Vericel Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Veracell Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Nick Colangelo, Veracell's President and CEO. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Veraselt's third quarter 2020 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that on today's call, we'll be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are available on our website. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copy of our third 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. This morning, we reported record third quarter total net revenues of $32.3 million. Our strong revenue performance, which exceeded our expectations, was driven by Macy as the V-shaped recovery that started in June continued in the third quarter. MESI revenue grew 18% over the third quarter of 2019. We also reported the second highest quarterly epiCell net revenue in history and reported our first NEXABRID revenue related to the BARDA procurement for emergency response preparedness. Our strong revenue performance generated significant profitability in cash flow as we reported a gross margin of 70%, record third quarter net income of $3.6 million, and positive operating cash flow of $4.6 million for the quarter. With these results, we've generated growth in total revenues year-to-date compared to the same period in 2019, and the company has cash flow positive for the year through the third quarter, a great achievement given the significant challenges during this period. From an operational standpoint, in addition to announcing the first delivery of Nexabrid to BARDA and related revenue, We also announced that the FDA has accepted the Nexabrid BLA for review and assigned a PDUFA goal date of June 29, 2021. As those of you who were able to join us on our recent Analyst and Investor Day heard, not only is there a great deal of enthusiasm for Nexabrid among burn surgeon thought leaders in the United States, but we also have extensive pre-commercialization marketing and medical initiatives underway to support the planned NEXPRD launch in the second half of 2021 upon approval. As we approach the end of this challenging year, our third quarter results demonstrate the significant progress we've made in 2020 on several key metrics that give us confidence regarding the resiliency of our long-term growth profile and point to a strong fourth quarter and the potential for significant growth acceleration as we move into 2021. Before covering additional details of our commercial performance and expectations looking forward, I'll briefly cover our financial highlights for the third quarter. As mentioned earlier, total net revenues increased to $32.3 million, compared to $30.5 million in the third quarter of 2019, and included $24.4 million of MESI revenue. and $6.7 million of EPICEL revenue compared to $20.6 million and $9.9 million of MESI and EPICEL revenue, respectively, in the third quarter of 2019. Total revenues for the quarter also included $1.2 million of NEXABRID revenue related to the BARDA procurement for emergency response preparedness. Gross profit for the quarter was $22.5 million, or 70% of net revenues, compared to $21.2 million, or 69% of net revenues, for the third quarter of 2019. Total operating expenses for the quarter were $19 million, compared to $18.1 million for the same period in 2019. The increase was primarily driven by incremental employee expenses related to the Macy Salesforce expansion earlier this year. Net income for the quarter was $3.6 million, or 8 cents per share, compared to $3.5 million, or 7 cents per share, for the third quarter of 2019. Non-GAAP adjusted EBITDA was $7.6 million for the quarter, compared to $6.8 million in the third quarter of 2019. Finally, we generated $4.6 million of operating cash flow, and as of the end of the quarter, had $85.5 million in cash and investments, compared to $79 million as of December 31st, 2019, and no debt. Clearly, it was a very strong quarter for the company as we were able to grow total revenues despite the all-time high EPICEL revenue comp from the third quarter of last year and deliver similar levels of profitability and cash flow despite the additional investments we've made in our Salesforce expansions. We believe that this reflects both the strong underlying fundamentals of our business and the fact that the company continues to execute at a high level. Our third quarter performance was driven by Macy as we generated double-digit growth in revenue, implants, and biopsies and achieved a record monthly high for biopsies in September. To provide further insight regarding Macy's performance, this time I'll share how we view the underlying drivers of Macy performance and how they shape our outlook for the fourth quarter and for 2021 and beyond. As discussed in the past, there are three key levers that drive the growth of Macy. The number of surgeons taking biopsies, the average number of biopsies taken per surgeon, and the conversion rate of biopsies to implants. With respect to the number of surgeons taking biopsies, we reported on our fourth quarter earnings call last year that Macy's growth in 2019 was due in large part to an increasingly broad group of surgeons adopting Macy as a preferred treatment for larger symptomatic focal cartilage defects in the knee. This strong adoption was reflected by the fact that we had received biopsies from approximately 1,400 surgeons in 2019, which represented 25% growth over 2018. Despite the significant challenges resulting from the pandemic over the course of this year, we still expect the number of surgeons taking biopsies to grow to around 1,500 surgeons in 2020. Of particular note, the 27 expansion territories added this year had by far the highest growth rate in the third quarter in terms of adding new surgeons that had never previously taken a MACE biopsy. This supports our Salesforce expansion strategy to increase the reach and frequency on our high volume cartilage repair target surgeons and gives us confidence that we'll return to a similar rate of growth in surgeons taking biopsies in 2021 as we saw in 2019. In terms of the average number of biopsies taken per surgeon, third quarter rates were already back to 2019 levels. Looking forward into 2021, we'd expect biopsies per surgeon to increase from current levels, which, when combined with our expectation for an acceleration in the growth in surgeons taking biopsies, sets Macy up for a very strong 2021. Finally, given the expansion of our surgeon base and the current environment, we're very pleased that the biopsy conversion rate has remained within the historical range, and we expect that to be the case for 2021. Turning to epi-cell, we've seen steady monthly epi-cell volume since May, and this trend is carried into the fourth quarter. This is the first full year with our new FSL Salesforce structure, which includes both sales representatives and clinical support specialists. And we believe that this new structure has helped maintain our momentum despite the challenges throughout the year. As we expand the Salesforce next year in anticipation of the NexaBridge launch, we believe that we'll have the right scale and structure to drive another leg of growth for FSL as we target additional centers that we believe could become FSL users in the years ahead. Finally, as discussed in detail during our recent Analyst and Investor Day, we believe that the addition of Nexibrid to our burn care franchise will create a unique strategic market position for VeriCell and enhance the company's leadership position in burn care by having highly innovative products for both the debridement and wound closure phases of the burn treatment pathway. Given that we'll be targeting a much larger segment of hospitalized burn patients than with EpiCell alone, The addition of Nexibrid will triple our burn care addressable market to over $300 million in the U.S. The expansion of the addressable market supports a broader commercial footprint, which we believe will drive both Nexibrid uptake and increase epi-cell penetration as we build a larger share of voice and expand our presence in the burn care market. So we're very excited to have an opportunity to bring Nexibrid upon approval to the market in the United States in 2021. We believe it will be a meaningful contributor to our growth in 2022 and beyond. To wrap up, I'll spend a few minutes discussing the current operating environment and our expectations for the fourth quarter. While we're not in a position to forecast exactly how the recent rapid increase in COVID-19 cases could impact Macy in the second half of the fourth quarter, we can say that to this point we have not seen any change in the trends in Macy biopsies, new case activations, or scheduled surgeries as a result of the effects of the pandemic. Barring widespread reinstatement of restrictions on elective surgeries, as we've previously discussed, we believe that Macy's well-positioned to return to its prior growth trajectory, even in a challenging COVID-19 environment, given the profile of potential Macy patients, the outpatient nature of the surgery, and its favorable reimbursement status. As support for this view, although there was a spike in COVID-19 cases in states including Florida, Texas, and California in the third quarter, Macy growth rates in those states actually outperformed the national average in the quarter. That experience, together with our market research with surgeons around the country regarding expected practice dynamics during times of increased COVID hospitalizations, has helped calibrate how we're thinking about Macy performance in the fourth quarter. Our outperformance in the third quarter certainly increased our expectations for Macy in the fourth quarter, and all key metrics point to the normal seasonal dynamics in terms of a significant sequential step-up in Macy volume from the third to the fourth quarter. As I mentioned earlier, EpiCell has been performing consistently well since May, and that trend continued into October. We also expect the second shipment of Nexibrid to BARDA later this month, which should generate around $1 million in revenue for the company in the fourth quarter. We're closely monitoring the evolving COVID-19 dynamics, and absent a market change in current conditions in the second half of the fourth quarter, our expectations have increased, and we now expect to be able to achieve double-digit product net revenue growth in the fourth quarter. Together with the Nexabrid revenue related to the BARDA procurement, This would generate total net revenue growth and positive net income and cash flow for the full year in 2020. Our company executed exceedingly well during the third quarter, as we generated stronger than expected financial results, drove strong commercial performance for Macy and Epicel, and achieved important milestones towards our goal of attaining marketing approval of Nexavirt in the United States. Our third quarter results demonstrated the strength of our business across several measures, and while uncertainties related to COVID-19 remain, we're highly confident in the underlying fundamentals of our business, and we remain on track to deliver strong revenue and profit growth in the years ahead. This concludes our prepared remarks. As a reminder, the presentation is available on our website, provides additional highlights of today's call. Now I'd like the operator to open the call to your questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ryan Zimmerman with BTIG.