Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to VeriCell's third 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. We'll 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 VeriCell's third quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that on today's call, we will be making forward-looking statements 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 are described more fully in our filings with 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 the investor relations section of our website. I am joined on this call by Veris, our president and chief executive officer, Nick Colangelo, and our chief financial officer, Joe Mara. I will now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'll begin today's call with a discussion of our third quarter financial and business highlights and our expectations for the remainder of the year. I'll then turn the call over to Joe for more detailed review of our financial performance and fourth quarter financial guidance before opening the call to Q&A. The company delivered another solid quarter from a financial and operational perspective as we generated strong Macy revenue growth, record third quarter total revenue, continued profitability and operating cash flow, and made meaningful regulatory progress with respect to Nexabrit and our Macy life cycle initiatives, which we believe will position the company for further growth in the years ahead. Third quarter total revenue was $38.6 million, with product revenue growth of 14% compared to the third quarter of 2021. The company generated more than $3 million of adjusted EBITDA and $4.1 million of operating cash flow, which was our ninth consecutive quarter of positive adjusted earnings and operating cash flow. Macy had another strong quarter with revenue of $31 million as we generated the highest quarterly revenue outside of the seasonally high fourth quarter since the launch of Macy. Macy revenue grew 30% compared to the third quarter of 2021, and sequential revenue growth was 8% over the second quarter, which is noteworthy given that third quarter revenue typically is flat to down compared to the second quarter due to summer seasonality. Macy's 30% growth also was the highest year-over-year quarterly growth rate since 2019, excluding the comparison to the second quarter of 2020, which was impacted by the widespread shutdowns due to COVID-19. Importantly, we continue to see significant growth in surgeon adoption and remain on track to generate double-digit growth in surgeons taking Macy biopsies this year. The majority of surgeons taking biopsies for the first time in 2022 were engaged through our digital and in-person marketing and training initiatives prior to taking their first biopsy as we continue to focus on high-value commercial investments to expand the Macy customer base. Overall, the Macy sales and marketing team executed extremely well in the third quarter. The underlying Macy business fundamentals remained strong. And we expect that consistent surgeon growth will continue to drive further clinical utilization of MACI. Finally, as we've mentioned on previous calls, the biopsy conversion rate for MACI has been impacted by the disruption to patient flow dynamics in ongoing healthcare system challenges as a result of the COVID-19 pandemic. Those market dynamics are also reflected in a decline in the overall cartilage repair procedure market, which is stabilized but remains down more than 10% compared to last year. While Macy continues to significantly outperform the overall market, and the biopsy conversion rate is stabilized, we've not seen a sustained improvement towards pre-COVID levels so far this year, which will impact full-year revenue for Macy, as Joe will cover in our guidance update. Despite these market dynamics, Macy remains on track for a strong finish to the year as it resumes its high-growth profile And we expect Macy growth in the mid-20% range for the second half of the year compared to 2021. Moving forward, we believe that continued execution by our Macy sales team and the gradual improvement of the overall cartilage repair market and Macy conversion rate will support further growth and expanded utilization of Macy in the quarters and years ahead. With respect to Macy lifecycle management, Our plans for the Macy arthroscopic delivery and Macy ankle development programs remain on track. We're scheduled to have a Type C meeting with the FDA in December to discuss the Macy arthroscopic delivery development plan, which we believe represents a meaningful clinical enhancement for patients and physicians. In addition, based on initial interactions with the FDA, we expect to have a pre-IND meeting with the agency in the first quarter of next year regarding the Macy ankle development program. We believe that these programs position the company for significant additional growth opportunities for Macy in the years ahead. Turning to our burn care franchise, we reported epi-cell revenue of $7.3 million for the third quarter, which was below our recent quarterly run rate in 2021 levels. As discussed on our last call, external market data shows that the incidence of large burns greater than 30% of total body surface area has declined this year compared to 2021, in which there was a significant increase in the incidence of larger burns. These lower patient volumes this year have had a significant impact on results at our highest volume centers and have impacted the growth drivers for EpiCell of continuing to expand the number of burn centers using EpiCell and driving greater patient volumes at those centers. Based on these dynamics and EPICEL revenue performance year to date, we're revising our EPICEL revenue guidance for the year, as Joe will describe in more detail. It's worth noting, however, that while the incidence of larger burns and patient volumes are more in line with pre-2021 levels, year-to-date revenue for EPICEL in all of the underlying business fundamentals, including burn centers taking biopsies and treating patients, as well as overall biopsies and graft volumes are significantly higher than the same year-to-date periods prior to 2021. Turning to Nexibrid, as we announced on our last call, the Nexibrid BLA resubmission was accepted for review by the FDA with a PDUFA date of January 1, 2020-23. The FDA's review of the BLA is progressing. Manufacturing facility inspections in Taiwan and Israel are underway, and we continue to actively plan for a potential next launch in the first half of 2023. I'll now turn the call over to Joe to provide additional details regarding our third quarter results and financial guidance.

Thanks, Nick, and good morning, everyone. Starting with our Q3 results, total net revenue for the quarter was $38.6 million, and was comprised of 31 million of Macy revenue, 7.3 million of EpiCell revenue, and 0.2 million of revenue related to the procurement of Nexibrids by BARDA for emergency response preparedness. Macy had another strong quarter with 30% revenue growth versus the prior year and also increased sequentially with 8% growth versus the second quarter after strong quarterly sequential growth in the second quarter as well. Gross profit for the quarter was 25.2 million, or 65% of net revenue, an increase compared to gross margin of 64% in Q3 last year. Total operating expenses for the quarter were 32 million, compared to 27.1 million for the same period in 2021. The increase in operating expenses was driven by an increase in employee expenses, continued investment in commercialization initiatives, and additional stock-based compensation expense. Net loss for the quarter was 6.6 million, or 14 cents per share, compared to a net loss of 4.9 million, or 11 cents per share, for the third quarter of 2021. Non-GAAP adjusted EBITDA for the quarter was 3.3 million, and we generated 4.1 million of operating cash flow, representing our ninth consecutive quarter with positive adjusted EBITDA and operating cash flow. We ended Q3 with approximately $133 million in cash investments and no debt. Turning to our financial guidance. For EPICEL, our guidance had assumed that growth would be driven by adding new burn centers and driving additional biopsies within existing centers. Although these key metrics remain above pre-2021 levels, the lower incidence of burns this year has made it more difficult to drive growth over 2021, which has impacted our results. Based on this market dynamic and EpiCell revenue performance over the past two quarters, we now expect EpiCell revenue in the $8 million range for the fourth quarter and total burn care revenue, including Nexibrid, for the full year of approximately $34 million. For Macy, as we discussed in prior earnings calls, our initial four-year guidance assumed that patient flow and conversion rates would begin to normalize in the back half of the year. Although we have seen stabilization in the overall market and in our conversion rate, we have not yet seen sustained improvement in those metrics, which will impact our overall revenue for the year. We still anticipate strong Macy's second half growth in the mid-20% range versus the second half of 2021 with full-year revenue for Macy of approximately 130 to 132 million. In total, we expect revenue of approximately 164 to 166 million for the full year. Based on this change to revenue expectations, we now expect gross margin to be in the mid-60% range and adjusted EBITDA margin to be in the mid-teens percentage range for the full year. With another year of significant positive adjusted EBITDA, contribution, and operating cash flow. This now concludes our prepared remarks. We will open the call to your questions.

Thank you. This time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Ryan Zimmerman of BTIG.

Your line is now open.

Good morning. Thanks for taking the questions, Nick and Joe. I guess to start on guidance, I want to talk about first Macy and then EpiCell. And we think back to the second quarter, I think, you know, you guys were up maybe double digits on I think both biopsies and new surgeons. And correct me if I'm wrong on that, but the implied growth, was in the mid to high 30s in the fourth quarter coming into the third quarter. So help me understand kind of what dynamics are specifically impacting it because it would seem that the conversion rate or the biopsy to procedure period is elongating relative to what we've seen historically.

Thanks, Ryan. So, you know, I'll start off on Macy here. So, you know, first off, I would say, you know, we had a really strong Q3. And as we talked about in our prepared remarks, you know, we think the second asset is still growing at mid-20% range, you know, despite, you know, what importantly is a continued decline, a double-digit decline on a year-over-year basis in the carload repair market. So, you know, I think it's important we're up, you know, 30% for the quarter after being kind of, as you talked about, And then high single digit growth range over the last three or four quarters. So if the team has certainly performed well in Q3, you know, I think on your question around kind of Q4 in the full year. So, you know, at this point we expect kind of a range of 130 to 132, which is, you know, just outside of our initial range of 132 to 141. And I think importantly to your question, you know, our initial range assumes some improvement in both the market and patient flow. which we have not seen happen, and then a corresponding increase in conversion rates, which again is stabilized but hasn't improved. So, you know, I think, you know, if you take a step back and kind of think about where we are, you know, we're kind of near that initial guidance despite these challenges in the market. And our other metrics, you know, have generally kind of tracked, you know, as you talked about our new surge in ads, you're kind of in that double-digit range. You know, biopsies have continued, but that conversion rate, particularly in Q4, which is our largest quarter, as you kind of see the year play out, will have an impact on the second half of the year.

Just to push back, Joe, just to be clear, with the new docs up, are you seeing lower conversions with these newer docs, or is that specifically lower patient volumes in the door? I'm just trying to understand because it seems like somewhat of a change from maybe historical precedents.

Yeah. Hey, Ryan, this is Nick. So, you know, I don't think we've seen any difference in sort of the uptake for for biopsying surgeons. As we said, we were on track for double digit growth for the year. And just, you know, you said correct me if I'm wrong. You know, we had not said that biopsies were double up double digits. We just said, you know, they were tracking more. in line with sort of implant volume so there's really you know to your point it's really all about patient flow that's the point when we give you market data you know that's basically sort of patient flow data right and as joe mentioned you know the lower end of our guidance for the year assumed some improvement over 2021 the higher end of the guidance range assumed more gradual normalization And we haven't seen either of those. The market's down double digits versus last year overall, kind of in line with what you're hearing about procedures generally or physician visits or specialty visits. And so despite those issues around patient flow, we're continuing to point to the lower end of the guidance, which again assumes some improvement. And we think that's just good execution by the team. You know, Macy, obviously, product attributes remain strong. And as Joe said, you know, a lot of momentum in the second half of the year, and especially as we look forward into 2023 and beyond as, you know, that patient flow should normalize, market should normalize, et cetera. Right.

Okay. And then let's turn to EpiCell for a minute. I mean, you did guide EpiCell similar to the second quarter, kind of midway through the third quarter. So, you know, kind of a similar question here. I mean, at what point did you see a change in burn that forced, you know, such a drastic change to kind of your expectations on EpiCell, both in the third quarter and then, you know, as we look ahead?

Yeah. So, Ryan, you know, as we mentioned on our last call, we've recently, and right ahead of our last call, been able to access some similar market data which showed You know, a relatively strong 1st quarter, you know, we started to see a decline in the 2nd quarter in terms of these large 30% plus total body surface area burns. And, you know, obviously, in July on our earnings call, or early August, you know, you're 1 month into the 3rd quarter and this data lag. So you don't really kind of get it until a quarter ends. Um, so, you know, as we had always talked about, we never call, you know, a trend on episode on an upside and, you know, because. The burns were down for 1 quarter and, you know, we weren't where we expected to be in the 2nd quarter. It was a little early to to say, this is what we're going to see going forward. So, clearly, we, we continue, we saw continued decline in these larger burns in Q3, and that sort of lines up with the anecdotal feedback. We're getting consistently across the sales force that the. burn center admissions for these larger burns are just down. And so that's kind of why we just sort of maintained the similar to Q2 level expectations in Q3 until we kind of saw how it played out a little. So that obviously played out in the third quarter. I would say, as we mentioned on the call, that despite these lower patient volumes, which are sort of more in line with the lower pre-2021 levels. We did see a big, you know, increase in 2021 once we were able to get the data overall in these larger burns. You know, we continue to have a much broader presence in terms of the burn centers and all the metrics are up versus pre-2021 levels. And, you know, even in the third quarter, we did have, despite these challenges, essentially the same number of biopsies as we did even in 2021. You know, the issue is once you have that, and that reflects the fact that we have a broader customer base as the sales forces continue to expand the epicel or the centers using epicel. Once that happens, though, then you're kind of subject to the variability of EpiCell. So you can have the same biopsies in the quarter like we did, but depending on the timing, depending when the patients are stabilized and ready for treatment, you know, you just can't really call exactly when those treatments are going to occur. And that, you know, had an impact in the third quarter for us.

And is the fourth quarter EpiCell guidance at a level that sufficiently accounts for the variability at this point, in your view?

Yes.

Thanks for taking the questions.

Okay. Thanks, Ryan.

Thank you.

Please stand by for our next question. Our next question comes from the line of Sam Brodowski of Truist Securities. Your line is now open.

Hi. Good morning. Thank you for taking the questions. Just the first one, just thinking about Macy in the next year, can you just What gives you confidence that the product can re-accelerate to 20% growth? And then when we think about the mix of drivers, whether it's surgeons or biopsies or the conversion rate, how should we think about that mix driving growth next year and sort of through the market expansion items with ankle and arthroscopic delivery?

Yeah, I'll start with that, Sam. So, you know, I'd say in terms of re-accelerating to 20% plus growth, you know, obviously we just posted a 30% growth quarter and 20 plus percent, mid 20% for the second half of the year. And I think if you kind of do the math, it'll be, you know, sort of in the high teens for this year overall in light of a declining market, right? So, You know, I'd say as we think about next year and beyond, for the reasons I mentioned earlier, we certainly expect, you know, patient flow to normalize, continued surge in growth and so on. And, you know, that's what will be the driver for next year. So continued surge in growth primarily. And, you know, if the market doesn't change, we'd certainly expect to be able to grow in the same range. But as things strengthen and normalize, you know, we'd expect growth to reaccelerate.

And that, when you say the same range, you're talking about second half, 22, about?

No, just for the year. I mean, just for the year, right? If the market doesn't change, you know, we'd expect we'd be able to sort of grow at a similar rate to this year. But, you know, that market improvement that we expect in the coming quarters and years, you know, will be more of a tailwind for 2023 and beyond.

Got it. That's hopeful. Thank you. And then? On NexoBrid, any items there that would lead you to believe there may be any delays towards the PDUFA date? And then how should we be thinking about the timing of a full launch into the market next year? Thank you.

Yeah, so, you know, obviously we can't comment on the interactions, but I'd say, you know, we sit now, you know, less than 60 days out from the date. The manufacturing inspections are ongoing, which is great. And, you know, we continue to actively plan for a launch in the 1st, half of 2023. so, you know, with the January 1st date, as we've talked about before, we do have to go through the committee approval process for the burn centers. And so. You know, we've called it kind of more of a set Q2 launch when product will be available and, you know, you make your way through that process. So, you know, maybe a little bit of revenue in Q2, but really the back half of the year, second half of the year is when we'd expect to sort of be fully ramping on that. So, you know, with all that said, we don't control the FDA decisions, but, you know, at this point we remain on track.

Got it. Just one back on Macy, if I can sneak one more in. When you think about the potential for market improvement, do you think you can see that as early as the first half of 23, or is that likely more going to be in the second half weighted?

Well, you know, we can't really – I can't really opine on that, right? I mean, I think, you know, it's hard to call exactly when patient flow will – start approaching pre-COVID levels like we saw, you know, for instance, in the second quarter of 2021. Certainly feels like we're set up for that, but it's a little hard to say what the exact timing is. Great. Thanks for taking the questions. Okay. Thanks, Sam.

Please stand by for our next question. Our next question comes from the line of Jeffrey Cohen of Leidenberg Thalmann. Your line is now open.

Hi, Nick and Joe. How are you? Good, Jeff. Thanks. I guess, firstly, I wanted to circle around with one of Ryan's questions and talk a little bit about biopsies and implantations on the Macy's side. Does it seem like that there's a more pronounced drop-off period after a certain amount of months or quarters after a biopsy, or perhaps could some of that be... Correlated to, you know, the general economy.

No, I don't think there's been a pronounced sort of delay. Um, I mean, I think it's just really sort of patient again. We use that that market data is sort of a proxy for, you know, patients going into the office, whether it's for initial visits or, you know, after a biopsy is taken how, how soon they, they go in after that. you know, at this point, you know, there's not really anything that we hear about sort of economics around, you know, Macy, um, obviously, you know, employment is strong insurance, you know, for employees, you know, should remain pretty strong. So we haven't, you know, really that hasn't been an issue at this point.

Okay. And could you give us any color on, um,

historic q4 biopsy levels what have you found in the uh the past few years and what would you anticipate on the biopsy side for the the fourth quarter it's not something you necessarily want to break out or discuss well yeah i mean we don't give out sort of quarterly biopsies but you know i would just say generally the fourth quarter is the strongest quarter across medtech and obviously with macy as well kind of across the board in terms of biopsies implants etc so you know, we'd expect a strong biopsy quarter just like every fourth quarter.

Got it. And then was there any update on, you had spoken previously about a facility, moving facility, adding manufacturing space. Was there any update there from the corridor?

Well, you know, the nothing in particular other than construction is underway um and so you know we remain on track as we've talked about before for you know expecting commercial production once you go through the fda approval of a new facility in early 2026. got it and then lastly for us just a quick one uh for joe as far as modeling purposes uh what would you anticipate we should be uh

factoring in for BARDA for Q4 and the first half of 23. Would there be anything there that we should be modeling?

No, I think at this point, we're kind of through our initial kind of agreement, and, you know, we recognized kind of that through the third quarter this year. So, you know, at this point, you know, we're not anticipating certainly any more in Q4. And, you know, certainly at this point, you know, I wouldn't say in 2023 either. It would be more, you know, a potential commercial launch on the next hybrid side.

Got it. So expect nil to little for the front half of 23, followed by a commercial launch in the back half.

Yes, exactly.

Okay, perfect. That does it for us. Thanks for taking the questions. Thanks, Scott.

Please stand by for our next question. Our next question comes from the line of George Sellers of Stevens, Inc.

Your line is now open.

Thanks for taking the question. Thinking about Macy growth into next year, how should we think about the sort of puts and takes, I guess, with the drivers there? You know, how much of that is due to expectations for greater physician adoption versus your ability to sort of drive higher biopsy conversions?

Yeah, so, you know, we've consistently spoken about kind of the three growth drivers, the first of which is, you know, adding biopsying surgeons. And, you know, as we said, we're on track for double-digit growth in biopsying surgeons this year. And we certainly expect growth in biopsy surgeons for next year. So that will be a significant driver. You know, patient flow impacts the biopsy's per surgeon, right? So, as patient flow increases, you expect to, you know, that typically will grow in a given year. So, that, you know, would be a contributor as well. And then the conversion rate, you know, we're always focused on that, right? Whether it's the sales force sort of having the list of biopsies and patients to talk about with the surgeons or marketing efforts, medical affairs efforts around lesion progression. So, address the... the cartilage defects more quickly. So, you know, we'll continue to take efforts to drive that conversion rate. And, you know, first job is to try to get it back to pre-COVID levels, which, you know, we would expect over time.

Okay. I'll leave it there. Thank you for the time.

Stand by for our next question. Our next question comes from the line of Arthur He of HC Wainwright. Your line is now open.

Hey, good morning, Nick and Joe. I had a follow-up on the Macy's growth regarding the patient flow into the surgery office. So in your view, this is more impacted by their surgeon's capacity side, or it's more impacted by the patient's intention or willingness to get into the office?

Yeah, no, I don't think we've had any discussions with our commercial team around surgeon capacity. Obviously, we continue to add surgeons. They're very enthusiastic about the product. This is always, we've been consistently stating just sort of a different in the patient flow dynamics when they go back for surgeries, et cetera. And so that's been consistent throughout the past couple of years.

All right, thanks for that. And so my second question is regarding the lifecycle management for the Macy's part. So could you give us more color after the Type C meeting with the FDA for the endoscopic delivery system. So, what's the next step and how soon we can see these coming to the market?

Yeah. So, you know, the issue there will be sort of presenting to the FDA our proposed development plan and gaining agreement there. And, you know, that's really what will dictate the timing, depending on, you know, whether the FDA requires clinical clinical development, or, you know, we can do something more like a human factor study that just demonstrates that surgeons are able to use the instruments, deliver the product, et cetera. And so that once we kind of have that discussion with the FDA, we'll have much more clarity on the timeline. We've talked about sort of a mid-decade opportunity for Macy arthroscopic. Could be a little earlier with a human factor study. Could be a little later if it's more of a clinical safety development program. So that's the nature of the discussion with the FDA.

All right. Thank you. Thank you for taking my question.

At this time, I'm showing no further questions. I would now like to turn it back to Nick Colangelo, CEO, for closing remarks.

Okay, well, thanks, everyone, for your questions and your continued interest in the company. Obviously, the VeriCell team here is continuing to focus on delivering strong financial and operational results for the final quarter of 2022 and preparing for a potential MexiBridge launch in the first half of 2023, and we look forward to updating you on our progress on the next call. So thanks again, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.