Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Barrisville's fourth quarter 2022 conference. At this time, all participants are going to listen only. I would also like to remind you that this call is being recorded for replay. After the speaker's presentation, there will be a question. As you ask your question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message that your hand is raised. Draw your question and press star 1-1 again. I will now turn the conference over to Eric Burns. Varicell's Head of Financial Planning and Analysis and Investor Relations.

Thank you, Operator, and good morning, everyone. Welcome to Varicell's fourth quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, let me remind you on today's call, we will 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 findings at the SEC, which are available on our website. In addition, all four 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 fourth 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. I'm joined on this call by Xerisol's President and Chief Executive Officer, Nick Colangelo, and our Chief Alliance Officer, Joe Morrow. 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 fourth quarter and full year 2022, current trends for Macy, which have been very positive to start the year, our next hybrid commercial launch activities, and our overall outlook for 2023, a year in which we expect total revenue growth to accelerate and continued strong profitability for the company. Joe will then provide a more detailed update on our financial performance in 2022 and financial guidance for 2023 before opening the call to Q&A. The company delivered strong financial and business results to close the year as we generated record quarterly revenue, delivered our 10th straight quarter of profitability and positive operating cash flow, and achieved significant development milestones, including an accelerated regulatory pathway for the arthroscopic Macy program and FDA approval of Nexibrid, which we believe will enable the company to build a second high-growth commercial franchise. For the full year, total revenue was more than $164 million, with Macy revenue growing 18% to $132 million, We continued to deliver strong profitability and cash flow as we generated nearly $25 million of adjusted EBITDA and $18 million of operating cash flow, ending the year with $140 million in cash and investments and no debt. We also generated record total revenue of nearly $53 million in the fourth quarter, as well as gross margin of 73% and adjusted EBITDA margin of nearly 30%, Both of which increased versus the prior year and approximately 6M dollars in net income for the quarter, which increased more than 30% compared to 2021. Our strong 4th quarter results were driven by record quarterly Macy revenue of over 46M dollars, which came in at the high end of our guidance range represented 24% growth over the 4th quarter of 2021. and approximately 50% sequential growth over the third quarter of 2022. This strong revenue growth was driven by strengthening key growth drivers for Macy. Surgeon adoption continued to grow as we finished the year with approximately 2,000 surgeons taking biopsies in 2022, an increase of approximately 10% from 2021. We also had continued growth in Macy biopsies in the fourth quarter and stabilization in the biopsy conversion rate to close out the year. As I'll discuss in a moment, the positive trends that we saw in the fourth quarter have continued into the first quarter as the operating environment continues to improve. With respect to EpiCell, fourth quarter and full year revenue was lower than anticipated as the incidence of large burns greater than 30% of total body surface area declined to pre-2021 levels. Notwithstanding this dynamic, we continued to see broad burn center engagement as we had a record number of burn centers taking biopsies in the fourth quarter and the full year, and a similar number of burn centers grafting patients during the year. While the breadth of customer engagement generated solid epithelial biopsy activity. The proportion of biopsy patients going on to surgery was lower in 2022, and particularly in the fourth quarter, due mainly to patient health-related issues. We also had fewer epithelial grafts per patient in 2022, which had grown significantly in 2021. And there were some organizational changes at our largest customer, which impacted patient referral patterns, and had a significant impact on patient volume at that center. Despite these dynamics, which led to the variability we often see with EpiCell, we believe that our strong engagement with leading burn centers and our expanded customer base positions us very well to drive Nexabrid uptake upon launch. In addition to generating strong financial results in the fourth quarter, we also made significant progress advancing our pipeline. As we announced last month, Following our Type C meeting with the FDA in December, we're planning to initiate a human factors validation study this year to support expanding the MACEY label to include arthroscopic delivery of MACEY for the treatment of cartilage defects in the knee. We now anticipate a potential launch of arthroscopic MACEY in 2024, which is several years earlier than if an additional clinical study was required. We believe that the arthroscopic delivery of MACE will be a very attractive option for patients and surgeons and could provide a substantial upside growth opportunity for MACE. Based on our initial market research, approximately 90% of respondents expressed interest in an arthroscopic delivery option for MACE, which provides an opportunity for additional surgeon adoption, given that a portion of the more than 10,000 surgeons that perform cartilage repair procedures in the U.S. each year either primarily or exclusively perform arthroscopic procedures and could now consider MACI as an option for their patients. Arthroscopic MACI also offers the potential for increased utilization among current MACI users, as approximately 90% of current users indicated that they would expect to increase MACI procedure volume if an arthroscopic option was available. To that end, the arthroscopic MACE instrument kit is designed to treat the most common defects in the MACE patient addressable market, which are two to four square centimeter defects on the femoral condyles. And MACE would be the only arthroscopically administered restorative cartilage repair product to treat these defects, which we believe would allow us to achieve a greater share of those procedures. We're also in discussions with the FDA regarding our planned Macy clinical development program for the treatment of cartilage injuries in the ankle, which is the next largest market opportunity for Macy. We believe that a potential ankle indication with an estimated $1 billion addressable market could be a significant growth driver for Macy over the long term. Turning to our burn care franchise, The FDA approval of Nexibrid was a significant milestone for the company, and our commercial launch activities are progressing well. We've seen widespread interest and enthusiasm from burn surgeons and other healthcare providers for Nexibrid, and we're on track to meet or exceed our internal goals regarding burn center engagement ahead of commercial product availability, which is expected in the second quarter of this year. The hiring of our Nexibrid sales team is nearly complete, and training for burn surgeons began last month following approval. There are a number of high-profile burn conferences in the first part of the year, including the American Burn Association annual meeting, where we'll have a significant presence to support the launch of Nexibrid, and where Nexibrid training conducted by leading burn surgeons will be included in pre-conference peer-to-peer educational sessions regarding the science of wound preparation and the science of wound closure. Given that Nexibrid will be dispensed through hospital pharmacies, Gaining P&T committee approval for the use of Nexibrid in our largest or in our target burn centers is a high priority activity during the early launch phase. Based on the widespread interest in Nexibrid, we have surgeon champions at dozens of our target burn centers who will lead the process to gain P&T committee approval at their respective institutions. This process can take up to a few months, which should sync up well with the timing for Nexibrid commercial product availability in the second quarter. Looking at the overall burn care franchise, the approval of Nexabrid in the U.S. significantly increases the addressable market for a burn care franchise to over half a billion dollars. While we expect that EpiCell will return to growth over the coming years, we believe that Nexabrid will provide a more consistent and predictable revenue stream and help offset much of the EpiCell revenue volatility. In addition, The incremental investment required for Nexabrid is relatively limited given our existing burn care commercial infrastructure and the overlap with EpiCell, which should also benefit from a larger commercial footprint and higher share of voice in the market. Finally, turning to guidance for 2023, we expect total revenue for the year to increase to approximately $100 to $188 million and to generate continued strong profitability and operating cash flow. Joe will provide further details in a moment, but I wanted to touch on some of the key elements of our guidance, as well as the current operating environment for Macy to start the year. As we announced this morning, we expect Macy revenue to be in the range of $152 to $156 million for the year. The underlying framework for our initial Macy's guidance is that full-year revenue growth will be driven by continued growth in biopsy surgeons and higher net price per implant. At this point, our guidance for the year does not assume any sustained increase in other Macy-Keege growth drivers of biopsies per surgeon or the biopsy conversion rate compared to 2022 levels, which would represent upside growth potential as we start the year. That being said, we're very encouraged not only by the strong fourth quarter for Macy, but also by a strong start of the year. with positive trends that we saw in the fourth quarter continuing into the first quarter and the overall operating environment continuing to improve. At this point, we expect Macy growth for the first quarter to be approximately 20% versus last year, which would represent the third straight quarter of 20-plus percent year-over-year growth as Macy resumes its high growth profile. More broadly, we believe that Macy is very well positioned for another strong year of growth in 2023, and we expect that the launch of arthroscopic Macy in 2024 will drive even broader surgery adoption and further growth acceleration next year. Importantly, based on our 2023 full-year guidance, our sales rep productivity will meet or surpass our historical high of $2 million per rep achieved prior to our last sales force expansion in 2020. And we would expect to begin to significantly exceed that level in 2024 and beyond. With respect to the burn care franchise, we expect total burn care revenue of $28 to $32 million, with growth versus our fourth quarter annualized run rate for EpiCell of $24 million, driven primarily by the launch of Nexibrid. We believe that the launch of Nexibrid, which has the potential to become the standard of care in eschar removal and take a very meaningful share of its $300 million addressable market in the U.S., will enable the company to build a second high-growth franchise in the burn care market. I'll now turn the call over to Joe to discuss our fourth quarter and full year financial results, as well as our financial guidance for 2023.