Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to VeriCell's first quarter 2022 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 Eric Burns, VeriCell's head of financial planning and analysis and investor relations.

Thank you, operator, and good morning, everyone. Welcome to Verasol's first quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, let me remind you on today's call, we'll be making forward-looking statements covering 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 describe more fully in our findings of the SEC. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copy of our financial results press release and a short presentation with highlights from today's call are available on our website. I'm joined on this call by Veriself's President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer, Joe Marra. I will now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'll begin today's call by discussing financial and business highlights for the first quarter and our expectations for the rest of the year, and then turn the call over to Joe for a more detailed review of our first quarter financial performance and guidance for 2022 before opening the call to Q&A. Overall, we're very pleased with our financial and operational performance to start the year across both our sports medicine and burn care franchises, despite the continued impact of COVID-19, particularly in the first half of the quarter. The company remains on track to deliver another year of significant revenue growth, margin expansion, and operating cash flow, and as such, we're reaffirming our full-year financial guidance. We also continue to make significant progress on key regulatory and clinical programs for both franchises, and importantly, We remain on track for the planned mid-year resubmission of the Nexabrig BLA. From a financial perspective, we generated total net revenue of approximately $36 million for the first quarter, which represents 7% total product revenue growth for Macy and EpiCell compared to the first quarter of 2021. We also maintained our strong profitability profile, as we generated positive adjusted EBITDA and operating cash flow for the seventh consecutive quarter. From a commercial perspective, Macy revenue of $26 million came in above our first quarter guidance, increasing 9% compared to the first quarter of 2021. Importantly, Macy significantly outperformed the overall cartilage repair procedure market, which we estimate, based on market data, declined by double digits over the same period. In addition, we generated double-digit growth in surgeons taking MACE biopsies compared to the first quarter of 2021 and generated the second highest monthly biopsy volume in March since the launch of MACE. We expect that as the overall healthcare environment and MACE patient behavior trends continue to normalize over the remainder of the year, These strong MESI fundamentals will lead to a significant acceleration in growth during the second half of the year. And as such, we're reaffirming MESI revenue guidance for the full year. EPICEL revenue of approximately $10 million was in line with our recent higher run rate and represents the sixth consecutive quarter of revenue greater than $9.5 million. The growth drivers for EPICEL also remain very strong. as we had over 20% growth in burn centers treating patients and taking epi-cell biopsies compared to last year, and a record monthly high for epi-cell biopsies in March. From an operational perspective, as we announced this morning, we expanded our commercial leadership team with the appointment of Mike Gilligan as our vice president of Macy National Cells. Mike, who will report to Roland DeAngelis, our head of commercial operations, joins VeriCell with more than 15 years of commercial experience in the medtech and pharmaceutical industries. Prior to joining VeriCell, Mike served as U.S. Vice President of Sales for Biologics and Commercial Initiatives at Smith & Nephew. Prior to Smith & Nephew, Mike held sales leadership and marketing roles at Stryker after beginning his career at Pfizer. Mike brings extensive sales experience in the sports medicine field, outstanding leadership skills, and strong business acumen to our high-performing Macy team as we continue to focus on our key growth drivers of adding new surgeons, achieving deeper practice penetration, and increasing biopsy conversion rates. We're excited to have Mike join the Veriself team, and I'm confident that he'll play an integral role in bringing the benefits of Macy to even more surgeons and patients as we continue to drive strong growth for Macy in the years ahead. Turning to our pipeline, we have several exciting milestones ahead for the balance of the year. We remain on track for a mid-year resubmission of the NexaBridge BLA, which would position the product for a potential commercial launch in the first half of 2023. Based on the strong leadership and track record of execution by our commercial and medical burn care teams, we're well positioned for a successful launch of this important product which we believe upon approval has the potential to change the standard of care for eschar removal for patients with severe thermal burns. We also continue to advance important lifecycle management initiatives for MACEI and remain on track for planned discussions with the FDA later this year to review both our MACEI arthroscopic and ankle indication development programs, initiatives that we believe will support continued strong growth in the years ahead. Finally, we're pleased to have announced plans during the first quarter for a new state-of-the-art advanced cell therapy manufacturing and corporate headquarters facility. The new facility, which broke ground last month and is expected to begin commercial manufacturing in 2025, will significantly increase our manufacturing capacity and demonstrates our confidence in the continued growth trajectory of Macy and EpiCell in the years ahead. In summary, The company had a strong start to the year. Our expectations for another year of significant growth for both Macy and Episod remain on track, and we continue to make progress on important regulatory and clinical programs for both of our franchises. I'll now turn the call over to Joe to discuss our first quarter financial results.

Thanks, Nick, and good morning, everyone. Starting with the income statement, total net revenue for the quarter was $36.1 million, and was comprised of 26 million of Macy revenue and 9.9 million of EpiCell revenue and 0.2 million of revenue related to the procurement of Nexibrid by BARDA for emergency response preparedness. We expect a similar amount of BARDA-related revenue in the second quarter, which would represent the final order for BARDA's initial procurement. Gross profit for the quarter was 23.5 million or 65 percent of net revenue, similar to the gross margin of 66 percent for the first quarter of 2021. Total operating expenses for the quarter were $30.7 million compared to $26.3 million for the same period in 2021. The increase in operating expenses was primarily due to higher non-cash stock compensation expense. Net loss for the quarter was $7.1 million, or $0.15 per share, compared to a net loss of $3.3 million, or $0.07 per share, for the first quarter of 2021. Non-GAAP-adjusted EBITDA for the quarter was $3.2 million, or 9 percent of net revenue. And importantly, this is now the seventh consecutive quarter that we have generated positive adjusted EBITDA. Finally, we generated approximately $3.5 million of operating cash flow in the quarter, and we ended Q1 with approximately $130 million in cash, restricted cash and investments, and no debt. Turning to our financial guidance, we are maintaining our full year financial guidance for 2022 for revenue, gross margin, operating expenses, and adjusted EBITDA margin. We expect total revenue of $178 to $189 million, gross margin of approximately 70%, and full-year operating expenses to be in the range of $134 to $137 million. We expect non-GAAP adjusted EBITDA margin for the full year to be approximately 21%, which would represent approximately $40 million in adjusted EBITDA in 2022. For MACIE, we continue to anticipate full-year revenue of $132 to 141 million. In terms of Macy quarterly trends and the seasonality of our revenue, we expect approximately 20% of Macy full-year revenue in the second quarter, which would imply sequential growth from Q1 to Q2 this year and continued year-over-year growth, despite a more difficult comparison versus Q2 2021 as our volumes increased significantly last year in Q2 coming out of the winter COVID-related surge. And for EPICEL, we anticipate that Q2 revenues will remain in line with recent run rates of approximately 10 million per quarter. This now concludes our prepared remarks. We will open the call to your questions.

Again, As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ryan Zimmerman with BTIG.

Good morning. Thanks for taking the questions. A couple for me to start. I want to talk about you entered this year, Nick and Joe, with I think about $10 million in backlog. And I'm wondering if you could comment on kind of what you estimate you recaptured in the first quarter, how much of that impacted results, and how much you think is remaining for the balance of the year.

Yeah, good morning, Ryan. Thanks for the question. This is Joe. So, you know, I would say on the backlog, you know, I would say, You know, just as a reminder, you know, to start the year, we certainly had, you know, continued COVID impacts. You know, we started the year, really the first half of the quarter in particular with the Omicron variant, et cetera. So I would say kind of from our perspective, you know, the backlog hasn't meaningfully changed in the first quarter. You know, we did come in a bit ahead of expectations in Q1, but, you know, I wouldn't really point to the backlog. And again, from a full year perspective, H1, H2, et cetera, kind of remains on track.

Okay. And if I'm doing the math right and I think about the guidance for Macy for the year and that comment on 20% roughly, correct me if I'm wrong, Joe, but it implies about $27 million in change for Macy in the second quarter. And so, you know, help me understand kind of, you know, you beat by $2 million or so, you know, this quarter on Macy. Guidance is unchanged. You're implying, you know, I think a couple million below what consensus is for second quarter on Macy. And so help us understand kind of what you're seeing or how you're thinking about guidance for the rest of the year, particularly in the back half of the year as we move into the back half.

Yeah, I'll start, and, you know, Nick can chime in as well if you'd like. So, you know, first off, I think you're right. So, you know, what we're saying, and really at the midpoint, it is about $27 million for the second quarter. You know, just to think a little bit about the quarters in each half of the year and Macy, which kind of plays into the guidance question. You know, again, back to your first question, you know, Q1 was strong and was a bit ahead of where we anticipated, you know, a little bit over a million and change over the midpoint of our guidance. So that did come in a bit higher than anticipated. But I would start by saying, you know, our view of the full year and our view of the first half has not changed. If you add that kind of 19% that we ended up at in Q1 as a percentage of revenue, add that 20%, you get to just under 40% for the first half of the year, about 39%, based on that 20% comment. And again, for Q2, just to reiterate, as you think about Q2, A, Q1 came in a bit ahead of expectations. And last year, we did have some strong pull through, particularly, you know, coming out of that winter surge in the early part of Q2, which impacts the year-over-year comparison. You know, so if you kind of look at each, you know, if you look at kind of the balance of the year, you know, similar to what we talked about last quarter where, you know, we expect kind of the majority of the Macy revenue in the second half, you know, you will certainly see an acceleration on a kind of year-over-year basis. But some of that is just due to the comps as we continue to be impacted by COVID and as you're looking at quarters or even halves of the year. You know, I think it actually is helpful, even though, you know, it's a couple of years back. If you look at really the H1 growth in our guidance, you know, versus H2 over 2019, which, you know, really still remains kind of the cleanest comp without all the noise from kind of COVID quarter to quarter or half by half. And what you see there is in the first half, if you kind of do the math, we're roughly 45% ahead of 2019, whereas in the second half, it's more like 55%. So it is a bit of a step up when you look at 2019, but, you know, we are assuming there are some improvements in the market, kind of procedures, kind of the healthcare system, et cetera. So, you know, I think at this point in the year, you know, we're certainly pleased where Q1 is, but I would say from a guidance perspective, it is still relatively early in the year. We have seen some COVID impacts. We also want to keep an eye on kind of what's happening in the broader healthcare system and the cartilage market.

That's very helpful. Thank you for taking the questions.

Our next question is from Danielle in Tulsi with SVB Security.

Hey, good morning, everyone. Thanks for taking the question, and congrats on a good quarter despite the ongoing headwinds here. Just to follow up on Ryan's question, I guess as we look at Q2, are you still seeing, are you still assuming some COVID impact? I get the year-over-year comparable, but I guess with the backlog that you guys have, why wouldn't Q2 be even incrementally stronger? It feels like momentum built in March and April. Maybe you can comment a little bit on trends that you saw earlier. Or is it more about the refill of the referral funnel? I guess what's the gating factor as we look into Q2 where hopefully we don't have actually another meaningful COVID surge?

Yeah, hey, Danielle, this is Nick. I'll start and then Joe can add comments as well. But, you know, certainly through the first quarter, everybody's aware that the first half was impacted by Omicron, and we did see some sequential improvement, whether it was biopsies or implants throughout the quarter. And, you know, obviously we mentioned that, you know, we had second highest biopsies, you know, since launch of Macy in March. So clearly we saw improvements as we moved through the quarter. You know, as we move into the second quarter, we expect, you know, those improvements to continue. But at the end of the day, I think everything you read and that we see, and as we commented on, the market was still double digits below where it was the prior year. So we're still outperforming the market, and we expect that to continue throughout not just the second quarter, but for the remainder of the year. I think, you know, to your point and as Joe alluded to, trying to do quarterly comparisons year over year when you have the kind of disruption that you see, you know, throughout COVID, you know, you can look back to our Q3 earnings presentation where we showed there was this, you know, very strong recovery of the sort of 2020, you know, too. So, you know, I think revenues were up for Macy, you know, 76% last second quarter. So, you know, you just have those dynamics where quarter over quarter comparisons aren't necessarily the way to look at it. I think as Joe alluded to, you know, we're right on track with what we've said historically around sort of 40% or so revenue in the first half of the year, 60% in the second half. And so it's tracking, you know, where we expected it to.

Okay. That's helpful. And I guess as we look at Macy and how to think about the rest of the year, just anything from the referral funnel and what you're seeing from a conversion rate perspective, you know, that's been one of the things that's been suppressed during COVID. How is that trending as we look ahead to Q2 and into the back half of the year? Thanks so much.

Yeah, so as you mentioned, you know, and we've highlighted, you know, it really is when you look at last year and we had 30% biopsy growth and, you know, revenues were up sort of 18%. The difference there is, you know, how the biopsies are converting. And so that's one of the things that we expect to continue to see improvement on throughout the year. I'd say, as Joe mentioned, you know, you're coming out of a first quarter where there was a fair amount of disruption, so, you know, you wouldn't expect necessarily to see that improve, but that's something we, in the first quarter, but, you know, we expect as we move through the year that that will normalize as we've talked about before.

Thank you.

Our next question is going to be from Chris Cooley with Stevens.

Good morning, and thanks for taking the questions, and congratulations on a solid start to the new year. Maybe just one more for me on Macy, then we can maybe change gears to the Byrne franchise. But I just want to make sure that I'm level set correctly here. When you originally established guidance, you talked about to get to the high end of the range for this year, you basically assumed modest disruption from COVID-19. in the one queue, I just want to make sure that kind of the underlying assumptions there to get to both the high and the low end of the range are essentially the same, or if they've changed in any manner, you know, kind of what your thinking is now as we're, you know, a little bit farther into the year and we've clearly seen some new variabilities and other things, you know, kind of resolve themselves. I just wanted to make sure I understood the underlying assumptions to the high and the low end of the range, then I've got a quick follow-up.

Yeah, I would say kind of broadly speaking, I don't think really anything has changed. You know, obviously we came in a bit ahead on the Q1 side relative to expectations, but as we talked about, you know, kind of mix of the year as well as the full year, nothing has really fundamentally changed as we kind of think about that range of scenarios on Macy.

Perfect. And then if we could switch gears to EpiCell, I was really impressed with the growth there and the increase in biopsies. Could you just maybe speak to not only What's helping you drive into these additional accounts? There aren't that many level one burn centers here in the U.S., so I'm just kind of curious what's helping accelerate broader adoption and what looks, back of the envelope math here at FirstPath, which looks like greater utilization within those existing accounts. Maybe it's more grafts per patient. Just trying to get a better understanding of what's supporting that $10 million run rate. Thank you.

Yeah, thanks, Chris. It's Nick. You know, just, you know, taking a step back and at a higher level on epiCell, as you mentioned, there's about 140, you know, burn centers, accredited burn centers in the U.S. And as we kind of consistently talked about in any particular kind of two or three year period, you know, we may be getting, you know, biopsies or graftings from probably half of those centers, 70 or 80. And that's because, you know, not all centers are the same and the really critical patients are often, you know, at those centers. And in any particular year, it's probably more like, you know, 40 to 50 burn centers treating patients. So, you know, there's, so that's just kind of the, sort of the market background. You know, we had a very strong year last year, right, where we kind of had a new level of performance, which we continued into the first quarter and very much aligned with the commentary Joe gave on the last call that, you know, we would expect kind of similar, you know, run rates in the first couple of quarters and then a step up as the growth drivers sort of continue to take hold. And The growth drivers we've talked about was, you know, especially last year, we saw a significant increase in the average number of grafts per patient. But we think that's kind of stepped up to sort of where we would expect it to continue. And that going forward into this year, the growth drivers were really going to be around sort of increasing the number of centers, which we've seen, and then in the first quarter, and then increasing the number of biopsies. which again will give you deeper penetration into those centers. So those are the exact growth drivers that we pointed to, you know, in the back half of last year, and that's what we're seeing to start the year. And, you know, that goes back to the other factor that we mentioned around the sales leadership and the execution of the commercial sales and medical teams, and that's sort of responsible for increasing the number of

Understood. Thank you so much.

Our next question comes from Jeffrey Cohen with Ladenberg-Tallman.

Hi, Nick and Joe. How are you? Morning. Doing well. Thanks, Jeff. Thanks for taking the question. So, too, I know that I guess both Brian and Daniele asked kind of I wanted to get a sense of conversion rates and what you found. throughout first quarter, maybe any commentary for April as well and how they're holding and how they look versus your expectations.

Yeah, I guess I'll just sort of repeat what I said earlier, right, where conversion rates, you know, you've got these patients where biopsies have been taken and As you know, sort of cartilage injuries don't heal themselves. So, you know, we expect at some point these patients will seek treatment. And, you know, in the first quarter, which, again, was disrupted by the Omicron variant, you know, we wouldn't expect to see any, you know, improvement or substantial improvement in those conversion rates. But as we progress through the year and the healthcare system sort of improves and moves towards normalization, you know, we expect those conversion rates to kind of move back in the direction of the historical norms.

Okay, got it. And then I guess secondly for us, could you talk a little bit about the arthroscopic delivery and also the ankle franchise as well with the FDA as far as what you would expect to discuss and what kind of timing could we anticipate for development and the commercial side?

Yeah, so it remains very much in line with what we talked about at the end of last year. Obviously, the first step is to meet with the FDA and share our perspective on clinical development programs for both programs. And that's what we would expect to do in the second half of this year. There's always prep work to request meetings and get prepared to go meet with the FDA. You know, our teams here are continuing to make great progress on that front, and so we remain on the schedule that we articulated earlier that, you know, we plan to meet with the FDA in the second half of the year, and then, you know, would provide an update to investors and analysts based on the outcome of those discussions. From a commercial perspective, we characterized, you know, the arthroscopic delivery of Macy. As sort of a mid to early second half of the decade 2025 plus and so that hasn't changed at this point. And that The Macy ankle program would require more of a Macy knee summit study kind of study, clinical study, and therefore, you know, you'd be looking at sort of the back half of the decade for a potential Macy ankle indication. So everything's sort of on track and in line with what we have discussed previously.

Okay, perfect. And then two quick ones for Joe, if I may. Jerry, throughout 134 to 137, was that an OPEX study? guide on a range for 2022?

Yes, correct. That's consistent where we started the year, so that has not changed.

Okay. And then secondly, any commentary on the cadence of margins throughout the year? I mean, barring 2020, it looked like you were typically always fairly sequential. Is that a good assessment? Yes.

Yeah, I mean, I think broadly speaking, I mean, we talk more kind of on a full-year basis, but you do tend to see, you know, kind of later in the year, particularly with the higher Macy quarter, kind of higher margins at that point in the year. So, you know, I think, you know, in general, I think that kind of holds up.

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

Our next question is from Samuel Brodowski with Truist.

Hi, thanks for taking the questions. First one for us, just when we're thinking about the cartilage repair market more broadly, I mean, one, kind of how did that progress through the quarter? Maybe any better in April versus what we saw in 1Q? And then, you know, what needs to happen to see that market get to a more normalized level?

Yeah, Sam, thanks for the question. So you know when we make commentaries or comment on sort of market dynamics as we've talked about before, you know we're able to purchase LexisNexis market view data and we can kind of look at procedural codes basis of our addressable market. So, osteochondral allografts, microfracture, chondroplasty, Macy, and that's kind of the market basket. And, you know, obviously it was significantly impacted in January and February. Now, the data lags, right? So, the March data probably comes in January and February and a presumed improvement in March. But, you know, we don't have April data yet and we won't for a while to comment on sort of where the market is right now. So I do think that's a very important backdrop, you know, just to repeat what I said on the last call, you know, Macy outperformed the market, you know, pre-COVID, during COVID, and we expect it will, you know, post-COVID. And what you need to see to kind of for the market broadly to get back is just sort of normalization of patient flow and activity. And, you know, we saw that as COVID waves sort of abated last year. Q2, from a market perspective, you know, was starting to approach pre-COVID levels, and then you had the Delta and Omicron variants, and you saw, you know, significant declines in market activity again. So, I think almost it's probably not really any different than other markets that you see, uh, in the industry where patient volumes are not quite back to pre COVID levels yet, probably, you know, 10, you know, double digit, 10% down, maybe starting to close that gap. And I just think as the healthcare environment starts to normalize, you'll see that market activity return.

Got it. That's, that's helpful. And then just another one more on the market, uh, Any updates in terms of the competitive activity in cartilage repair and anything you're seeing there, whether it be interest from docs and other products or maybe more difficulty in terms of keeping reps? Thanks.

Yeah, no, we, you know, the, obviously, Agila C was approved. recently in BioVentus, you know, exercised their option to acquire the company and kind of has laid out its plans for launching Agilecy, you know, sort of soft launch this year and then, you know, a more fulsome launch next year, according to their commentary. So that's a product that we've talked to you and others about, you know, for a number of years. And, you know, from our perspective, you know, that's kind of a different segment of the cartilage repair market, right? Typically, you know, and I think the company has commented on this, for instance, their JP Morgan presentation that typically sort of intended for older patients, osteoarthritic really is a bridge to partial or full knee replacements. You know, that's very much in line with, you know, how our KOLs have thought about that product, not as a Macy competitor, but kind of addressing a part of the market where there really are no other alternatives for those patients. So sort of nothing different from our perspective on that product. And in terms of the competitive marketplace for reps and so on, I think we continue to attract retain really top talent across our commercial organization. I think that's evidenced by, you know, our announcement this morning of Mike Gilligan joining as our national sales director from Smith and Nephew. I think everybody's pretty aware of, you know, of Macy's place in the market and the enthusiasm around the product, and that allows us to kind of, you know, retain and attract great talent.

Great, thanks.

Our next question comes from Arthur He with H.C. Wainwright.

Hi, good morning. Nick and Joe, this is Arthur for RK. Thanks for taking my question. Most of the questions have been answered. I just want to follow up regarding the MACE biopsy dynamics. Could you guys give us more color on the Average number of biopsies per surgeon taking we see during the quarter and getting to the second quarter. Appreciate it.

Yeah, I think, you know, probably the best way to address that is to take a step back and say, you know, coming into the year, we expected to see double-digit growth in biopsying surgeons. And, you know, we commented and we saw that in the first quarter. Little hard given the disruption, you know, obviously procedures were down across the board in the first quarter, you know, in January and February, I should say. And then obviously we had a strong recovery in March. So biopsies continued to grow in the quarter, just not at the rate we would have expected. But again, we saw a big bounce back in March. You know, we expect that to continue in Q2 and then throughout the rest of the year.

Thank you. Thank you for taking my question. And congratulations on the strong quarter. Okay. Thank you. Thank you.

I'm showing no further questions at this time. I would now like to turn the conference back to Nick Colangelo.

Okay. Well, thank you, operator, and thanks to all of you for your questions. Just in summary, overall, the company executed well in the first quarter and remains on track to deliver another year of strong financial and operational results. Given the significant market opportunities for our products and strong growth profile, we believe the company is very well positioned for sustained long-term growth in the years ahead. So thanks again and have a great day.

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