Ladies and gentlemen, thank you for standing by. Welcome to Vericel’s Fourth Quarter 2023 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 call over to Julie Downs, Vericel’s Head of Corporate Communications.

Thank you, Operator, and good morning, everyone. Welcome to Vericel’s fourth quarter 2023 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 Security 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 fourth 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 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.

Thank you, Julie, and good morning, everyone. I’ll begin today’s call by discussing financial and business highlights for the fourth quarter and full year, as well as our expectations for 2024. Joe will then provide a more detailed update on our 2023 financial results and financial guidance for this year before opening the call to Q&A. The company executed exceptionally well in 2023 and delivered outstanding financial and business results in the fourth quarter, generating top-tier revenue growth and even higher profitability growth. Total revenue for the full year increased 20% to over $197 million, which was at the top end of our guidance range, with MACI revenue growing 25% to nearly $165 million and burn care revenue of nearly $33 million. The company also reached an inflection point with respect to our profitability profile, with bottomline profitability growing at twice the rate of our topline revenue growth as adjusted EBITDA increased 40% to $34 million and we generated over $35 million of operating cash flow, ending the year with approximately $153 million in cash and investments and no debt. The company also had a very strong close to the year, as we generated record total revenue of $65 million in the fourth quarter, an increase of 23% over the prior year. Our strong fourth quarter performance was driven by record quarterly MACI revenue of nearly $57 million, which was above the high end of our guidance range and represented more than 50% sequential growth over the third quarter and 22% growth over the fourth quarter of 2022, marking the sixth straight quarter of 20%-plus growth for MACI. This outstanding MACI revenue performance was driven by strong underlying business fundamentals, as we had the highest number of MACI implanting surgeons, surgeons taking biopsies, and biopsies in any quarter since launch. We also generated very strong growth in the burn care franchise, as fourth quarter revenue grew 31% over the prior year. Our topline revenue performance drove significant margin expansion and profit growth in the fourth quarter, as we generated gross margin of 75% and adjusted EBITDA margin of 34%, with adjusted EBITDA growing 50% to over $22 million and net income for the quarter more than doubling to $13 million. As we look forward to 2024 and beyond, we expect that continued high revenue growth will drive further expansion of our margins and enhancement of our profitability metrics. From a commercial perspective, MACI sustained growth has been driven by continued expansion of our surgeon customer base, as we had another year of double-digit growth in surgeons taking biopsies in 2023. We’re now approaching 50% penetration of our current 5,000 target surgeons. The expansion of our surgeon base and the corresponding growth in biopsies has fueled MACI’s success and helped drive sales rep productivity to its highest level ever at $2.2 million per rep in 2023. Our commercial team continues to execute high-quality peer-to-peer programs to help drive surgeon uptake, and we had our highest number of programs to date in the fourth quarter, demonstrating that interest in MACI continues to grow. In addition, MACI’s positive long-term clinical outcomes were highlighted in a prospective study published in the American Journal of Sports Medicine last week. The study showed improved clinical scores, high levels of patient satisfaction, and clinical and MRI-based outcomes that were maintained out to 10 years for patients treated with MACI. The study also showed excellent long-term outcomes for MACI patients treated for both patellofemoral and femoral condyle defects, which is the focus of our MACI Arthro program. Based on the strength of MACI’s clinical outcomes, topline revenue performance, and its underlying growth drivers, our core MACI business remains very well-positioned for continued strong growth in 2024 and the years ahead. Looking beyond this core MACI growth to our lifecycle management and indication expansion initiatives, we announced last month that our MACI arthroscopic delivery submission was accepted for review by the FDA and that we expect to launch MACI Arthro in the third quarter of this year. As we previously discussed, the MACI Arthro kit targets 2 to 4 square centimeter femoral condyle defects, which comprise the largest segment of our addressable market, representing approximately 20,000 patients per year or roughly one-third of the $3 billion addressable market for MACI. In January, the USPTO issued a patent covering the complete set of MACI Arthro instruments until 2043, underscoring our market research indicating that orthopedic surgeons view MACI Arthro as a meaningful innovation in the cartilage repair market, and that regardless of their current MACI usage, surgeons expect to shift a meaningful share of their procedures to the MACI Arthro procedure. Our pre-launch commercial activities are well underway. In addition, in connection with the MACI Arthro launch, we’ll be expanding our surgeon target base from 5,000 to approximately 7,000 surgeons, to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures. Based on our experience to date, we’d expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for MACI in the years ahead. We’re very excited about the anticipated launch of MACI Arthro later this year, as we believe it represents another significant growth opportunity for MACI and a key value driver for our business moving forward. We’re also advancing our MACI development program for the treatment of cartilage injuries in the ankle and expect to initiate the MACI ankle clinical study in 2025. Cartilage defects in the ankle represent the second largest market opportunity for MACI, and we believe that a potential ankle indication, with an estimated $1 billion addressable market, could be another significant growth driver for MACI in the next decade and beyond. Turning to our burn care franchise, we also saw strength in the underlying business fundamentals for Epicel in the fourth quarter, as we had the highest number of Epicel biopsies in the quarter since 2021, and that momentum has carried into 2024 with a strong start to the year. We continue to see positive pull-through for Epicel from our expanded burn care sales team, which further supports our belief that Epicel will benefit from a larger commercial footprint and higher share of voice in the burn care market. With respect to NexoBrid, our burn care team is executing on the initial phases of our launch plan, following commercial availability of the product in the U.S., beginning in the fourth quarter of last year. Our commercial and medical teams remain focused on building a strong foundation for NexoBrid by supporting P&T committee approvals to enable burn care center access to NexoBrid, training burn surgeons and their staffs, and supporting initial cases at burn centers to ensure successful patient outcomes. We’re pleased with the progress that we made in the fourth quarter in terms of the early launch phase key performance indicators for onboarding burn centers. As of the end of 2023, more than 50 burn centers had submitted packages to their P&T committees, more than 25 centers had gained P&T committee approval, and nearly 20 centers placed initial product orders. While our performance on these metrics was strong, as we mentioned on our call, the manufacturing-related delay in 2023 and the resulting uncertainty around the ultimate timing of product availability did cause a number of burn centers to defer or delay NexoBrid training and P&T committee approval processes, which, in addition to the typical administrative hurdles at hospitals, impacts ordering patterns and the timing of use and uptake at many of these centers. Most importantly, however, the clinical outcomes for the initial patients treated with NexoBrid and the feedback from burn surgeons treating those patients has been very positive, which serves as a great signal for the long-term potential of NexoBrid as we look to change the standard of care for eschar removal for patients with severe burns. In addition to the progress with initial burn center onboarding, we also completed a number of initiatives designed to build a strong foundation for NexoBrid commercial success over time. In the fourth quarter, we submitted a supplemental BLA for a pediatric indication for NexoBrid that was accepted for review by the FDA. In terms of commercial access, CMS granted NexoBrid a permanent J code and transitional pass-through payment status, which became effective in January, and provides a reimbursement pathway for the outpatient treatment of appropriate NexoBrid patients in our target burn centers, as well as additional hospitals over time. So overall, we’re very pleased with the strong surgeon interest in NexoBrid, our progress in market access activities and onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients, and the clear impact that our broader burn care portfolio and expanded sales team is having on Epicel. We believe that all of these factors will enable the company to build a strong foundation for NexoBrid in 2024, meaningfully contribute to our burn care franchise revenue this year, and enable the company to have a second high-growth franchise in burn care moving forward. Finally, turning to guidance for 2024, we expect continued strong revenue growth of over 20%, with full-year revenue of $237 million to $241 million, driven by the continued strength in our core portfolio, our first full year of NexoBrid revenue, which will contribute to growth this year and even more meaningfully so next year, and the anticipated launch of MACI Arthro in the third quarter, which is expected to generate some revenue towards the end of the year and support a sustained high level of growth for MACI and the company in 2025 and beyond. We also expect that our sustained high revenue growth will drive further expansion of our margins and growth in our profitability metrics. I’ll now turn the call over to Joe.

Thanks, Nick, and good morning, everyone. Starting with our 2023 financial results, total net revenue for the full year was $197.5 million, representing growth of 20%. Total net revenue in the fourth quarter was $65 million, with growth of 23%, driven by strong results from both of our franchises. MACI revenue of $164.8 million for the full year was above our guidance range, growing 25% versus the prior year. For Q4, MACI revenue was $56.7 million and grew 51% over the third quarter and 22% versus the prior year, as we continued our momentum in the MACI business with our sixth consecutive quarter of over 20% growth. Total burn care revenue for the full year was $32.7 million, consisting of $31.6 million of Epicel revenue and $1.1 million of NexoBrid revenue. In the fourth quarter, our total burn care revenue increased by 31%, with Epicel growth of 22% and the addition of NexoBrid revenue in the quarter, leading to a very strong fourth-quarter burn care result. Gross profit for the year was $135.6 million or 69% of net revenue, an increase of approximately 200 basis points compared to 2022. For the quarter, gross profit was $48.5 million or 75% of net revenue, which also increased by 200 basis points versus last year and represents the highest gross margin for the company in any quarter to date. In addition, our pull-through of incremental revenue to gross profit has now returned to levels similar to 2019, with the pull-through to gross margin of 83% for the fourth quarter and nearly 80% for the full year. Total operating expenses for the year were $142 million, compared to $126.8 million in 2022. For the quarter, operating expenses were $35.8 million, compared to $32.2 million for the same period in 2022. The increase in operating expenses in 2023 was primarily due to increased headcounts and related employee expenses, lease expenses associated with the company’s new facility that is under construction, variable sales and marketing expenses, as well as other external expenses. Net income for the fourth quarter more than doubled to $13 million or $0.26 per share, compared to net income of $5.9 million or $0.12 per share for the fourth quarter of 2022. For the full year, our net loss was $3.2 million or $0.07 per share, compared to a loss of $16.7 million or $0.35 per share in 2022, representing an improvement of nearly $14 million on a year-over-year basis. Non-GAAP adjusted EBITDA for the year grew 40% to $33.9 million or 17% of net revenue, compared to $24.2 million or 15% of net revenue in 2022. For the quarter, adjusted EBITDA grew 50% to $22.3 million or 34% of net revenue, an increase of approximately 600 basis points versus 28% in the fourth quarter last year. Importantly, our adjusted EBITDA growth of 40% for the full year is double our topline revenue growth of 20%, and our adjusted EBITDA growth of 50% in the fourth quarter is more than double our revenue growth of 23%, as our results continue to demonstrate very strong P&L leverage and a top-tier profitability profile. In addition, the company has now consistently generated positive adjusted EBITDA each quarter for more than three years and continues to convert adjusted EBITDA into strong cash flow. We generated operating cash flow of $35.3 million in 2023 and ended the year with $152.6 million in cash, restricted cash, and investments and no debt, up from approximately $140 million to start the year, as our cash balance increased in 2023, despite CapEx investments for our new facility. Turning to our financial guidance for 2024, we’re using a similar guidance framework to start the year that we used in 2023 for both MACI and our burn care franchise. For the full year, we expect total company revenue of $237 million to $241 million, representing growth of approximately 20% to 22%, driven by continued strong growth in both of our franchises. With MACI on track for another strong year, Epicel benefiting from a higher share of voice and NexoBrid early in its launch phase, we have multiple paths to our 20%-plus total revenue guidance for the year. We expect another year of growth for MACI, and as a starting point, we expect full-year revenue growth in the high-teens percentage range, with biopsy surgeon growth, biopsy growth, and an increase in price continuing to serve as the key MACI growth drivers. For the burn care franchise, we expect growth of over 30% for the full year, based on significantly improved Epicel trends over the past several quarters, plus the initial revenue contribution from NexoBrid. For the first quarter, we expect a strong start to the year, with total company revenue of approximately $48 million to $50 million, representing approximately 20% revenue growth at the midpoint. We expect Q1 MACI revenue of $38.5 million to $39.5 million, and for burn care, we expect total revenue in the first quarter to be $9.5 million to $10.5 million, with the vast majority of revenue coming from Epicel, which is trending above our recent run rate, based on the strength of biopsies to close out 2023, and NexoBrid revenue to be in a similar range as Q4. Moving down to P&L, for the full year, we expect gross margin of approximately 70% and adjusted EBITDA margin of approximately 20%, which would imply another year of very strong adjusted EBITDA growth of around 40%. We would expect similar quarterly trends in terms of seasonality and progression for both our gross margin and adjusted EBITDA margin percentages throughout the year, and we would expect operating expenses to be approximately $165 million for the full year. Finally, we anticipate an increase in capital investment for the buildout of our new manufacturing and headquarters facility, with our share of construction costs expected to be in the $50 million range for 2024. In total, this guidance points to continued high revenue growth in 2024, with further enhancement of our top-tier profitability profile. In addition, we would also anticipate continued strong revenue growth in 2025 with a full year of arthroscopic MACI and further acceleration of NexoBrid usage, as well as continued expansion in our key profitability metrics. This now concludes our prepared remarks. We will open the call to your questions.

Thank you. Our first question comes from Ryan Zimmerman with BTIG. Please go ahead.

Good morning. Can you hear me okay?

We can. Good morning, Ryan.

Good morning and congratulations on a very strong 2023. I appreciate the insights on guidance this morning, Joe. Could you discuss seasonality concerning the top line? It seems to be a fairly typical year compared to previous ones with the launch of NexoBrid, which might bring some advantages late in the third and fourth quarters for arthroscopic MACI. I would like you to elaborate on how we should approach seasonality and pacing this year, considering it's somewhat unusual.

Thank you for the question, Ryan, and good morning. I'll start with a high-level overview of our guidance to ensure everyone understands the framework and then discuss the seasonality aspect. First, from a company-wide perspective, we are maintaining our message of over 20% growth, consistent with our updates from the end of last year and early this year. Importantly, we are using the same framework as last year, but we have a higher starting point for both franchises. Regarding MACI, we are assuming strong growth in surgeon activity, leading to an increase in biopsy volumes and pricing. This positions us in the high-teens growth range for the full year. We have factored in some impact from the arthroscopic launch, primarily in Q4, but this doesn't significantly alter our outlook for MACI seasonality from last year. If we consider MACI resulting in high-teens growth, we're looking at a full-year figure in the low-to-mid $190 million range. For instance, if we take an 18% growth leading to $194 million, the remaining amount for burn care would be approximately $45 million. This represents strong growth, over 30% at that midpoint. There are various outcomes across our products, and while we’re not providing specific product guidance, we will outline our framework. We anticipate a similar situation to last year, aiming to grow our Epicel run rate from last year's exit rate. Last year, Epicel was around the $6 million to $7 million run rate range, and we ended 2023 with a run rate closer to $8.3 million. Thus, our exit rate on Epicel is around $33 million, and we believe it’s reasonable to expect continued growth, likely in the low double digits. We've noted a strong Q4 in biopsies, and part of that includes price increases on Epicel. Therefore, we expect low double-digit growth, which would be lower than last year. The seasonality for Epicel may fluctuate from quarter to quarter, but overall, it's a reasonable starting point. Assuming low double-digit growth, you’re looking at approximately $37 million to $38 million for Epicel, which would imply NexoBrid in the $7 million to $8 million range. NexoBrid is still early in its launch, making it hard to predict exact figures, especially on a quarterly basis. We don’t have specific guidance yet for 2024, but we anticipate growth throughout the year for NexoBrid. As we know, Epicel may have quarterly variability, but we expect NexoBrid to build throughout the year. In conclusion, while there may be some seasonality, we don't anticipate anything materially different for MACI, and Epicel's volatility is to be expected.

Thank you for all that color. That’s very, very appreciated. Maybe just to ask on NexoBrid, I think people were hoping it would kind of get rolling pretty quickly here. You’re guiding to kind of a similar level from the fourth quarter. Talk to us about kind of how the process is going. I mean, clearly, there’s interest, you wouldn’t have that many sites ordering this early if there wasn’t. But how do you think about kind of the early adoption of NexoBrid from what you’re seeing so far a couple weeks in the launch? Thanks for taking questions.

Yes, Ryan. This is Nick. I'll begin, and then Joe can provide insights into the distribution system dynamics. From our viewpoint, as you've mentioned, there is significant interest from surgeons in NexoBrid, supported by our market research and independent studies. The team has successfully onboarded several burn centers, and we will continue to expand this network. Last year's delays did interrupt the onboarding process for many centers once the product became available. Centers that were further along were able to complete their processes and start placing initial orders, while others that had paused needed to go through a re-engagement process, which is progressing well. As we've noted, this is a long-term endeavor, as it involves changing the standard of care for burn surgeons regarding eschar removal protocols that have remained unchanged for decades. Progress is being made, and we ensure that we support the initial patient applications and treatments, which have yielded excellent outcomes and positive feedback from surgeons. We believe we are on track and making the anticipated progress.

Yeah. And just to add a little bit as well on the NexoBrid side. So first, as Nick said, obviously, the metrics have been very strong to start. The clinical feedback has been very positive. So, those are great signals. I think it is important to understand, we’re early in the launch, and a couple of things just to point out, which is, again, the distribution on NexoBrid is very different than MACI and Epicel. And just as a reminder, we have a 3PL that kind of manages our inventory and then the distribution network that’s in place consists of multiple specialty distributors. Some have multiple locations and we recognize revenue when those specialty distributors order from our 3PL. The second kind of part of the channel, if you will, is then the burn centers and hospitals order from those FTs. It might be the one that they typically work with, most likely or some different products at their centers. So when they order, that drives additional orders from our FTs each quarter and then leads to our quarterly revenue. And then lastly, it’s important to remember that both the FTs and the hospitals will keep some level of inventory, which can vary and impact ordering patterns. So just briefly, as you kind of think about the first couple quarters of launch, again, Q3, that was, if you remember in Q3, we got commercial availability very late in the quarter. So that was essentially the FTs kind of ordering from a channel perspective in Q3 and we didn’t really get into the market and start treating patients until Q4. That’s the quarter where hospitals start ordering from FTs and kind of it’s in the market, et cetera. And generally, I think what we’ve seen is a lot of the burn centers that were more physicians, sorry, more familiar with NexoBrid, some of the burn surgeon KOLs, as well as the hospitals that were farther along in the P&T process, even when things were disrupted last year. So that was as anticipated that leads to essentially some initial stocking at hospitals. And now as we get into Q1, we’re seeing continued use on patients. We’re seeing some of those hospitals start to use that inventory that can then lead to some reorders. And at the same time, as Nick mentioned, the team’s working to add new centers on top of the ones that have already ordered and working through some of those administrative challenges at the burn centers. So I think as these dynamics play out, particularly early in the launch, it’s going to take some time for ordering patterns to normalize at both the FTs and the hospitals, which is anticipated, I would say, at this point in the launch. And lastly, again, we have one quarter of history and still a few weeks left in Q1. And again, unlike MACI and Epicel, we have a ton of history and data. We won’t know exactly what those FT orders look like until we get later in the quarter and so there’s still a range of outcomes, I would say.

All fair. Thanks guys for the very comprehensive answers. Appreciate it.

Thanks, Ryan.

Thanks, Ryan.

Thank you. One moment for our next question. Our next question comes from Mike Kratky with Leerink Partners. Please go ahead.

Hi, everyone. Thanks for taking our questions. Can you speak to how you’re thinking about how quickly you can get traction in the new target surgeon population once you get arthroscopic approval? I mean, do you get the sense there’s pent-up demand from surgeons that are not currently using MACI presently, but will start doing implants once you have arthroscopic approval?

Yeah. Hey, Mike. This is Nick. Obviously, as we said, we’re really excited about MACI Arthro for the reasons we’ve described. It targets the largest segment of our addressable market. It will be the only arthroscopic restorative cartilage repair procedure for these femoral condyle defects of a certain size. So we think this is going to be very meaningful for us as we move forward. Obviously, we can’t at this point, since it’s not an approved method of administration, be out there talking generally to surgeons. But we are working with a couple dozen surgeons through the human factors study, voices at customer labs, additional training, et cetera. And I’ll just say the enthusiasm from the surgeons who have been exposed to the new instruments has been significant and great. So they’re really excited about it and I would expect that that will translate to those who aren’t as familiar with it right now. And I would just, last point would be that for these surgeons, if you look at our addressable market, right now, the vast majority of cartilage repair procedures are done arthroscopically, whether it’s chondroplasties, microfracture. Those are the things that make up the majority of the cartilage repair market. So this kind of is right in the wheelhouse for those surgeons in terms of how they currently do their cartilage repair procedures. And there’s nothing out there that has the clinical outcomes that MACI has. So we think that combination is going to be very powerful for us as we move forward.

Got it. Yeah. I really appreciate the color there. And then maybe just as a follow-up. Is it reasonable to think that as you get arthroscopic approval, that could ultimately lead to an improvement in the conversion rate just as more implants end up getting done over time? Is that available?

Yeah. Well, we certainly believe and our surgeons believe that, number one, with a less invasive procedure that obviously there are better aesthetic outcomes, there’s less post-operative pain and we would expect there to be faster post-surgical recoveries, and that is something from a medical affairs perspective that we’ll be focused on as soon as we launch the product and generating data that actually supports what I think everybody expects to be the case. So, yeah, I think that is very much in line with sort of what we’re thinking.

Got it. Thanks very much.

Okay. Thanks, Mike.

Thank you. One moment for our next question. Our next question comes from Richard Newitter with Truist Securities. Please go ahead.

Hey. Sorry. It’s actually Sam on. Thanks for taking the questions. Just first one, on MACI, can you just sort of walk us through the price dynamic in 2023 and then any changes there for 2024 and how should we be thinking about that impacting revenue and any price impact from arthroscopic as well?

Yeah, Sam. This is Nick. We’ve discussed previously that we usually implement annual price increases for MACI, and we plan to do so again this year. Historically, we have typically increased prices in the middle of the year. For arthroscopic MACI, the reimbursement will remain consistent regardless of whether it is delivered through a mini arthrotomy or an arthroscopic procedure, so this will not have an effect. The CPT codes stay the same, meaning the surgeon's reimbursement will also remain unchanged for the procedure. We do plan to charge for the arthroscopic procedure itself, which involves a set of disposable instruments. We expect that these instruments will generate some revenue for the company and could help offset other costs over time. However, the primary revenue source will be the reimbursement for the implant itself.

Great. Thanks for that. And then thanks for all the really detailed great color earlier. That was really helpful. I did just want to touch a little more on Epicel given the quarterly volatility this product can have. Can you just give us a little more insight into the visibility you have into that sort of run rate through the year and why you’re so confident again? Thanks.

I’ll begin, and Joe can add his thoughts. Joe mentioned in the prepared remarks that before COVID, we generally considered it safe to project high single-digit to low double-digit growth for Epicel. Historically, we often outperformed that expectation. However, due to current uncertainties compared to what we see with MACI, we communicate that as a reasonable starting point. Over the last three quarters, Epicel has gained a larger share of voice but has not fully returned to its peak performance; still, we have observed it consistently achieving over an $8 million run rate. The market has stabilized. We had some issues related to our largest customer that have now been resolved, which were not related to Epicel but rather other challenges. With these issues resolved, we are returning to the performance levels seen in previous years. Additionally, following a strong biopsy quarter like the one we experienced in the fourth quarter, we expect that to bolster our results for the year, as previously discussed. We’re feeling optimistic about this. We have seen a positive impact from having a larger share of voice, and we are now present in more hospitals than before. This began affecting our results around the middle of last year, as we also noted in earlier calls, and continues to influence our outcomes.

To add to Sam's earlier question about seasonality and guidance, it's important to note that Epicel has significantly grown compared to its position at the end of 2022. While it can be challenging to evaluate calendar years, we know it was generating around $6 million to $7 million. In the last few quarters of 2022, it was in the high $6 million range, and now it has surpassed $8 million. This represents more than 20% growth, which aligns with our historical data. As we consider growth over the full year, it's worth emphasizing that there are several factors involved. We anticipate improvements in volume, and we are beginning to see indications of that due to a larger market presence and increased awareness. Additionally, there is also a pricing element to consider. Therefore, we are looking at low double-digit growth for Epicel, which is one of the scenarios in our guidance, while acknowledging there may be variations with other franchise products. This is a reasonable expectation, even if it fluctuates by quarter, as we head into the year.

That’s great. Thanks for taking the questions.

Thanks, Sam.

Thank you. One moment for our next question. Our next question comes from George Sellers with Stephens. Please go ahead.

Hey. Good morning and thanks for taking the question. Maybe to shift gears a little bit to the margin guidance, I’m just curious, what does that assume in terms of the improvement driven by price versus NexoBrid and Epicel ramping up? And then what’s also sort of assumed related to investment for commercializing arthroscopic delivery?

Good morning, George, and thank you for your question. I'll address your inquiry and also provide some insights on our guidance beyond just revenue. As mentioned, we anticipate an increase in gross margin from the high 60s last year to 70 this year. Regarding adjusted EBITDA, we concluded last year at 17 and believe we may reach around 20% this year. It's important to consider the quarterly trends as we think about this guidance. Generally, our business experiences seasonal variations, with Q1 often showing lower margins, while Q4 tends to be higher. Therefore, we can expect a progression similar to last year's trajectory, with some improvements, while acknowledging that there will be fluctuations within the quarters. In terms of what is driving the margin improvement, we've discussed the operational expenses, which we estimate to be around $165 million. Our investment strategy focuses on ensuring Arthro is positioned for success, which includes readiness in commercial aspects and preparing the necessary instruments. This is a key investment priority for us this year, along with lifecycle management for products like NexoBrid. Our objective is to maintain a sustainable top-line growth while managing our operational expense growth at a lower rate than revenue, a strategy we've successfully implemented last year and aim to continue this year. As for margin contributions, NexoBrid contributes positively to our gross margin. Price increases will certainly assist in enhancing gross margins as well. Additionally, we are beginning to see natural leverage in our business; if we can keep our costs below the overall revenue growth, we expect to see that flow through to the margin. Lastly, as highlighted in my earlier remarks, we also focus on how much of our earnings contribute to the bottom line. Last year, we saw strong adjusted EBITDA and gross margin pull-through in Q4, maintaining an 80% range overall, which is something we aim to sustain moving forward.

Okay. That’s really helpful color. I appreciate all that detail. You touched on MACI ankle. Just curious with that clinical study initiating in 2025 and then you’ve also talked about getting close to 30% adjusted EBITDA margins in 2025 and beyond, how do we sort of reconcile those two items and what should we think about in terms of the investments for launching that clinical trial?

Yeah. Hey, George. Nick. As we’ve talked about, this study has always been sort of planned and is included in sort of the longer-term projections that we’ve given. This is not a large study by pharma or biotech standards. It’ll be very much like the summit study that was the pivotal study for MACI in the knee, somewhere call it up around 200 patients. It’ll take a couple of years to enroll. So it’s kind of single-digit-million dollars kinds of study and so it’s, again, not compared to our overall sort of OpEx and investment, it’s really not that significant.

Okay. Great. Thank you all again for the time.

All right. Thank you.

Thanks, George.

Thank you. One moment for our next question. Our next question comes from Jeffrey Cohen with Ladenburg. Please go ahead.

Hi, Nick and Joe. How are you?

Great. Well.

Good, Jeff.

A couple of quick ones from our end. So, when you talk about MACI Arthro and the surgeon population expanding out from 5,000 to 7,000, how do we equate that or think about the overall TAM as there’s certainly some other levers out there? Is that a 40% greater TAM or what might we think?

Yeah. So as we talked about previously, when you look at our 60,000 patient TAM, clearly MACI’s a go-to product in patella and larger defects on the femoral condyle or other areas of the knee. We do get business on these 2 to 4 square centimeter defects in the femoral condyle, but just our penetration rate there is lower and we think MACI arthroscopic will allow us to have deeper penetration there. So, for MACI Arthro, it’s really about sort of deeper penetration into the existing addressable market of $3 billion plus. The TAM expansion for MACI occurs when you move to other joints, and that’s where MACI ankle comes into play. And as I mentioned in my prepared remarks, that’s about a $1 billion addressable market opportunity for us with around 20,000 eligible patients per year.

Okay. Got it. And then, lastly, first, could you talk about cash a little bit? You had a strong Q4 with $10 million of free cash flow. Any thoughts on cash? I know that some portion of that would be for the facility, but any thoughts there?

I believe we had a strong year in terms of cash flow. It's encouraging to finish the year at a higher level than we began, even as we started investing in the building. As mentioned in my earlier remarks, this year will see a more significant amount of capital allocated to our new building, but we also anticipate generating additional cash to help self-fund that. This will be the main aspect to consider regarding cash flow in 2024.

Okay. Perfect. That does it for us. Thanks for the questions.

Thank you.

Thanks, Jeff.

Thank you. One moment for our next question. Our next question comes from Swayampakula Ramakanth with HCW. Please go ahead.

Thank you. Good morning, Nick and Joe. Most of my questions have been answered, but I just have a quick question regarding how to think through NexoBrid, not just over 2024, but even beyond. Just like what we had seen with Epicel, I remember even about a year, year and a half ago, you folks were not quite sure how to talk through the dynamics of Epicel, but now you’re able to give guidance for the year. And also, I listened to what Joe had talked about special centers and specialty centers and how the product moves through it. So should we expect similar dynamics, or since you have had some learnings with how to commercialize Epicel, NexoBrid probably will get to decent dynamics earlier than what you had experienced with Epicel?

Sure. The variability we've observed historically with Epicel comes from the smaller patient population we typically treat. A slight increase or decrease in treatments per year can significantly affect revenue, which is why we've generally considered that starting out in the high single-digit or low double-digit range for Epicel is a safe estimate, and we often exceed that. We're essentially returning to what we experienced before. In contrast, with NexoBrid, we're engaging with a much larger addressable market, as we estimate that 30,000 out of the 40,000 hospitalized patients each year are eligible for NexoBrid treatment. Once we navigate the initial dynamics related to specialty distributor stocking and hospital stocking, we anticipate having a more established customer base with normalized treatment protocols. This progression should help reduce any variability seen with Epicel as NexoBrid revenues increase over time. Our confidence in this trajectory and our enthusiasm for NexoBrid remain unchanged.

Thank you. One quick question. So, do you think you have better leading indicators with NexoBrid than obviously it’s difficult to do that with Epicel, but is NexoBrid in a better place in that sense?

Yeah. Well, again, yes. The answer is definitely yes. Because, again, as we kind of get into sort of, you can kind of think about we have a certain number of centers, right, 140 burn centers. We’ve got certain tiered targeting of those. As you onboard those, they get P&T committee approvals and then they start to make their initial order and you see penetration into the patients that they see. You’ll see sort of routine or more routine reordering patterns. And we’re just so early in this right now that those patterns haven’t emerged yet, but once they do, we certainly will have sort of more visibility in terms of forecasting as we go out.

Perfect. Thank you very much. Thanks for taking my question.

All right. Thank you.

Thank you. I’m showing no further questions at this time. I’d now like to turn it back to Nick Colangelo for closing remarks.

Okay. Well, thank you everyone for your questions and continued interest in Vericel. Obviously, we had outstanding financial and business results in 2023 and we expect that the momentum in our core portfolio and new product launches will drive continued strong revenue and profit growth in 2024 and the years ahead, so we look forward to talking to you again at our next call and thanks and have a great day.

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