Conference Transcript - VCEL 2026-06-16

Richard Nuiter, Analyst — Truist Securities

uh welcome everyone welcome back uh richard nuiter here uh medtech analyst at truest securities and our next fireside chat we have uh senior management from varicell uh we have varicell ceo and president nicolangelo and cfo joe mar welcome thanks rich good to be here yeah thanks for having us yeah um so i i thought maybe we would uh start off and get kind of the macro question out of the way. We're trying to ask all of our companies just about underlying utilization and volumes. And you guys have a lot of things going on, new product launches, so I appreciate your growth rate and what's going on at your company might not be what's happening on the underlying utilization environment. But would love to just hear, are you seeing any notable change in trends, positive or negative, you know, against the backdrop of some hospitals, companies that are talking about slowing utilization and things like that? What can you

Nick Colangelo, CEO

tell us there? Yep. And I guess I'll just start by reminding our listeners that, you know, we'll be making some forward looking statements today. So they should take a look at our documents on file with the SEC for further information. You know, I would just say, Rich, to your point, You know, we certainly recognize that there's a lot of macro events going on, you know, rotations out of health care or med tech specifically into tech and AI and things like that. There's a lot of sector specific issues that people have mentioned. And this really started back, you know, at the beginning of the year at a major conference. And, you know, we were very specific in our comments that we did not, you know, while others were mentioning sort of December slowdowns and things like that, that we did not see anything impacting our business, nor do we expect to. In fact, we had, I made a point of saying that we had our largest month ever since we launched the product in December by far. So we had really strong sort of underlying metrics, biopsy procedures, implant procedures, every sort of metric we always talk about, you know, really in the second half of the year, particularly in the fourth quarter, certainly in December, and that carried over into the first quarter, where again, we had another 20 plus percent growth, highest first quarter metrics ever, second highest biopsy month ever. So, you know, you have two straight quarters of the highest quarterly biopsies we've ever delivered. So, you know, we've had some pretty strong growth and we haven't seen any sort of procedural slowdown for Macy. And really in our part of the market, you know, we do track other procedures in cartilage repair. And, you know, there hasn't been any sort of noticeable decline in patient flow overall. all, you know, we obviously are outgrowing the market by multiples, right? So we don't rely on sort of market growth to drive our growth anyway. But we certainly haven't seen that to date. And, you know, we mentioned on our last earnings call that, you know, those trends have continued to start the second quarter, which you would expect if we have two of our highest biopsy quarters ever, you're probably set up well for, you know, not only the second quarter, but, you know, the

Richard Nuiter, Analyst — Truist Securities

rest of the year. Yeah. And, you know, maybe we can just go to the quarter and guidance and the update that was there. You know, you had a great start to the year, especially for Macy. You said volume growth accelerated throughout the quarter, as well as into April, like you said, the beginning of 2Q, and that you grew units, I believe, double digits. Your guidance, though, implies more of a high teens growth rate instead of 20 plus for the remaining nine months of the year. And then you also had a nine and a half percent price increase in May. So thinking about double digits throughout, you know, throughout one Q, and it was accelerating and into April, just help me reconcile the step down in the back half or the two Q to four Q period. Is that just conservatism or what can you reconcile for us there? Yeah, so I can take that one, Rich. I would

Joe Mara, CFO

say just to build off where Nick started, I think we feel like from a commercial perspective, we just feel like the team's been operating and really executing at a very high level over the last few quarters. And I would say particularly in the back half of last year, into the start of the year, as we talked about, and as Nick referenced, we had a really strong first quarter, 22% revenue growth our best first quarter and you know in a few years so feel really good about the start of the year um and obviously q1 puts us in a good position you know as we move forward you know i would say from kind of a guidance sort of framework and philosophy perspective you know we were pretty pointed to start the year um to try to be you know a bit prudent you know if you kind of look back at last year i think a good analog is um kind of how we're thinking about burn care now we've moved back to kind of a run rate concept on burn care. And I think that's worked out very well. You know, the last few quarters, we've over delivered there. I think on the Macy side, you know, I would say, you know, we probably just want to be, you know, a bit prudent as we think about the guidance. To your point, you know, whether you look at Q2, or you look at the remainder of the year, it's really high teams growth is kind of where the guide is at. But I think to your question, You know, from a pricing perspective, you know, we did take that high single-digit price increase last month. So when you kind of factor that in and kind of think about similar year-over-year pricing growth, you know, it's not going to take much for us to kind of meet our guidance. And certainly, you know, our internal expectations are higher than where our guidance is, you know, and certainly our internal goals are as well. So, you know, I would say, you know, if we can continue to be around that double-digit range on biopsies and see similar pull-through on implants and, you know, a conversion rate has typically been pretty stable, you know, I think we certainly feel like we're in a good position as we move, you know, into Q2 and beyond. Again, not only to meet the guidance, but, you know, ideally overperform there. Got it.

Richard Nuiter, Analyst — Truist Securities

And that's a really helpful color. Maybe just this has come up as well, just on the pricing. So, you know, you had multiple price increases last year. You have, I believe, a single price increase this year. There is some confusion out there, I think, for investors of how you guys manage your price increases. Obviously, not all of them are the same order of magnitude each time. They happen at different times. But can you tell us a little bit about how you stagger them, what the strategy is, and, you know, what your ongoing price assumption is in your growth algorithm?

Nick Colangelo, CEO

Yeah, so I'll start, and Joe, you can add in color if you'd like as well. So, you know, I think first of all, you have to recognize that Macy is kind of a unique product compared to other med tech products in that it's a combination device biologic product as regulated as such by the FDA. every major plan has a medical policy that covers macy it's reimbursed under a j code so like other biologic products we set the price and you know we're not kind of subject to you know cms pricing or anything like that because we don't really have medicaid and medicare business so that's kind of the first thing so we do a lot of pricing research every year or two and we do multi-year product or pricing analysis with payers and hospital administrators. And I think it's important for investors to understand that from a payer perspective, they kind of look at it on two dimensions. So similar technologies, this is an advanced cell therapy. If you think about other cell therapy products like CAR-T therapies or other gene therapies, which fall within the same class, those products are, you know, half a million dollars to multiple millions of dollars per unit. So our pricing for Macy is not even on the radar screen in terms of similar technologies. The other dimension they look at is sort of what's the overall impact to the system or their plan. And, you know, again, Macy, we're very proud of the fact that we've grown the product to about a quarter billion dollars and we're well on our way to kind of getting to half a billion dollars over the next several years. But if you look at either sort of those types of therapies I talked about selling gene therapies where they're not only high price but high volume and there's multiple billions of dollars spent on these products or even in our space if you think about total knees which call it 20 billion-ish a year, total hips 10-ish, total shoulders you know to $5 billion, you know, again, it's not even on the radar screen. So we have this really enviable position. And again, we price sort of based on sort of that market research. And it's really not atypical for similar kinds of products to take the price increases we take. So overall, you know, you couple that with the kind of double digit volume growth, you know, we expect it to be sort of a strong pricing and volume growth story for years to come with no competition on the

Richard Nuiter, Analyst — Truist Securities

horizon. I don't want to put words in your mouth about a long-term Macy growth trajectory, but if we just assume that your pricing can durably sustain, as you just suggested, let's just say in that high single-digit, low double-digit range, and I'm giving you a 9 to 11, 8 to 12, whatever you want to say i call it 10 at the midpoint um and then you know units sustaining in that close to double digits even if it's just barely 10 or nine and a half i mean you should be a 20 plus percent macy grower for the intermediate to longer term no i mean is it are the components wrong i i know you won't necessarily guide there but right is that is that a reasonable way to think about what you know all else equal should be doable yeah i mean obviously you know we we

Nick Colangelo, CEO

can't predict out you know multiple years and what kind of you know any other sort of macro changes in the environment you know we don't expect any but so i don't think directionally you're off right i mean we still think you know we'll have strong pricing power as we move forward And, you know, the penetration rate in our TAM is still relatively low, and we would expect to continue to have strong growth, again, especially as there's sort of no Macy-like competition on the horizon.

Richard Nuiter, Analyst — Truist Securities

Nick, if we had to hypothesize about what could potentially change that pricing conversation with the commercial payers, other than you're not on the radar compared to what they're paying for, what could it be?

Nick Colangelo, CEO

Well, you know, I wouldn't, I mean, again, we meet with payers and we've done it to say it was every other year since we launched the product a decade ago. So it's not like we're under the radar. It's just when you think about, you know, I always use an example, like even, you know, Macy at 300 million, if you, you know, look at a UnitedHealthcare that has 15% of covered lives, you know, what would that mean if it's a representative example, which it is, you know, it's $45 million a year. for UnitedHealthcare. Again, that's just not something that they're going to spend time actively managing. But I would say it's also a function of the fact that we, Macy, has to have a prior approval. So it's a medical policy. You have to meet certain parameters to even be eligible to be treated with Macy and covered under those plans. So the plans know the price. They know the outcomes data which is great long-term outcome data and they know that only the appropriate patients are going to be treated with macy so you know it's a very transparent process it's not like we're under the radar but once they find out there's going to be an issue they already know and they know all everything you know when we do that research and again it's you know very much in line with sort of what they might expect i think you know if we got greedy that's when you would get heard, right? And so we just try to be very thoughtful about how we price going forward,

Richard Nuiter, Analyst — Truist Securities

and we don't really expect that to change. And Nick, you also said you're basically the only player in town, right? So competition, no competition on the horizon, I think is what you said. So I want to maybe just ask, because this comes up a lot from investors, you have Agility, which has been on the market for some time, but they are potentially going to be stepping into a better CMS reimbursement situation starting January 1st, 2027. Smith & Nephew is a formidable company that is going to likely commercialize more aggressively and put more behind it as they step into that more favorable reimbursement situation. I guess, how do you expect the competitive landscape to change at all once that happens it sounds like not much and and

Nick Colangelo, CEO

then why well yeah i mean i would just kind of step back and say you know for those who aren't as familiar with us i mean macy is by far the market leader in cartilage repair uh you know we've been on the market this is our 10th year we've had a compounded annual growth rate of 24 20 or more in the last three years i mean it is the market leader uh especially obviously in our addressable market segment. I think you have to always start by saying a cartilage injury is not the same. It's a very sort of complex treatment algorithm and nuanced in that the decisions surgeons make are really based on the patient profile, so the age of the patient, their ability to do rehab with any kind of cartilage repair procedure, and the characteristics of the defect itself. So the size, the location, whether there's bone involvement or not, the overall health of the knee, those are the primary decision points that, you know, lead surgeons to make a certain decision on how they want to treat. So, I mean, the competitive landscape has been very stable since we, you know, bought this business in 2014 and launched Macy in 2017. So potential market entrance really haven't changed and in fact it's moved very strongly in our favor so the way we always talk about competition is macy like products and that's what i said earlier so at at one point in time there were two macy like products in development for the u.s market you know one didn't meet its primary endpoint is gone you know the other sort of had a european study that didn't show a difference versus micro fracture and you know so yes i would say that there's not going to be a macy like product on the market in the foreseeable future if ever so that's number one that's what investors should worry about was there going to you know was there going to be a product that would come to market and sort of have a direct impact on macy because that could you know a new product that's kind of in that class could have taken market share, could have impacted pricing, whatever. So that's just not going to happen. And so that's number one. The other thing we talked about is there's always sort of these other products that have been out there for different parts of the cartilage repair market, different segments. And so when you talk about, you know, procedures that are alternatives to Macy, like osteochondral allografts, oats, which is taking a plug of a patient's own cartilage and transplanting it, microfracture with these microfracture augmentation products that are out there. And there have been other synthetic sort of, you know, products that have been on the market sort of come and gone. You know, those have always been out there throughout the history that we've had Macy. So, you know, on Agilacy in particular. You know, we've known that product for 10 years. It's been in development. It's been on the market for four years. There are, I think if you go to the website, there are reimbursement codes if physicians want to use it now with a permanent CPT code coming. And again, it'll depend on the reimbursement under that code based on RVUs. It'll depend on the price that's charged. Is it good economics for surgeons? You know, we'll see. But the issue is it's not really our patient population. So Macy's typical patient is a younger patient sort of in their early 30s with a pure chondral or just a cartilage surface injury. And so that's what the core Macy patient is. I think if you look at our publication on the first 5,000 patients, low single digit percentage of patients had any bone involvement. So it really is sort of those surface cartilage defects. And, you know, in the tenets of joint preservation is do no harm. So if you have a pure cartilage injury, you know, you're not going to do, you're not going to drill into the bone, core out the bone to use, you know, an OCA or even an agilacy. So, you know, we've always said it's likely to be used in smaller defects, older patients with osteoarthritis sort of as a bridge to a partial or full knee replacement and you know that hasn't changed over the last seven years we've been talking about it and you know i think you know there was another analyst that did a koal call last week with a sort of early macy adopter high volume surgeon hurricanes doc if you're a hockey fan um and you know his point was when he thinks about this um you know when you've got a defect that's one square centimeter or less. There's lots of different options out there that you can do. OCAs and, you know, potentially agility, oats, whatever. When it gets to be a centimeter and a half or larger, that's when you start skewing towards Macy, to use his words. And, you know, if there's bone involvement, that's going to change the algorithm. That's where you might use an OCA or, again, potentially an agility. So really, in his words, The share shift's going to come from OCA and Oates. Did not expect any meaningful impact on Macy business, as we wouldn't. And, you know, his point was, I believe my Macy business will continue to grow in the double digits to teens in the years ahead. So we've been, I don't think we could be more consistent in our perspective on this. And so hopefully that answers your question.

Richard Nuiter, Analyst — Truist Securities

It does. I guess the question that I have as a follow-up would just be, you know, if your competitor positions the product in a way that is more overlapping on the Venn diagram, if you will, even if it's not where it's suited, you could get some trialing or some physicians who are influenced or trying it, you know, maybe in areas they shouldn't be or pushing the envelope. I guess, you know, will you need to contemplate that or is the market expanding at a rapid enough clip that that type of impact will be negligible in your view?

Nick Colangelo, CEO

We don't expect any sort of impact of note. Again, you're I mean, companies can position products however they want. You're basically saying, you know, you're going to override a surgeon's treatment algorithm to try a product that, you know, again, why would you? you know, there's a failure rate like there is with any product, right? And so if you core out the bone and it doesn't work, then what are you going to do in a 29-year-old patient, right? And so, you know, I would expect that most surgeons, you know, would not do something just regardless of how any company positions any product, if it's sort of contrary to their normal treatment

Richard Nuiter, Analyst — Truist Securities

algorithms. Got it. And what do you think the most, what do you think investors are most underappreciating about your competitive mode, your IP, your true protection on a true Macy-like

Nick Colangelo, CEO

product? Yeah, well, like I said, you know, Macy's regulated by the FDA is a combination device biologic product. There is no established pathway to bring those kinds of product markets to market. So there's no sort of biosimilar pathway for these combination products. There's no 510K pathway. So if anybody wants to enter the market with a Macy-like product, they have to run the clinical studies. And as I mentioned earlier, it hasn't gone well for those that have tried to do it other than Macy. And so, you know, you can ask yourself why that is. Were they not run well? Is there something different about sort of sort of our approach from a, you know, sort of manufacturing and product profile perspective, which there's probably something to that. And so that's the moat. You can't just sort of enter the market under a 510 K or a biosimilar kind of pathway. You have to run the studies. The last company in the U.S. that ran a study, whether it's, you know, a Macy like product. It was a 10 year enrollment for 200 patients. Like, why would you use? a, you know, trial of product when Macy's available for an appropriate patient. So it gets very difficult for anybody to run these kinds of studies. And so it's a pretty big moat.

Richard Nuiter, Analyst — Truist Securities

Yep. I want to switch gears a little bit to just Macy Arthro and kind of what this has been doing for the business, where you've been seeing use. You know, I think you said Macy Arthro now drives over half your implants, and the trained base has reached 1,000 surgeons, right? I guess, where are you seeing the uptake most prominently, and is this expanding the market?

Nick Colangelo, CEO

Yeah, so just to clarify, what we've said is that over half of Macy's overall business is coming from surgeons who are trained on Macy Arthro. So it's that group of trained surgeons. So yeah, last year was Macy Arthro's first year on the market. You know, we had said there's, you know, roughly call it 2,500-ish prior to that surgeons that, you know, were using Macy, taking biopsies, et cetera, in any given year, cumulatively a little higher than that. And so yeah, to have a thousand surgeons trained in the first year on the market was pretty good. And we were pretty happy with that. And, you know, so at this point, we have critical mass of trained surgeons over time i would expect that any surgeon that is using macy is going to be trained on macy arthro so it's not really training metrics anymore that we're concerned about it's getting that pull through of macy arthro cases from those that have been trained so that's what our commercial team is focused on this year and that's important because not only have we seen sort of what you'd want to see out of trained surgeons where biopsy growth implant growth increases. But when you, total, yeah. But when you, you know, sort of the surgeons that have done Macy Arthro cases, they actually have even higher biopsy growth and implant growth rates. And we've seen their conversion rates go higher. So, you know, it's kind of this halo effect on the overall business. So we want to make sure that continues. Obviously we'll continue to train surgeons, you know, the trends, you know, of how they behaved tended to continue. I'd say last year, you know, Macy actually, the growth rate increased by a couple hundred basis points. And I'd say the increase we saw in those small femoral condyle defects that Macy Arthro is designed to treat actually became one of our faster growing segments. Now it's off a lower volume. So, you You know, patella has always been our highest volume, sort of highest growth, or consistently is. And we said the small femoral condyle defect growth actually sort of matched that or was on par with that last year. So that's important, right?

Richard Nuiter, Analyst — Truist Securities

That was incremental to those specific physicians' overall use, right? Or is it tough to break out? Yeah, it's tough to break out.

Nick Colangelo, CEO

I mean, we just look at it in aggregate. Yet, you know, you never know if they would have done the case anyway, even if they did at Macyarthro and so on. I would say just there was much more use of Macyarthro than that. I'm saying you can look at the increase in the femoral, you know, small femoral condyle defects and that, you know, really accounted for the incremental overall growth. So, you know, we're coming into the year with a lot more trained surgeons. We'll continue to train those surgeons, but, you know, we think that's a great indicator for us. And where it's being used is, you know, these instruments were designed for two to four square centimeters. So they're matching cannulas and cutters and everything for either a two, three, or four square centimeter defect on the femoral condyle. So that's where we've seen the most uptake. We've been pleasantly surprised that we're also seeing trochlea cases. So behind the kneecap, just because they can access that area easily with our arthro procedures. And then also patella usage, which is kind of interesting, right? The back of the kneecap. And I think, you know, from a surgeon perspective, they'll look at it and say, hey, that could be a great benefit for the patient. Overall, it is with Macy Arthur generally, because it's a less invasive surgery. So you'd expect sort of less postoperative pain, greater range of motion, faster back to full weight bearing, et cetera. But if they can treat the defect without having to open up the knee and kind of flip the kneecap over to address a patella defect you know that could have some pretty meaningful benefits for the patient as well so we're actually seeing surgeons sort of even though that's not what the instruments were designed for doing patella cases as well

Richard Nuiter, Analyst — Truist Securities

i wanted to ask also so you got macy arthro uh still in the relatively early to mid innings of launch. And then you also took some measures to realign your Salesforce entering 2026. Talk a little bit about how that's trending relative to your expectations. And, you know, should we be nervous at all that there's potential, you know, you're splitting territories? Is there a delayed impact coming or what gives you confidence to say that it's not? Yeah. So, you know, we decided to

Nick Colangelo, CEO

expand our Salesforce at, you know, in the second half of last year. And, you know, we actually moved it up a little bit because we knew we had a super high volume fourth quarter coming in the large territories we wanted to get people on board to be able to support those cases and given the momentum of the business we wanted to make sure that we had the full expanded sales force in place for all of 2026 so yeah a lot of them came on board in the fourth quarter obviously it's really interesting you know i think the commercial leadership team did it i mean they executed flawlessly to bring new reps on sort of partnering with the existing reps in those territories i mean there's a lot that could have gone wrong and obviously we sort of blew it out in q4 and had our highest quarter ever right so they worked really well together they each knew what part of the territory they were going to have come the first part of the year so then we get into this first quarter and everybody's territory is realigned and again we kind of we said on our earnings call that it was the first quarter with the new reps and all the reps in their new territories. We had record first quarter metrics across the board. We saw strong double-digit biopsy growth, double-digit implant growth, and particularly strong biopsy growth in the new territories. So again, I think there was flawless execution. We've done this a lot. We know how to do it well in terms of communication, incentive comp plans, and so on. And I think the proof is in the results and at this point with sort of potential disruption behind us i mean they're almost six months into the tenure here there there'll be no disruption that's delayed

Richard Nuiter, Analyst — Truist Securities

sounds like you're feeling good uh just maybe to to close it off here we have two minutes left um you're sitting on you know a little over 200 million dollars of cash in the balance sheet you know if you continue with this type of free cash flow generation which is accelerating you know you could be approaching a half a billion dollars in a couple of years here, right? How should we think about what you're going to do with that cash? And, you know, I'm just curious with where the stock is trading now, I would imagine you think it's undervalued. Tell me if

Nick Colangelo, CEO

you think different, but could there be a buyback potentially on the horizon? Yeah, I'd say, you know, our capital allocation strategy has been pretty consistent. You know, our big capital investment was the hundred million dollars into our new facility which you know we self-funded and actually increased our cash balance while we were we're doing that so that was the big cap you know in order to meet our projected growth over the next five to ten years that was sort of the big capital uh investment we needed to make and that's why with that behind us you know two to three million a quarter in in capex you know we're going to have really strong uh free cash flow so then it's down to the other two areas that we would always talk about, which is business development. So, you know, we're certainly looking for other opportunities, particularly in sports medicine. And then, yeah, you know, at some point, if we didn't do anything else, we're going to be, you can do the math and say the pull through, given our margins, both gross margin and adjusted earnings margin is pretty strong. And yeah, you'd have to think about sort of kind of those capital returns to shareholders and a buyback certainly is something that we we think about and we're in a position to do when we think it's right but yeah we obviously think the stock is undervalued now um and so i just say it's an option that's on the table that you know we

Richard Nuiter, Analyst — Truist Securities

certainly talk about great i think we'll we'll close it off there but uh nick joe thank you so much great really appreciate it appreciate it having us rich