Vericel Corp (VCEL) September 2026 Conference Transcript

Thank you very much. This is Peter Harrison from Morgan Stanley's Investment Banking Group. I'd like to welcome you to the Vericell chat. Today with us is Nick Colangelo, the CEO, and Joe Mara, the CFO. With that, we'll get started. Thank you very much for attending the conference. We greatly appreciate it.

Happy to be here. Thanks for having us.

Let's start with Macy, of course. It's your lead product for Carly's Repair on the Knee. TAM is $4 billion in the U.S. You're currently preparing to launch it outside the U.S., conducting a trial for the product and the ankle. Can you provide an update on these two initiatives and how they will continue to drive what's been an extremely impressive growth profile for Macy?

Yeah, and I'll just start by taking kind of a step back for those who are less familiar. So, you know, Macy is our lead product, as you mentioned. And it's an advanced cell therapy that's used to restore cartilage, repair cartilage and restore function that we launched in 2017 for the treatment of knee cartilage injuries. And since that time, it's become far and away the leading restorative cartilage repair brand on the market and the only FDA approved product in its class. And I'm sure, you know, we'll talk a little bit about sort of the growth drivers for Macy over time, which really had to do with it was a kind of tech procedural advancement from a technology standpoint versus the prior product that was on the market at the time. So it made it a much simpler, faster, clinically effective product for surgeons, which expanded the use in the U.S. So, you know, there's a bunch of sort of growth drivers that we talk about in the short term, but the ones you mentioned are really the longer-term growth drivers for Macy. So immediately after launch, we started to think about how do we continue down the pathway of sort of procedural advancements to continue to make it a less invasive, simpler, faster procedure, and that's kind of the launch of Macy Arthro that I'm sure we'll talk about a little later. In addition, you know, you have articular cartilage in all joints. The knee is the greatest opportunity since it's the greatest weight-bearing joint, and that's why all the injuries occur in the knee. But ankle is a second opportunity for us, and, you know, so moving into other joints has been a long-term growth driver and initiative for the company, as has OUS expansion. So I'll start there. You know, just by way of background, Macy was actually developed in Europe by a German company there before Genzyme purchased that company back in the 2010s. The pivotal study for Macy both in Europe and in the U.S. was conducted in Europe, so there's a long history, and it was marketed in Europe, so a long history of Macy in Europe. Once we completed our manufacturing facility in the U.S., that allows us to go back into Europe because we designed that facility with global CMC requirements in mind. So that facility was completed and approved by the FDA for Macy production earlier this year. And we announced last year that we intended to go back into Europe in a staged manner and that we would start with the U.K. And we did that for a number of reasons. Number one, there's a high degree of brand awareness and surgeon advocacy for Macy in the U.K. So because the clinical study was conducted in Europe, U.S. surgeons, when we launched in 2017, didn't really have experience with the product. And it was surgeons from the U.K. that came over and trained our trainers who then went out and trained other surgeons in the U.S. So long history there. Number two, there's an expedited approval and reimbursement pathway in the U.K. So if you have a product that's approved in the U.S., Japan, Europe, other countries, then the U.K. has a mutual recognition procedure, which we qualify for and we're following. So it's an expedited approval process. And then from a commercial standpoint, there really are, if you're in the national health system there, which most patients are, there are 12 or 13 centers of excellence, joint restoration or preservation centers of excellence in the UK where these patients will be treated. So a very sort of concentrated call point for us. So we're really excited about the opportunity there. We submitted our marketing application in the second quarter. The process is that you have to go through a validation of that application. You have to have facility inspection, just like we did by the FDA earlier this year. And then the clock starts ticking. And so hopefully, you know, sometime next year we'll be in a position where the product's approved and we can launch in the U.K. So really excited. And then we would move beyond that to other countries in Europe, potentially Canada and so on. So a really nice opportunity for us in the back half of this decade to sort of continue to drive growth for Macy outside the U.S. Macy ankle, as I mentioned, we've always been focused on, you know, other joints in Macy ankle. Really, the ankle represents the second largest opportunity behind the knees. So just like we did in terms of the opportunity for knee cartilage repair in the U.S., a quantitative market assessment, we did the same thing for ankles. There's about 170,000 or so cartilage resurfacing procedures that are done in the U.S. each year in the ankle. Our TAM is probably about 20,000 patients a year, but at our price point of, you know, call it roughly $70,000 per implant, you know, it represents a really nice billion-dollar-plus market opportunity for us. And that's really somewhat of a longer timeframe for us in that, you know, it'll be, call it a three-year enrollment, a two-year follow-up, a couple years for regulatory approval. So that's more of a 2030 kind of, early 2030s kind of opportunity. But when you take a big step back and you say, we launched Macy in 2017, we're kind of in our 10th year on the market. We've had a 24% CAGR in terms of revenue growth over those years. So really strong momentum in the business. We launched Macy Arthro last year. That allows us to access another part of the addressable market. That's an important one. You can layer on OUS opportunities and then Macy in the ankle, and you can see this multi-year, multi-decade opportunity for Macy, especially because there's no Macy-like products.

Super helpful in the longer term. So I think about that 24% CAGR in the last couple years and in the near term as you bridge to OUS and the ankle. What has been the driver of Macy over the last couple years? Is it price? Is it volume? Is it patient awareness?

Yeah, so I would say, you know, like our whole portfolio, and we can use Macy as an example, but, you know, essentially we have a product portfolio, including Macy, where it's the only FDA-approved product in its class. We can talk about the burn care products a bit later, but they follow a similar model where these are, because they're the only FDA-approved products in their class, they are sort of kind of the most clinically proven products. So there's a great deal of clinical data for all of our products. And, you know, essentially we have a model that is premium price products, concentrated call points. And so, you know, that has supported both the revenue growth but also sort of the profitability and cash generation that we can talk about as well. For Macy in particular, there's a very large addressable market. So I mentioned the ankle addressable market. It's probably three times the size for the knee, about 60,000 patients each year. So it's a large addressable market. relatively low penetration for restorative therapies like Macy, but that market is shifting pretty dramatically towards restorative therapies. Obviously, there's a pricing component to our growth as well, but it's really driven by continued penetration into our target surgeon base. So as I mentioned, as a less invasive, simpler procedure, it's kind of a tried and true med tech play where you're less invasive, simpler to do, the number of surgeons that use the product grows. That's been a principal driver to date. We also look at depth of penetration. So how many biopsies per surgeon are we getting as they adopt Macy into their practice, how those biopsies convert into implants. And so, yeah, I mean, that 24% CAGR is not over a couple of years, it's over a decade. And so it's been very strong growth, and we think, you know, there's a lot of opportunity as we go forward. Macy's growth has actually inflected somewhat since we launched Macy Arthro and a couple other initiatives over the past year. Rolling four-quarter growth is about 23% versus 19% the four quarters before that. So we're seeing sort of good, strong growth. It's grown 20% plus each of the last three years, and so we think there's a lot of room ahead for us with Macy that will continue to drive durable growth, not only through the back half of this year, but into 2027 and beyond.

On that room for growth, you did a Salesforce expansion at the end of last year. How is that going? How is the productivity of the Salesforce ramp up as we move into the second half of this year and beyond? And do you think you'll see additional Salesforce increases in the foreseeable future?

Yeah, you know, the Salesforce expansion was sort of one of a few initiatives that we engaged in. And so, you know, mid last year, we were kind of on a path to get to about a quarter billion in revenue. And we said that's great, but a lot of times companies don't transition from that to what, you know, to our next goal, which is about half a billion in revenue by 2029. We've set that as a midterm target along with our margin targets. And, you know, what got us to a quarter billion may not be what's necessary to get us to half a billion. So we did a number of things. You know, we accelerated our planned Salesforce expansion at the end of last year. That's when we did the hiring, but they actually went into their new territories, all the reps, as of January 1st of this year. So that's a relatively sort of new development. You know, we obviously talked about it on a bunch of our earnings calls. You know, we had launched Macy Arthro at the beginning of 2025. That's kind of contributing to our growth. And then, you know, we invested, you know, multi-millions of dollars in commercial excellence initiatives that also have sort of combined with the expansion and Macy Arthro contributed to the growth. So I'd say on the expansion itself, it's gone exactly to plan. Obviously, folks worry about disruption when you're expanding a sales force. We've done it a number of times, and each time we've done it previously, we see our rep productivity go up, you know, often in the same year that we expand, which is somewhat unusual. So we made a comment on our first quarter earnings call that, you know, we had double-digit biopsy growth. That was the rep's first quarter in place, and biopsy growth in new territories was particularly strong. So they were doing exactly what we'd want to see, which is taking the existing biopsies, converting those into implants, but also building their own pipeline as they were moving forward. Second quarter, we said both biopsy and implant growth had accelerated in the new territory. So I think they're doing really well. And I think the important point that we mentioned is not only does it set them up for a strong second half of the year in our business overall, but, you know, we look at sort of how reps progress over time. And we looked at cohorts of post-COVID hires, and, you know, they clearly contribute immediately. And, again, they're not walking into white spaces and starting from scratch, so they're able to move the needle pretty quickly. but it's really, you know, years two and three where their growth rates in both biopsies and implants are actually the highest versus legacy territories or other new territories. So for us, what that means is, again, we feel we're set up well for the back half of 26, but also for 27 and 28 as those, it's a pretty big percentage of our sales force, about 30% expansion, sort of get up to speed. And just the time it takes to go from a biopsy to an implant, it all sort of makes sense. In year one, they're converting business, building a book of biopsies, but those convert over multiple quarters and sometimes multiple years. And so they're just building this foundation where you really see the strongest growth in years two and three. Helpful.

You mentioned in passing the commercial excellence initiatives, you know, in that answer. What, you know, can you go into a little more detail on what those have been and how they have also contributed to the growth we've seen?

Yeah. I mean, I think a lot of it has to do that with the fact that we're now able to access sort of better procedural data for the surgeons that we target. So that allows you to sort of segment the surgeons at a different level. You know, our growth, we've always talked about the fact that there are four Macy growth drivers. It's adding more surgeons who are taking biopsies. It's getting more biopsies per surgeon. That's the depth into their practices. It's how those convert, and then it's price. And for, you know, the past few years, our growth has principally been driven by more surgeons adopting the product, taking biopsies. So you're getting more biopsies because you have more biopsying surgeons and price. Last year, we started to talk about the fact we're starting to see an uptick in biopsies per surgeon. And as surgeons mature, they typically end up taking more biopsies and treating more patients. And so that has become sort of a growth driver for us as well. And so it's really focusing through these commercial excellence, sort of the segmentation, first of which surgeons are really going to grow your business because you can see the number of qualifying procedures they do. You can target those surgeons better. It's also about sort of standardizing the playbook. So there are different segments. If you have, you know, a surgeon that doesn't take a ton of biopsies and could take more, but the biopsies they take, they convert at a very high rate. Okay. You want to kind of run plays that allow you to grow their biopsies because you know they're going to convert. You might have the opposite with some other surgeons where they take a lot of biopsies but don't convert at such a high rate. So how do you get them to convert at higher rates? And so there's different things you can do. And really just standardizing best practices across a larger sales force is an important piece of that. And then implementing what will be a sales force CRM so it ties everything together and allows them to sort of do better account planning, focus on the right surgeons, it's a great performance management tool, all of those things combined to just have more productive reps out in the field that can really drive our business. Makes sense.

And the last question on Macy before we move on, you mentioned Arthur a couple times. What did that do from a competitive position, and how do you see that contributing to growth over time?

Yeah, so as I mentioned, you know, continuous procedural advancements is an important and kind of tried-and-true playbook, right? So the predecessor product, CardoCell, was highly invasive. Macy is a less invasive surgery. Macy Arthro, you know, is really designed to continue down that pathway. And what it did basically, Macy over the years became sort of the go-to product for larger defects, Just the way the product works, we take a patient's cells, we put them onto a collagen membrane that's surgically implanted where the cells then migrate down to the subchondral bone and basically generate the cartilage, which is essentially a pothole. And because it's a simpler procedure, that's what initially kind of catapulted Macy growth. Macy Arthro but again it's more it's position prior to Macy Arthro was in larger defects and then defects on the back of the kneecap because there really aren't other good alternatives for treating those kinds of patella defects and that's a big part of the market so those were always the go-to as Macy continued to grow post-launch the Macy Arthro instruments are designed for smaller defects, two to four square centimeters, on the femoral condyles. And that's a place where, you know, we have business, but we had lower penetration, lower overall volumes, because there are other things that surgeons can do. And so our whole goal there, it's probably a third of the addressable patient market have smaller femoral condyle defects. And that's why we developed the Macy Arthro instrument, so that we'd have the most competitive positioning in a very large part of the market. So that's been an important evolution for us. We launched, kind of did a full launch last year, early 2025. You know, at that time, we probably had 2,500 surgeons out of our 5,000 or so targets that were taking biopsies in any given year, probably higher than that cumulatively. And, you know, out of the gate, we trained around a thousand surgeons last year. It was kind of a critical mass of sort of getting surgeons trained on doing a Macy Arthro procedure. They represented that trained surgeon cohort, you know, more than half of our implants last year. And we saw that while patella defects not only is our highest volume, but it's typically been our highest growing segment, we saw those, you know small femoral condyle defect that growth rate sort of at par with patella and so that was an important sort of development for us we've seen continued strength in the leading indicator so i think it it refreshes you know the brand it allows us to access a different part of the addressable market with a more competitive offering and it will allow us to continually innovate because this was just version 1.0. We're working on additional enhancements to the Macy arthroscopic instrument set. We'll look at developing a specific set of instruments for use arthroscopically in the patella. And, you know, it's kind of, as you would expect, a less invasive procedure is better for the patient. And, you know, we're also focused on, sort of like Macy, when it was launched, We didn't really have clinical data in the U.S. because the Pivotal study was run in Europe. We have a registry now to generate Macy U.S. patient data. We have some publications out there already. The ARTHRO instruments were approved with a human factor study, so we didn't have to do a clinical study. We just had to demonstrate that surgeons could follow the instruction and implant the Macy membrane properly. And so now we're focused on demonstrating what we know is the case that, you know, with a less invasive surgery, you have better post-operative outcomes in that, you know, less post-operative pain, better range of motion, back to full weight bearing more quickly. And so we're generating that kind of data that we think also will help with Macy Arthro uptake. Interestingly, Macy was on the market in Europe and Australia for years. And about a month or so ago, there was a long-term publication coming out of Australia that demonstrated after 13 and a half years of follow-up patient satisfaction with arthroscopic administration, not our instrument set, but they just used standard arthroscopic instruments, they had the highest patient satisfaction outcomes after that period that we've seen. And, you know, they're all typically pretty high in the 90-plus percent range. This was like 100% patient satisfaction, 13 1⁄2 years on average after treatment. So we know the long-term outcomes will be great. We also want to have data that our sales reps can use showing those shorter-term postoperative outcomes are better as well.

That's helpful. Before we go on to the burner franchise, let's step back a little bit. And, you know, what this has built is a company that has both growth, strong, very strong margins and cash flows, which is, you know, fairly unique in MedTech and companies that spend time with. What do you think contributes to this kind of durable top line plus the margin pull through and cash flow generation you all bring to bear for investors?

Yeah. So, you know, we've talked about Macy and its growth over the last decade. But the company as a whole, since we launched Macy in 2017, has grown at a 20 percent CAGR. So not far behind Macy, and that's both because Macy's has had strong growth, but also burn care as well. As I mentioned, all of our products, you know, sort of fall into this category of being highly innovative products, great clinical outcomes, premium pricing, and then concentrated call points. So, again, we're generating what would be close to $300 million in Macy revenue this year with 100 sales reps. So, I mean, the rep productivity is very strong. We obviously have the whole infrastructure, case management team, and other support around them. But that's a pretty high sort of, you know, productivity for reps. In our burn care franchise, we've guided to, you know, like 46 to 50 million this year. So it's a smaller part of our business. And there we have 17 territories. So, again, it's a very concentrated call point. There's only 140 or so burn centers in the U.S. And so you take that combination of innovative products, premium pricing, concentrated call points, and, yes, we've taken our margins up to this year we've guided to about 75% with our midterm targets in 2029 being high 70% range, which is quarter, which is our seasonally strongest quarter. and then our adjusted EBITDA margins, you know, this year will be 27% is what we guided to in the fourth quarters, those strong quarters, you know, I think we were at 40% last year and that's a good proxy for sort of what we grow into over the next couple of years as the business scales. So, yeah, it's a sort of unusually or uniquely, I would say, profitable company in addition to the revenue growth. I think when you look back over the past four quarters, you know, our company revenue growth is 23%. Burn Care is 23%. Macy's 23%. Adjusted EBITDA is up like 40%. And we generated this next piece, which was about $60 million in free cash flow or operating cash flow over that time frame. So we kind of hit the profitability inflection point a couple years ago, and that's continued to increase. Now with our new facility behind us, which, you know, is about $100 million investment that we self-funded and grew our cash balance while we were doing that, you know, now we're at a point where our CapEx will be, call it roughly $10 million a year. And, you know, our adjusted earnings are, you know, a good proxy for operating cash flow. So you can do the math if you look at our long-term targets, not only for this year, but our mid-term targets, I should say, in 2029, get to half a billion in revenue, close to 40% adjusted EBITDA margins. That's a good proxy for operating cash flow, minus a little bit of CapEx. I mean, it's a pretty strong cash generation engine as well for us.

Very powerful, powerful engine for sure. On the burn care franchise, Nexabrid, you know, has been a bit slow since the launch. But as we saw in the Q2, it appeared to be a relatively strong quarter. Are there signs that we're seeing, you know, an uptick in that launch and increased revenue growth there?

Yeah, just to take a step back quickly. So, you know, in the burn care space, we focus on severe burn patients that are hospitalized. So that's kind of where we are, which is why I said it's a pretty concentrated call point. So two products there. Nexabrid first is what you use. Enzymatic sort of topically applied to remove the burned tissue. And then you figure out how you're going to cover the wounds, which is where EpiCell comes into play. So EpiCell has been on the market for about, you know, 30 years now. So we can talk about that later. The only FDA-approved thickness skin replacement product. And then Nexabrid we launched a few years ago. And, you know, the interesting thing there is that it's a really important product for patients. So the only, you know, the standard of care before Nexabrid was launched was surgical removal of the eschar. So you take a patient into the, you know, into the OR and they basically cut away the dead skin. It's very traumatic. There's a lot of blood loss. So to have a product now that's basically a mixture of proteolytic enzymes that you can simply apply and it dissolves the dead tissue and leaves the healthy skin, I mean, that's a big deal from a patient perspective. You know, you're basically going to burn surgeons and say, don't do surgery anymore. Use this product. So it takes a little while to change the standard of care. It's more about sort of operationalizing it. They're used to saying, okay, I'm the surgeon. I need a nurse. I need an anesthesiologist. I need OR time for an hour. Now you have sort of a different flow, and how do you staff that? How do you operationalize it? It may sound trivial, but in a hospital with certain sort of workflows that they've used for decades, you know, that takes a little time to change. And so really, you know, when we launched the product, there were about 90 centers we were targeting. When we got the pediatric indication, we added, call it, 20 more. And to date, we've had about 80 centers that have used the product. So, you know, I think that's a good testament to people or, you know, surgeons and health care providers understand the benefit of Nexabrid. It's really about how do you get them up to protocols operationalized. And, yeah, we said in the second quarter, you know, we're starting to see that momentum build, and we expect that to continue. Also layered on top of that is sort of this BARDA contract. So BARDA is very worried about mass burn casualty events in the U.S. And if you have that kind of an event, you don't have enough surgeons and you don't have enough OR space to surgically take care of those patients. So that's why they funded the development of Nexabrid, and that is kicking in now. So we are generating revenue from the BARDA contract. I can touch upon that for a minute, which is, you know, It's close to a $200 million contract. The first piece of that is about $35 million. And whether it's the full contract or that first funded piece, about two-thirds of the benefit of that goes to us. First in the form of procurement for stockpiling. So, again, they want to have an available inventory of Nexabrid if there's a mass casualty event. We recognize that as revenue of the $35 million up front. You know, $10 million of that will be procurement revenue that we are recognizing. We gave guidance on that $3 million this quarter, $3 million next quarter, $4 million first quarter of 2027. The rest of it is, you know, BART is very interested in developing a new room temperature formulation, a new BLAST indication, and so on. And so we manage those subcontractor activities. And the other part of the two-thirds, call it $10 million plus, comes to us over a period of a few years sort of for managing that project as cost offsets. And the same sort of dynamics apply for the full contract where they're interested in ramping up procurement, maybe procuring the new formulation, et cetera. But they typically, those are options that they exercise over time.

Before we move on to the P&L, maybe real quickly on EpiCell, talk a little bit about the competitive position of the product, how it's been growing, and the synergies. You mentioned a little bit the synergies with Nexabrid.

Yeah, well, clearly from a treatment pathway, it's highly synergistic because, again, once you remove the eschar, if it's a full thickness burn, really EpiCell's the go-to product there. And, again, we're treating catastrophic burn patients who can have 80%, 90% of their body burned. You don't have enough healthy tissue to do sort of serial autographs. So it's a life-saving, very important product. You know, it's had very strong performance over the past four quarters, and it's kind of operating. We're never going to be able to control the number of catastrophic burns that occur and how many patients survive to be treated. But of those that do survive, you know, I think the team's doing an outstanding job of sort of converting the biopsies we get to create the skin grafts to sort of treatments for the patients. And it's really through a sort of multidisciplinary, you know, our burn care team, the sales reps, really putting treatment plans together for these patients. And, you know, it is like a capital sale in a med tech sense where, you know, one treatment can be half a million dollars. And so it's a big, you know, sort of investment for the hospitals. And, you know, we want to work with them to make sure there's great patient outcomes. And that's really sort of how we approach it. And I think it's really sort of given the business some good, strong, consistent quarters over the past year and change. Great.

Quickly, as we're wrapping up here, gross margin, even though, as you referenced, have expanded. With your new facility, which is super impressive, where can they go in the next couple of years?

Yeah, so Nick touched on some of this, but, you know, we've talked about in our midterm targets, you know, we think we can get to the high 70% range from a gross margin perspective, the high 30% range adjusted EBITDA. We've also talked about that kind of half billion plus, rather, from a revenue perspective. So, you know, generally I would say, you know, margins have been pretty strong in the first half of the year ahead of our guidance, the first and the second quarter. I feel like we're on track for our full year guidance. You know, this is a year we are absorbing some of the investments for some of the initiatives we talked about, everything from absorbing a new facility, the Salesforce expansion, the ankle spend for the trial there, and then some ex-US prep as well. But, you know, I'd broadly say we know from a company profile perspective we've had a history of strong revenue growth, feel like we're well positioned as we move forward there. You know, we've had that inflection in profitability. We think that will continue, particularly with the strong revenue and the pull through there. And then, again, as Nick referenced, really the cash generation piece is just starting as we finish that new facility. So, you know, moving forward, we think those are kind of all key aspects of the profile.

And lastly, you know, as an investment banker, I was in with capital allocation. You all announced a $200 million share repurchase program. You have been selectively active in M&A over time to grow the Burnt Care franchise. How do you think about your capital allocation evolving from here?

Yeah, well, I think, you know, we've always said that to achieve our growth objectives, kind of the big CapEx spend was going to be the facility, right? And so that's behind us. That's great. I'd say all the other things we're doing, whether it's Salesforce expansion, Macy Ankle Study, expanding OUS, that's kind of in our operating plan. That's reflected in the margin guidance that Joe's given. So you're really down to, you know, business development transactions, and you're right. I mean, we purchased this business from Sanofi back in 2014. We added Nexabrid through a license agreement. That's kind of how we built the company, and we will continue to add there. Or, you know, obviously capital returns to shareholders, and that's where the, you know, the buyback or the repurchase program comes in. And, you know, fortunately, I mean, we ended last quarter with nearly a quarter billion in cash. You know, we can do both things, right? We can selectively or opportunistically return capital to shareholders. We have got enough, you know, financial resources to do the kinds of deals that we'd be interested in doing. So, you know, I think it's a perfect position for us.

And with that, we're out of time and appreciate the chat today. All right. Congratulations on your momentum.

Thank you.