170,000 or so cartilage resurfacing procedures that are done in the U.S. each year in the ankle. Our TAM is probably about 20,000 patients a year, but at our price point of, call it, roughly $70,000 per implant, it represents a really nice $1 billion-plus market opportunity for us. And that's really somewhat of a longer time frame for us in that it will be, call it, a 3-year enrollment, a 2-year follow-up, a couple of years for regulatory approval. So that's more of a 2030 kind of -- early 2030s kind of opportunity. But when you take a big step back and you say, we launched MACI in 2017. We're kind of in our tenth year on the market. We've had a 24% CAGR in terms of revenue growth over those years. So really strong momentum in the business. We launched MACI Arthro last year that allows us to access another part of the addressable market. That's an important one. You can layer on OUS opportunities and then MACI in the ankle, and you can see this multiyear, multi-decade opportunity for MACI, especially because there's no MACI-like products on the horizon.

Super helpful in the longer term. When I think about that 24% CAGR in the last couple of years and in the near term, as you bridge the OUS and the ankle. What has been the driver of MACI over the last couple of years? Is it the price? Is it volume? Is it occupation awareness?

Yes. So I would say, like our whole portfolio, and we can use MACI as an example, but essentially, we have a product portfolio, including MACI, where it's the only FDA-approved product in its class. We can talk about the burn care products a bit later, but they follow a similar model where these are -- because they're the only FDA-approved products in their class, they are sort of kind of the most clinically proven product. So there's a great deal of clinical data for all of our products. And essentially, we have a model that is premium priced products, concentrated call points. And so that has supported both the revenue growth but also sort of the profitability and cash generation that we can talk about as well. For MACI, in particular, there's a very large addressable market. So I mentioned the ankle addressable market. It's probably 3x the size for the knee, about 60,000 patients each year. So it's a large addressable market. Relatively low penetration for restorative therapies like MACI, but that market is shifting pretty dramatically towards restorative therapies. Obviously, there's a pricing component to our growth as well, but it's really driven by continued penetration into our target surgeon base. So as I mentioned, is a less invasive, simpler procedure. It's kind of a tried and true med tech play where you're less invasive, simpler to do. The number of surgeons that use the product grows. That's been a principal driver to date. We also look at depth of penetration. So how many biopsies per surgeon are we getting as they adopt MACI into their practice. How those biopsies convert into implants. And so yes, I mean, that 24% CAGR not over a couple of years, it's over a decade. And so it's been very strong growth. And we think there's a lot of opportunity as we go forward. MACI's growth is actually inflected somewhat since we launched MACI Arthro and a couple of other initiatives over the past year. Rolling 4-quarter growth is about 23% versus 19% in the fourth quarter before that. So we're seeing sort of good strong growth. It's grown 20% plus each of the last 3 years. And so we think there's a lot of room ahead for us with MACI that will continue to drive durable growth not only through the back half of this year but into 2027 and beyond.

On that room for growth, you did a sales force expansion at the end of last year. How is that going? How is the productivity of the sales force ramp up as we move into the second half of this year and beyond? And do you think you'll see additional sales force increases in the foreseeable future?

Yes. The sales force expansion was sort of 1 of a few initiatives that we engaged in. So mid last year, we were kind of on a path to get to about $0.25 billion in revenue. And we said that's great. But a lot of times, companies don't transition from that to what -- to our next goal, which is about $0.5 billion in revenue by 2029. We've set that as a midterm target along with our margin targets and what got us to $0.25 billion may not be what's necessary to get us to $0.5 billion. So we did a number of things. We accelerated our planned sales force expansion at the end of last year. That's when we did the hiring, but they actually went into their new territories, all the reps as of January 1 of this year. So that's a relatively sort of new development. We obviously talked about them a bunch of our earnings calls. We had launched MACI Arthro at the beginning of 2025. That's kind of contributing to our growth. And then we invested multi-millions of dollars in commercial excellence initiatives that also have sort of combined with the expansion in MACI Arthro contributed to the growth. So I'd say on the expansion itself, it's gone exactly to plan. Obviously, folks worry about disruption when you're expanding a sales force. We've done it a number of times. And each time we've done it previously, we see our rep productivity to go up often in the same year that we expand, which is somewhat unusual. So we made a comment on our first quarter earnings call that we had double-digit biopsy growth. That was the rep's first quarter in place and biopsy growth in new territories was particularly strong. So they were doing exactly what we'd want to see, which is taking the existing biopsies, converting those into implants, but also building their own pipeline as they were moving forward. Second quarter, we said both biopsy and implant growth had accelerated in the new territory. So I think they're doing really well. And I think the important point that we mentioned is not only does it set them up for a strong second half of the year in our business overall, but we look at sort of how reps progress over time. And we looked at cohorts of post-COVID hires, and they clearly contribute immediately. And again, they're not walking into white spaces and starting from scratch. So they're able to move the needle pretty quickly. But it's really years 2 and 3, where their in growth rates in both biopsies and implants are actually the highest versus legacy territories or other new territories. So for us, what that means is, again, we feel we're set up well for the back half of '26, but also for '27 and '28 as those -- it's a pretty big percentage of our sales force, about 30% expansion sort of get up to speed. And just the time it takes from go -- to go from a biopsy to an implant, it all sort of makes sense. In year 1, they're converting business, building a book of biopsies, but those convert over multiple quarters and sometimes multiple years. And so they're just building this foundation where you really see the strongest growth in years 2 and 3.

Helpful. You mentioned in passing the commercial excellence initiatives in that answer. What -- can you go into a little more detail on what those have been and how they have also contributed to the growth we've seen?

Yes. I mean I think a lot of it has to do that with the fact that we're now able to access sort of better procedural data for the surgeons that we target. So that allows you to sort of segment the surgeons at a different level. Our growth -- we've always talked about the fact that there are 4 MACI growth drivers. It's adding more surgeons who are taking biopsies. It's getting more biopsies per surgeon, that's the depth into their practices. It's how those convert and then it's price. And for the past few years, it's -- our growth has principally been driven by more surgeons adopting the product, taking biopsies, so you're getting more biopsies because you have more biopsy and surgeons and price. Last year, we started to talk about the fact we're starting to see an uptick in biopsies per surgeon. So -- and as surgeons mature, they typically end up taking more biopsies and treating more patients. And so that has become sort of a growth driver for us as well. And so it's really focusing through these commercial excellence sort of the segmentation first of all, which surgeons are really going to grow your business because you can see the number of qualifying procedures they do. You can target those surgeons better. It's also about sort of standardizing the playbook. So there are different segments if you have a surgeon that doesn't take a ton of biopsies and could take more, but the biopsies, they take, they convert at a very high rate. Okay, you want to kind of run plays that allow you to grow their biopsies because you know they're going to convert. You might have the opposite with some other surgeons where they take a lot of biopsies. But don't convert at such a high rate. So how do you get them to convert at higher rates. And so there's different things you can do. And really just standardizing best practices across a larger sales force is an important piece of that. And then implementing what will be a sales force CRM, so it ties everything together and allows them to sort of do better account planning focus on the right surgeons. It's a great performance management tool. All of those things combined to just have more productive reps out in the field that can really drive our business.

Makes sense. And the last question on MACI before we move on. You mentioned Arthro a couple of times. What did that do from a competitive position? And how do you see that contributing to growth over time?

Yes. So as I mentioned, continuous procedural advancements is an important and kind of tried and true playbook, right? So the predecessor product Carticel was highly invasive. MACI is a less invasive surgery. MACI Arthro is really designed to continue down pathway. And what it did, basically, MACI over the years, became sort of the go-to product for larger defects, just the way the product works, we take a patient's cells, we put them onto a collagen membrane that's surgically implanted or the cells that migrate down to the subchondral bone and basically generate the cartilage in the -- which essentially a pothole, the surface of the knee. And because it was a -- it's a simpler procedure, that's what initially kind of catapulted MACI growth. MACI Arhtro -- but again, it's more -- its position prior to MACI Arthro was in larger defects, and then defects on the back of the knee cap because there really aren't other good alternatives for treating those kinds of patella defects. And that's a big part of the market. So those were always the go to as MACI continued to grow post launch. The MACI Arthro instruments are designed for smaller defects, 2 to 4 square centimeters on the femoral condyle. And that's a place where we have business, but we had lower penetration, lower overall volumes because there are other things that surgeons can do. And so our whole goal there, it's probably 1/3 of the addressable patient market, have smaller femoral condyle defects. And that's why we developed the MACI Arthro instruments so that we'd have the most competitive positioning in a very large part of the market. So that's been an important evolution for us. We launched -- kind of did a full launch last year, early 2025. At that time, we probably had 2,500 surgeons out of our 5,000 or so targets that we're taking biopsies in any given year, probably higher than that cumulatively. And out of the gate, we trained around 1,000 surgeons last year. It was kind of a critical mass of sort of getting surgeons trained on doing a MACI Arthro procedure. They represented that trained surgeon cohort more than half of our implants last year. And we saw that while patella defects not only is our highest volume, but it's typically been our highest growing segment. We saw those small femoral condyle defect that growth rate sort of at par with patella. And so that was an important sort of development for us. We've seen continued strength in the leading indicators. So I think it refreshes the brand, it allows us to access a different part of the addressable market with a more competitive offering. And it will allow us to continually innovate because this was just version 1.0. We're working on additional enhancements to the MACI Arthroscopic instrument set. We'll look at developing a specific set of instruments for use arthroscopically in the patella. And it's kind of as you would expect, a less invasive procedure is better for the patient. And we're also focused on publishing data. Sort of like MACI, when it was launched, we didn't really have clinical data in the U.S. because the pivotal study was run in Europe. We have a registry now to generate MACI U.S. patient data. We have some publications out there already. The arthro instruments were approved with the human factor study. So we didn't have to do a clinical study. We just had to demonstrate that surgeons could follow the instruction and implant the MACI membrane properly. And so now we're focused on demonstrating, surgeons would expect to be the case. And we know is the case that with a less invasive surgery, you have better post operative outcomes in that less postoperative pain, better range of motion, back to full weight-bearing more quickly. And so we're generating that kind of data and that we think also will help with MACI Arthro uptake. Interestingly, MACI was on the market in Europe and Australia for years. And about a month or so ago, there was an arthroscopic long term publication coming out of Australia that demonstrated after 13.5 years of follow-up patient satisfaction with arthroscopic administration, not our instrument set, but they just use standard arthroscopic instruments, they had the highest patient satisfaction outcomes after that period that we've seen. They're all typically pretty high in the 90-plus percent range, this was like 100% patient satisfaction, 13.5 years on average after treatment. So we know the long-term outcomes will be great. We also want to have data that our sales reps can use showing those shorter-term postoperative outcomes are better as well.

That's helpful. Before we go on to the burn franchise, let's step back a little bit and -- what this is built as a company that has both growth, strong -- very strong margins and cash flows, which is fairly unique in med tech and companies that's been tied with. What do you think contributes to this kind of durable top line plus the margin pull-through in cash flow generation you all bring to bear for investors?