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spk08: 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.
spk02: 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.
spk06: 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.
spk11: Thanks, Nick, and good morning, everyone. Starting with the income statement, total net revenue for the quarter was $45.9 million, an increase of 24% versus the prior year of driven by strong Macy revenue of $36.3 million and $9.6 million of EpiCell revenue. For Macy, during the first half of the year, we generated revenue of $70.5 million, which represents 29% growth versus the first half of last year. In addition, over the last four quarters, we've now consistently seen strong Macy growth each quarter with 30%, 24%, 32%, and now 27% growth versus the prior year. In total, this represents a 28% growth on a trailing four-quarter basis as Macy has resumed its high growth profile. For EpiCell, the $9.6 million of revenue in the second quarter was our highest quarterly revenue since Q1 of 2022, and Q2 revenue grew 40% compared to the first quarter and 17% versus the prior year. In addition, our first half episode revenue was more than $16 million, significantly ahead of our quarterly run rate of approximately $6 million per quarter entering the year. Gross profit for the quarter was $29.9 million, or 65% of net revenue, an increase compared to 62% in the second quarter of 2022. Total operating expenses for the quarter were $35.9 million, compared to $31.9 million for the same period in 2022. The increase in operating expenses was primarily due to higher sales and marketing expenses and R&D program related costs. Net loss for the quarter is $5 million or $0.11 per share, compared to $9 million or $0.19 per share for the second quarter of 2022. Non-GAAP adjusted EBITDA for the quarter was $4.4 million, which grew 60% versus the prior year. And importantly, this now represents the 12th consecutive quarter that we have generated positive adjusted EBITDA. Finally, we generated approximately 10 million of operating cash flow in the quarter, but we ended Q2 with approximately 147 million in cash, restricted cash and investments, and no debt. Turning to our financial guidance, we are increasing our full-year revenue guidance for 2023. We now expect total revenue of 190 to 197 million, an increase compared to our prior revenue guidance of 184 to 192 million, driven by both of our franchises. We are maintaining our profitability guidance and expect gross margins to be in the high 60% range and adjusted EBITDA in the mid-teens percentage range. For Macy, we now expect full-year revenue of 159 to 163 million, an increase versus our prior guidance of 156 to 160 million. with growth expected to be in the low 20% range for the full year. As Nick highlighted earlier, our Macy momentum has continued into the third quarter, and we expect Macy growth in the quarter to be approximately 20% with revenue of $37 million. For our BirdCare franchise, based on the strength of EpiCell during the first half of the year and with anticipated next-grid barter revenue in the fourth quarter, we now expect full-year revenue of $31 to $34 million, an increase compared to our previous guidance of $28 to $32 million. For EpiCell, based on our higher quarterly run rates over the last three quarters, we anticipate revenue of approximately $7.5 million in Q3. In total, our increased burn period revenue guidance does not assume any commercial revenue for Nexabrid during 2022. during 2023 at this point, although it does now include our share of barter procurement revenue of over $1 million, which we would expect to occur in the fourth quarter. Overall, we are very pleased with our second quarter performance, our strong start to the third quarter, and as we look towards 2024, we anticipate continued acceleration of our total company revenue growth rate to over 20% with continued strong execution on our core product, as well as the anticipated contributions of arthroscopic Macy's and Nexabrain. This now concludes our prepared remarks, and we will open the call to your questions.
spk08: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk01: Please stand by while we compile the Q&A roster.
spk08: Our first question comes from the line of Brian Zimmerman of BTIG. Please go ahead.
spk03: Hey, guys. Good morning, and congrats on a nice quarter. I want to start off. Joe, I appreciate all your comments on guidance, and there's a lot of moving components here. I guess I'll start off with Macy. Given the first half 23 performance, I guess I'd like you to speak maybe a little bit to end market dynamics, patient behavior and interest levels, you know, relative to last year. And then on that topic, you know, again, your third quarter commentary suggests an acceleration from your prior expectations, but maybe help us understand just broadly, you know, why that couldn't continue to accelerate in the fourth quarter And why not raise it by a bit more, given the record biopsies we're seeing?
spk11: Yeah, good morning, Ryan, and thanks for the question. So, you know, I'll probably take that in pieces and talk a little bit about where we were in the second quarter, kind of your point on the third quarter, and then round that out as we think about the full year and, of course, touch on Q4. So, you know, first off, I would say in the second quarter, you know, as we talked about, you know, just another really strong quarter for Macy. Tony Doan- 27% growth, you know ahead of our guidance, you know I think the team's doing an excellent job from an execution perspective. Tony Doan- And really just a continuation of the trends we've seen with with a number of quarters now in the kind of mid 20s or 30% plus. Tony Doan- And you're looking back, you know you basically at 29% relative the first half of last year so really strong growth, and I think to that point and to your question. Tony Doan- You know, really, the strength has been driven by the underlying metrics and really the top of the funnel so. Joseph Baeta, Supt of Schools & Biopsies have been extremely strong, you know that continued in Q2 where we nearly matched our Q4 number. Joseph Baeta, Supt of Schools & The growth in surgeons has continued very strong. We have three straight record quarters. So those are really kind of the key drivers, I would say, of our results to date this year and as we look forward. Joseph Baeta, Supt of Schools & So from a Q3 perspective, as we touched on in the prepared remarks, Joseph Baeta, Supt of Schools & you know it's off to another strong start and I think we expect another high growth quarter of 20%, which is approximately 37 million for the quarter. And that does importantly imply a step up from Q2 to Q3, which, you know, we don't always see. So I think that's certainly a sign of continued momentum. And then the other piece I would say is, and this will apply to Q4 as well, but, you know, we are running into some more difficult comps in the sense that Q3 and Q4 last year were also quite strong. They grew 30% and 24% respectively. So that's certainly, you know, a consideration as we look forward. You know, as we think about the full year guidance, I think it really starts with, you know, we started the year kind of in the mid to high teens, you know, we've continued to increase that. And now we're in the low 20% range, which is above the last couple of years and above the guidance from the last couple of quarters. So we've certainly increased that, you know, throughout the year. And the midpoint there at 161 is about 22% on a four-year basis. And both Q2 being ahead and to your point, H2 is also ahead of kind of where we expected coming in the last quarter. And then I think just to kind of give context on Q4, at the midpoint, it would be kind of growth in the mid-teens. Certainly, I think we're set up potentially to do better than that. But I think we just want to be balanced in the sense that if you look at Q4, it kind of lines up with what we typically see. It's about a third of the full-year revenue. It's still a pretty significant step up in the mid-40% range. And again, we are running into some more difficult comps. So broadly speaking, I would say, pleased with the performance in Q2. That's continued in the Q3. And on a four-year basis, we're now in the low 20% range. So, you know, I just think at this point, we don't want to get too far ahead of ourselves in Q4, but this would, you know, essentially call for that strength in the business continuing throughout the second half. And again, we'll, you know, we'll continue to drive the business.
spk03: Yeah. No, that's great, Joe, and appreciate all your color and thoughts there. And then, you know, Nick, on the NexaBridge launch timing, I think the prudent thing was to pull it out of numbers for the back half of the year. But, you know, I just want to understand, and I think investors would want to understand, so is there potential and kind of what is your view of potential of the FDA allowing these lots to potentially be on the market this year? And what would they need to see, I guess, to allow that, you know, maybe reestablish the NexoBrid launch in the second half of this year. Because this is, I mean, this I think is the second delay we've had on NexoBrid, you know, since doing the deal with Mediwim.
spk06: yeah ryan um you're right it is the second uh delay we've had obviously the product was not approved on the first grow around you know we stepped in uh got the product over the goal line um you know obviously we're frustrated and disappointed that we're seven months beyond the approval and we still don't have product from next brood next hybrid or metal wound that we can you know put into the commercial market so you know I think that's a fair comment. And, you know, again, we're trying to step in here now again, engage with the FDA, and be able to use these batches of intermediate drug substance to supply the U.S. market. So, you know, I can't go into all the details of our discussions with the FDA as we included it 10-Q, you know, we have done a detailed risk assessment and we don't believe there's any incremental risk to product quality or patient safety. And, you know, obviously those are the discussions we are having with the FDA. So this is You know, there were a number of, as we talked about before, a number of manufacturing updates that were required to be implemented following approval. You know, as we talked about previously, we were engaged with MediWound in the inspections last fall of their Israeli facility, the drug substance facility with CBC in Taiwan. Inspections obviously went well and the product was approved, but we had some of these updates or Meadowood had updates that needed to be completed. They completed the ones related to their own facility and those were successfully completed. Again, this third-party testing lab is basically testing the It's a microbial test of an antioxidant solution that's sprayed on the pineapple stems in one of the first processing steps. There are a number of other microbial controls that have been added. This one, the FDA did not approve this testing site. We were not involved with that. Obviously, MediWound, as our contract manufacturer, was responsible for that, and they didn't execute. And so we're going in and working with the FDA to try to be able to use this material. At the end of the day, again, we don't think that there's any incremental risk to using this. It's the same process that was used for all prior NexaBridge manufacturing. all material that was used in clinical trials, all material that was used to treat over 10,000 patients globally. They barred a stockpile. All of that product was manufactured without this upstream in-process control test. So we think there's a good case to be able to move forward with it. But I think, as you mentioned, it's prudent not to have that in our second half numbers until and unless we get the green light from the FDA. Okay.
spk03: Okay, and just to follow up, two finer points on that. One, the BARDA revenue that's being recognized in the back half of the year, are those the same lots that are being held off currently? And then conceivably, when would you get an update from FDA if you get one in the second half of the year, if you can share with us?
spk06: Yeah, so they would be the same lots, right, because all of the current intermediate drug substance lots were tested by this lab from both the 2021 and the 2022 harvest seasons. And then in terms of the timing of the FDA discussions, you know, we'd expect it to be relatively soon. Obviously, we need to We collectively need a determination on this in pretty short order, so I think we'll know. But again, the operating assumption is, unless we hear otherwise, we're just going to assume that we have to wait for the next pineapple harvest season, and that would result in new batches of both intermediate drug substance and NexaBridge finished product in the first quarter of 2024. Okay.
spk03: Well, it's a lot of good pineapple going to waste, I guess, but I appreciate the update.
spk08: Thank you. One moment, please, for our next question.
spk01: Our next question comes from the line of Sam Brodowski of Truist Securities.
spk08: Your line is now open.
spk10: Hi. Thanks for taking the question. First, a quick one, and you started to touch on this a little bit before on the sequential for Macy. Should we expect a 2Q to 3Q increase as sort of normal going forward, or are there some market dynamics that are still a little unusual behind your confidence in being able to grow sequentially this year?
spk11: Yeah, good morning, Sam. You're trailing off a bit at the end, but I think you were asking about should we kind of expect this quarterly cadence going forward?
spk10: Yeah, sorry. Is anything unusual behind the sequential increase from 2Q to 3Q, or is that a more normal seasonality going forward?
spk11: Yeah, I mean, I would say I think, you know, I think the way we're thinking about it is, you know, obviously we've kind of gone off to a good start with strong results in both Q1 and Q2. I think we're off to another good start in Q3. So, you know, if you look historically to kind of your point, it can certainly bounce around a little bit. You know, we certainly have seen some years where there is, you know, Q3 kind of stepped down from Q2. But I think kind of where we are now is, you know, this certainly could change a little bit going forward. But I think what you're seeing come together this year are three pretty strong quarters sequentially, Q1, Q2, and Q3, which I think is, you know, kind of driven by, Patrick Corbett, This momentum within the within the field and kind of driving biopsies and new surgeons, etc, which is great, so I think it's. Patrick Corbett, You know I think it's just continued execution and that's that's playing through in terms of the cadence of the numbers and you see pretty pretty pretty strong quarters. Patrick Corbett, You know the step up in Q4 because of that may not be quite as high as it's been in the past, but that's kind of how this year is playing out, and you know I think. That's probably how we would be thinking about it going forward, but I would say it could still vary a little bit within quarters. But we actually think it's certainly a good sign to see the continued momentum throughout the year.
spk10: Yes, that's great, Collar. And then switching to arthroscopic, and thanks for the market commentary. That was really great. How should we think about the scale of that launch progressing through 24? Should we think about second half being – sort of in full market release or is that going to be phased through the year?
spk06: Yeah. Hey Sam, it's Nick. In terms of the launch itself, you know, once the label is updated for arthroscopic Macy delivery, you know, we'll be out there obviously in sort of full launch mode. You know, I think the dynamic will, it'll, you know, we'll wait to see exactly how it rolls out. I think experienced Macy users who do a lot of Macy cases, you know, having an opportunity to do it arthroscopically, you know, they'll want to sort of be trained, and, you know, it's not obviously very complicated, but, you know, they'll probably pick it up a little quicker, you know, the segment of surgeons that are non-MESA users, you know, they may wait to sort of kind of attend peer-to-peer programs, so they may, you know, they may come sooner, they may come a little later, so I think, you know, it'll We'll wait to see sort of how it plays out exactly, and it'll differ by, you know, obviously the differing surgeons. But, you know, in terms of our efforts in rolling it out and making it available, when we launch, we launch.
spk08: Thanks for taking the question. Thank you. Thank you.
spk01: One moment, please, for our next question. Our next question comes from the line of Jeffrey Cohen of Bladenburg.
spk08: Your line is now open.
spk04: Hi, Nick and Joe. Thanks for taking our questions. Just a couple from our end. Firstly, Nick, it sounded like you commented about BARDA in the back half of the year being a few million dollars, and Joe was talking about just a Q4 impact of approximately a million dollars. For forecasting purposes, what should we think about on BARDA for back half of this year?
spk11: Yeah. So, you know, just to clarify that. So what I'm talking about was that BARDA, you know, will be replenishing part of their stockpile, which in total is about a $3 million replenishment from a BARDA perspective. But then there's some economics that play into that. And we and we would share that with Metawoon. So essentially what I said, which is, I think, the right number to think about from our revenue is we would expect you know, something, you know, over a million dollars, our portion of that 3 million. So, you know, over a million dollars, part between a million and a million and a half. And that would be, our expectation would be that it would be in the fourth quarter.
spk04: Okay. So, for modeling purposes, don't think about anything for the third quarter.
spk11: Exactly.
spk04: Okay. I got it. Can you talk a little bit about the Nexabrid commercial expansion? It seems like most of your organization was in place that was expanded over the past few quarters. How does that look now, and how might that look going forward, specific to Nexabrid?
spk06: Yeah, so you're right, Jeff. We mentioned that we were adding half a dozen reps that would be Nexabrid-only reps under our original and current plan. And, you know, that we've executed on that pretty successfully. The you know, if we get the green light from the FDA shortly, then of course, we'll kind of deploy them as next grid only account managers as originally intended. And then sometime down the line, they'd be trained up on episode. And, you know, eventually all reps would sell both products. If we have to wait until a Q1 launch, then we'll accelerate that EPICEL training, get them up to speed there as well. And in the meantime, we have, as I mentioned in the call, we've started to see the impact of our Nexibrid reps in terms of as they call on the Nexibrid accounts that, you know, they're actually getting some epi-cell pull through now, and we've had cases from those dormant burn centers as well, which is exactly what we were hoping to see when we expanded the sales force.
spk04: Okay, got it. That's helpful, Nick. And then lastly for us, any recent commentary to discuss about the ankle indication as far as progress or news or what we may expect in the back half of the year?
spk06: Yeah, you know, obviously our focus as we've talked about over the past year is that, you know, arthroscopic Macy was, you know, kind of a nearer term and larger opportunity. And, you know, that's been kind of a heavy focus for the team for Macy ankle that continues to progress. There's some, you know, upfront work that needs to be done on the preclinical nature, and that's progressing. And, you know, once we kind of get to the point where we're ready to start talking about our clinical plan, you know, we'll provide more guidance on that either later this year or into early next year.
spk04: Okay, got it. Thanks for taking our questions. Congrats on the strong quarter. Thanks, Jeff.
spk08: Thank you. One moment, please, for our next question. Our next question comes from the line of Swayam Pakula Ramakant of HCW. Your line is now open.
spk09: Thank you. Good morning, Nick and Joe. I'm trying to triangulate your comments on continued increase in biopsies and at the same time trying to be careful regarding fourth quarter MACE numbers. So how has the conversion rate been for the biopsies to use of MACEI and with adding additional surgeons, has that conversion rate stayed the same or is it tending to get into a higher number?
spk06: Yeah, hey, RK, it's Nick. So, you know, as Joe mentioned, really the outperformance for the year so far has been driven principally by a significant increase in the number of biopsy surgeons, obviously three straight quarters of a record number of biopsy surgeons. They, of course, you know, are driving an increase in biopsy, which is really kind of the top of the funnel. And that's principally driving, again, the outperformance. We did mention in the first quarter that there was kind of an uptick in the conversion rate and that sort of maintained into Q2. But I'd say that's kind of secondary to the prior two drivers that I mentioned in terms of, you know, new surgeons and their increasing biopsies. I'd say we're kind of in the situation that we've been in in the past, even kind of pre-COVID, where, you know, as you're adding a substantial number of new surgeons, you know, your experienced surgeons, their surgeons, segments of those surgeons, their conversion rates are going up. New surgeons typically have a lower conversion rate as they come on board. And, you know, we're kind of seeing that same dynamic now. So I think that's the explanation overall in terms of the drivers for Macy.
spk09: Thank you for that, Nick. And then on the Macy orthoscopic product, do you need to change anything in the manufacturing of the product itself, or is it the same product but having a new indication?
spk06: Yeah, no, it's the exact same product. There's no changes to the drug substance or drug product. And that's why we're able to, you know, move forward from a regulatory standpoint in an accelerated manner with a human factor study versus having to do any additional clinical work. So it's really the instrument kit that has been the development work and that will kind of form the basis around the human factor study.
spk09: Okay. And then with the new supplier of Matricelle from Germany, is that going to be making any changes, or is that just trying to make sure that you have additional supply because you're going to be adding additional indications, you know, through 24 and 25?
spk06: Yes, so Matricelle is not a new supplier. They're actually our existing supplier for the membrane. So what we mentioned is that we executed, you know, a long-term extension that will take us well into 2030s, into the 2030s in terms of our supply agreement. And, you know, that's important because it's an exclusive agreement so that, you know, they can't sell these membranes to anybody else who might be interested in sort of following down this path. So it's an important part of our sort of long-term market protection strategy for Macy.
spk09: Okay. One last question from me, Nick. So traditionally, you've been careful about talking through EpiCell and giving guidance on EpiCell sales, but I'm glad that you're doing that now. Does that mean you're becoming more and more confident about the dynamics of that bone care market, or is it more because you have more feed on the ground for that product?
spk06: Well, no, I think it's kind of a stabilization of the market right over the past year and change, you know, the incidence of large burns has come down. So you're kind of fighting that dynamic. And now that's, stabilized more. And the team's just out there executing. And I think that's reflected in the stronger first half of this year that we've had compared to the second half of last year. So I think it's just an execution story, a market stabilization story. I do think And again, we're not talking huge numbers of new reps on them on the ground. Right. But, you know, having next hybrid reps in dormant epi cell accounts and then realizing, you know, both biopsies and then orders from those accounts, you know, that's a contributor. Right. And that's important. And as I mentioned earlier, it's exactly what we that pull through is exactly what we were intending to happen as we expanded the Salesforce.
spk09: Perfect. Great quarter, as always, and looking forward to talking to you soon.
spk06: Thanks. Great. Thanks, RK.
spk08: Thanks, RK. Thank you. All right. One moment, please, for our last question. Our last question comes from the line of George Sellers of Stevens Incorporated. Your line is now open.
spk05: Hey, good morning. Congrats on the quarter and thanks for taking my question. I guess my first one, sticking with the arthroscopic delivery option and that dynamic, I'm just curious, how does that option change the sales strategy, if at all, in terms of would you be expanding that sales force given the increased target market or Would the current sales force maybe just shift their focus or how do you expect that launch to impact your sales operations?
spk06: Yes, so, you know, I think as we talked about in the past, you know, when we did our sales force sizing exercise, you know, back in 2019 now, you know, we had data on, you know, 12,000 orthopedic surgeons and, you know, we could obviously draw an intersection of surgeons that did high volumes of cartilage repair and and open procedures, and that sort of formed the basis for our initial 5,000 targets. There was also a group of those surgeons that did high volumes of cartilage repair, but, you know, we did not have open procedure data on them. And so, you know, the presumption is that those are kind of arthroscopic-only surgeons or predominantly arthroscopic surgeons. procedure surgeons. And so, you know, our intention is to kind of refresh that data. And to the extent there are additional targets that we'll focus on in that latter bucket, which I expect there will be, that would drive, you know, whether we feel like we need to increase the sales force or not. In terms of a sales process, you know, the Macy clinical data speaks for itself, and it's obviously very strong. Basically, now this just gives surgeons an option to, in appropriate cases, deliver the product arthroscopically, which, again, we think and they think there's potential meaningful benefits and advantages to doing that. And so it won't fundamentally change kind of how we sell. I expect we'll add some targets. And then, you know, again, if it requires us to expand the sales force, we'll do that. I would not envision, you know, any sort of wholesale restructuring of our sales force. You know, if we add 1,000 or two targets, you know, you'd add, you know, maybe a dozen reps. But we'll think about that as we get closer to launch.
spk05: Okay. That's really helpful. And then I believe you mentioned in your prepared remarks that, arthroscopic delivery has the potential to double MACE in the coming years. And I'm just curious, what are some of the key assumptions that would go into that? Is it simply sort of what's going on now that more surgeons taking biopsies and more biopsies is going to drive that revenue growth? Or is there any change in your expectations for biopsy conversion rates associated with arthroscopic delivery?
spk06: Yeah, well, I'll just start and Joe can kind of go into the sort of the math of that comment. But, you know, what we basically said was that, you know, over the coming years, we could essentially double our current business if we had the same share of those smaller femoral condyle defects as we do in the patella. So, you know, Macy's a go-to product in patella cases. There's about 10,000 patients in the addressable market with patella defects. There's double that in this segment of femoral condyle defects that are two to four square centimeters in size. There's triple that if you added all, you know, femoral condyle defects below four centimeters. So it's a big market opportunity. And the point is, you know, if we get to the same share, because now you have a delivery advantage in those smaller defects, you know, you could basically double the size of our current business.
spk11: Yeah, just to add, I think Nick kind of hit it, this is Joe, but I would also point out we have a slide in our earnings deck that I think is helpful where we kind of double click a bit on the TAM that, you know, visually shows this. But, you know, again, I think what we're saying there is, again, the patella is, you know, it's about a, um 500 million dollar opportunity and you know we're kind of north of in the double digits on that and again from uh if we're that competitive and it potentially could be so in that in this two to four square centimeter segment you know that that could be significant which is where you know kind of potentially effectively doubling the business kind of plays in so i think the point we wanted to make and again i think the slides helpful this is a pretty big opportunity you know when we think our specific macy would potentially make us much more competitive in that space
spk05: Okay, okay, that makes a lot of sense. Thank you for that, Kohler, and thank you for the time. I'll leave it there. Thank you.
spk08: Thank you. At this point, I would now like to turn the conference back to CEO Nick Colangelo for closing remarks.
spk06: Okay, thank you, Operator, and thanks, everyone, for your questions and your continued interest in VeriCell. Obviously, the company had a very strong financial and business results in the second quarter, and we expect that momentum to continue in the second half of the year and beyond. So we look forward to providing further updates on our next call. And with that, thanks again and have a great day.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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