Vericel Corp Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Vericel's Second Quarter 2022 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 will now turn the conference call over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations. Please, go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's second quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, let me remind you 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. 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 financial results press release and a short presentation with highlights on today's call are available on the Investor Relations section of 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'll now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'll begin today's call with a discussion of our second quarter financial and business highlights and our expectations for the remainder of the year. And then I'll turn the call over to Joe for a more detailed review of our financial performance and 2022 financial guidance, before opening the call to Q&A. We generated total revenue of $37 million in the second quarter and approximately $3 million of adjusted EBITDA and operating cash flow, marking the eighth consecutive quarter of sustained profitability and positive cash flow for the company. MACI had a very strong quarter, as we generated revenue of $28.6 million, representing the highest quarterly revenue outside of the seasonally high fourth quarter since the launch of MACI. MACI revenue grew 8% compared to the second quarter of 2021 and sequential revenue growth was more than 10% compared to the first quarter of 2022. Importantly, MACI continued to outperform the overall cartilage repair procedure market and we remain on track to generate our expected double-digit growth in surgeons taking MACI biopsies this year, as our sales team continues to expand the MACI customer base. MACI is also off to a strong start in the third quarter, and as Joe will discuss in further detail, we expect to see an inflection in MACI performance in the second half of the year with continued strong quarterly revenue progression and significantly higher quarterly growth rates compared to the same periods in 2021. Based on our results to date and MACI's continued momentum, we expect MACI growth to accelerate through the remainder of the year, translating to growth in the mid to high 20% range in the third quarter and mid to high 30% range in the fourth quarter versus the same period in 2021. Accordingly, we're maintaining our full year revenue guidance for MACI, as it resumes its high-growth trajectory. MACI adoption also continues to be supported through medical education and publications. Data from a recently published MACI study in a journal showed the expansion of knee cartilage defects in the formation of new high-grade lesions in patients as time between a MACI biopsy and implantation increases, highlighting the importance of treating patients in a timely manner. Finally, we remain on track for planned meetings with the FDA later this year to discuss our MACI arthroscopic and MECA ankle development programs, initiatives that we believe will support sustained growth in the years ahead. Turning to our burn care franchise. We reported Epicel revenue of $8.2 million for the second quarter, which was below our most recent quarterly run rate. As we've discussed previously, even though quarterly baseline revenue for Epicel is significantly higher than pre-2021 periods, there will continue to be inherent volatility in quarterly revenue given the small patient population and the concentrated number of burn centers treating these patients. We have seen solid underlying fundamentals for Epicel in the first half of the year, as the number of burn centers taking biopsies and treating patients with Epicel was consistent with the significantly higher burn center penetration seen in the same period last year, which included the highest Epicel volume and revenue quarter ever in Q2 2021. However, we did see fewer biopsies in patients treated with Epicel in the second quarter and a lower average burn size for treated patients compared to recent trends. This clearly impacted our quarterly results, although again, quarterly revenue of over $8 million is significantly above pre-2021 quarterly run rate. We also continue to support the expanded utilization of Epicel through medical education and important publications. We recently announced the publication of results in a leading peer-reviewed journal from a retrospective study conducted by the Burn and Reconstructive Centers of America, which showed a 90% survival rate for patients with large posterior burns treated with Epicel. These burns presented a treatment challenge in that the posterior surface bears the major portion of body weight. And this first of its kind study highlights the potential for improved outcomes using Epicel for patients with significant posterior burns. Turning to NexoBrid. We're very pleased to announce this morning that the NexoBrid BLA resubmission has been accepted for review by the FDA with a PDUFA date of January 1st, 2023. Our cross-functional teams in conjunction with their colleagues at MediWound worked extremely diligently to address the FDA's feedback with a high quality and timely resubmission, which met our target timeline. We're very pleased to have completed this important milestone, and we continue to believe that NexoBrid, if approved, has the potential to become a new standard of care for eschar removal for patients with severe burns in a meaningful part of our overall business. Finally, I'd like to highlight that we recently issued our inaugural ESG report, which reflects our commitment to incorporating these important principles across all of our business activities. We'll continue to identify opportunities to broaden our positive impact and build upon our ESG performance in the years ahead, as we remain focused on how we can better serve all of our stakeholders, including our patients, customers, employees, investors, and the communities in which we operate. In summary, after a solid start to the year, we're maintaining our total revenue, MACI revenue and adjusted EBITDA guidance for the full year as the entire Vericel team is focused on delivering continued strong commercial and financial results in the second half of the year, while preparing for a potential NexoBrid launch in the first half of 2023. I'll now turn the call over to Joe to provide additional details regarding our second quarter results and financial guidance.

Thanks, Nick, and good morning, everyone. Starting with our Q2 results. Total net revenue for the quarter was $37 million and was comprised of $28.6 million of MACI revenue, $8.2 million of Epicel revenue, and $0.2 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI had a strong quarter with 8% revenue growth versus the prior year and also improved sequentially with 10% growth versus the first quarter. For Epicel, it is important to note that the prior year revenue of $12.2 million represented the highest quarterly revenue of any quarter-to-date, resulting in a difficult year-over-year comparison. And as Nick referenced with Epicel, there is inherent volatility in quarterly volumes due to the burn patient population and treatment dynamics. Gross profit for the quarter was $22.9 million or 62% of net revenue, compared to 68% in the second quarter of 2021. Our gross margin was lower than the prior year due to lower BARDA revenue, which is 100% gross margin, P&L geography cost movement, as SG&A is no longer absorbing the cost from our current Cambridge manufacturing facility, and these costs have moved to cost of goods sold as well as higher Epicel related costs. For Epicel, we have expanded our manufacturing headcount over the last year to support significant product growth, and we also had a higher mix of smaller burns, which translates into an overall higher cost per unit, and both of these factors also contributed to the year-over-year change. Importantly, we expect a typical gross margin increase in the second half of the year with our anticipated revenue growth in the third and fourth quarters. Total operating expenses for the quarter were $31.9 million, compared to $30.6 million for the same period in 2021. Net loss for the quarter was $9 million or $0.19 per share compared to a net loss of $3.8 million or $0.08 per share for the second quarter of 2021. Non-GAAP adjusted EBITDA for the quarter was $2.8 million and we generated $3.1 million of operating cash flow, representing our eighth consecutive quarter with positive adjusted EBITDA and operating cash flow. We ended Q2 with approximately $131 million in cash, restricted cash, and investments and no debt. In addition, we recently entered into a $150 million revolving credit facility with a syndicate of banks led by JPMorgan that significantly increases our strategic flexibility to pursue organic and inorganic growth opportunities using non-dilutive capital. Turning to our financial guidance. After two strong quarters of performance to start the year and momentum accelerating into Q3, MACI is well-positioned to return to its high growth profile, and we are maintaining our full-year MACI revenue guidance of $132 million to $141 million. In terms of MACI quarterly revenue phasing, as Nick mentioned, our orders for Q3 have been a strong start of the quarter and we anticipate a higher than typical step-up versus the second quarter, with Q3 sequential MACI revenue growth expected to be in the mid- to high single-digits versus Q2. This would imply a year-over-year growth in the mid- to high 20% range for Q3 MACI revenue versus last year. Moving to Epicel. After a lower-than-anticipated second quarter, Epicel is now trending below our original expectations for the year. We expect third quarter revenue to be at a similar run rate to what we saw in the first half of the year with a step-up in the fourth quarter. Overall, we are maintaining our total revenue guidance of $178 million to $189 million for the full year. For the full year, we expect gross margin of approximately 69%, a slight reduction from the prior full year guidance of approximately 70%. However, we now also expect lower operating expenses for the full year of approximately $130 million to $132 million versus our original guidance of $134 million to $137 million, which will offset the slight reduction to gross margin. Accordingly, we still anticipate a full year adjusted EBITDA margin of approximately 21%. This concludes our prepared remarks. We will now open the call to your questions.

Thank you. Our first question is from Ryan Zimmerman of BTIG. Please proceed.

Thank you. Thanks for taking our questions. Good morning. Maybe to start with the guidance for a little bit, Nick and Joe. Appreciate the commentary and the color in terms of the pacing. A few questions around that though, I mean, if I think about kind of the pacing dynamics that we saw in the first half of this year on Epicel, it implies, obviously, around $9 million for the third quarter. But I guess – how are you thinking about your comfort level with the implied step up in the fourth quarter? Because assuming MACI guidance is the same, there's not much expected BARDA revenue it would suggest that Epicel guidance previously of 45 to – 45.5% to 47.5% is unchanged for the year. So, maybe to get your thoughts around why you can step up and hit that number in the fourth quarter? And then I have a couple of follow-ups. Thank you.

Yeah. Good morning, Ryan. This is Joe. I'll start. Thanks for the question, and maybe Nick will chime in as well. So – maybe just to talk kind of about the full year guidance and start broad and then kind of hit Epicel. So first off, we are maintaining our full year guidance in total of $178 million to $189 million. As we talked about, we're also maintaining our MACI revenue range for the full year as well. So as we kind of think about the product, I would say, to your point, I mean, MACI is on track from a full year perspective. And I think the midpoint is probably still a good kind of estimate in terms of how we're thinking about MACI for the full year. I think on Epicel, to your point, I think we're not – I think what we're thinking now is kind of given the start of the year, it's more likely Epicel will be kind of flattish to last year or in the low $40 million versus our original guidance. So when you add kind of that midpoint of MACI, the lower estimate on Epicel as well as the BARDA revenue, it really points you more to the lower end of the range. So in terms of Epicel, changing kind of hit that, and then I'll kind of turn it over to Nick. We do expect a similar quarter based on our run rate in Q3 called $9 million plus, and a step-up in the fourth quarter, but kind of more in that, call it, $12 million to $13 million range, which would get us into the low 40s.

Yeah, I think that captures it, Joe. So I appreciate that. And Ryan, maybe just a little bit on sort of the market dynamics as we've seen in Epicel performance. So as I mentioned during my remarks, the underlying fundamentals in terms of burn center penetration as measured in up-sell biopsies that we receive from centers, and then centers treating patients remained in the first half of the year pretty strong and comparable to what we saw last year, which was a big step-up compared to prior years. That being said based on sort of diagnosis codes that we're able to access and so on. It's clear that, at least for the larger burns, 30% plus that there was a decline in those burns in the first quarter and particularly in the second quarter. So again, the one thing, as we've always said is that, even operating at a higher baseline level of revenue, there is obviously inherent volatility given the small patient population and we just saw that in the first half of the year.

Okay. That's very helpful, guys. And then just two follow-ups for me. I want to take a swing at 23% a little bit. And just the MACI growth you have kind of in that low 20% range for this year. You'll let some others ask about the pacing. But are you comfortable with kind of that 20% longer-term growth rate on MACI, as we think about '23 and beyond and the durability of that? And then the second question off of that is just, I saw the 8-K last night I think almost saw the 8-K you mentioned today about the line of credit for $150 million. Has your thinking around product life cycle or strategy changed at all given this credit line and how you think about that in the context of both MACI, as well as maybe inorganic M&A? Appreciate your comments. Thanks for taking the question.

Thank you, Ryan. I'll take this one to start, and Nick can add in as well. Regarding the first question, it's still quite early to discuss MACI and our outlook for 2023 specifically. However, in terms of MACI and the overall healthcare landscape, we're optimistic that things will continue to improve. We believe MACI is still positioned for long-term growth, maintaining its trajectory. As for the line of credit, I see it as a valuable resource for the company, providing non-dilutive capital at a lower cost than equity. We're pleased to have this tool available as it offers us significant flexibility, especially as we invest in a new building. We're mindful of sustaining long-term growth through potential business development, life cycle management, and other organic opportunities as we strategize moving forward.

Yes. I would like to reiterate our confidence in MACI's future performance. We are starting from a solid cash position of over $130 million with no debt. We prefer to have access to various financial tools. We have an at-the-market facility available, although we have not utilized it yet, but it exists for future business development opportunities. Our line of credit serves a similar purpose. Our viewpoint on this remains unchanged. We have consistently mentioned that we can finance our life cycle management initiatives using our existing cash and operating cash flow, thanks to the company's strong profitability. However, as we consider potentially larger endeavors in the future, it's beneficial to have these resources ready.

Thanks for taking my question.

Our next question is from the line of Sam Bedovsky of Truist. Your question please.

Hi, thank you for taking my question. My first inquiry is regarding the sequential growth in the third quarter for MACI. I would like to know if you are experiencing a slower environment for elective procedures like other companies reported in June and that continued into July. Additionally, could you share what gives you confidence in achieving sequential growth in the third quarter?

Yes. I'll start, Sam, and thanks for the question. So, obviously, in our remarks, we referenced that our performance to-date and continued momentum gives us a lot of confidence about accelerating growth for MACI both in the third and fourth quarters. So, I think that speaks for itself.

Yes, go ahead.

Just maybe to put a final point. Is that more of a confidence in terms of you're seeing more biopsies, or are we starting to see higher conversion of biopsies and different actual procedures, is that how you're seeing it?

At the end of the day, implants are the revenue-generating metric that we focus on. In the first half of the year, we didn't see a significant change in conversion rates. Our guidance for the rest of the year does factor in some improvement, particularly at the high end of the range, but what we're observing around implants and implant scheduling gives us confidence moving forward.

Yes. No, I would just add, I think, Nick, kind of hit the key points in terms of the drivers. Again, I think what we talked about was kind of in that mid to high single-digit quarter-over-quarter growth, which gets you into the mid to high 20s on a year-over-year basis. It's kind of in that $30 million plus range for the quarter. And I think Nick talked about the drivers so, leave it there. Thanks.

Yes, that's helpful. And just to kind of extrapolate off that to 4Q, just in back and that looks like probably the assumption should be similar sequential growth from 3Q to 4Q that we saw in 2019. Is that the right way to think about it?

Yes. Generally speaking, we have been consistent throughout the year regarding the revenue mix and seasonality of MACI. We observed a strong performance in Q2 and believe Q3 is following that trend. As we look toward the latter half of the year, including Q4, we anticipate maintaining the typical 40-60 split between the first and second halves. Historically, this has remained consistent, with around 60% of revenue coming in the second half, even after accounting for the variations over the past couple of years due to COVID. Overall, Q4 has also been stable, typically falling into the low $50 million range. Based on the midpoint calculations and step-ups, we see a pattern similar to earlier years, particularly 2019, which serves as a relevant comparison.

Okay. Thanks for taking the questions.

Thank you. Our next question is from the line of Jeffrey Cohen of Ladenburg Thalmann. Go ahead please.

Hi Nick and Joe, how are you?

Good morning.

Hey Jeff.

So, a couple of questions from our end. I guess, firstly, could you talk a little bit about your gross margin commentary in your modest OpEx reduction down to $130 million, $132 million, at least as it relates to the back half and the confidence that you have on the margin and the things?

Thanks for the question. Regarding gross margin, we typically consider this over the long term, acknowledging there may be variability across quarters. For the full year, we expect it to trend in the high 60s, with guidance at 69%. We can evaluate the quarterly run rate compared to last year, and it appears to be tracking as expected. A few factors influence this, including lower BARDA revenue and certain costs related to our manufacturing facility. Our FFO costs are slightly higher due to some smaller expenditures. We anticipate material cost increases, but they are largely in line with expectations. Spending from outside vendors has risen a bit as well. It's important to note that we generally see more significant revenue growth and a shift in revenue mix from the first half to the second half of the year. Historically, this pattern holds true, with gross margin progressing throughout the year. For the full year, we're close to our initial expectations, albeit slightly lower. However, we are effectively managing our operating expenses, reducing guidance by a few million, and optimizing our overall spending. All our key initiatives remain on track, and we believe there is a balance in the total P&L as we assess the year ahead.

Okay, got it. And then secondly, first, can you talk a little bit about NexoBrid from a commercial standpoint from year end, how you're perhaps making some preparations into a commercial launch early next year as far as your sales and clinical organization in the US? Thank you.

Yeah. Thanks, Jeff. I'll take that one. Obviously, with an established PDUFA date now, we have resumed our commercial pre-launch activities, and that also includes medical affairs in terms of continued education, the next protocol, expanded access protocol and so on. So all those activities are ongoing and at this point, based on the information we have, we certainly expect a first half commercial launch, assuming things stayed on track. Again, we feel like we certainly submitted a high-quality and timely resubmission that addressed the questions raised by the FDA. I'd say one thing, we'll keep our eyes on, our inspection schedules. As we mentioned previously, we certainly expect that the FDA will want to inspect the sites in Taiwan and Israel, and that's the one piece of it that's out of our control. But at this point, again, we're planning for a first half commercial launch. And given as we've talked about previously, the P&T process and so on, we'd expect that schedule commercial revenues to begin sometime in the second quarter next year.

Perfect. That's it for us. Thanks for taking the questions.

Okay. Thanks, Jeff.

Our next question is from the line of Arthur He with HCW. Your question, please.

Hi. Good morning, Nick and Joe. This is Arthur in for RK. I just had a quick question regarding MACI. Could you guys give us some color on the metrics on the biopsy growth for MACI during the quarter?

Yes. We haven't talked specifically about kind of the biopsy growth, specifically. I guess what I would say is, in general, I would say, last year, we had significant kind of delta between kind of how biopsies were growing and kind of the revenue range, et cetera. Broadly speaking, I would say, as we think about this year, I think they're generally kind of been more instinct. So if you kind of look at where the revenue grows, it kind of gives you a good sense of kind of in general where the biopsies are trending as well.

Got you. Thanks. And regarding the backlog of the MACI, how is that looking for the quarter? And what's your expectation for the second half of the year.

Yes. I would say that as we evaluate the first half of the year for MACI, the results so far, and even looking ahead to the second half, this remains an area of focus regarding our backlog from a commercial standpoint. However, I wouldn't characterize it as a significant factor in the results we've seen thus far, nor do I expect it to play a major role in the latter half of the year. If our conversion rate improves significantly, it could be related to the backlog, but at this time, we're not anticipating that it will be a meaningful contributor.

Got you. Thanks. Really appreciate that. Thank you for taking my question.

Thank you. And now I would like to turn the conference back to Nick Colangelo for closing remarks.

Thank you, everyone, for joining us today and for your questions. We believe the company is on track to achieve another year of strong financial and operational results, and we look forward to updating you on our progress in the next call. Thanks again, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.