Ladies and gentlemen, thank you for standing by, and welcome to the Vericel Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Nick Colangelo, Vericel's President and CEO. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's Third Quarter 2020 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that, on today's call, we'll be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are available on our website. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copy of our third quarter financial results press release is available in the Investor Relations section of our website. We also have a short presentation with highlights from today's call that can be viewed directly on the webcast or accessed on our website. This morning, we reported record third quarter total net revenues of $32.3 million. Our strong revenue performance, which exceeded our expectations, was driven by MACI as the V-shaped recovery that started in June continued in the third quarter. MACI revenue grew 18% over the third quarter of 2019. We also reported the second highest quarterly Epicel net revenue in history and reported our first NexoBrid revenue related to the BARDA procurement for emergency response preparedness. Our strong revenue performance generated significant profitability and cash flow as we reported a gross margin of 70%, record third quarter net income of $3.6 million, and positive operating cash flow of $4.6 million for the quarter. With these results, we've generated growth in total revenues year-to-date compared to the same period in 2019, and the company is cash flow-positive for the year through the third quarter, a great achievement given the significant challenges during this period. From an operational standpoint, in addition to announcing the first delivery of NexoBrid to BARDA and related revenue, we also announced that the FDA has accepted the NexoBrid BLA for review and assigned a PDUFA goal date of June 29, 2021. As those of you who were able to join us on our recent Analyst and Investor Day heard, not only is there a great deal of enthusiasm for NexoBrid among burn surgeon thought leaders in the United States, but we also have extensive pre-commercialization marketing and medical initiatives underway to support the planned NexoBrid launch in the second half of 2021 upon approval. As we approach the end of this challenging year, our third quarter results demonstrate the significant progress we've made in 2020 on several key metrics that give us confidence regarding the resiliency of our long-term growth profile and point to a strong fourth quarter and the potential for significant growth acceleration as we move into 2021. Before covering additional details of our commercial performance and expectations looking forward, I'll briefly cover our financial highlights for the third quarter. As mentioned earlier, total net revenues increased to $32.3 million compared to $30.5 million in the third quarter of 2019 and included $24.4 million of MACI revenue and $6.7 million of Epicel revenue compared to $20.6 million and $9.9 million of MACI and Epicel revenue, respectively, in the third quarter of 2019. Total revenues for the quarter also included $1.2 million of NexoBrid revenue related to the BARDA procurement for emergency response preparedness. Gross profit for the quarter was $22.5 million, or 70% of net revenues compared to $21.2 million, or 69% of net revenues for the third quarter of 2019. Total operating expenses for the quarter were $19 million compared to $18.1 million for the same period in 2019. The increase was primarily driven by incremental employee expenses related to the MACI sales force expansion earlier this year. Net income for the quarter was $3.6 million, or $0.08 per share compared to $3.5 million, or $0.07 per share for the third quarter of 2019. Non-GAAP adjusted EBITDA was $7.6 million for the quarter compared to $6.8 million in the third quarter of 2019. Finally, we generated $4.6 million of operating cash flow; and, as of the end of the quarter, had $85.5 million in cash and investments compared to $79 million as of December 31, 2019, and no debt. Clearly, it was a very strong quarter for the company as we were able to grow total revenues despite the all-time high Epicel revenue comp from the third quarter of last year and deliver similar levels of profitability and cash flow, despite the additional investments we've made in our sales force expansions. We believe that this reflects both the strong underlying fundamentals of our business and the fact that the company continues to execute at a high level. Our third quarter performance was driven by MACI, as we generated double-digit growth in revenue, implants, and biopsies, and achieved a record monthly high for biopsies in September. To provide further insight regarding MACI's performance, this time, I'll share how we view the underlying drivers of MACI performance and how they shape our outlook for the fourth quarter and for 2021 and beyond. As discussed in the past, there are three key levers that drive the growth of MACI: the number of surgeons taking biopsies, the average number of biopsies taken per surgeon, and the conversion rate of biopsies to implants. With respect to the number of surgeons taking biopsies, we reported on our fourth quarter earnings call last year that MACI's growth in 2019 was due in large part to an increasingly broad group of surgeons adopting MACI as a preferred treatment for larger symptomatic focal cartilage defects in the knee. This strong adoption was reflected by the fact that we had received biopsies from approximately 1,400 surgeons in 2019, which represented 25% growth over 2018. Despite the significant challenges resulting from the pandemic over the course of this year, we still expect the number of surgeons taking biopsies to grow to around 1,500 surgeons in 2020. Of particular note, the 27 expansion territories added this year had by far the highest growth rate in the third quarter in terms of adding new surgeons that had never previously taken a MACI biopsy. This supports our sales force expansion strategy to increase the reach and frequency on our high-volume cartilage repair target surgeons and gives us confidence that we'll return to a similar rate of growth in surgeons taking biopsies in 2021 as we saw in 2019. In terms of the average number of biopsies taken per surgeon, third quarter rates were already back to 2019 levels. Looking forward into 2021, we'd expect biopsies per surgeon to increase from current levels, which, when combined with our expectation for an acceleration in the growth in surgeons taking biopsies, sets MACI up for a very strong 2021. Finally, given the expansion of our surgeon base in the current environment, we're very pleased that the biopsy conversion rate has remained within the historical range, and we expect that to be the case for 2021. Turning to Epicel. We've seen steady monthly Epicel volumes since May, and this trend has carried into the fourth quarter. This is the first full year with our new Epicel sales force structure, which includes both sales representatives and clinical support specialists. And we believe that this new structure has helped maintain our momentum despite the challenges throughout the year. As we expand the sales force next year in anticipation of the NexoBrid launch, we believe that we'll have the right scale and structure to drive another leg of growth for Epicel as we target additional centers that we believe could become Epicel users in the years ahead. Finally, as discussed in detail during our recent Analyst and Investor Day, we believe that the addition of NexoBrid to our burn care franchise will create a unique strategic market position for Vericel and enhance the company's leadership position in burn care by having highly innovative products for both the debridement and wound closure phases of the burn treatment pathway. Given that we'll be targeting a much larger segment of hospitalized burn patients than with Epicel alone, the addition of NexoBrid will triple our burn care addressable market to over $300 million in the U.S. The expansion of the addressable market supports a broader commercial footprint, which we believe will drive both NexoBrid uptake and increase Epicel penetration as we build a larger share of voice and expand our presence in the burn care market. So we're very excited to have an opportunity to bring NexoBrid, upon approval, to the market in the United States in 2021, and we believe it will be a meaningful contributor to our growth in 2022 and beyond. To wrap up, I'll spend a few minutes discussing the current operating environment and our expectations for the fourth quarter. While we're not in a position to forecast exactly how the recent rapid increase in COVID-19 cases could impact MACI in the second half of the fourth quarter, we can say that, to this point, we have not seen any change in the trends in MACI biopsies, new case activations or scheduled surgeries as a result of the effects of the pandemic. Barring a widespread reinstatement of restrictions on elective surgeries, as we've previously discussed, we believe that MACI is well-positioned to return to its prior growth trajectory even in a challenging COVID-19 environment, given the profile of potential MACI patients, the outpatient nature of the surgery and its favorable reimbursement status. As support for this view, although there was a spike in COVID-19 cases in states, including Florida, Texas, and California in the third quarter, MACI growth rates in those states actually outperformed the national average in the quarter. That experience, together with our market research with surgeons around the country regarding expected practice dynamics during times of increased COVID hospitalizations, has helped calibrate how we are thinking about MACI performance in the fourth quarter. Our outperformance in the third quarter certainly increased our expectations for MACI in the fourth quarter, and all key metrics point to the normal seasonal dynamics in terms of a significant sequential step-up in MACI volume from the third to the fourth quarter. As I mentioned earlier, Epicel has been performing consistently well since May, and that trend continued into October. We also expect the second shipment of NexoBrid to BARDA later this month, which should generate around $1 million in revenue for the company in the fourth quarter. We're closely monitoring the evolving COVID-19 dynamics. And absent a market change in current conditions in the second half of the fourth quarter, our expectations have increased, and we now expect to be able to achieve double-digit product net revenue growth in the fourth quarter. Together with the NexoBrid revenue related to the BARDA procurement, this would generate total net revenue growth and positive net income and cash flow for the full year in 2020. Our company executed exceedingly well during the third quarter as we generated stronger than expected financial results, drove strong commercial performance for MACI and Epicel, and achieved important milestones towards our goal of attaining marketing approval of NexoBrid in the United States. Our third quarter results demonstrated the strength of our business across several measures, and while uncertainties related to COVID-19 remain, we're highly confident in the underlying fundamentals of our business, and we remain on track to deliver strong revenue and profit growth in the years ahead. This concludes our prepared remarks. As a reminder, the presentation is available on our website and provides additional highlights of today's call. Now, I'd like the operator to open the call to your questions.

Your first question comes from the line of Ryan Zimmerman with BTIG.

Hey, thanks for taking the questions. Congrats on the Q like a one-man band today. I was hopping between calls, so I apologize if I missed this. But I guess I want to put a finer point around the strong growth for MACI in the fourth quarter. I think the Street's modeling about mid single-digit growth right now. But certainly, based on your commentary and the commentary for double-digit product growth, it would suggest something a little bit higher, assuming Epicel holds at its current levels. So, one, is my thinking around that correct; and then, two, any commentary to put a finer point on your expectations around MACI?

Well, yes, I do. I think your thinking around that is correct. Obviously, you can look at the product revenues from last year, which in total were about $39.4 million. So if you just apply double-digit growth to that and then back out the current Epicel run rate, then I think you get to that answer with respect to MACI.

Understood. You outlined the key factors influencing MACI, particularly the number of surgeons and biopsy rates. Considering the significant increase in biopsies during the third quarter, could you break down what contributed to this increase? Specifically, how much was driven by the expansion of the sales force, physician adoption, and patient demand from your recent marketing efforts? I would like to understand these elements in relation to the overall growth drivers you previously mentioned.

Well, I guess I would start by saying we saw pretty consistent performance among our surgeon segments that we discussed on our Analyst Day, and then across all of the regions, so very pleased with the breadth of the performance. We did mention that, in the new 27 territories, there was the highest level of growth in terms of bringing on new surgeons who had never taken a MACI biopsy before. And again, that supports the rationale for why we expanded the sales force, to make sure we had appropriate reach and frequency on these surgeons. One thing we did talk about on our last call was the fact that we expected the majority of our volume in the third quarter to be essentially new patient flow. So we said maybe 20% would be, 'catch-up'. And for us, that really has two components, number one, there were cases in late March and April that were canceled. And there were some cases, probably less than 5% of third quarter volume related to cases that were previously scheduled being canceled, and then rescheduled. On the theoretical front, we said, hey, just based on historical averages, we would have expected a certain number of biopsies to convert to implants, and that was a little lower. So the rest of that call it, 20% catch-up in the third quarter related to biopsies that normally would have converted in the first half. But that was really a July-ish, maybe early August phenomenon. And by the time we got to September, the age of the biopsies, we're pretty much comparable to the age of that biopsy converting to implants in 2019. So really, that supports our growth outlook, going forward. It's really mostly driven at this point, or almost exclusively driven now by new patient flow.

Okay. Appreciate the color. I’ll hop back in queue. Thank you.

Your next question comes from Danielle Antalffy with SVB Leerink.

Good morning. Thank you for taking my question. Nick, I understand you’re not providing guidance for 2021 at this moment. However, regarding the consensus data you mentioned, you talked about an increase in biopsy rates among physicians and higher utilization. Can you help us understand how to view MACI growth as we approach next year, considering the various factors and the favorable comparison in Q2? There are many elements at play, so it would be helpful if you could discuss some of the metrics you can share to give us an idea of how this could unfold.

Well, yes. Thanks, Danielle for the question. And I would say that I appreciate your acknowledgment that we're not going to give 2021 guidance right now. What we're trying to do is say that, obviously, we are expecting the reference back to sort of the growth rate in new biopsying surgeons that we saw in 2019 over 2018. We had talked about that being absent our pre-COVID disruptions, sort of a good baseline growth for the company going forward, and that was sort of the mid-20% range. And our commentary now is that we expect to get back towards those levels in 2021 in terms of the growth rate. That, combined with additional biopsies per surgeon, I think gets you to a point where you can kind of look at consensus and say does it seem to make sense from a MACI perspective.

Thank you for that insight. I wanted to follow up on NexoBrid and Epicel. Epicel tends to fluctuate quite a bit from quarter to quarter, and there isn’t much visibility into it. Could NexoBrid help provide more consistency in the Epicel business? Additionally, how do you plan to leverage NexoBrid in your sales strategy to boost Epicel sales? Thank you.

I would like to reaffirm my earlier comments about this being the first full year with our new sales force structure, including both sales representatives and clinical support specialists, which we believe is positively affecting the business. As you mentioned, Epicel has historically shown significant variability, but we have observed fairly consistent monthly performance. Thus, our outlook for the fourth quarter suggests that the trends we witnessed in the third quarter are continuing into the fourth quarter. Looking ahead to next year, we plan to implement a similar approach to sales force expansion for the launch of NexoBrid as we have done previously for MACI. We will start by hiring management-level personnel at the beginning of the year and aim to add seven new clinical support specialists and sales representatives shortly before the launch. Currently, we are focusing on approximately 70 or 80 of the top burn centers out of around 140 nationwide. With the introduction of NexoBrid, we expect to expand our reach, which should help increase the utilization and penetration of Epicel.

Thank you.

Your next question comes from Kevin DeGeeter with Oppenheimer.

Hey, guys. Thanks for taking my question. Nick, maybe you can just talk a little bit about capital structure as we go forward here with a business that looks like it's essentially sustainably profitable, pretty healthy balance sheet, pretty low cost of debt options out there as well. So you have a lot of potential levers to pull. So maybe you could just prioritize for us sort of internal investments versus external business development, M&A versus potential share buyback and other structures for reinvestment of capital.

Got it. Yes, I think we will continue, as we've always done, to look at external opportunities that would allow us to expand our sports medicine or burn care franchises or if we find new opportunities that have a profile in new cell therapy verticals, like our current products, in other words, highly innovative concentrated call points and good financial profile. You know, we look at those as well. We'll continue to do that. Those, as you know, on the business development front, are more sort of sporadic opportunities, so we'll continue to look. But we have a pretty high hurdle, and those will happen when it makes sense for us. In terms of internal investment, obviously, we have lifecycle management initiatives that are underway. We're always sort of upgrading facilities and looking at capacity expansion plans over a five-year plus to ten-year period. So there may be capital requirements there over time as we continue with these very high growth rates. I would say we certainly have not ventured into the share buyback territory yet. But obviously, we'll think about all those parameters as we move forward.

And maybe just following up on that topic. With regard to manufacturing structure, can you remind us as to how you think about what type of run rates, particularly with regard to MACI, made to a discussion about upgrades, expansion or perhaps geographic diversification of the manufacturing infrastructure, timely discussions? Kind of when does that sort of threshold of run rate on MACI kind of make that informative?

Yes. We've talked in years past, and it's probably been a couple of years now, about sort of the capacity here. And again, we've essentially doubled our volumes or more over the past couple of years since we've launched MACI. And so, we certainly, you have to look out three to five years and say, where do you think you'll be and when do you need to start making those strategic moves. And so, we're at a point where we're looking out three to five years and saying where are the pinch points in terms of capacity. Obviously, our December volumes are so high, you typically double any other month in the year, and that creates certain capacity constraints that we need to navigate around. And so, I would just say that, while we have adequate capacity for the next three to five years or so, three years, call it, you need to get ahead of it. So, we're looking at that now, different alternatives, etc.

Great. Thanks for taking my questions.

Okay. Thanks, Kevin.

Your next question comes from Jeffrey Cohen, Ladenburg Thalman.

Hi Nick, how are you?

Good, Jeff. Thanks.

So I wanted to ask you about if you could discuss a little bit about plans for NexoBrid as far as the launch in the U.S. and kind of the Venn diagram on overlap with Epicel. You talked about bringing in some managers and some support sales launch. Can you talk about kind of go-to-market strategy as far as current centers, which are already being serviced as well as opportunities for new centers and how you see that overlap out there?

Yes. And I would point folks on the call to our Analyst and Investor Day presentation where we covered the sales force expansion plans, the pre-approval sort of medical and marketing initiatives, and so on. And so, I would say, Jeff, the current activities kind of fall into three buckets. You have disease state awareness ahead of a product approval, and that campaign was launched at the American Burn Association meeting this past year, virtual meeting, and that will continue ahead of launch. We have, obviously, brand development that is ongoing right now. And then, of course, market access initiatives, as well. So, all three of those buckets were sort of laid out by Roland on our Analyst and Investor Day call. It's kind of the typical sequence of events you do ahead of launch. And so there's a lot of those activities. Once the BLA has been filed for review or accepted for review by the FDA, that you kick those initiatives off. So we're deeply engaged in all of those activities. In terms of the sales force expansion, we currently have one national sales director and 11 sales reps and clinical support specialists. So as you think about getting towards 20 sales personnel, that's a little difficult for one person to have that many direct reports. So, we'll have a structure that again, is much like our MACI structure in terms of we'll have two regions with two regional managers and then essentially 11 territories that are supported by both reps and clinical support specialists. So, we think that's about the right number to call on the burn centers, which is the next part of your question, which is sort of right now, as I mentioned, we probably focused on the top 80 burn centers out of the 140 in the country, because those are the centers that typically see sort of the catastrophic burn patients like the Epicel patients are, so not all the burn centers routinely will have Epicel-appropriate patients. So, we do focus on sort of the upper end of that. As we've talked about before, virtually all of the 40,000 hospitalized burn patients across those 140 centers are going to need some sort of debridement. And so, NexoBrid will allow us to focus our efforts on a broader set of the burn centers. And as I mentioned in my prepared remarks, we certainly expect that will provide opportunities to increase Epicel uptake in those centers that don't currently use the product. So, we do think there will be a lot of synergies there in terms of the Venn diagram portion of your question.

Okay. Got it. And then secondly for me, just wanted to review and go back to your Q4 commentary that Ryan has some questions about. You talked about double-digit growth for MACI for fourth quarter, double-digit annual growth, correct?

Yes. What we said was double-digit product growth. So, our current commercial products for the fourth quarter, and that certainly, our expectations have increased based on our Q3 performance, but double-digit product growth for MACI and Epicel combined. So last year, the products were at about $39.4 million, so you can sort of do the math from there.

Okay. And then one more question, if I may, lastly, on NexoBrid. In the near-term, the next four quarters, you would anticipate the BARDA procurement to continue at current levels, call it, approximately $1 million?

Yes. So we had $1.2 million in the third quarter. We said about $1 million in the fourth quarter. And then, I think there's about $3.8 million left for next year that, yes, we've suggested you spread over the four quarters. So one last point just around that. In terms of our prelaunch activities, I'd just remind you that we do have the next study ongoing. So there will be, assuming all of those sites are up and running, about 33 centers in the country that will have experience with NexoBrid at launch.

Perfect.

Thank you.

Your next question comes from Kaila Krum with Truist Securities.

Hi guys. Thanks so much for taking our questions. So first, I think that something a lot of companies are talking about is just learning how to be sort of more efficient with virtual training going into next year. And so I'm curious, are there any sort of cost efficiencies you guys think will stick heading into 2021 that perhaps we may not have otherwise considered?

Yes. We've been utilizing various virtual tools. During our Analyst Day, Roland discussed several aspects related to MACI, particularly the peer-to-peer interactions among surgeons during these times. We've been actively using platforms like Doximity and VuMedi, where surgeons can view surgical procedures. Doximity functions similarly to LinkedIn for the surgical community. We've also mentioned significant investments in a platform called KOLCast, which focuses on these peer-to-peer initiatives for surgeons. We've seen a great response and success with these platforms in the second and third quarters, and we plan to keep leveraging them. This approach has helped us maintain a lower cost structure this year. We'll monitor how travel evolves, as we anticipate a return to normalcy by mid-next year. In the meantime, we'll keep engaging with these effective virtual tools.

Great. Okay. And then I think, obviously, you guys have proven an ability to scale your sales force with MACI and do it effectively. I mean, is there anything that you call out that maybe you've learned from or can use as you guys scale up your burn sales force as well? Thank you.

Yes. Well, I appreciate that. First of all, this past year, we expanded the MACI sales force for the fourth straight year. This was a bit more of a significant one. And so this one for MACI is intended to last us at least two or three years, and we have been effective in how we've done that. And we there are certain dynamics around the MACI business where we kind of have a playbook where we hire the managers at the end of a given year, hire the reps in the first quarter of that year. They do their sort of home training, field training and then come into home office training and hit the ground running on the first day of the second quarter. And that involves extensive training and preparation. And that's why we think we've been effective in our sales force expansions we will do the exact same thing for Epicel and there will be opportunities obviously not only for home training and virtual home office training, but also to be out in the field during the surgeries and gaining that field experience as well. So all of the learnings that we have for MACI that have led to our successful expansions will be applied to the Epicel expansion as well. And we've been just to be clear, we started 2019 with five reps in one clinical support specialists. So for Epicel, we're now up to seven reps and four clinical specialists. So we've doubled the Epicel sales force and certainly have done well and have not seen any disruption as last year was our third year in a row of double-digit growth for a product that's been on the market for 20 years.

Thank you.

Thank you.

Our next question comes from RK with H.C. Wainwright.

Thank you. Good morning, Nick. Congratulations on a great quarter. Most of my questions have been answered, but I just have a couple of them. I know you gave a lot of metrics around the leading indicators for MACI. I just want to see if you can give a little bit more color. As far as the biopsies are concerned, you said by the end of 2019, you were talking about 1,400 biopsies. So at this point, year-to-date, could you give us roughly what the number of biopsies you have gotten so far?

Yes. Let me just correct you. What we said was there were 1,400 surgeons who had sent in biopsies in 2019. And we've not given out specific biopsy numbers, but I think you can get there on your own by looking at the revenues in 2019. The average price per the implant is known, so that gives you a rough implant number. The conversion rate we've said is sort of mid-to-high 30%, so you can sort of do the math to get to the number of biopsies in 2019. And we do expect some biopsy growth in this year even with sort of the market declines that we saw in Q2.

Great. Then just one quick question on the financials. In terms of gross margin, by end of 2019, there was actually a 300 basis-point expansion on your gross margin last year. Obviously, this year, because of what we are facing, there's been actually a decline in there. But do you expect the fourth quarter to help you revert that and at least get it flat to 2019, or even better, maybe?

Yes. Well, certainly, in the fourth quarter, as you know, it's our highest volume quarter by far and so the margins tend to be pretty high in that time. And so, yes, I think it will be roughly in line with last year. So we're very pleased with that, obviously, given sort of the second quarter results.

Thank you. Thanks for taking my questions. And I will talk to you soon.

Great. Thank you.

There are no questions at this time. Mr. Colangelo, do you have any closing remarks?

No, I would just like to say thank you very much for participating in our call today. We appreciate the interest and look forward to keeping you updated on our continued progress. So have a great day. Thanks.

This concludes today's conference call. You may now disconnect.