Vericel Corp Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now turn the conference over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Vericel's second 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 second 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. I'm being 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.

Thank you, Eric, and good morning, everyone. The company continued to execute extremely well in the second quarter as we delivered another quarter of strong financial and commercial results. From a financial perspective, we reported total revenue of $39.5 million for the second quarter, an increase of 97% compared to the second quarter of 2020, and 51% compared to the second quarter of 2019. We also generated positive adjusted EBITDA and operating cash flow for the fourth consecutive quarter. Based on these results, we're raising our full year total revenue guidance to $168 million to $171 million, and adjusted EBITDA margin guidance to 23% to 25%. Joe will provide further details regarding our updated 2021 financial guidance in a few moments. From a commercial perspective, we continued to deliver strong results with respect to the key underlying growth drivers for both MACI and Epicel. MACI biopsies, which grew more than 50% in the first half of 2021 compared to the same period in 2020, achieved record quarterly and monthly highs in the second quarter. We also had a record quarterly high in the number of surgeons taking MACI biopsies with strong performances across both our legacy and expansion territories. Importantly, the 2020 expansion territories led the country in terms of new biopsy surgeon growth and overall new biopsy surgeons added in the first half of the year. Based on the efforts of our expanded sales force as well as the strong surgeon engagement resulting from our highly effective virtual and in-person marketing programs, we're well positioned to meet our target of growing the number of surgeons taking MACI biopsies by more than 20% this year. We believe that the strong growth in biopsy surgeons, which is a primary growth driver not only for this year but for the years ahead, reflects the strength of the underlying MACI business fundamentals and positions us to continue to drive sustainable penetration into the MACI addressable market. Turning to our burn care franchise. In addition to generating record quarterly Epicel revenue of $12.2 million, we also achieved record quarterly highs in the number of Epicel biopsies and the number of burn centers grafting patients in the second quarter. We believe that the recent changes to our Epicel sales leadership in customer-facing sales and clinical support roles have driven the increase in our burn center customer base, the higher utilization of Epicel at the patient level and ultimately, the substantial increase in Epicel volume. Importantly, the significant increase in Epicel grafts per patient has also led to an increase in our estimated total addressable market, or TAM, for Epicel. Our previous Epicel TAM of more than $100 million was developed several years ago and was based on the historical number of Epicel grafts per patient used at that time. The actual graft utilization trends over the past year, as described on Slide 5 in our accompanying earnings call presentation, have increased the total addressable market for Epicel to more than $200 million. Based on our strong results in the first half of 2021, we believe that we're well positioned to continue driving sustained penetration into this increased TAM and strong Epicel growth moving forward. Turning to NexoBrid. I'll begin by noting a few important points. First, based on Epicel's outperformance this year, we now expect that our burn care franchise revenue for 2021 will significantly exceed our initial revenue expectations for this year, even with the delayed NexoBrid launch. We also believe that with additional time for field force training, disease state awareness and continued burn center training on the use of NexoBrid through the NEXT expanded access protocol that we'll be in an even better position to drive NexoBrid uptake upon approval. And finally, we were pleased to see positive topline results that MediWound recently reported for the NexoBrid Phase III pediatric study, which met all of its primary endpoints with highly statistically significant results, reinforcing the strong clinical profile of the product. Turning to the NexoBrid BLA. Vericel will now lead the BLA resubmission process and partner with MediWound to leverage their vast experience with NexoBrid. Our clinical, regulatory and operations teams have a strong track record of regulatory success that we believe positions us well to drive the resubmission process. While it's premature to provide a specific timeline for the BLA resubmission, we're actively preparing for a Type A meeting with the FDA and will provide a timeline update at the appropriate time. We remain very enthusiastic about adding NexoBrid to our burn care franchise and look forward to bringing this innovative product to the market as expeditiously as possible. I'll now turn the call over to Joe to provide more details on our second quarter financial performance and our updated 2021 financial guidance.

Thanks, Nick. Starting with the income statement. Total net revenue for the second quarter increased 97% to $39.5 million compared to $20 million in the second quarter of 2020, and included $26.5 million of MACI revenue and $12.2 million of Epicel revenue, compared to $15.1 million and $4.9 million of MACI and Epicel revenue, respectively, in the second quarter of 2020. Total revenue for the quarter also included approximately $0.8 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI revenue grew 76% compared to the second quarter of 2020, and Epicel revenue grew 148% compared to the second quarter of 2020. Compared to the second quarter of 2019, MACI revenue grew 27% and Epicel revenue grew 128%, reflecting the strong underlying growth of both franchises compared to a pre-COVID-19 baseline. Gross profit for the quarter was $26.9 million or 68% of net revenue compared to $11.4 million or 57% of net revenue for the second quarter of 2020, which was more than double the gross profit in the prior year. Total operating expenses for the quarter were $30.6 million compared to $19.7 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 spend across all areas of the business when compared to the constrained spend in 2020 due to COVID-19 related factors. Net loss for the quarter was $3.8 million or $0.08 per share compared to a net loss of $8.3 million or $0.18 per share in the second quarter of 2020. Non-GAAP adjusted EBITDA for the quarter was $7.8 million or 20% of net revenue compared to a loss of $3.5 million in the second quarter of 2020. Finally, we generated approximately $5 million in operating cash flow in the quarter, and as of the end of Q2, the company had approximately $116 million in cash and investments compared to $100 million as of December 31, 2020, and no debt. Transitioning to our updated financial guidance for 2021. We are increasing our full year revenue guidance and now expect total revenue of $168 million to $171 million or approximately 35% to 38% growth. This compares with our previous full year revenue guidance of $165 million to $168 million or 33% to 35% growth. The revenue guidance increase is driven by Epicel, which we now expect to have full year growth in the low 40% range compared to our previous guidance of growth in the high 20% range. We are maintaining our previous MACI guidance and expect full year growth in the mid-30% range. This guidance for MACI reflects a higher growth rate in the second half of 2021 versus the first half of the year when compared to the same period in 2019, driven by the significant growth of both surgeons taking biopsies and overall biopsies in the first half of this year. In terms of quarterly phasing, we are expecting the typical Q3 cadence compared to Q2 and that the factors which drive the strong sequential step-up in Q4 are in place. Overall, our guidance assumes that approximately 60% of our full year revenue would be in the second half of 2021, which is consistent with prior years. This guidance for MACI assumes that biopsy conversion rates and timing, or calendarization of that conversion, is generally in line with historical patterns and that COVID-19 dynamics do not materially change those patterns versus prior years. Additionally, we expect to recognize approximately $0.8 million to $0.9 million of revenue per quarter in Q3 and Q4 related to the BARDA stockpile procurement. Moving down 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. And finally, based on our increased revenue expectations, we are increasing our non-GAAP adjusted EBITDA margin guidance for the full year to 23% to 25%, compared to the prior guidance of 21.5% to 23.5%. Importantly, this updated adjusted EBITDA guidance for the full year would more than double our adjusted EBITDA of approximately $19 million in 2020, demonstrating the continued strengthening of the overall financial profile of the company. Our financial guidance also assumes that the COVID-19 dynamics do not worsen materially, including the impact of the delta variant in the second half of the year. This concludes our prepared remarks. We will now open up the call to your questions.

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

I want to start with Epicel for a moment here; it continues to perform very well. I'm wondering, Nick, if you could elaborate a little bit on the dynamics within Epicel in terms of market dynamics and the incidents of burns versus the higher grafts per patient that you're seeing. And give us your thoughts around your expectations for those two dynamics and their interplay going forward?

Yes. Thanks, Ryan. As we've talked about, we made changes recently to our sales force leadership and the customer-facing roles in terms of sales reps and clinical support specialists. We continue to believe that has had a very significant impact in terms of the number of burn centers that we're engaged with, where we now have greater coverage. As our reps and clinical support specialists continue to educate surgeons on the optimal use of Epicel, that's led to an increase in the grafts per patient and, obviously, led to the increase in Epicel volume. That's a theme we've been talking about all year, and the performance over the past three or four quarters has demonstrated the impact of those sales force changes. In terms of market dynamics, there's a lot of commentary about reopening and greater incidents of burns. For our patient population, which are the most critically and severely burned patients, I don't feel that reopening dynamics are a primary driver. They may contribute a little, but not at the same level as our sales force effectiveness in that patient population. Earlier this year, Q4 and Q1 cumulatively were the highest buy-ups we had seen, and that was before any reopening dynamic. So I really think it weighs more toward sales force effectiveness than any market dynamics.

Got it. That's very helpful. And then maybe just one on guidance. If I think about the past two quarters, Vericel has beaten expectations on the top line by roughly 8% or so. Yet guidance has increased by roughly about 2% in each of those past two quarters. For both of you, Nick and Joe, help us understand your guidance philosophy and what may or may not be constraining your decision to nudge that guide slightly higher than you are right now.

Well, Ryan, I'll start and Joe can chime in as well. We've had a consistent guidance approach for several years now, where we model out a bunch of scenarios and we've tried never to get out over our skis. Yes, we've updated the guidance twice this year based on outperformance. We think that's a prudent approach, especially given there are always challenges forecasting Epicel because of the small patient population. We never want to get too far out ahead on that. With MACI, we upped guidance in the first quarter to mid-30% growth. That's a healthy growth rate, and we're comfortable where it is right now, especially given dynamics around reopening and patient behavior. So there's no reason to get too aggressive at this point in the year.

Yes, Ryan. Thanks for the question. If you go back a little in time, we started the year above a 30% growth rate when you think about the company-wide guidance. Epicel progressed from mid-teens to high 20s to low 40s in our expectations as it's continued to perform. From a MACI perspective, we started the year above 30% and we continue to see the underlying drivers. We're thoughtful on guidance, but there's a full-year aspect as well as the quarter-to-quarter aspect that we consider.

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

Just a quick question on the reopening dynamics and any lingering COVID impact. Are you seeing the referral funnel back to 100%? How can you characterize the recovery at this point in time?

Danielle, a couple of things we track are general market commentary and market research with top surgeons, looking at their surgical volumes relative to pre-COVID levels. I'd say surgical volume is probably 5% to 10% down versus pre-COVID, and clinic visits were lagging but seem to be catching up since December. Those dynamics aren't back to pre-COVID levels but are improving. Regarding the delta variant, we haven't seen an impact in terms of widespread facilities restricting surgeries. For surgical procedures, patients have pre-op COVID tests, and when cases surge, some patients must reschedule if they test positive, so we are keeping an eye on that. Reopening dynamics, vacations and similar factors can lead to a slightly choppier month-to-month pattern. But overall, we look at the significant increase in surgeons taking biopsies and the record number of biopsies we are receiving, and we feel good about the underlying growth drivers.

Understood. That's helpful. One quick follow-up on the growth in biopsying surgeons. I think you said 20% growth. How are those new surgeons ramping relative to past years as surgeons come online?

It's early days when new biopsy surgeons start, so it's a bit soon to determine how their implant behavior will settle. But historically, the ramp patterns for new surgeons have been consistent year-to-year, and we expect that to remain the case.

Your question is from the line of Chris Cooley with Stephens.

Congrats on the great quarter. Two questions. First, on Epicel and the step-up in TAM and the revised guidance, if I'm doing the math right, you're still in early days in terms of stepping up the number of grafts per patient. Can you confirm that? When thinking about that step-up, would you say you're still sub-50% in terms of the step-up in grafts per patient when you look at the increase in the TAM relative to the implied annual growth guidance? I'm trying to think about where we are in that adoption curve.

Thanks, Chris. If you step back on the Epicel guidance, near-term we've had strong quarters with run rates around $9 million plus over recent quarters. Historically, prior to these quarters, run rates were more like $6 million to $7 million. The business has shifted and the execution in the field has improved. It's above prior run rates but not quite at the most recent quarterly high, which was much higher. Regarding TAM, historically the average grafts per patient was around 90; now it's closer to about 120. We reviewed trends over the last few quarters and conclude the TAM is $200 million plus. There is some rounding in the numbers and the average price per graft is around $3,000 which changes calculations, but we think there's substantial opportunity as we consider this larger TAM and the performance to date.

Super. That's really helpful. As a quick follow-up: the passing of the baton on the NexoBrid resubmission — Nick, could you, in broad strokes, paint what's transpired there? What specifically do you think Vericel can bring to the table to expedite the process and any challenges you see post the prior notification from the agency?

Thanks, Chris. As I mentioned in my prepared remarks, our clinical, regulatory and operations team has significant regulatory experience and a strong track record, including the MACI BLA, the Epicel label expansion and numerous prior approval supplements, primarily related to CMC matters. Our leadership, including Mike Halpin, our COO, who was Head of North American Regulatory Affairs for Sanofi Genzyme, brings deep experience. The members of his team also have extensive relevant experience on the CMC and clinical sides. We bring a strong track record of working effectively with the FDA and will leverage MediWound's 20 years of experience with NexoBrid. We feel good about the path forward. It's less about speed and more about putting together a high-quality resubmission that will lead to approval.

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

A couple from our end. First, on the resubmission, any effect on your R&D that you'd call out beyond your OpEx number for 2021?

I don't think we see the resubmission having a material impact on the operating expense line.

Okay, got it. Secondly, can you give us a little further flavor on MACI as far as Q2 being pretty strong on biopsies and pull-throughs? Do you think that was people waiting on the biopsy side and then the pull-through on the implant side? How do you see that playing out with COVID factors in mind?

On the biopsy side, we continue to see strength in biopsy surgeon growth, which is the key primary growth driver. Average biopsies per surgeon are consistent with 2019 levels, and we expect that to increase in the second half of the year. These dynamics are set up well for the second half of this year and into 2022 and beyond. Regarding pull-through on implants, our assumptions for the back half of the year reflect that historically we've had about 40% of revenue in the first half and 60% in the second half, consistent since 2017 except last year. That's the dynamic we expect, absent COVID-related factors that might change conversion timing.

I'd add that our guidance assumptions are consistent with historical patterns and what we've seen in other years.

Got it. No material changes to pull-through percentages versus past expectations?

No.

Your next question is from the line of Sam Bordovsky with Truist.

Just to start on Epicel: you touched on it in the prepared remarks, but can you provide more about the account dynamics and surgeon wins coming from the new sales force? Any detail on the number of burn centers you're in now and whether these new reps are driving new account wins?

Sam, we've seen activity in burn centers that either never used Epicel or hadn't used it in years. Our sales representatives are broadening the customer base. There is churn on the tail end where some burn centers may not routinely see Epicel patients, but we are seeing a clear impact from new reps in broadening the customer base. Within centers, the more present our reps are, the more often they see admitted patients and can have educational discussions about appropriate patients and treatment plans. We believe that is also contributing to the increased grafts per patient we've seen over the past several quarters.

Great. As the sales force matures, and maybe it's early, but thinking about the sustainable growth rate for surgeons, is maintaining that 20% surgeon growth into 2022 a reasonable assumption going forward?

We haven't given guidance on 2022, but as we've said, we think we're in a strong position to exceed that 20% target. We believe the number of surgeons is a material growth driver, along with biopsies per surgeon and long-term conversion rates. We expect these drivers to remain robust into 2022, though we'll provide more specifics when we give next-year guidance.

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

I want to follow up on sustainability of growth. How should we think about the relative volume potential from the surgeons you're adding now? Are you still adding high-volume sports medicine surgeons with similar MACI volume potential as the surgeons added three or four years ago? How does the potential per surgeon compare?

Kevin, it's early, but we still believe it's early days in adding surgeons. In 2019 we were adding about 25% more biopsying surgeons year-over-year when we were three years into launch. When we expanded our target universe to 5,000 surgeons and added reps, we ended 2020 with about 1,500 surgeons biopsying, so we're still barely more than one-third penetrated into that target base. We think there are several years ahead of strong growth and we expect to see the same dynamics as with our initial targeted surgeons. We're still calling on high-volume cartilage repair surgeons, and from our perspective, there's no material difference in potential for these newly targeted surgeons. On a per-surgeon basis, potential remains quite significant given the number of patients with cartilage injuries.

Great. A follow-up on the Epicel TAM: is the increase driven more by medical education and surgeons using Epicel differently than historically, or is it broader access and more centers treating optimal patients? How much is education versus better access driving the higher graft utilization?

We're seeing both expansion of the customer base and higher grafts per patient driven strongly by medical education from our reps, clinical support specialists and medical affairs. For example, one of our large customers presented data on using Epicel on posterior surfaces, which is an additional use case and may change prior treatment choices. Our clinical support team has also implemented an 'extra graft' program where if extra grafts are available during manufacturing, we ship them and they are often used. That suggests initial graft estimates sometimes underestimated needs. The main driver, though, is earlier engagement by our reps and clinical support, enabling better treatment plans and educating surgeons on optimal Epicel use.

Your final question comes from the line of Arthur He with H.C. Wainwright.

I have a follow-up on the NexoBrid BLA resubmission. Have you scheduled a meeting with the FDA? How are you feeling about regulatory performance and site inspections in a timely manner for the resubmission?

We are actively planning for a Type A meeting with the FDA. After requesting a Type A meeting, the FDA has 14 days to respond and the meeting is typically scheduled within 30 days. A Type A meeting requires submitting a meeting package along with the meeting request, so there's more front-end work compared to a Type C pre-BLA meeting. Once a package and request are submitted, the meeting gets scheduled in relatively short order. We are working within that timeframe and will update investors when appropriate. Regarding inspections, we haven't discussed inspections in detail at this point. Inspections are not required before resubmission, but they must occur prior to an approval. Okay. Well, I'll just close by saying thank you to everyone for joining us this morning and for your continued interest in Vericel. As we mentioned today, the company executed extremely well in the first half of 2021, and we remain focused on continuing to deliver on our long-term strategy to bring our products to even more patients and drive significant growth and profitability in the years ahead. Thanks again, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect.