Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Veracel's fourth quarter 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 Julie Downs, Veracel's head of corporate communications.

Thank you, operator, and good morning, everyone. Welcome to Veracel's fourth quarter 2023 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 covered under the Private Security 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 FCC, which are available on our website. 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 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 am joined on this call by Verizell's President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer, Joe Marra. I will now turn the call over to Nick.

Thank you, Julie, and good morning, everyone. I'll begin today's call by discussing financial and business highlights for the fourth quarter and full year, as well as our expectations for 2024. Joe will then provide a more detailed update on our 2023 financial results and financial guidance for this year before opening the call to Q&A. The company executed exceptionally well in 2023 and delivered outstanding financial and business results in the fourth quarter, generating top-tier revenue growth and even higher profitability growth. Total revenue for the full year increased 20% to over $197 million, which was at the top end of our guidance range with Macy revenue growing 25% to nearly $165 million in burn care revenue of nearly $33 million. The company also reached an inflection point with respect to our profitability profile with bottom line profitability growing at twice the rate of our top line revenue growth as adjusted EBITDA increased 40% to $34 million And we generated over $35 million of operating cash flow, ending the year with approximately $153 million in cash and investments and no debt. The company also had a very strong close to the year as we generated record total revenue of $65 million in the fourth quarter, an increase of 23% over the prior year. Our strong fourth quarter performance was driven by record quarterly MESI revenue of nearly $57 million, which was above the high end of our guidance range and represented more than 50% sequential growth over the third quarter and 22% growth over the fourth quarter of 2022, marking the sixth straight quarter of 20 plus percent growth for MESI. This outstanding MESI revenue performance was driven by strong underlying business fundamentals as we had the highest number of MESI implants, implanting surgeons, surgeons taking biopsies, and biopsies in any quarter since launch. We also generated very strong growth in the burn care franchise as fourth quarter revenue grew 31% over the prior year. Our top line revenue performance drove significant margin expansion and profit growth in the fourth quarter, As we generated gross margin of 75% and adjusted EBITDA margin of 34%, with adjusted EBITDA growing 50% to over $22 million and net income for the quarter more than doubling to $13 million. As we look forward to 2024 and beyond, we expect that continued high revenue growth will drive further expansion of our margins and enhancement of our profitability metrics. From a commercial perspective, Macy's sustained growth has been driven by continued expansion of our surgeon customer base as we had another year of double-digit growth in surgeons taking biopsies in 2023. We're now approaching 50% penetration of our current 5,000 target surgeons. The expansion of our surgeon base and the corresponding growth in biopsies has fueled Macy's success and helped drive sales rep productivity to its highest level ever at $2.2 million per rep in 2023. Our commercial team continues to execute high-quality peer-to-peer programs to help drive surgeon uptake, and we had our highest number of programs to date in the fourth quarter, demonstrating that interest in Macy continues to grow. In addition, Macy's positive long-term clinical outcomes were highlighted in a prospective study published in the American Journal of Sports Medicine last week. The study showed improved clinical scores, high levels of patient satisfaction, and clinical and MRI-based outcomes that were maintained out to 10 years for patients treated with MACI. The study also showed excellent long-term outcomes for MACI patients treated for both patellofemoral and femoral condyle defects, which is the focus of our MACI-ARTHRO program. Based on the strength of MACI's clinical outcomes, top-line revenue performance and its underlying growth drivers, our core Macy business remains very well positioned for continued strong growth in 2024 and the years ahead. Looking beyond this core Macy growth to our lifecycle management and indication expansion initiatives, we announced last month that our Macy arthroscopic delivery submission was accepted for review by the FDA and that we expect to launch Macy-Arthro in the third quarter of this year. As we previously discussed, the Macy-Arthro kit targets 2 to 4 square centimeter femoral condyle defects, which comprise the largest segment of our addressable market, representing approximately 20,000 patients per year, or roughly one-third of the $3 billion addressable market for Macy. In January, the USPTO issued a patent covering the complete set of Macy-Arthro instruments into 2043. underscoring our market research indicating that orthopedic surgeons view Macy-Arthro as a meaningful innovation in the cartilage repair market, and that regardless of their current Macy usage, surgeons expect to shift a meaningful share of their procedures to the Macy-Arthro procedure. Our pre-launch commercial activities are well underway. In addition, in connection with the Macy-Arthro launch, will be expanding our surgeon target base from 5,000 to approximately 7,000 surgeons to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures. Based on our experience to date, we'd expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for Macy in the years ahead. We're very excited about the anticipated launch of MacyArthro later this year, as we believe it represents another significant growth opportunity for Macy and a key value driver for our business moving forward. We're also advancing our Macy development program for the treatment of cartilage injuries in the ankle and expect to initiate the Macy ankle clinical study in 2025. Cartilage defects in the ankle represent the second largest market opportunity for Macy, We believe that a potential ankle indication with an estimated $1 billion addressable market could be another significant growth driver for Macy in the next decade and beyond. Turning to our burn care franchise, we also saw strength in the underlying business fundamentals for EpiCell in the fourth quarter, as we had the highest number of EpiCell biopsies in the quarter since 2021. And that momentum is carried into 2024 with a strong start to the year. We continue to see positive pull through for EpiCell from our expanded burn care sales team, which further supports our belief that EpiCell will benefit from a larger commercial footprint and higher share of voice in the burn care market. With respect to Nexibrid, our burn care team is executing on the initial phases of our launch plan following commercial availability of the product in the US beginning in the fourth quarter of last year. Our commercial and medical teams remain focused on building a strong foundation for Nexibrid by supporting P&T committee approvals to enable burn care center access to Nexibrid, training burn surgeons and their staffs, and supporting initial cases at burn centers to ensure successful patient outcomes. We're pleased with the progress that we made in the fourth quarter in terms of the early launch phase key performance indicators for onboarding burn centers. As of the end of 2023, more than 50 burn centers had submitted packages to their P&T committees, more than 25 centers had gained P&T committee approval, and nearly 20 centers placed an initial product order. While our performance on these metrics was strong, as we mentioned on our last call, the manufacturing-related delay in 2023 and the resulting uncertainty around the ultimate timing of product availability did cause a number of burn centers to defer or delay NAXABRIC training and P&T committee approval processes, which, in addition to the typical administrative hurdles at hospitals, impacts ordering patterns and the timing of use and uptake at many of these centers. Most importantly, however, the clinical outcomes for the initial patients treated with Nexibrid and the feedback from burn surgeons treating those patients has been very positive, which serves as a great signal for the long-term potential of Nexibrid as we look to change the standard of care for eschar removal for patients with severe burns. In addition to the progress with initial burn center onboarding, We also completed a number of initiatives designed to build a strong foundation for Nexibrid commercial success over time. In the fourth quarter, we submitted a supplemental BLA for a pediatric indication for Nexibrid that was accepted for review by the FDA. In terms of commercial access, CMS granted Nexibrid a permanent J-code and transitional pass-through payment status, which became effective in January. and provides a reimbursement pathway for the outpatient treatment of appropriate Nexibrid patients in our target burn centers, as well as additional hospitals over time. So overall, we're very pleased with the strong surge in interest in Nexibrid, our progress in market access activities and onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients, and the clear impact that our broader burden care portfolio and expanded sales team is having on EpiCell. We believe that all of these factors will enable the company to build a strong foundation for an expert in 2024, meaningfully contribute to our burn care franchise revenue this year, enables the company to have a second high growth franchise in burn care moving forward. Finally, turning to guidance for 2024, We expect continued strong revenue growth of 20 plus percent with full year revenue of 237 to $241 million, driven by the continued strength in our core portfolio, our first full year of Nexabrid revenue, which will contribute to growth this year and even more meaningfully so next year, and the anticipated launch of Macy-Arthur in the third quarter, which is expected to generate some revenue towards the end of the year, and support a sustained high level of growth for Macy and the company in 2025 and beyond. We also expect that our sustained high revenue growth will drive further expansion of our margins and growth in our profitability metrics. I'll now turn the call over to Joe.

Thanks, Nick, and good morning, everyone. Starting with our 2023 financial results, total net revenue for the full year was $197.5 million, representing growth of 20%. Total net revenue in the fourth quarter was 65 million with growth of 23% driven by strong results from both of our franchises. Macy revenue of 164.8 million for the full year was above our guidance range, growing 25% versus the prior year. For Q4, Macy revenue was 56.7 million and grew 51% over the third quarter and 22% versus the prior year, as we continued our momentum in the Macy business with our sixth consecutive quarter with growth over 20%. Total burn care revenue for the full year was $32.7 million, consisting of $31.6 million of EpiCell revenue and $1.1 million of Nexabrid revenue. In the fourth quarter, our total burn care revenue increased by 31%, with epiCell growth of 22% and the addition of Nexabrid revenue in the quarter leading to a very strong fourth quarter firm care results. Gross profit for the year was 135.6 million or 69% of net revenue, an increase of approximately 200 basis points compared to 2022. For the quarter, gross profit was 48.5 million or 75% of net revenue, which also increased by 200 basis points versus last year, and represents the highest gross margin for the company in any quarter to date. In addition, our pull-through of incremental revenue to gross profit has now returned to levels similar to 2019, with a pull-through to gross margin of 83% for the fourth quarter and nearly 80% for the full year. Total operating expenses for the year were $142 million compared to $126.8 million in 2022. For the quarter, operating expenses were $35.8 million compared to $32.2 million for the same period in 2022. The increase in operating expenses in 2023 was primarily due to increased headcount and related employee expenses, lease expense associated with the company's new facility that is under construction, variable sales and marketing expenses, as well as other external expenses. Net income for the fourth quarter more than doubled to 13 million, or 26 cents per share, compared to net income of 5.9 million, or 12 cents per share, for the fourth quarter of 2022. For the full year, our net loss was 3.2 million, or 7 cents per share, compared to a loss of 16.7 million, or 35 cents per share in 2022, representing an improvement of nearly $14 million on a year-over-year basis. Non-GAAP adjusted EBITDA for the year grew 40% to $33.9 million, or 17% of net revenue, compared to $24.2 million, or 15% of net revenue, in 2022. For the quarter, adjusted EBITDA grew 50% to $22.3 million, or 34% of net revenue, an increase of approximately 600 basis points versus 28% in the fourth quarter last year. Importantly, our adjusted EBITDA growth of 40% for the full year is double our top line revenue growth of 20%. And our adjusted EBITDA growth of 50% in the fourth quarter is more than double our revenue growth of 23%. As our results continue to demonstrate very strong P&L leverage and a top tier profitability profile. In addition, the company has now consistently generated positive adjusted EBITDA each quarter for more than three years and continues to convert adjusted EBITDA into strong cash flow. We generated operating cash flow of $35.3 million in 2023 and ended the year with $152.6 million in cash, restricted cash and investments and no debt, up from approximately $140 million to start the year as our cash balance increased in 2023 despite CapEx investments for our new facility. Turning to our financial guidance for 2024, we are using a similar guidance framework to start the year that we used in 2023 for both Macy and our Burn Care franchise. For the full year, we expect total company revenue of $237 to $241 million representing growth of approximately 20 to 22%, driven by continued strong growth in both of our franchises. With Macy on track for another strong year, EpiCell benefiting from a higher share of voice, and NextBrit early in its launch phase, we have multiple paths to our 20 plus percent total revenue guidance for the year. We expect another year of growth for Macy, another year of strong growth for Macy. And as a starting point, we expect full year revenue growth in the high teens percentage range with biopsy surgeon growth, biopsy growth, and an increase in price continuing to serve as the key Macy growth drivers. For the burn care franchise, we expect growth of over 30% the full year based on significantly improved FSL trends over the past several quarters, plus the initial revenue contribution from next quarter. For the first quarter, we expect a strong start to the year with total company revenue of approximately 48 to 50 million, representing approximately 20% revenue growth at the midpoint. We expect Q1 Macy revenue of 38.5 to 39.5 million. And for Burn Care, we expect total revenue in the first quarter to be 9.5 million to 10.5 million with the vast majority of revenue coming from EpiCell, which is trending above our recent run rates based on the strength of biopsies to close out 2023, and next-grade revenue to be in a similar range as Q4. Moving down to P&L, for the full year, we expect gross margin of approximately 70% and adjusted EBITDA margin of approximately 20%, which would imply another year of very strong adjusted EBITDA growth of around 40%. We would expect similar quarterly trends in terms of seasonality and progression for both our gross margin and adjusted EBITDA margin percentages throughout the year. And we would expect operating expenses to be approximately $165 million for the full year. Finally, we anticipate an increase in capital investment for the build out of our new manufacturing and headquarters facility with our share of construction costs expected to be in the $50 million range for 2024. In total, this guidance points to continued high revenue growth in 2024 with further enhancement of our top tier profitability profile. In addition, we would also anticipate continued strong revenue growth in 2025 with a full year of arthroscopic Macy's and further acceleration of Nexabridge usage as well as continued expansion and our key profitability metrics. This now concludes our prepared remarks. We will open the call to your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. In the interest of time, we kindly ask that you limit yourself to one question.

Please stand by while we compile the Q&A roster. Our first question comes from Ryan Zimmerman with BTIG.

Please go ahead.

Good morning. Can you hear me okay?

We can. Good morning, Ryan.

Good morning and congrats on a really strong 2023. I appreciate all the commentary and guidance this morning, Joe. I'm wondering if you could talk a little bit about seasonality on the top line, though. I mean, it is kind of an abnormal year, you know, relative to years prior with the launch of NexoBridge. potentially some benefit late in the third and fourth quarter for arthroscopic macy. I'm just curious if you could kind of expand a little bit on that in terms of how to think about maybe seasonality and pacing this year, given it is a little abnormal.

Yeah, so thanks for the question, Ryan, and good morning. So I can hit on that, and maybe I'll just sort of start at a high level with guidance just to make sure people understand the framework, and then I can touch on the seasonality as part of that. know first off from a total company perspective as we talked about in that 20 plus range you know very consistent with our messaging to close out last year and early this year at jpm where we updated our corporate presentation and thinking for this year in 2025 you know importantly as part of that question you know we're using the same framework we used last year obviously a higher starting point for the company and both franchises so it is a bit higher but same framework which is important so So on Macy, and I'll touch on the seasonality. So on Macy, you know, from a framework perspective, again, it's very similar to 2023, which is starting the year, you know, assuming our key growth drivers are continued surging growth, which has been strong. That leads to additional biopsies and volumes, an increase in price. So, you know, that gets you into the, call it high teens on a full year basis. And so, you know, as part of your question, I would say, you know, we factored in some impact. from the arthroscopic launch. It's really more, I would say, from a Q4 perspective, but I wouldn't say that meaningfully changes kind of how we're thinking about seasonality from a Macy perspective. So, you know, it certainly could have some impact because we do think, you know, ours will have an impact in Q4, but to start, I wouldn't think from a quarterly perspective it'll be significant relative to last year, kind of what an average year looks like. So, if you think about Macy, and we talked about in the prepared remarks, you know, I think a good place to start, you know, we're not giving formal product guidance, but we did want to touch on kind of our framework across the franchises. So, you know, if you assume Macy's kind of in that high teens, as we talked about, which is higher than our starting point for last year, you know, that gets you in the kind of low to mid 190s on a full year basis. So, for example, if you use kind of 18% or 194 million, that would kind of lead to burn care, which, you know, the balance at our midpoint would be about 45 million. And so, From a bird care perspective, and then I'll tie in the seasonality as part of this, you know, I think, you know, that would certainly be pretty strong growth. You know, it implies 30%, you know, more than 30% at that midpoint and call it 45. And again, I think what's really important is, you know, a couple of things. One, there's certainly a range of possibilities across the product. So we don't know exactly what that's going to look like across EpiCell and Nexabrid. And again, we're not giving specific product guidance, but we'll talk a little bit about a framework. But I think you know to that framework perspective again very similar to last year, which is we came out of 22. A year ago, and said, we think we can grow our episode run rate off that exit rate, you know our expectations is kind of the same this year so last year. If you remember, we were coming out of the out of the year kind of called the six to 7 million run rate range on episode and actually if you look back at where we ended 23. You know, our run rate in the last three quarters was more like call it eight plus million, around 8.3 million. So our exit rate on EPCEL is actually really a $33 million number. And we certainly think it's reasonable to grow that number. So last year we grew that exit rate over 20% and even more if you assume the starting point for like 6 million. And prior to COVID on EPCEL, you know, we generally grew in kind of the 20% range. You know, our expectation in EpiCell obviously can vary from quarter to quarter, but from a full-year perspective, we certainly think it's reasonable to, again, assume, you know, call it the low double-digit growth. And importantly, you know, we're seeing a higher share of voice. We have a strong Q4 in terms of biopsies. And, you know, part of that equation is an increase in price. We do take price increases on EpiCell. So it's certainly reasonable to expect, I think, low double digits, which would be lower than last year and lower than, pre-COVID years from relative to the exit rate on epiCell. So, obviously, from a seasonality perspective there, you know, as you know well, that can vary quarter to quarter, but we think from a full-year perspective, that's probably a pretty good place to start. So, you know, if you assume that, you know, for example, we'll call it low double-digit or double-digit range, you know, kind of probably the starting point is, you know, I think a good scenario is call it 37 to 38 million, for example. You know, in that scenario, Nexabrid would be in that 7 to 8 million range. And clearly, you know, Nexabrid's obviously very early in the launch. It's still difficult to predict the absolute number, let alone the quarterly numbers. You know, we have not given any specific guidance to date on 2024, and that's still difficult, obviously, a few, you know, a month and a few weeks in the launch, or a quarter, rather, and a few weeks in the launch. But we would expect kind of progression throughout the year on Nexabrid. So, again, epicell can vary a bit, as we know, from quarter to quarter. You know, I think it's safe to assume that Nexabrid will continue to build during the year. So there will be a degree of seasonality, certainly in Nexabrid. But just to bring it back, I wouldn't assume anything materially different on Macy. And again, epicell is a typical quarterly volatility.

Thank you for all that cover. That's very, it's very appreciative. Maybe just to ask on Nexabrid, you know, I think People were hoping it would kind of get rolling pretty quickly here. You're guiding to kind of a similar level from the fourth quarter. Talk to us about kind of, you know, how the process is going. I mean, clearly there's interest. You wouldn't have that many sites ordering this early if there wasn't. But, you know, how do you think about kind of the early adoption of NexoBread from what you're seeing so far, you know, a couple weeks from the launch? Thanks for taking the question.

Yeah. Hey, Ryan, this is Nick. I'll start and then, you know, Joe can kind of talk about sort of the dynamics of the distribution system. But, you know, from our perspective, as you referenced, whether it's our market research or independent work that others have done, I mean, there is a high level of interest from surgeons in Nexibridge. There's no doubt about that. You know, obviously we, you know, the team's done a great job on In terms of the onboarding of burn centers and you know we'll continue to keep adding those burn centers you know, with the delay last year, you know, there was an interruption to sort of the. boarding process for many centers when the product did become available, obviously, those that were farther along were able to kind of finish out that process and start making some initial orders. And with respect to other centers where they had really kind of put things on hold, you know, it was a re-engagement process. And all of that's going really well, obviously. You know, importantly, we think about this, obviously, as we've always said, over the long term. You know, when you're changing the standard of care for what burn surgeons have done for the last several decades in terms of their eschar removal protocols, etc., You know, those things take time, but making great progress. And importantly, you know, we take great care to make sure we support the initial patient applications and treatments. The outcomes have been great. The surgeon's feedback has been great. So, you know, we think we're, you know, kind of where we thought we'd be and sort of making the progress that we would expect.

Yeah, just maybe just to add a little bit on as well on the NextGrid side. So, you know, first, as Nick said, obviously, the metrics have been very strong to start. The clinical feedback has been very positive, so those are great signals. You know, I think it is important to understand, you know, we're early in the launch, and a couple things just to point out, which is, you know, again, the distribution on NextGrid is very different than Macy's and EpiCell. And, you know, just as a reminder, you know, we have a 3PL that kind of manages our inventory, and then the distribution network, that's in place consists of multiple specialty distributors. Some have multiple locations. And we recognize revenue when those specialty distributors order from our 3PL. The second kind of part of the channel, if you will, is then the burn centers and hospitals order from those FDs. It might be the one that they typically work with most likely for some different products at their centers. So when they order, that drives additional orders from our FDs. each quarter and then leads to our quarterly revenue. And then lastly, you know, it's important to remember that both the SDs and the hospitals will keep some level of inventory, which can vary and impact ordering patterns. So, you know, just briefly, as you kind of think about, you know, the first couple quarters of launch, you know, again, Q3, that was, you know, if you remember in Q3, we got commercial availability very late in the quarter. So, you know, that was essentially the SDs kind of ordering from a channel perspective in Q3, and we didn't really get into the market and start treating patients for Q4. That's the quarter where hospitals, you know, start ordering from SDEs and kind of it's in the market, et cetera. You know, and generally, I think what we've seen is it's a lot of the burn centers that were more physician, sorry, more, I'm more familiar with Nexabrid, some of the burn surgeon KOLs. you know, as well as the hospitals that were farther along in the P&T process, even when things were disrupted last year. So, you know, that was as anticipated. That leads to essentially some initial stocking at hospitals. And, you know, now as we get into Q1, we're seeing, you know, continued use on patients. You know, we're seeing some of those hospitals start to use that inventory. That can then lead to some reorders. And at the same time, as Nick mentioned, the team's working to add new centers on top of the ones that have already ordered. and working through some of those, you know, administrative challenges at the burn center. So, you know, I think as these dynamics play out, particularly early in the launch, it's going to take some time for ordering patterns to normalize at both the SDs and the hospitals, you know, which is anticipated, I would say, at kind of this point in the launch. And lastly, again, you know, we have one quarter of history and still a few weeks left in Q1. And again, unlike Macy and Epizel, we have a ton of history and data. You know, we won't know exactly what those SD orders look like until we get, you know, later in the quarter. And so there's still a range of outcomes, I would say.

All fair. Thanks, guys, for the very comprehensive answers. Appreciate it.

Thanks, Ryan.

Thanks, Ryan.

Thank you. One moment for our next question. Our next question comes from Mike Kratke with Learing Partners.

Please go ahead.

Hi, everyone. Thanks for taking our questions. Can you speak to how you're thinking about how quickly you can get traction in the new target surgeon population once you get arthroscopic approval? I mean, do you get the sense there's pent-up demand from surgeons that are not currently using MACEY presently but will start doing implants once you have arthroscopic approval?

Yeah. Hey, Mike. This is Nick. You know, obviously, as we said, We're really excited about Macy Arthro for the reasons we've described. It targets the largest segment of our addressable market. It will be the only arthroscopic restorative cartilage repair procedure for these femoral condyle defects of a certain size. So we think this is going to be very meaningful for us as we move forward. Obviously, we can't at this point, since it's not an approved method of administration, be out there talking generally to surgeons. But we are working with a couple dozen surgeons through the human factors study, voices at customer labs, additional trainings, et cetera. And I'll just say the enthusiasm from the surgeons who have been exposed to the new instruments has been tremendous. significant and great. So they're really excited about it. And I would expect that that will translate, you know, to those who aren't as familiar with it right now. And I would just last point would be that, you know, for these surgeons, if you look at our addressable market right now, the vast majority of cartilage repair procedures are done arthroscopically, whether it's chondroplasties, microfracture, those are the things that make up the majority of the cartilage repair market. So this kind of is right in the wheelhouse for those surgeons in terms of how they currently do their cartilage repair procedures. And there's nothing out there that has the clinical outcomes that Macy has. So we think that combination is going to be very powerful for us as we move forward.

Got it. Yeah, I really appreciate the color there. And then maybe just as a follow-up, You know, is it reasonable to think that as you get arthroscopic approval, that could ultimately lead to an improvement in the conversion rate just as more implants end up getting done over time with that available?

Yeah, well, we certainly believe and our surgeons believe that Number one, you know, with a less invasive procedure that, you know, obviously there's better aesthetic outcomes, there's less post-operative pain, and we would expect there to be, you know, faster post-surgical recoveries. And that is something from a medical affairs perspective that will be focused on as soon as we launch the product and generating data that actually supports what I think everybody expects to be the case. So, yeah, I think that is, you know, very much in line with sort of what we're thinking.

Got it. Thanks very much.

Hey, thanks, Mike.

Thank you. One moment for our next question. Our next question comes from Richard Newitter with Truist Securities. Please go ahead.

Hey, sorry. It's actually Sam on. Thanks for taking the questions. Just, just first one, uh, on, on Macy, can you just sort of walk us through the price dynamic, uh, in, in 2023 and then any, any changes there for 2024 and how should we be thinking about that impacting, uh, revenue and, and any, any price impact from, from arthroscopic as well?

Yeah. Hey Sam, this is Nick. Um, so yeah, so, you know, we've, spoken before about we routinely take annual price increases for Macy. We, of course, expect to do that this year as well. We typically take a mid-year price increase. With respect to arthroscopic Macy, the product itself obviously is reimbursed under a J code. That pricing will not change whether a surgeon delivers Macy in a mini arthrotomy or an arthroscopic procedure, so that won't impact it. The CPT codes is the same, so the reimbursement or for the surgeon will be the same for the procedure. You know, we do anticipate charging. This will be a disposable set of instruments and we do expect to charge for those instruments. So, you know, much like our Macy's biopsy kits where there's a line item in our financial filings that you can see, you know, we expect that it these instruments will generate, you know, some revenue for the company and offset some other costs, potentially over time. But, you know, really the main revenue driver is the reimbursement for the implant itself.

Great. Thanks for that. And then thanks for all the really detailed riff color earlier. That was really helpful. I did just want to touch a little more on EpiCell. given the, you know, the quarterly volatility this product can have. Can you just give us a little more insight into the visibility you have into that sort of run rate through the year and why you're so confident again? Thanks.

Yeah, I'll start and Joe can, you know, kind of chime in. You know, I think Joe referenced it in the prepared remarks that, you know, historically and pre-COVID, I mean, things got a little, you know, more variable during COVID, obviously. And, you know, we would always say it probably safe place to start the year. Assuming high single digit to low double digit growth for episode, we kind of routinely outperformed that. But again, given sort of less visibility than we have, for instance, with Macy, we kind of always just assume that, you know, kind of communicated. I should say that that was a good place to start. You know, I would say that over the past essentially three quarters now, you know, with a large larger share of voice has been sort of returning it's not even back to its highest levels ever um and but you know we're we've seen it kind of get back routinely into more of like an eight plus million dollar run rate um and you know the markets kind of normalized the you know we had some dynamics with respect to our largest customer that have now been resolved at their their facility not episode related but other issues and so all of that is kind of normalized and so we're kind of back into sort of that that place we were in from prior years and so again you know obviously we have when we have a biopsy quarter like we did in the fourth quarter we know that's going to create strength into the year as we discussed earlier so so yeah we're feeling pretty good about it um and again we we said all along that we expected pull through for epicel from having a larger um share of voice we're in more hospitals than we were previously and all that it had an impact starting kind of the middle of last year as we talked about on earlier calls and it continues to have an impact

Yeah, just to add, you know, just to kind of reiterate or add a little bit, Sam, kind of the earlier question around seasonality ties into it and guidance, et cetera. But, you know, I think it is important to recognize, you know, epi cells meaningfully grew versus where it exited 22. Sometimes it's a little bit tough to look at calendar years, but, you know, we know it was running in the $6 to $7 million range. Again, if you just use the last couple quarters of 22, it was kind of high sixes. Now we're above eight. I mean, that's more than 20% growth. which also lined up historically to kind of where we were. And, you know, again, as we think about kind of growth on a full year basis, just to reiterate, there's, you know, multiple components there. So, you know, we think the volume can be a bit better, and we're starting to see some signs of that with a larger footprint and the share of voice. But also, as I said earlier, there's a price component to there as well. So as you think about called low double-digit growth on FSL, and again, that's one scenario within our guidance in burn care. There can be shifts along the franchise products, but the one I referenced, I mean, that's below where we were last year. So I certainly think that's a reasonable expectation. Again, it could vary quarter to quarter in terms of how we get there, but we think that's certainly a reasonable expectation going into the year.

Great. Thanks for taking questions.

Thank you. One moment for our next question. Our next question comes from George Sellers with Stevens. Please go ahead.

Hey, good morning, and thanks for taking the question. Maybe to shift gears a little bit to the margin guidance, I'm just curious, what does that assume in terms of the improvement driven by price versus Nexabred and EpiCell ramping up, and then what's also sort of assumed related to investment for commercializing arthroscopic delivery?

Yeah, so morning, George, and that's the question. So, you know, I'll kind of hit that and just make sure we talk a little bit about some of the guidance, you know, beyond the revenue piece. So, you know, as we talked about, you know, we're expecting improvement in gross margin, you know, from high 60s last year to 70. On adjusted EBITDA, we ended last year on a four-year basis at 17. We think we could be around that 20% number this year. You know, first off, I just kind of point out, I did comment in my report prepared remarks, but, you know, as you think about that guidance, I would say it's also important to think about the quarterly progression and the trends there. So, you know, the way kind of our business works with just some of the seasonality and whatnot is, you know, we typically see improving kind of margins throughout the year, particularly, you know, Q1 often ends up being kind of on the low end and then Q4 obviously ends up being on the higher end. So there's going to be a progression, I would say, and you can really reference last year's trajectory and assume, you know, probably, um something similar on a year-over-year basis you know with some improvement and they can obviously be some puts and takes within quarters um in terms of kind of what's driving kind of the margin improvement you know i would say um yeah i guess on the last piece on the opex side just before i go there you know we did talk about you know call it mid 160s i think i mentioned 165 from an opex perspective and from an investment perspective you know, it's the thing that we've been talking about. So certainly we'll want to make sure our throw is set up for success. You know, there's some spend there to kind of get ready from a commercial perspective to make sure the instruments are ready. So that is, you know, clearly a priority investment this year to make sure that it's successful. And then, you know, things like Hankel from a life cycle management and, you know, other investments, just, you know, they're probably more modest, but things, you know, to make sure things like Dexabrater kind of continue to track. So those remain the investment areas. You know, certainly our leverage, you know, broadly is driven by the top line, you know, growth being sustained at a high level. You know, we certainly want to make sure we manage our OpEx growth at a lower level than that, and we did that last year, and that's certainly our plan this year. In terms of kind of what flows through to the margin, you know, certainly, you know, as we talked about, Nexabraid kind of fits into the margin profile from a gross margin perspective, so that's helpful. um and then you know some of that to your question obviously as you take increases in price that certainly helps from a gross margin perspective but there's also just some natural leverage in the business i think we're starting to see where again if we can kind of manage our costs at a lower level than overall revenue we're going to see that pull through and then lastly you know i talked about in the fair remarks but you can also see just you know we we also talk about pull through in terms of how much is dropping to the bottom line. Like if you look at Q4 last year, you know, that was really strong in the adjusted EBITDA line, pull through in gross margin, both Q4 and full year, kind of in that 80% range. So, you know, I think that's kind of where it needs to be last year and something we're focused on maintaining this year.

Okay, that's really helpful, Keller. I appreciate all that detail. You touched on Macy Angle. Just curious, with that clinical study initiating in 2025, and then you've also talked about getting close to 30% adjusted EBITDA margins in 2025 and beyond, how do we sort of reconcile those two items? And what should we think about in terms of the investments for launching that clinical trial?

Yeah, hey George, Nick, you know as we've talked about, you know this study has always been sort of. planned and is included in sort of the longer term projections that we've given. You know, this is not a, you know, large study by pharma or biotech standards. You know, it'll be very much like the summit study that was the pivotal study for Macy in the knee. You know, somewhere, you know, call it up around 200 patients. It'll take a couple years to enroll. So, you know, it's kind of single digit million dollars kind of study. And so, you know, it's, again, not compared to our overall sort of OPEX and investment. You know, it's really not that significant.

Okay, great. Thank you all again for the time. All right. Thank you.

Thanks, George.

Thank you. One moment for our next question. Our next question comes from Jeffrey Cohen with Lattenburg. Please go ahead.

Hi, Nick and Joe. How are you? Good morning. Well? Good, Jeff. A couple quick ones from Aaron. So when you talk about Macy, Arthro, and the surgeon population expanding out from 5,000 to 7,000, how do we equate that or think about the overall TAM as there's certainly some other levers out there. Is that a 40% greater TAM or what might we think?

Yeah, so, you know, as we talked about previously, you know, when you look at our 60,000 patient TAM, you know, clearly Macy's a go-to product in patella and larger defects. on the femoral condyle or other areas of the knee. You know, we do get business on these two to four square centimeter defects in the femoral condyle, but just our penetration rate there is lower and we think Macy arthroscopic will allow us to have deeper penetration there. So for Macy arthro, it's really about sort of deeper penetration into the existing addressable market. of $3 billion plus. The TAM expansion for Macy occurs when you move to other joints, and that's where Macy-Ankle comes into play. And as I mentioned in my prepared remarks, that's about a billion-dollar addressable market opportunity for us with around 20,000 eligible patients per year.

Okay, got it. And then lastly for us, could you talk about cash a little bit? You had a strong Q4 with $10 million of free cash flow. Any thoughts on cash? I know that some portion of that would be for the facility, but any thoughts there?

Yeah, so, you know, I think we talked about, you know, pretty strong year from kind of a cash flow perspective. I think it was great to end the year at a higher place than we started, even as we started funding the building. You know, I think as I talked about the prepared remarks, you know, I mean, this is more of the year where you're going to see some more substantial kind of capital or cash kind of allocated to our new building. But we also expect to continue to generate kind of new cash, you know, additional cash and sort of self-fund that. So, you know, that's probably the key dynamic, I would say, as you think about the cash flow in 2024.

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

Thank you. One moment for our next question. Our next question comes from Swayampakula Ramakant with HCW.

Please go ahead.

Thank you. Good morning, Nick and Joe. Most of my questions have been answered, but I just have a quick question regarding how to think through next to bread, not just over 24, but even beyond. Just like what we had seen with EpiCell, I remember even about a year, year and a half ago, you folks were not quite sure how to talk through the dynamics of EpiCell. But now, you are able to give guidance for the year. And also I listened to what Joe had talked about special centers and specialty centers and how the product moves through it. So should we expect similar dynamics or since you have had some learnings with how to commercialize EpiCell, NexaBrit probably will get to a decent dynamics earlier than what you had experienced with epicella.

Yeah, hey, RK, I'll try to parse that out and just, you know, the variability that, you know, we had seen, have seen historically with epicella is really just a matter of, you know, a smaller patient population that you're typically treating, right? So, if you have a few more or less uh treatments per year when the average treatment is you know pretty significant in terms of revenue you know it can bounce around a little bit and that's you know why we kind of historically said before again coveted sort of disruptions that um you know starting out high single digit or low double digits for epi cell is usually safe ground and you know we typically outperformed that so it's really kind of reverting back to kind of what we did previously With Nexabrid, of course, you're really sort of playing more at the top of the addressable market funnel where there's multiple times more patients. 30,000, we believe, out of the 40,000 hospitalized patients each year are eligible for Nexabrid treatment. And so, yeah, once you get through, as Joe was talking, sort of the initial dynamics around hospitalization, specialty distributor stocking, hospital stocking, you have kind of a more mature customer base that, you know, has more kind of normalized or routine treatment protocols, then you kind of, you know, we would expect, as we've said for a long time, that, you know, it will help dampen any variability that you would see with EpiCell as as NexaBridge kind of revenues grow over time. So nothing has changed in terms of our belief on how that will play out and sort of our excitement around NexaBridge.

Thank you. One quick question. So do you think you have better leading indicators with NexaBridge than obviously it's difficult to do that with EpiCell, but is NexUpgrade in a better place in that sense?

Yeah. Well, again, yes. The answer is definitely yes because, again, as we kind of get into sort of – you can kind of think about, you know, we have a certain number of centers, right, 140 burn centers. We've got certain tiered targeting of those as you onboard those. They get P&T committee approvals, and then they start to, you know, make their initial order, and you see penetration into the patients that they see. You'll see, you know, sort of routine or more routine reordering patterns, and we're just so early in this right now that, you know, those patterns haven't emerged yet, but once they do, we certainly will have sort of more visibility in terms of forecasting as we go out.

Perfect. Thank you very much. Thanks for taking the questions. All right.

Thank you.

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Nick Colangelo for closing remarks.

Okay, well, thank you, everyone, for your questions and continued interest in VeriCell. Obviously, we had outstanding financial and business results in 2023, and we expect that the momentum in our core portfolio and new product launches will drive continued strong revenue and profit growth in 2024 and the years ahead. So we look forward to talking to you again at our next call, and thanks, and have a great day.

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