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spk07: Ladies and gentlemen, thank you for standing by. Welcome to Verisal's second quarter 2024 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, Verisal's Vice President of Finance and Investor Relations.
spk08: Thank you, operator. Good morning, everyone. Joining me on today's call are Verisal's President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer, Joe Marra. Before we begin, let me remind you on today's call we will be making full-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 defer mutual expectations and are described more fully in our findings of the SEC. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copy of our second quarter financial results press release and a short presentation with highlights from today's call are available in the Investor Relations section of our website. I will now turn the call over to Nick. Thank you,
spk02: Eric, and good morning, everyone. I'll begin today's call by discussing the company's financial and business highlights for the second quarter as well as our expectations for the remainder of the year. Joe will then provide a more detailed review of the company's second quarter financial results and guidance for 2024 before opening the call to Q&A. The company had another strong quarter as we generated record second quarter revenue of nearly $53 million, highlighted by continued high growth for Macy and solid progression in demand for Nexabrit. We also delivered another quarter of significant margin expansion and profit growth with record second quarter gross margin of 70% and adjusted EBITDA growth of 42% compared to last year as the company's profit growth continues to outpace our high revenue growth. Through the first half of the year, the company generated 20% growth in total revenue, Macy revenue and burn care revenue, expanded gross margin by over 400 basis points and more than doubled adjusted EBITDA compared to the first half of last year. Based on the strength of our first half performance, we're reaffirming our revenue guidance of 20 plus percent growth for the full year and raising our profitability guidance for gross margin to 71% and adjusted EBITDA margin to 21% for the full year. Macy had another excellent quarter with record second quarter revenue of more than $44 million, which increased 21% and exceeded our guidance for the quarter. Macy's second quarter performance was once again driven by strong underlying business fundamentals as we continue to expand the Macy Surgeon customer base and drive growth and biopsies. We had the second highest number of Macy biopsies and Surgeon taking biopsies in any quarter since launch as well as the highest number of biopsies in any month since launch during the quarter. The strength of these key Macy growth drivers together with another quarter of significant increases in -to-peer programs and attendees at those programs demonstrates that Surgeon interest in Macy remains high as we continue to build a strong foundation for sustained Macy growth over the long term. As our expanded Surgeon base gains further experience with Macy, we also expect biopsies per Surgeon and biopsy conversion rates to become more significant growth drivers. Notably, we saw a significant increase in biopsies per Surgeon during the second quarter, which helped drive an acceleration in biopsy growth in the quarter. We also saw an uptick in the conversion rate versus the prior year as there's a direct correlation between Surgeon experience with Macy in higher conversion rates. Typically, once Surgeons perform more than a few implants on average per year, their conversion rate tends to increase into the mid 40% range and even higher at higher average implant volumes per year, which is significantly above our overall conversion rate and demonstrates the clear potential for conversion rate to become an important growth driver over time as Macy utilization increases across our Surgeon customer base. Turning to our Macy lifestyle management initiatives, we're excited about the potential launch of Macy Arthur later this quarter. Our custom Macy Arthur instruments have already been registered with the FDA and plans are in place for the commercial launch of this innovative addition to our portfolio upon FDA approval to expand Macy's label to include arthroscopic delivery. As part of the plan launch, we're expanding our target Surgeon base from 5,000 to 7,000 Surgeons to include Surgeons that perform high volumes of cartilage repair surgeries predominantly through arthroscopic procedures. Given that the Macy Arthur instruments target smaller cartilage defects that comprise the largest segment of our addressable market, representing approximately 20,000 patients per year or one third of the $3 billion addressable market for Macy, we believe that Macy Arthur will have a meaningful impact on utilization and provides a significant potential upside growth opportunity for the brand and the company in the years ahead. We also remain on track 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 Macy 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 burden care franchise, Nexabrid launch momentum continued to build during the second quarter as revenue nearly doubled and we made further progress with respect to our burn center key performance indicators. Through the end of the second quarter, approximately 70 burn centers had completed P&T committee submissions, more than 40 centers had gained P&T committee approval and nearly 40 centers had placed an initial product order. There also was a meaningful increase in hospital orders and patients treated in the quarter as more burn centers incorporate Nexabrid into their regular clinical practices. We also expect FDA approval of a pediatric indication for Nexabrid in the coming weeks, which would provide an important treatment option for pediatric patients with severe thermal burns. There are approximately 20 pediatric burn centers in the US that will be added to our target customer base following the approval, which we believe will have a meaningful impact on overall Nexabrid to uptake over time. Turning to FSL, while we had a similar number of biopsies in the second quarter as in the first quarter of this year and the second quarter of last year, which resulted in revenue in the $10 million range for both of those quarters, FSL revenue in the second quarter of this year was closer to its quarterly run rate entering the year of approximately $8 million. After a strong start to the quarter in April, the number of patients treated with FSL was lower in May and June due to a number of factors, including patient health issues and the timing of patient treatments. While there can be variability in FSL quarterly results giving the relatively small patient population and the critical nature of their injuries, demand for FSL remains strong. Over the first half of the year, the quarterly run rate for FSL has increased as expected to more than $9 million per quarter with double digit growth for the first half of the year versus last year. We're also off to a very good start in the third quarter based on the strength in FSL biopsies, patients treated and graph volumes to date in the quarter. Overall, the company delivered another strong quarter in first half of the year with sustained high revenue and profitability growth, excellent MIECE results, solid progression in Nexabrid demand and meaningful growth for FSL in the first half of the year. Based on the strength of our core portfolio and expected contributions from new product launches, we believe that the company is very well positioned for continued high revenue and profit growth in 2024 and beyond. I'll now turn the call over to Joe.
spk05: Thanks, Nick, and good morning, everyone. Starting with our second quarter results, total net revenue for the quarter was 52.7 million with MIECE revenue of 44.1 million and total burn care revenue of 8.5 million, which was made up of FSL revenue of 7.8 million and Nexabrid revenue of 0.8 million. In the second quarter, MIECE revenue grew 21% versus the prior year and 10% versus the prior quarter while Nexabrid increased 76% versus the prior quarter. In addition, through the first half of the year, both of our franchisers delivered 20% revenue growth versus the prior year. Role profit for the quarter was 36.6 million or 70% of net revenue, an increase of 430 basis points versus the prior year, which is the company's highest second quarter gross margin to date. Total operating expenses for the quarter were 42.6 million compared to 35.9 million for the same period in 2023. The increase in operating expenses was primarily due to development and pre-launch activities for MIECE Arthrow, increased headcount and related employee expense and lease expense associated with the company's new facility that is under construction. Net loss for the quarter was 4.7 million or 10 cents per share compared to 5 million or 11 cents per share for the second quarter of 2023. In addition, the company has now generated positive GAAP net income on a rolling 12 month basis as we continue to enhance our strong profitability profile. Non-GAAP adjusted EBITDA for the quarter increased 42% to 6.3 million or 12% of net revenue compared to 4.4 million or 10% of net revenue in 2023. As adjusted EBITDA growth continued to significantly outpace our high revenue growth. For the first half of the year, adjusted EBITDA more than doubled to 13.5 million and adjusted EBITDA margin increased approximately 600 basis points, demonstrating continued strong leverage across our P&L. Finally, the company generated 18.5 million of operating cashflow in the quarter and ended the second quarter with 154 million in cash, restricted cash and investments and no debt. Turning to our financial guidance. For the full year after a very strong first half of the year, we are reaffirming our total company revenue guidance of 238 million to 242 million or 20 to 26 million. We are now expecting a total of 23% total revenue growth. Within our guidance framework, based on a strong first half results for Macy and the continued strength and its key leading indicators, we have increased our expectations for Macy for the full year. We now expect Macy revenue growth of approximately 20% for the full year and increase versus our prior expectation of high teams growth to start the year with the balance of revenue coming from our burn care franchise. In addition, based on the company's strong overall financial performance, we are increasing gross margin guidance to 71% and adjusted EBITDA margin guidance to 21% for the full year compared to the previous guidance of 70% and 20% respectively. Importantly, we also expect to be gap profitable in 2024 on a full year basis. For the third quarter, we expect sequential growth in both Macy and burn care revenue with total company revenue of approximately 55 million, representing growth of more than 20% versus the prior year. For Macy, we expect another strong quarter with year over year growth in a similar range as the first two quarters of the year and revenue of approximately 44.5 million. For burn care, we also expect a strong third quarter with total burn care revenue of approximately 10.5 million. Finally, we expect gross and adjusted EBITDA margin in the third quarter to be similar to second quarter margin. This concludes our prepared remarks. We will now open up the call to your questions.
spk07: 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. Please stand by while we compile the Q&A
spk06: roster. Our first question comes from Ryan Zimmerman
spk07: from BTIG. Your line is now open.
spk04: Hey, good morning. Thanks for taking our questions. I want to start first on Macy and then I have a burn care question, but a two-part question on Macy. So, appreciate the guidance, Joe, both for the year and quarterly. I just want to make sure people are clear about the pacing expectations and kind of the step-up implied in fourth quarter coupled with the Arthro launch that may be happening over the back half of the year. And then the second part of the question, a little different, but it's around your comments, Nick, on conversion, which is you're seeing more tenure in the user base of conversion, which as you noted is going to increase conversion ratios. But at the same time, as you move to smaller cartilage defects, which in absolute value will increase, I would imagine that has some downward pressure on the conversion ratio, just given that there may be less acute injuries. And so maybe there's less likelihood to convert from biopsy to procedure there. And so how would you have us think about conversion and against those two factors over time, just given the nature of the injuries treated in the Arthro launch? And then I have one follow-up on burn care, thanks.
spk05: Yeah, so good morning, Ryan. Thanks for the questions. I'll start on maybe the Macy cadence, and then we'll address kind of your conversion question second. So from a Macy perspective, honestly, two strong quarters start the year. As Nick said, extremely strong leading indicators. So we do have higher expectations on a full year basis. We started in kind of the call for mid to high teens, now around that 20% range. So certainly, increasing expectations on Macy as it continues to perform well. In terms of the cadence for the rest of the year, so we did call out to your point, a Q3 estimate of around 44 and a half million on Macy. And that's pretty similar growth that we've seen over the first couple of quarters, which is probably about an average of the two. And then as you think about kind of the seasonality and the step up for Q4, I would generally say, it follows our typical seasonal pattern. So whether we look at kind of the H1 to H2 growth, you kind of look at the step up to Q4, which is in that 50% range. You look at the kind of call it H1, H2 mix, which is around our 43 to 57% if you look at that guidance. So I'd say it's very similar. What we've seen in the past, in terms of expectations and sort of assumptions around kind of Macy-Arthrow, I think we've consistently said, our expectation is that's more of a 2025 driver. It's really kind of the core performance of Macy that's continuing to perform. And again, that's the seasonality and mix is very much in line within the guidance to what we've seen last year and what we typically see.
spk02: Can you take a second? Yeah, thanks. And so Ryan, to your conversion rate. Yeah, as we've talked about for years now, as surgeons gain more experience and our higher volume surgeons clearly have higher conversion rates, a lot of the dynamics that we point to are that we're adding a lot of new surgeons and we continue to do so. And that's what sort of balances out sort of those higher conversion rates, because obviously as they're getting up to speed, they have lower conversion rates. So it's remained relatively stable. In terms of the size of the defect, I'll just tell you that a two to four square centimeters of defect on the surface of your knee, that's a pretty big injury. And when we look at, for instance, we're targeting Macy-Arthrow for those two to four square centimeter femoral condyle defects. And we can see sort of how those defects are treated in the patella, which obviously Macy is a go-to product there. And it's a pretty significant piece of our business now. To the best of my knowledge, it's at least the average conversion rate, if not higher for patella cases. So I don't anticipate any impact on conversion rate from that size and location of the defect. They're getting treated somehow. And we just think Macy will be able to have a greater penetration into those defects on the femoral condyle with the Macy-Arthrow instrument kit.
spk04: Okay, very helpful, Nick and Joe. And then just on burn care, the nature of the business is volatile. I've covered you guys long enough to know that. I just wanna make sure that there's no structural change in the burn market from what you saw. It sounds like you guided early May and then you saw some volatility in the patient population around epicelle in later May and June. But again, just wanna be clear that you're not seeing any structural change there with the epicelle.
spk02: No, and yeah, thanks, Ryan. Appreciate the question and it's a fair one. But my point of, we had similar biopsies, right? That's the top of the funnel. And if you saw some sort of structural change in the burn market, you would expect it, that that's the place you see it. We also mentioned that we had a very strong start in April. And then we just had sort of that variability that you can see in certain months based on patient health issues and again, the critical nature of their injuries. And right back to a strong start in July, highest biopsies of the year in the month of July. So, we feel pretty good about epicelle and the continued growth. First half of the year, up 12%. So, I think we're again, feeling pretty good about that. We also have implemented kind of our Salesforce optimization plan where we've added a few additional territories for the burn care Salesforce. So we're up to 17. As of the third quarter, all reps will now be promoting both epicelle and Nexabrid. And we've seen a pretty strong pull through for epicelle from the formerly dormant accounts that were being called on for Nexabrid. So, we think we're set up nicely for strong burn care growth. And based on the guidance we've given, it's in the 30% range for the year. So pretty robust growth.
spk04: All right, thanks for taking the questions guys. Thanks Ryan. Thanks Ryan.
spk06: Thank you, please stand by. Our next question comes from Mike Krapke from Lear
spk07: Inc Partners. Your line is now open.
spk03: Hi everyone, thanks for taking our questions. So it looks like Macy's sales came in a bit higher than the street during the quarter. And you also started seeing the highest number of biopsies in any month since launch. So can you just confirm what month of the quarter that record number of biopsies came in and to what extent is that tied to some of your ongoing pre-arthroscopic launch activities that you mentioned?
spk02: Well, yeah, I mean, it was in May for what that's worth. I think the more important part is we're continuing to see very strong engagement with surgeons in terms of the number of surgeons taking biopsies, continuing to be at sort of very high levels. Obviously that translates to more biopsies, particularly when you see an uptick in biopsies per surgeon, which is great. That's really independent of the arthroscopic prep. Obviously, the arthroscopic delivery is not approved yet. So it's really independent. It's just kind of the strength of the core Macy business that we've really been seeing for quite some time
spk03: now. Understood, and maybe just as a follow-up, can you give us a sense of, A, regarding the 2,000 new target surgeons that you cited, basically just how quickly you can start targeting those surgeons, reaching out to them, and at what point you really expect a Salesforce efficiency to start taking up?
spk02: Well, there's really, I mean, obviously we have the target list set and ready to go. So immediately upon FDA approval, sales reps can start calling on those surgeons. So there's really no limitation on that. So excited to have that. I'd say we probably feel like we'll see more immediate uptake potentially from Macy surgeons who are obviously familiar with the product. They also do a lot of arthroscopic procedures, as we always remind folks. Anytime they're doing chondroplasties, microfractures, OATs, and the vast majority of cartilage repair procedures are done arthroscopically. So they're used to treating cartilage injuries that way. So I think it's a pretty easy transition for patients with appropriate defects, for experienced surgeons to kind of flip to Macy arthroscopic. Delivery. Similarly though, as you know, where those 2000 surgeons will be adding who really do their cartilage, high volumes of cartilage repair predominantly through arthroscopic procedures. They too are used to treating cartilage injuries with arthroscopic instruments and doing things like microfracture augmentation where they're also doing implants as part of that. So we think it's a pretty seamless transition that will continue, it'll occur over time and give us a pretty long runway, we think, for Macy growth as we move forward in the years ahead.
spk06: Understood, thanks very much. Okay, thanks Mike. Thank you.
spk07: Our next question comes from Josh Jennings from TD Cohen. Your line is now open.
spk01: Hi, good morning. Thanks for taking the questions. It's nice to see that Macy momentum here. Wanted to just follow up on the last question just around but in a different angle. Just thinking about the success you've had in terms of getting more surgeons in -to-peer events getting trained. Is just wanted to hear from you just what's driving that. Clearly, you're experiencing momentum but you do have tenure data out there early in the year. You have Arthro on tap and I guess with the gist of the question, just trying to figure out that leading indicator, any just high level comments on the first half, the drivers of that and whether this Macy Arthro approval is driving some of that increased interest this year.
spk02: No, I'd say back to the prior response that we've just seen a lot of momentum in the core Macy business as we exited those COVID impacted years. Since that time, we've seen Macy just in total rebound to its prior high growth profile. As it becomes more and more the standard of care for cartilage repair based on, as you mentioned, not only the two-year data in the pivotal study, the five-year data in the extension study, 10-year data that was published earlier this year. I just think you kind of see this broadening of the customer base that has just continued for a number of years now. And then as we launched Macy Arthro, those new targets, again, they're doing high volumes of cartilage repair already. Macy will be a new option for them but I'm pretty sure they're aware of Macy and its profile from a clinical and efficacy perspective.
spk01: Understood, thanks for that. And I also wanted to just get an update on business development initiatives. I think your team is out there on the hunt, the profitability profile inflecting. How would you have investors think about those efforts and M&A opportunities out there to bring even more portfolios under the Verisale roof? Thanks.
spk02: Yeah, our corporate development strategy has been quite consistent over the number of years. And obviously we have a lot ahead of us with new product launches and continued high growth with our core business. But as you said, we have dedicated effort on the business development front, always looking at opportunities in the sports medicine space that would be synergistic with Macy for our customer base in the burn care space. And then probably relatively less so, but also given our expertise in advanced cell therapy, development, manufacturing, commercialization, a lot of folks come to us with different opportunities as well. I'd say for us, the hurdles are relatively high. You all know, have seen sort of BD deals sort of go awry even in our space. And so we're very focused on maintaining the innovation profile of our portfolio. I think we're in a relatively unique position where our products are the only approved products of their kind in our space. And so that's where it all starts. And then we also have a unique financial profile. And so we're very focused on making sure we maintain our high revenue growth rate, our profitability and so on. So, I always say that if something transacts, you should be pretty comfortable. We probably looked at it, but we have a pretty high bar and we'll add products and portfolios as it makes sense for us. But you're right, we certainly have the financial sort of firepower to be able to do that. And it's all about just making sure it's the right fit for us. Appreciate that,
spk06: Nick. Thank you. Thank you.
spk07: Our next question comes from Jeffrey Cohen from Leidenberg, Salmon & Company. Your line is now open.
spk10: Hi Nick and Joe, good morning. Couple questions from our end. So firstly, could you talk about Lexabrid and pediatric indication and how that may go on as far as the trying to bring some of these that you got from us? So there's an addition to the Code 70 and will that be the same 17 commercial folks as we all focus on in our area?
spk02: Yeah, I think I had a little bit of a hard time hearing you, Jeff, but I think I have the gist of the question. So yeah, upon approval, obviously we have the 17 territories that I mentioned as we've implemented kind of our Salesforce optimizations for the Burn Care franchise. So, on average, it's about one center per territory. And so it's certainly, they're already in the target base for these reps, but until the approval comes, they're obviously not sort of in there promoting the use of Lexabrid. We certainly have seen a few centers using it, these pediatric burn centers, they're free to do that. We just can't promote it, but on day one, we've got a playbook for the reps to go out and sort of promote Lexabrid. And it'll have to go through the same process, right? P&T committee approval and establishing ordering protocols and patient protocols, et cetera. But we do think there'll be a pretty meaningful impact over time, roughly 25 to 30% of hospitalized burn patients are pediatric patients. And so, as I mentioned on the call, we think this will certainly aid in Lexabrid uptake over
spk10: time. Perfect, and then last, across to you, I did hear you call out the burn franchise for Q3 on your guide of 10 and a half. Could you give us a composition or some flavor beneath that on Lexabrid versus at the cell, please?
spk05: Sorry, Jeff, we're having a hard time in the morning, this is Joe, but are you asking about kind of Q3 revenue composition within the guidance?
spk10: We did burn here. Yes, we did burn here, yep, thank you.
spk05: Yeah, so, I'd say if you kind of look at burn care and you kind of think about the framework there, Nick talked about this a bit, but in the first half of the year, FSL obviously can vary a bit by quarter and we saw that, but pretty encouraging that it was kind of over the 9 million mark, grew in the double digits from a run rate perspective, also from a year over year perspective on total revenue for FSL. So as we think about the back half, and I think Q3 is certainly part of that equation, we expect FSL to kind of be at that higher run rate, calling in that nine to $10 million range, don't know exactly what it's gonna look like across quarters, but I think that's a reasonable assumption. And then in terms of Lexabrid, I'd say, as we talked about in the prepared remarks, some strong progression from Q1 to Q2. As we think about the second half of the year and think about the third quarter, that should certainly continue, that progression kind of throughout the year. So, it's difficult to say exactly what the mix of the two will be, but we certainly expect FSL to kind of remain at these higher run rates and have a strong second half of the year. We're seeing strong indicators there, and Lexabrid's moving in the right direction as well. So I'd say both of those are part of it, and that's how we're thinking about Q3 and the back half.
spk10: Perfect, thanks for taking your questions. Thanks, John.
spk06: Thank
spk08: you.
spk06: Thank you.
spk07: Thank you. Our next question comes from Swayam Pakula Ramakant from HCW. Your line is now open.
spk09: Thank you. Good morning, Nick and Joe. A quick question on the burn franchise. If I heard everything correctly, when you're talking, Nick, about conversion rates, you were saying something about FSL biopsy and conversion there. Did some of that spill over into the third quarter, because you were also talking about some, you were talking about timing, and I'm just trying to have an idea if any of the revenue that you had expected in the second quarter spilled over into that.
spk02: Go ahead, Nick. Yeah, thanks, RK. So yeah, as I mentioned, just kind of the top of the funnel, again, was pretty consistent with prior quarters. And yeah, I did mention that there's always going to be patient health variables that impact timing of treatments. And we certainly did see, particularly late in the quarter, cases that were pushed into or rescheduled into Q3. Again, that happens because these patients have a lot of other injuries or infections that prevent surgeries from taking place. So the short answer is yes, but that is relatively common.
spk09: Okay, and then a quick question on the pediatric indication of neck subreddits. You said you have 70 centers, burn centers already had the PT and approval. If you get the pediatric indication on board, how many of these centers also do pediatric and also would you add centers outside of the 70, which are just only for pediatric? I'm not really good at the bond market. Yeah, yeah, so
spk02: let me just kind of give a quick overview. So as in the launch, there's about 140 burn centers in the US that are accredited by the ABA. We target, we break them up into three tiers and we really focused on the 90 tier one and tier two centers with our initial launch. And that's kind of what we've been reporting on in terms of the 70 submissions, the 40 approvals, et cetera. There's about 20 pediatric burn centers that we'll now, we will actively promote to. So certainly in some of our existing centers, pediatric patients can be treated. They don't all get treated at the pediatric centers. But again, we can't be in there promoting. So you'll have some that pediatric centers that used the product a few, but many of them were sort of waiting for the pediatric indication. And so, we think, as I mentioned on the call, that it would have a meaningful impact on nexifer uptake as we get out there and get these centers through the process and they start treating this pediatric burn population.
spk09: Thank you. Looking forward to the exciting second half with this new introduction.
spk02: Okay, thanks, R.P.
spk07: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Nick Colangelo for closing remarks.
spk02: Okay, well, thank you everyone for your questions and continued interest in Verisal. As we mentioned, the company had a very strong first half of the year. We expect to continue to deliver sustained high revenue and profit growth for the remainder of the year and beyond. And we look forward to providing further updates on our progress on our next call. Thanks again and have a great day.
spk07: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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