Vericel Corp Q1 FY2021 Earnings Call

Once again thank you for standing by and welcome to Vericel’s First Quarter 2021 Conference Call. At this time, all participants are in listen-only mode. I would also like to remind you that this call is being recorded for replay. I would now like to turn the conference over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations. Sir, the floor is yours.

Thank you, operator, and good morning, everyone. Welcome to Vericel Corporation's first quarter 2021 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that on today's call we will 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 first quarter financial results press release is available on 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. I am joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. I will now turn the call over to Nick.

Thanks, Eric, and good morning, everyone. We entered 2021 with a great deal of momentum based on strong revenue, profitability and cash flow that we generated last year and the strength of the underlying growth drivers across our business. That momentum continued through the first quarter, as we had a very strong start to the year from both a financial and commercial perspective. This morning, we reported total revenue growth of 30% in the first quarter, achieving record first quarter revenue, gross margin, adjusted EBITDA and operating cash flow. We reported positive adjusted EBITDA for the first time in what is historically our seasonally lowest revenue quarter of the year and generated operating cash flow of more than $10 million for the second straight quarter, ending the quarter with $110 million in cash and investments and no debt. We believe that these results demonstrate the strength of the company's financial profile, as we continue to generate strong revenue growth and increased profitability and cash flow, which was recognized by the addition of Vericel to the S&P Small-Cap 600 index in March. Based on these results and our underlying business fundamentals, we're raising our revenue guidance and now expect total revenue for the year to be in the range of $165 million to $168 million, or approximately 33% to 35% growth, with MACI revenue growth in the mid-30% range and Epicel revenue growth in the high 20% range. Joe will provide further details regarding our updated financial guidance in a few moments. From a commercial perspective, both MACI and Epicel had strong performances in the quarter. MACI implant and biopsy growth exceeded 20% for the quarter, with the growth in biopsies continuing to outpace the growth in implants, which is important as biopsy growth remains a leading indicator for the MACI business. The growth in biopsies was driven by an increase in the number of surgeons taking biopsies in the quarter versus the first quarter of last year, as we continue to focus on broadening our MACI surgeon base. While in most years, we see a seasonal step down in the number of surgeons taking biopsies in the first quarter compared to the prior fourth quarter, this year the number of surgeons taking biopsies in the first quarter was comparable to the fourth quarter of 2020 and we had the second highest number of surgeons taking biopsies in any quarter since we launched MACI. Given the lingering COVID-19 headwinds in the first half of the quarter, we're very pleased with this performance and believe that we're on track to deliver over 20% growth in surgeons taking biopsies for the full year. We also saw significantly higher approval rates for UnitedHealthcare patella cases following the expansion of its MACI medical policy, which became effective on February 1. We believe that the expanded coverage will not only improve access for UnitedHealthcare patients, but also reinforce with surgeons the broad access and favorable reimbursement profile for MACI and contribute to its continued growth in the years ahead. Overall, we believe that the underlying MACI business fundamentals remain very strong, positioning us to continue to drive sustainable penetration into MACI's addressable market. Turning to our burn care franchise. After a great close to 2020 for Epicel, with fourth quarter revenue of nearly $10 million, we continued to deliver very strong results to start the year. First quarter revenue for Epicel increased over 50% compared to the first quarter of 2020, as we achieved a new monthly volume record for Epicel grafts in February and the second highest quarterly revenue in history. The average quarterly revenue for Epicel over the past three quarters is now more than $8 million and the underlying Epicel business fundamentals remain very strong. Epicel biopsies over the past two quarters were the highest in history and the average number of grafts per patient also continue to outperform historical levels. Although Epicel can be challenging to forecast due to the variability in the number of severe burn patients, we believe that these recent trends indicate a sustainably higher level of utilization of this important product. And we therefore have increased our growth expectations for Epicel in 2021. To support the recent growth and increased demand for Epicel and to prepare for the planned launch of NexoBrid, we're continuing our staged expansion of the burn care commercial team. Our increased commercial efforts on Epicel, together with the structural changes to our sales force to include both sales and clinical support roles, have driven the increased demand for Epicel. We believe that additional resources for the burn care team will drive continued increases in Epicel utilization and support our preparation for the planned launch of NexoBrid. In terms of NexoBrid we continue to make significant progress with respect to our commercial and medical affairs pre-launch activities. In addition to an ongoing disease state awareness campaign, our commercial team continues to advance multiple brand development and market access initiatives. Our clinical and medical affairs teams also are continuing to engage with burn centers in training and educational initiatives through the Expanded Access study, which is enrolling new adult and pediatric patients at leading burn centers across the country. From a regulatory standpoint, the NexoBrid PDUFA goal date remains June 29. However, as is apparent from recent FDA actions across the industry, travel restrictions related to the COVID-19 pandemic are impacting the FDA's ability to complete manufacturing facility inspections. The FDA has informed MediWound that, due to these restrictions, the agency may not be able to conduct the required inspections of NexoBrid manufacturing facilities in Taiwan and Israel prior to the PDUFA date. The FDA has also requested additional CMC information from MediWound and has informed MediWound that it is unlikely that the additional CMC information provided will be reviewed during the current review cycle. Accordingly, we expect the timing of potential approval and commercial launch of NexoBrid to be impacted. As we previously communicated, while we're not expecting any significant NexoBrid commercial revenue in 2021, we are expecting to recognize the remaining BARDA procurement revenue of approximately $3.8 million in 2021. Given its robust clinical data package, we believe that NexoBrid remains well positioned to become a standard of care for removing eschar in patients with severe burns. We look forward on approval to bringing NexoBrid to the U.S. market. I'll now turn the call over to Joe to provide more details on our first quarter financial performance and our updated 2021 financial guidance.

Thanks Nick. Starting with the income statement, total net revenue for the first quarter increased 30% to $34.6 million, compared to $26.7 million in the first quarter of 2020, and included $23.8 million of MACI revenue and $9.8 million of Epicel revenue, compared to $20.3 million and $6.4 million of MACI and Epicel revenue respectively, in the first quarter of 2020. Total revenue for the quarter also included approximately $0.9 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI revenue grew 17% compared to the first quarter of 2020. Note that MACI revenue in the first quarter of both 2020 and 2021 included favorable revenue adjustments related to prior period estimates. If you exclude the net impact of those adjustments, revenue growth would have been over 20% which is in line with our implant growth. Epicel first quarter revenue grew 54% compared to Q1 2020 and our total burn care revenue of $10.8 million increased versus a strong fourth quarter of 2020. Gross profit for the quarter was $23 million or 66% of net revenue, compared to $16.8 million or 63% of net revenue for the first quarter of 2020, representing an approximate 350 basis point improvement in our gross margin versus the prior year. Total operating expenses for the quarter were $26.3 million, compared to $21.8 million for the same period in 2020. The increase in operating expenses was primarily driven by higher non-cash stock compensation expenses related to our higher share price as well as incremental employee expenses related to the MACI sales force expansion in 2020. Note that Q1 2021 results did not include a full quarter of stock compensation expense based on the increase in our share price. We will see sequential growth in operating expenses into Q2 to account for a full quarter impact of this expense, which is already factored into our full year operating expense guidance. Net loss for the quarter was $3.3 million or $0.07 per share compared to a net loss of $4.7 million or $0.10 per share for the first quarter of 2020. Non-GAAP adjusted EBITDA for the quarter was $4.6 million or 13% of net revenue, compared with a loss of $0.7 million in the first quarter of 2020. Importantly, this is our third consecutive quarter with positive adjusted EBITDA and our first time reporting positive adjusted EBITDA for the first quarter, which is seasonally our lowest revenue quarter of the year. Finally we generated $10.1 million of operating cash flow in the first quarter. As of the end of Q1, the company had approximately $110 million in cash and investments, compared to $100 million as of December 31, 2020 and no debt. Transitioning to our updated guidance for 2021. Based on the strength of both MACI and Epicel in Q1, both in terms of revenue and underlying growth drivers, we are increasing our full year revenue guidance and now expect total revenue of $165 million to $168 million or approximately 33% to 35% growth. This compares with our previous full year guidance of $161 million to $164 million or 30% to 32% growth. In terms of our franchises, we expect MACI to be at the upper end of our previous guidance with growth in the mid-30% range. The increase to our full year revenue guidance range for MACI is driven by higher expectations for the second half of the year based on our biopsy performance over the past few months, which typically would begin to convert to implants in the third quarter. Moving to our burn care franchise, after a strong start to the year both in terms of revenue and underlying commercial trends, we now expect revenue growth to be in the high 20% range for the year versus our previous guidance of mid-teens growth. Our overall burn care franchise including NexoBrid BARDA revenue is now expected to be approximately 30% for the year. Moving down to the P&L, we continue to expect gross margin to be 70% to 71% for the full year and operating expenses to be approximately $115 million for the full year with a sequential increase of about $5 million in spend expected in the second quarter and then approximately $30 million of operating expenses in each of the remaining quarters. Finally based on our increased revenue expectations, we are increasing our non-GAAP adjusted EBITDA margin for the full year to be approximately 21.5% to 23.5% compared to the prior guidance of 21% to 23%. This concludes our prepared remarks. I'd now like to ask the operator to open the call to your questions.

Your first question is from the line of Ryan Zimmerman of BTIG. Your line is now open.

Thanks for taking the question. So maybe to start on the NexoBrid delay here. I know MediWound is giving their call right now too. They have some additional commentary. Can you talk about how long you expect this delay to occur or what guidance you have in terms of the review cycle? Any color to help investors think about when NexoBrid will be approved and then commercial activities pick up and proceed?

Yes. Thanks, Ryan. At this point, with less than two months left to the PDUFA date and without an inspection being scheduled, it's likely that there is going to be an impact. We certainly aren't in a position to speak for the FDA or predict what they're going to do or how the likely delay will play out, but we want to bring the information that we have to investors' attention. There are a number of different scenarios that can happen. Across the industry, if there's a delay it can either fall into the category of a major amendment when additional information is requested, it could be a deferral or it can be a complete response letter. We've seen all of those happen in recent history with the FDA around these kinds of issues.

Okay. We'll hear more about that as we proceed. Maybe turning to guidance for a moment to follow up. Epicel is certainly doing better than your expectations. Your guidance of about 2.5% or so from the midpoint you guys beat by about 7%. Can you help us understand the underlying dynamics in terms of the composition of the guidance for the year? Specifically on MACI growth in the mid-30s, how should we think about the biopsy dynamics? You clearly have more surgeons sending you biopsies, but you exited last year with a bit of a backlog and really strong biopsy growth. Any additional color around biopsy dynamics in terms of whether you're seeing fewer biopsies per surgeon but a broader surgeon base would be helpful.

I'll start, Ryan, and then Joe can pick up the guidance. We mentioned on our fourth quarter call that we saw strong biopsy growth in the fourth quarter. It wasn't the same growth we would have had without COVID-19 impact. Then, of course, we saw 20% plus biopsy growth in the first quarter, so we're seeing a strengthening in that biopsy growth. Biopsies per surgeon dipped during the first half of last year due to COVID-19, but bounced back to 2019 levels, and we expect that to grow throughout 2021. The dynamic remains the same: we expect 20-plus percent growth in the number of surgeons taking biopsies. The strong biopsy performance was driven in part by growth in biopsying surgeons. When we guide to mid-30% revenue growth, it's because we expect an increase in the average number of biopsies per surgeon as well. That dynamic is consistent with what we've been saying over the past few quarters.

Yes. Just to add as well, think about it this way: we are seeing underlying strength in both the number of surgeons and biopsies over the last few months. The increase in MACI guidance from low-to-mid 30% to mid-30s is driven by the strength in those biopsies, and our expectation is that the increase will be more in the back half of the year as those biopsies begin to convert to implants.

Thank you.

Our next question is from the line of Kaila Krum from Truist Securities. Your line is now open.

Great. Hi, guys. Thanks for taking our questions. A follow-up on NexoBrid: can you clarify the steps that have to be completed at this point before gaining approval in the U.S.? It sounds like the FDA hasn't officially scheduled the inspection for the MediWound facility; have they given any sort of ballpark date for that yet? And you were still determining the right price for the product a couple of months back—have you made additional progress on pricing? Also on Epicel, you've now had two consecutive quarters of almost $10 million performance. Was there anything specific that drove the record month in February? And can you help us understand why about $9 million wouldn't be a baseline for quarterly performance going forward? Thank you.

We stated that the FDA may be unable to conduct an inspection prior to the PDUFA date and that's all we know at this time. There's no indication of when an inspection would be scheduled. Regarding the pricing study for NexoBrid, it is wrapping up and we expect to get the final results shortly; we'll share that at the appropriate time.

Okay. That makes sense. On Epicel, there's nothing particularly unique about February. Over the past two quarters we had a record number of biopsies, and when the top of the funnel is filled with more patients, you tend to get higher volumes. We're also seeing a higher number of grafts per patient and per order, which is important as our sales reps are engaged earlier in the process on treatment plans with surgeons. Joe, can you add on the baseline for quarterly performance?

There's nothing particularly unique about February. The higher grafts per patient and improved engagement by our reps earlier in the treatment planning process are important dynamics. I'll let Joe address the baseline run rate.

Thanks. Epicel is difficult to predict due to the variability of severe burn cases, but if you look back over the last three quarters there are two really strong quarters in Q4 and Q1. The run rate over the last three quarters is about $8 million. Our initial guidance for Epicel was in the teens growth; now we're up to the high 20s. From a run rate perspective, you can think of something closer to $8.5 million for the remaining quarters in the year. The team is doing a great job and we'll continue to push the product.

Great. Thanks, guys.

Your next question is from the line of Danielle Antalffy of SVB Leerink. Your line is now open.

Hi, thanks so much for taking the question and congrats on a really strong start to the year. Nick or Joe, I'm curious about what you're seeing from a productivity perspective with the sales force that you added. You added them right before COVID, so their productivity ramp was likely delayed. What have you seen now as restrictions ease? Is that part of what's driving stronger biopsy growth—are productivity ramps occurring? Any color would be great.

Thanks, Danielle. We've always followed the same practice for sales force expansions and they've been productive compared to industry norms. As we scaled the sales force we saw increased rep productivity measured by revenue per rep. Adding a relatively larger number of reps caused a step back, but the delay in getting into the field last year was about a month and it gave new reps time to build strong business plans and then hit the ground running. In Q3 last year we saw new territories leading the way in growth of new biopsying surgeons, which often happens because we brought in experienced reps—on average they had about 10 years of experience in large-cap medtech sports medicine roles. So they bring relationships. In the first quarter of this year we realigned existing territories rather than creating greenfield territories. There's a book of business there. From a biopsy and implant perspective, the metrics for the 27 expansion territories are aligned with our legacy territory growth rates. We expect those reps to have the same productivity profile as prior cohorts we've added.

Understood. Thank you for that. A question on biopsy conversion rate: biopsies are outpacing implants, which is a positive leading indicator. Are you seeing progress on conversion rates? How should we think about conversion contributing to growth in 2021 and over the next few years?

Thanks, Danielle. We've consistently talked about three growth drivers for MACI: the number of biopsying surgeons, biopsies per surgeon, and conversion rate. For this year and likely the next couple of years, the primary drivers will be adding new biopsying surgeons and increasing biopsies per surgeon. The breadth of penetration into our target base and depth within practices matter most now. We expect conversion rate to remain stable while that broadening occurs. New surgeons typically convert at a lower rate initially and then move toward the average over time. Once we saturate our target surgeon base of about 5,000 surgeons in the coming years, the number of biopsies per surgeon and conversion rate will play a larger role in driving growth. For this year we expect conversion rate to be stable and then to increase over time.

Got it. Thanks so much.

Thanks, Danielle.

Thank you.

Your next question is from the line of Chris Cooley from Stephens. Your line is now open.

Good morning and congratulations on a great start to the year. Two quick questions: Nick, could you talk a bit about the operating model? With the leverage you're seeing in the burn franchise, how should we think about the margin profile longer-term? Are you essentially at scale now with the existing group and incremental reps coming on top, or is the existing group still scaling with increased productivity opportunities? How should we think about margin contribution from Epicel and burn care more broadly longer-term? Quick follow-up after that, thanks.

I'll start on the first part and then Joe can talk about operating margin impacts. As we restructured the Epicel sales force into sales rep and clinical support roles, we've seen increased efficiencies and productivity, which has driven growth without adding a meaningful number of reps over the past two quarters. That said, in planning for NexoBrid we intend to expand from seven reps and four clinical support specialists to 11 reps and seven clinical support specialists. We're currently embarking on that staged expansion to grow Epicel further and prepare for the NexoBrid launch. That is our approach.

Broadly, we're looking to continue the leverage in both franchises. For the burn franchise we expect it to fit our gross margin profile of around 70% plus. Operating income could be around 20% as we leverage the business. The investments to support Epicel and potential NexoBrid are modest from an operating expense perspective and shouldn't materially impact margins. From a company-wide perspective, EBITDA was about $18 million in 2020, and our guidance this year is roughly two times that, around $36 million to $38 million. We pay attention to margins and expect to add leverage and increase margins over time.

Appreciate that color. In your prepared remarks you stated you're seeing increased acceptances from UnitedHealthcare. When you look at the increase in biopsies on the MACI side, are those surgeons more skewed towards a UnitedHealthcare patient base? Are you seeing a benefit from United's coverage change in the growth of surgeons taking biopsies?

We view the UnitedHealthcare policy expansion as an important win. Beyond treating those patients more frequently, it provides a halo effect reinforcing strong reimbursement for MACI. The policy update became effective on February 1 and we saw an immediate uptick in approval rates for those cases, roughly in line with or slightly above the overall national average. It's a bit early to determine whether the new surgeons we've added are disproportionately United-focused. United is the largest commercial plan but covers about 15% of covered lives, so I would be surprised if new surgeon additions were solely driven by having a skewed United practice. The approval rate increase reinforces overall confidence in reimbursement and access.

Thank you.

Your next question is from the line of Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

Hi, Nick and Joe. How are you?

We’re doing well. Thanks, Jeff.

Great. Thanks.

So Joe, on the OpEx guide of $115 million, was there any additional composition of OpEx we should be thinking about throughout the cadence of the year?

We did about $26 million of OpEx in Q1 and our full year guidance of $115 million is unchanged. We expect a sequential increase in Q2 of about $5 million and then approximately $30 million in each of the remaining two quarters. The timing reflects the higher share price impacting non-cash stock compensation expense and how that flows through the P&L. There was a portion in Q1 and that will step up in Q2 and the remaining quarters.

That’s helpful. Could you talk about surgeon training in Q1 and into Q2? Anything to call out there?

For MACI, training is not a gating item because the procedure is simple and can be done online. Growth is focused on the number of biopsying surgeons. The strength in biopsies in Q1 was driven by biopsy and surgeon growth, indicating broad adoption by an increasing surgeon base.

Do you have a view on the additional TAM related to patella and cartilage defects after UnitedHealthcare's coverage expansion?

We discussed this with the United expansion. Of the roughly 60,000 patients in our addressable market, about 20% of cartilage injuries involve the patella. United covers about 15% of commercial patients in the U.S. So you can estimate that portion. If you do the math, of the $2 billion TAM, approximately $70 million or so could relate to United patella cases. We were already getting some of that business, but approval rates were lower previously. Surgeons don't want to spend a lot of time on one-off appeals for coverage, so the policy expansion should make those cases easier to treat and add incremental business over time.

Lastly, you mentioned $3.8 million remaining on the BARDA contract for 2021. Can you comment on that and any expectations for 2022?

For 2021, we recognized $0.9 million of BARDA revenue in Q1 and the remainder of the contract was $3.8 million in total. That leaves a little less than $3 million to be recognized over the remaining three quarters of 2021. We have no additional commentary beyond that at this time.

Perfect. Thanks for taking the questions.

Your next question is from the line of Kevin DeGeeter of Oppenheimer. Your line is now open.

Hey, great. Thanks for taking my question. With regard to NexoBrid, did I hear correctly that the FDA has requested additional CMC information from MediWound? If so, can you provide some context around that statement?

Yes. We mentioned that the FDA has communicated to MediWound that additional CMC information has been requested, and the FDA has indicated that it is unlikely they'll be able to review that additional information during the current review cycle.

With the uncertainty on timing, which portions of prelaunch investment and scale-up do you feel comfortable continuing according to plan? What elements might you need more clarity on before moving forward with investments? I'm trying to put some of the OpEx guidance in context.

Our approach is to continue key activities while being thoughtful about timing. From the medical affairs and clinical side, the Expanded Access study continues to enroll patients. From a commercial preparation standpoint there are three primary buckets: disease state awareness, brand development and market access, and training and launch readiness. Those initiatives continue. We're completing the pricing study, P&T kits and training materials because we don't want to be caught flat-footed upon approval. There are some elements whose timing could be adjusted, but most initiatives are moving forward.

To add, we're moving forward with the expansion of the burn care team to support Epicel growth and potential NexoBrid launch. Many launch preparations are ongoing and while some sales and marketing pieces could be shifted in timing, I wouldn't expect a material impact to our operating expenses for the year.

Can you provide an update on the Expanded Access study? Number of surgeons or sites engaged, patient procedures, or other relevant metrics?

The program initially planned to treat up to 150 patients at up to 30 U.S. sites. The pediatric NexoBrid study enrollment is closed and pediatric patients can now be treated in the Expanded Access study. The protocol was amended to increase sites up to 35 and patients up to 200. We're probably in the low to mid-20s regarding sites currently engaged. COVID impacted site starts, but we expect to increase that number over time. We continue to enroll patients and have room to enroll more, which helps ensure that centers and surgeons are experienced with the product ahead of approval.

That’s very good. Congratulations on a terrific quarter and all the progress.

Your next question is from the line of Ryan Zimmerman of BTIG. Your line is open.

One follow-up: the NexoBrid approval and the PDUFA date—there's a milestone payment of $7.5 million. Joe, does the $115 million OpEx guidance contemplate that milestone payment? Also, what provisions do you have in the agreement with MediWound to potentially modify that payment given uncertainty on timing? Could the $7.5 million change based on timing?

The $115 million OpEx guidance is unchanged and that milestone was not part of that OpEx figure. The milestone impacts cash flow and has different accounting treatment, so it was not included in operating expense guidance.

And any contractual provisions that could change the $7.5 million milestone based on timing?

There are no provisions to scale that payment with timing. That's not typical. As Joe said, it was never included in OpEx. When the product is approved, we will make the $7.5 million payment.

Okay. Thanks for taking the call.

Great. Thanks, Ryan.

Seeing no additional questions, I will now turn the call back to Nick Colangelo for closing remarks.

Okay. Thank you, operator, and thanks to everyone for your questions and your continued interest in Vericel. I also wanted to thank all of our employees for their continued hard work and dedication to the patients we serve. The company executed extremely well in the first quarter and we remain focused on continuing to execute on our long-term growth strategy, providing our therapies to even more patients in need and in the process creating significant value for all of our stakeholders including patients and shareholders. Thanks again and have a great day.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.