Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to VeriCell's second quarter of 2023 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 Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to VeriCell's second quarter 2023 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 four looking statements covered under the Prior Security Litigation Reform Act of 1995. These statements may have all risks and uncertainties that could result to differ materially from expectations and to describe more fully in our funds with 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 for producing any interviews as of any subsequent date. Please note that a copy of our financial results press release is available in the investor relations section of our website. We also have a short presentation with ties in today's call that can be addressed in webcasts or accessed on our website. I am joined in this call by Verisource 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 our financial and business highlights for the second quarter, as well as our expectations for the rest of the year. Joe will then provide a more detailed review of our second quarter financial performance and our updated financial guidance for 2023 before opening the call to Q&A. The company had an outstanding quarter as we delivered significant revenue growth and record second quarter revenue, continued profitability and operating cash flow, and strong underlying business results for Macy and Ephesel. From a financial perspective, total revenue for the second quarter increased 24% to approximately $46 million, with both Macy and Ephesel exceeding our second quarter financial guidance. We also continued to generate strong profitability as we delivered our 12th straight quarter of positive adjusted EBITDA, which increased by 60% over last year. and operating cash flow of over $10 million, ending the second quarter with $147 million of cash in investments and no debt. Based on the strength of our performance in the first half of the year, which included combined total revenue growth for Macy and Epizel of 20%, we're raising our full-year revenue guidance to $190 to $197 million. As we look beyond this year into 2024, we expect the momentum in our core business to continue With the anticipated commercial launch of arthroscopic Macy and a significant contribution from Nexibrid, we believe that we're well positioned to drive further revenue growth acceleration, with total company revenue growth of over 20% in 2024. Our financial results for the second quarter were driven by continued strength and momentum for Macy, as we generated record second quarter revenue of $36.3 million, representing 27% growth compared to last year. Our sustained Macy revenue growth over the past few quarters has been driven primarily by the continued expansion of our surgeon base and the resulting strength in biopsies, both of which were ahead of our forecast for the first half of the year. In addition to generating record second quarter Macy revenue in implants, We also had the highest number of surgeons taking biopsies in any quarter since launch and the second highest number of biopsies in the quarter, which were only a handful short of the record number of biopsies taken in the fourth quarter last year. This performance reflects the continued strong execution of our sales and marketing teams in engaging new surgeons and the continued improvement in the overall market dynamics as we've now delivered three consecutive quarters with a record number of biopsy surgeons and our three highest quarters of biopsies since we launched Macy. Based on these underlying business fundamentals, Macy has achieved a sustained high growth trajectory with nearly 30% growth for the first half of the year, and four straight quarters of mid-20% to low 30% growth. Given these results and the continued momentum to start the third quarter, in which we expect another quarter of 20% growth, We are increasing our full year Macy revenue guidance to $159 to $163 million. This updated guidance range represents more than 20% growth for the full year and acceleration in the Macy growth rate versus last year. With respect to our Macy lifecycle management initiatives, we continue to advance the Macy arthroscopic and Macy ankle development programs. Importantly, we plan to initiate the human factors validation study for arthroscopic Macy this quarter and to submit the study results as part of a prior approval supplement to expand the Macy label to include arthroscopic Macy by the end of this year. We now anticipate commercial launch of arthroscopic Macy in the first half of 2024, which we believe will positively impact the growth trajectory for Macy in the years ahead and have a significant impact on our overall business. We recently completed an extensive quantitative market research project that included more than 100 orthopedic and sports medicine surgeons to evaluate the potential impact that arthroscopic delivery could have on Macy penetration of the addressable market. This research confirmed our view that arthroscopic Macy will represent a meaningful innovation in the cartilage repair market. First, the research indicated that there was a high degree of interest in arthroscopic MESI across all surgeon groups, which included MESI users as well as non-users. Surgeons pointed to several potential benefits and advantages of arthroscopic MESI delivery, including a less invasive procedure resulting in less postoperative pain, faster recovery, and improved aesthetic outcomes for patients. The Macy arthroscopic instrument kit is designed to treat smaller 2 to 4 square centimeter defects on the femoral condyles, and the research indicated that regardless of their current Macy usage, surgeons expected to shift a meaningful share of their procedures in this segment from alternative products and procedures to the arthroscopic Macy procedure. Importantly, 2 to 4 square centimeter femoral condyle defects represent the largest market opportunity for Macy. as this segment represents about 20,000 patients per year, or approximately a third of the $3 billion addressable market for Macy. While Macy has significant volume in this segment, its penetration rate is lower compared to other areas of the knee. For example, in patella defects, which represent about 10,000 patients per year, Macy's penetration is greater than 10%, and we continue to see very strong growth in this segment. If we're able to achieve similar penetration in the femoral condyle segment with arthroscopic MACE, we'd effectively double our current MACE business over the coming years. We believe that arthroscopic MACE delivery will be a valuable option in the cartilage repair market and will help drive an acceleration in the company's overall growth trajectory beginning next year. Finally, as noted in our earnings release this morning, We recently executed a long-term extension of our exclusive supply agreement with Matricel for the Macy-Maex collagen membrane. This agreement not only provides for continued supply of this key component of the Macy final product, but also provides Veracel with exclusive rights to the membrane for the next decade and beyond, which is an important part of our long-term protection strategy for Macy. Turning to our burn care franchise, we reported second quarter EPICEL revenue of $9.6 million, which was one of our higher quarters to date and significantly ahead of recent trends in our guidance for the second quarter, with growth of 40% versus the first quarter and 17% versus the prior year. This strong performance for EPICEL was driven primarily by the fact that we continued to see a higher proportion of biopsy to patients moving on to treatment with EPICEL, and continued stabilization in the average number of grafts per patient. EPICEL revenues of $16.4 million for the first half of the year is 20% higher than in the second half of 2022, as our burn care team has driven a significant improvement in our performance trends and increased utilization of this important product. We're also beginning to see examples of positive pull-through for EPICEL from our Nexabert sales reps, based on the high level of engagement and interest in Nexibrid, helping to drive usage at dormant EPICEL accounts. Although we expect that EPICEL revenue will still be variable from quarter to quarter, we're very pleased to see the significant improvement in our recent results and a strong first half of the year for the product. With respect to Nexibrid, our pre-launch activities have remained on track throughout the first half of the year. And our burn care team has generated a tremendous amount of interest and enthusiasm for Nexabrid in the burn care community. In terms of Nexabrid product availability, we received our first lot of finished product from MediWound for the U.S. market at the end of June, which currently is warehoused to our third-party logistics provider. While this Nexabrid lot met all release criteria for distribution in the U.S. market, we're not able to commercially distribute the product at this time due to a deviation associated with a third-party testing lab in Taiwan used in MediWound's manufacturing process. As we previously discussed, there were several manufacturing process updates that were required to be implemented by MediWound following approval of the next BLA. And all of those updates related to the MediWound facility have been successfully completed. However, One of the process updates was a new upstream in-process control test on an antioxidant solution or a preservative that sprayed on the peeled pineapple stems in one of the first processing steps for the botanical raw material at CBC, which manufactures the intermediate drug substance for Metawound in Taiwan. This routine in-process control testing was outsourced to a lab in Taiwan that subsequently was not approved by the FDA. giving rise to the deviation at issue and invalidating the test results for all of the current lots of intermediate drug substance currently available to produce Nexibrin finished product. This impact will not impact or this issue will not impact Nexibrin finished product manufactured for the U.S. market from new intermediate drug substance lots as the in-process control test will be done directly by MediWound, which is the testing site of record in the BLA. Craig Vaughn, However, absent FDA allowing commercial distribution of the finished product affected by this deviation, Craig Vaughn, we would not be able to distribute this product and would expect to begin commercial sales of Nexabrid in the first quarter of next year, following the upcoming fall pineapple harvest season, which is our current operating assumption until we hear otherwise. To that end, we're currently engaged in discussions with the FDA following a formal request that the agency exercise its discretion to allow the distribution of Nexibrid lots impacted by this deviation. Although there may be a delay in the commercial availability of Nexibrid, the FDA's determination will not affect BARDA's planned $3 million procurement of Nexibrid to replenish the national stockpile for emergency response preparedness, which we now expect in the second half of 2023. In terms of our overall burn care revenue guidance, based on our improved epi-cell trends and the anticipated BART of procurement revenue, we're increasing our guidance for the year from $28 to $32 million to $31 to $34 million, which Joe will discuss in more detail later in the call. And finally, as we look beyond 2023, we continue to expect Nexabrid to make a significant contribution to our revenue growth in 2024. and that our burn care franchise will become a second high growth franchise for the company in 2024 and beyond. In summary, we're pleased with our excellent start to the year, strong second quarter financial results, and continued progress on Macy Lifecycle management activities. Importantly, we've raised our revenue expectations for this year, and we expect company growth to accelerate to over 20% in 2024, with continued strong performance from our core products and significant contributions from the launch of new products. I'll now turn the call over to Joe to discuss our second quarter financial results and updated financial guidance.