Vericel Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Veracel's third 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, Veracel's Vice President of Finance and Investor Relations.

Thank you, Operator, and good morning, everyone. Joining me on today's call are Verasol's President and Chief Executive Officer, Nick Colangelo, and our Chief Science Officer, Joe Marra. Before we begin, let me remind you that on today's call, we will be making four looking statements covering 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 findings of the SEC. In addition, all four looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Please note that a copyright third 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.

Thanks, Eric, and good morning, everyone. The company had another outstanding quarter as we generated total revenue growth of 27% and record third quarter revenue of approximately $58 million, which exceeded our guidance for the quarter. This strong performance was highlighted by record third quarter RACI revenue and the highest EPSA revenue in any quarter to date. We also delivered another quarter of significant margin expansion and operating cash flow, as the company's profit growth continues to outpace our high revenue growth. Finally, the company achieved two very important regulatory milestones with the FDA approval of Macy Arthro and the Nexabrid pediatric indication, which positioned the company for sustained high revenue and profit growth in the years ahead. Macy had another solid quarter and was well positioned for a strong close to the year as the momentum in underlying growth drivers continued through the third quarter. We achieved record third quarter highs for Macy biopsies in the number of surgeons taking biopsies, driven by robust growth in both biopsy surgeons as well as biopsies per surgeon, which has become a meaningful growth driver for Macy this year. The strength of these key growth drivers, together with another quarter of significant increases in peer-to-peer programs, which more than doubled in the third quarter compared to last year, and attendance at those programs, which is at the highest level at any time since launch, demonstrates that surgeon interest in the core Macy procedure remains extremely high. In addition, with the recent approval of Macy-Arthro, Macy's now the only restorative biologic cartilage repair product approved for arthroscopic administration. The first Macy-Arthro case was successfully performed a few days after we announced the approval, And there's been considerable engagement and interest in Macy-Arthro from both current Macy users and non-users at training programs, as well as our launch meeting at the Orthopedic Summit in September. An important early indicator of the potential for Macy-Arthro to meaningfully expand utilization and sustain Macy's high revenue growth over the long term. Turning to burn care, EpiCell's third quarter revenue was its highest quarterly revenue to date, and we continue to generate significant EpiCell revenue from Nexabird selling activity at previously dormant burn centers. Nexabird adoption continued to progress with more than 70 burn centers completing P&T committee submissions and approximately 50 burn centers obtaining P&T committee approval and placing initial orders since launch. With the Nexabird pediatric indication now in place, More than a third of the pediatric burn centers have completed P&T submissions, with several pediatric centers placing initial orders. Finally, Nexabert recently received a Category 3 CPT code, which is scheduled to be posted on the AMA website on January 1st and go into effect on July 1st next year. Overall, the company had an excellent third quarter, and importantly, We remain on track to meet all of the key objectives for 2024 that we established at the beginning of the year, including sustaining high revenue growth for Macy and the company, establishing a second high growth franchise in burn care, securing FDA approval and launching Macy-Arthur in the third quarter, and continuing to drive substantial margin expansion and profit growth. I'll now turn the call over to Joe to provide a more detailed review of our third quarter financial results and guidance for the remainder of 2024.

Thanks, Nick, and good morning, everyone. As Nick referenced, Verizell had an excellent quarter across all financial metrics with record third quarter revenue and profit margins coming in ahead of our guidance for the quarter. Total net revenue for the third quarter was $57.9 million, an increase of 27% versus the prior year. Macy revenue grew 19% in the third quarter to $44.7 million and remains on track for a strong fourth quarter and approximately 20% growth for the full year. Total burn care revenue in the third quarter grew 66% to $13.2 million, well ahead of our guidance. The outperformance was driven by record quarterly epiCell revenue of $12.2 million with the increased graph volume primarily due to considerably higher graphs per order. Importantly, based on our higher share of voice in the burn care market, both new and dormant epiCell accounts have contributed a meaningful portion of epiCell's nearly 30% growth on a year-to-date basis. Next-grade revenue grew sequentially to $1.1 million for the quarter as we continue to add new ordering centers and the number of centers regularly using Nexibrid increases. The company's substantial revenue growth translated into significant margin expansion with gross profit of $41.7 million, or 72% of net revenue, an increase of 480 basis points compared to 2023, which also represents a record quarterly gross margin outside of our seasonally highest fourth quarter. Through the third quarter, the company has generated gross margin of 70%, an increase of 450 basis points versus the prior year. Total operating expenses for the quarter were 44.1 million compared to 35.7 million for the same period in 2023. The increase in operating expenses was primarily due to development and commercial launch activities for Macy Arthro, increased headcount and related employee expenses as well as additional marketing initiatives that helped drive a significant increase in physician engagement across both franchises. Net loss for the quarter narrowed to $0.9 million, or $0.02 per share, compared to $3.7 million, or $0.08 per share, in the prior year. In addition, the company has generated positive gap net income on a rolling 12-month basis, and importantly, we remain on track for positive GAAP net income for the full year. Adjusted EBITDA for the quarter increased 84% to 10 million, or 17% of revenue, an increase of over 500 basis points versus the prior year, as we continue to drive very strong bottom line growth. On a year-to-date basis, adjusted EBITDA has more than doubled to nearly 24 million. Finally, the company generated over 10 million of operating cash flows, and ended the third quarter with 151 million in cash, restricted cash, and investments, and no debt. Notably, our cash and investment balance has remained consistently in the $150 million range throughout the year, as the company's strong financial and cash generation profile has allowed us to completely self-fund the investment in our new manufacturing facility to support the company's future growth. Turning to our financial guidance, for the full year, we are maintaining our total company revenue guidance of $238 million to $242 million, or 20% to 23% total revenue growth, which implies fourth quarter revenue of $76 million to $80 million. In terms of our profitability guidance, based on the company's financial performance year to date, and expectations for a strong fourth quarter, we are increasing gross margin guidance to 72% and adjusted EBITDA margin guidance to 22% for the full year, compared to the prior guidance of 71% and 21%, respectively. Overall, 2024 is set up to be another very positive year for the company, with another year of high topline growth as well as significant margin expansion and profit growth ahead of our initial expectations. As we look ahead to next year, we believe that the durable growth in our core portfolio, together with our recent product launches, positions the company to sustain strong top-line and bottom-line growth and deliver a meaningful inflection in our cash generation given significantly lower CapEx as we complete the construction of our new facility early next year. I will now turn the call back over to Nick.

Thanks, Joe. The company's performed extremely well to date in 2024. And as we move into 2025 and beyond, we expect the momentum across our business to continue. While we're still very early in the Macy Arthro launch, we're seeing substantial interest and engagement with both previous Macy targets as well as the incremental 2000 high volume arthroscopy surgeons that are now part of our 7000 target surgeon base. As I mentioned earlier, the first Macy Arthro case was performed within days of approval, and surgeons have already performed or scheduled dozens of Macy Arthro cases to date. Importantly, Surgeon feedback has been very positive with respect to the potential patient benefits noted by surgeons in our market research, as the Macy-Arthur procedure offers a less invasive treatment option requiring smaller incisions, which may result in less postoperative pain and overall faster postoperative recovery for patients. We're very pleased with the launch date, and given that the Macy-Arthur instruments target the largest segment of the Macy addressable market, representing approximately 20,000 patients per year, we believe that Macy-Arthur will have a meaningful impact on overall Macy utilization and potentially bolster its current high growth trajectory, providing a significant potential upside growth opportunity for the company in the years ahead. We also continue to advance the Macy-Ankle development program. We remain on track to submit an I&D in the first half of 2025, and expect to initiate the Phase III clinical study in the second half of the year. A potential Macy ankle indication represents a substantial longer-term growth driver for Macy, with an estimated addressable market of $1 billion that would enable the company to expand into other orthopedic markets. Lastly, we'll be moving into our new facility early next year and plan to begin commercial manufacturing of Macy at that site in 2026. The new facility is designed to meet both U.S. and global manufacturing requirements, which provides strategic flexibility for the company to potentially commercialize Macy's outside the United States. We're initiating an evaluation of the market opportunities and regulatory requirements in several OUS geographies as we continue to expand the long-term growth and value creation opportunities for the company. Overall, we believe the company is well positioned not only for a strong close to 2024, but also to deliver a unique combination of sustained high revenue and profitability growth in 2025 and beyond, based on the strength of our core portfolio, the recent launch of Macy Arthro, and continued progress on other long-term growth initiatives. This concludes our prepared remarks. We will now open the call to your questions.

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. Please stand by. We compile the Q&A roster. And our first question will come from Ryan Zimmerman from BTIG. Your line is open.

Good morning, and thanks for taking the questions. Congrats on a really nice quarter. I guess I want to start with Nexabrid because it's getting off the ground this year. There's some decent expectations on Nexabrid in the next year as it normalizes and becomes more routine of a product versus having to go through the P&T process. And so, Joe, I know you're not going to give guidance for 25, but conceptually, I guess... Can you talk a little bit about kind of the drivers for growth next year, kind of where you see NexoBrit potentially settling into a rhythm, or when you see it settling into a rhythm, and whether or not Macy-Arthro is really an accelerant or a sustainable kind of driver of current Macy expectations?

Yes. So, Ryan, I'll kind of start there. you know, maybe kind of just talk a little bit about the framework from a guidance perspective and, you know, for 24 and then kind of how we're thinking about 25. You know, so, you know, for 24, you know, I think we've been consistent kind of all year in our framework. And I think as we think about Macy, you know, we think that's still very much on track, you know, for 20%, around 20% growth on a full year basis this year. So, you know, that hasn't changed. You know, as we move into 2025, you know, I would say kind of the way we're thinking about from a company perspective, you know, kind of thinking about the framework for next year, you know, we haven't given specific, you know, guidance, you know, at the company level or at the product level as of yet. But we have, you know, pointed out that we do expect, you know, another year of strong growth. We talked about kind of being in the 20% plus range. So I would say just kind of more as a framework as we move toward next year, You know, I think the right starting point, you know, as we think about 25 is really to think about the total company growing at a similar range as kind of where we started this year and kind of the range we're in from a growth perspective. So, you know, what does that mean kind of across the franchises? You know, for Macy, obviously, you know, the leading indicators have been extremely strong this year, kind of throughout the year. You know, biopsies have been strong. It's driven by surgeons and biopsies per surgeon. The initial feedback on Macy-Arthro, you know, as Nick talked about, has been very strong. But I think as we think about next year, probably the way we're thinking about Macy to start is, you know, just based on those strong leading indicators and their core growth drivers. And I would kind of say a modest contribution from Macy-Arthro. We think Macy can kind of be in a similar growth rate next year, just thinking about it that way. And maybe just to kind of round out 25, you know, I think on BurnCare, you know, I think from a Nexabrid perspective, you know, I think our expectation at this point, you know, we're three quarters into the year, kind of getting through our first year launches. You know, I think as we move into next year, I think at this point we'd expect, you know, continued progression kind of each quarter on Nexabrid. And then from an EpiCell perspective, probably more typical growth this year has been a little bit kind of outsized from a growth perspective. So I still think Burn Care will have you know, very strong growth next year, but probably more in line with the company growth. And then lastly, I would say kind of on both Macy Arthro and Nexabrid, you know, we don't want to get ahead of ourselves, but there's certainly potential to outperform kind of the starting point here. If Macy Arthro, you know, kind of the impact is greater than we initially assume, it may come faster. And then similarly, from a Nexabrid perspective, it really comes down to we've had a lot of penetration in terms of total centers, but in terms of the centers really using it more regularly and kind of moving our centers kind of up the segment chain, if you will, that could potentially lead to, you know, faster, faster growth in the Nexabrid side. But, you know, we're not going to assume that out of the gate on Arthro or Nexabrid as we think about 25. Okay.

That's very helpful. And Nick, maybe turn to Macy Arthro for a minute. Um, we, we heard it was, uh, and I could be wrong on this. We heard it was standing room only at the OSET conference in Vegas or about a week or two after Macy Arthro got approved. And so, you know, certainly a positive data point, uh, in terms of investors, excuse me, surgeon interest. Can you talk about, you know, you talk about record biopsies, you talk about, you know, biopsies for surgeon. I mean, what, are you seeing from those 2,000 or so doctors that are incremental right now as we get going? And the second part of that is, are you seeing an uplift in your existing Macy customer base as a result of Arthro, or do you expect that to be more the driver than, say, new physician adoption as it gets going?

Yeah, hey, Ryan, thanks. That's a great question. And, you know, when we kind of talk about Macy, Arthro, and having the past, and we really think about, obviously, we had, you know, kind of our current or prior Macy 5000 targets, and then adding the new 2000 surgeons. And as we think about segments within those kind of broader groupings, you know, you have current Macy users from the 5000 targets One bucket of them principally kind of looks at Macy as a patella or patellofemoral joint option for patients. Others do that plus femoral condyles. And so we kind of look at, you know, the surgeon segments in that way. And then you have kind of an opportunity for non-Macy users out of those prior targets. And then the new 2000 surgeons. And I would just say of the first few dozen cases that I referenced earlier, We actually have surgeons who have either performed or have scheduled Macy-Arthur procedures out of all four of those buckets. So we think that's a great leading indicator. As I've said on prior calls, certainly the low hanging fruit is our previous targets who have biopsies that haven't yet converted that are amenable to the arthroscopic approach. And of course, when we had Dr. Banphy uh who's you know on our website he did the first case the week we announced the approval um you know obviously that was a previously scheduled case previous biopsy that you know he was able to perform the arthroscopic mesi procedure with so you know that's those are the ones that are going to be easiest and as we've talked about you know we have that pool of unconverted biopsies for for the year that each rep can go out and talk to their yeah the surgeons about but As I mentioned, we've also had non-Macy users from our original targets, and then the new 2000 targets where surgeons have actually taken biopsies in scheduled cases. So again, we think that's a great sort of early leading indicator for the potential that Macy-Arthro can have as we move forward.

Thank you. Thanks, Ryan.

Thank you. Our next question comes from Richard Newlitter from Truist Securities. Your line is open.

Hey, guys. Thanks for taking the questions, and congrats on the quarter. Maybe just the first question here, following up on Ryan. I might have missed it. You might have said it when you were answering him. But with respect to the portion of the market where you see Macy Arthrow giving you better accessibility to the lesion sizes, the patellofemoral. I'm sorry, down the femoral condyle, rather. Are you seeing those dozens of initial cases getting used in that seemingly expansionary segment of the market? Is that kind of what you would have expected to see? Maybe just elaborate on that a little bit. And I'm sorry if you had said that when you were answering the last question. I might have missed it.

Yeah, hey, thanks, Rich. Yeah, no, I hadn't addressed that part. But as I mentioned on prior calls, so the entire Macy arthro instrument approach is designed for two to four square centimeter defects on the femoral condyles. Those are the most common defects represent about 20,000 of the 60,000 patient TAM or about a billion dollars a year. And, you know, typically with the open procedure, either patella defects or larger femoral condyle defects were kind of the go-to defects for Macy. And it doesn't mean we didn't, you know, have surgeons doing Macy procedures for those smaller defects, but we had a much smaller penetration compared to say patella or large defects. And so that is the opportunity for us to get a deeper penetration into the largest part of the TAM. And then, yeah, that's of course where the initial cases are going because the instruments, again, they come in pairs of two, three, or four square centimeter cutters, cannulas, and the implant device. And so that's exactly the size and the initial location But we've also seen surgeons, and again, we're just kind of in the early days, doing not only femoral condyle cases, but other areas of the knee as well. And of course, that could open up even broader utilization.

Very helpful. And maybe just, I know you're not giving official 25 guidance, but similar to kind of the way you parsed out some of the considerations and we used to think of starting points for revenue. Can you do the same down the P&L? This looks, you know, it's a great, great profit inflection that we're seeing in the business continuing in 24. You know, it looks like that's your continuum to 25, but anything you want to call out as we refine our models for next year, cadence, and maybe if you feel comfortable opining on where consensus forecasts are. Thank you.

Yeah, no, I appreciate the question, Rich. So, you know, I would say it's probably too early to get into specifics on next year. But I would say, you know, a couple of things. So one, you know, obviously the performance kind of this year, whether you look at individual quarters, kind of year to date, wherever, where the full year is trending from a margin perspective, whether you're looking at gross margin or adjusted EBITDA, you know, has been very strong. And I generally say probably a bit ahead of our expectations and ahead of our schedule for kind of getting up the curve there. So, you know, as I think, as we think about 2025, I would say we just want to be a little bit mindful of that. I mean, said differently, you know, I would not assume we're going to see the same kind of, you know, year over year expansion as a starting point, you know, in either gross margin or the adjusted EBITDA, you know, margin next year. You know, we will start to see, some of the depreciation and whatnot from the building start to play its way for the P&L. And that's, you know, more to get into for next year. But, you know, those are some of the considerations, you know, from an overall P&L perspective. You know, that said, I would say when you look at gross margin, you know, we're kind of at or ahead of our, what was essentially our mid to long-term expectation of 70%. So that is certainly great to see. And I think, you know, that's something we think we can certainly continue to improve upon. And from an adjusted EBITDA perspective, you know, I think we're tracking nicely there as well. I think we're well set up to kind of, you know, make progress and kind of hit our long, you know, call it mid-range targets of 30% plus. You know, what it means to next year is, you know, we'll probably start out, you know, with, I would say, the kind of right expectations for that to continue to increase. But, you know, at a lower rate, you know, at a lower rate on a year-over-year basis to start the year. I would also say, you know, and I guess on those two, I would say, you know, at the appropriate time, we'll probably think about, you know, updating some of those long-term targets. You know, obviously we're kind of at the 70%, for example, on gross margin or 70% plus. So that's, you know, we'll update that at the right time. You know, I just broaden it a bit as well and just say, as we move to next year, you know, the last couple of years for us, you know, we talked about, and I think we've experienced that inflection from a profitability perspective on the P&L. But as we move to next year, I think there's a couple of other important dynamics, which is one, you know, this year we're expecting to be gap net income positive. We obviously expect to build on that next year. So that'd be something that I think will be very important as we move into next year and beyond. And then we referenced it in the prepared remarks, but from kind of a financial profile and cash generation perspective, you know, we did want to point out, you know, we've self-funded our entire facility you know, primarily this year, but over the last, you know, few quarters. And, you know, essentially once we get into early next year, that will be behind us. So in addition to kind of the P&L metrics that we're obviously very focused on, as well as the top line, I think, you know, the cash generation, you know, should significantly, you know, will significantly improve in 25 and beyond. So that's something I'd say we're focused on as well.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question comes from Mike Kratky from LeeRent Partners. Your line is open.

Hi, everyone. Thanks for taking our questions. Maybe another one on Macy-Arthur. How have the early wave of Macy-Arthur procedures that are being done or scheduled guided your outlook both for 4Q and 2025, just in terms of, you know, one, the portion of implants that are going to be done arthroscopically, and then You know, too, again, just kind of the degree to which you could see any uplift from Macy procedures overall.

Yeah, I'll start and then Joe can jump in as well. So, you know, as we mentioned, the surgeon interest for obvious reasons is very strong. And, you know, we have had, as we expected, sort of the low hanging fruit, as I mentioned, is surgeons who had these biopsies that are amenable to arthroscopic procedures and then converting those cases, essentially doing them arthroscopically instead of open. So, you know, most of those are cases that I think you could say likely would have gone forward in the fourth quarter. Probably some were incremental, as we've seen surgeons Again, kind of get pretty enthusiastic about it. So we had said that we knew we would end up doing some cases this year. But given the dynamics of the launch in September and, you know, the obviously each surgeon who's in that bucket of 2000 new surgeons and then those who hadn't, you know, taken biopsies for Macy in the past. That's all prospective business. And as we've talked about, the median time for biopsies to convert is about four months. And that's why we have said consistently that we'd see kind of a bigger impact from Macia arthro in 2025 and beyond. So lots of momentum, as Joe mentioned, in the core business. We expect to have some incremental, obviously, as we get into 25 Macy-Arthro, and exactly how quickly that inflects, I think, remains to be seen. But we certainly, based on the initial enthusiasm, and it's just obvious, right? It's a less invasive surgery. As we talked about, surgeons and patients expect that there's less post-operative pain. faster post-operative recovery or overall recovery. And so, you know, that's what's driving a lot of the enthusiasm.

Yeah. And just to chime in briefly on 4Q and kind of the guide as well. So, you know, I think as we've talked about on Macy, you know, I think another strong quarter in Q3, I think we're set up well, you know, kind of still at that 20% kind of growth for the year. You know, that's From a q4 perspective i'd say you know the kind of right place to start, I may see is 68 million in q4 you know approximately 68 million that kind of gets you to that 20% in a four year basis. And just on that kind of on the question you know that's not that's really based on the strong leading indicators and really what would be typical seasonality. So, you know, that's based on just kind of the trends we've seen throughout kind of Macy's history there, you know, with the step up in Q4. It is not based on a significant kind of uptick in Macy arthros. So that's not really the driver of Q4 guidance. And then just quickly on the burn care side, just to round out Q4, you know, obviously a great third quarter, particularly on EpiCell, you know, which is great to see. And it's performed well really throughout the year. You know, I would say from a guidance framework perspective, you know, I think we've been pretty consistent on this. You know, we don't typically raise our guidance based on one quarter or a prior quarter of EPISEL performance, just because it can vary so much quarter to quarter. And just as a reminder, you know, for example, even in the second, sorry, in the first quarter, you know, we had 11 million of EPISEL revenue, and the following quarter, you know, we did not change our guidance, and the following quarter was 7.8 million. You know, I think that's a good example of kind of holding to our framework. It's certainly appropriate, and we continue to believe that's the best approach, just because it's a difficult product to predict on the burn care side. So, you know, in terms of Q4, on the burn care side, I would say still early in the quarter, and EpiCell, you know, clearly remains very difficult to predict. But, you know, I think at this point, it's probably trending closer to Q2, which was in that, you know, call it 7.5 to 8 million range. I think it was about 7.8 million. So that would point to burn care trending, you know, to around 9 million in Q4. So, you know, as we think about Q4 and closing the year, we think we're set up for a very strong close, but, you know, kind of our framework is 68 million on the Macy side and 9 million on the burn care side. Of course, there could be some variability, but we think that's the right place to start.

Understood. Yeah, super helpful color there. So I appreciate that. Maybe one quick follow-up. You know, EpiCell has definitely been a really positive surprise Do you expect that the Nexabrid launch has kind of helped you drive additional engagement there? And do you expect that that is a trend that could be more durable in 2025 and beyond?

Yeah, that's a great question. And, you know, we've said even since last year, you know, when we were first getting ramped up with Nexabrid, that we've definitely seen pull through and now meaningful contribution to epiCell growth. from the Nexabrid selling activities in either new or dormant burn centers. And yeah, it's been a meaningful contributor, you know, probably as much as Nexabrid itself for the year. And so we expect that will continue as we move into 2025. And I think we mentioned on our last earnings call that, you know, we had realigned probably on the earlier side to both expand the number of burn care reps and ensure that all of them are selling both products now. If you recall, when we first launched NexaBridge, just because the training requirements on EpiCell are pretty steep, that we kind of had a group, kind of an overlay configuration where the NexaBridge reps were calling just on the new NexaBridge accounts with the long-term vision that we would at some point have all of our reps selling both products. And we implemented that in the third quarter. And so long story short, yeah, we expect that the cross-selling opportunities will continue to help EpiCell as we move forward. And it's really been great. I mean, obviously, even based on the guidance Joe just mentioned, you know, it'll be up close to 30% for the year. So good, strong performance for EpiCell.

Awesome. Thanks, guys.

Thank you. Our next question will come from Josh Jennings from TD Cowan. Your line is open.

Hi, good morning. Thanks, Nick and Joe. Congratulations on another strong quarter. I wanted to just ask about the Macy Biopsy Bank, and you referenced one of the first procedures. There had been a biopsy that was taken prior to approval, is my assumption, but were you seeing some some of that pent-up demand flow through with kind of femoral condyle biopsies as you headed into the Macy-Arthro approval? And any sense of how that could, you know, kind of what that pent-up demand looks like in the biopsy bank?

Yeah, so you know we did have a number of surgeons and I believe we talked about this on our last call. You know roughly 100 ish surgeons that either were involved in sort of the design of the instruments and development in the human factor study and the voice of the customer labs following the submission to the FDA. So you know there were clearly call it 100 ish surgeons who had participated in this and And so, you know, as you'd expect, some of the early procedures are coming from those who were familiar with it. We obviously also, you know, have biopsy transmittal forms with the size and location of the biopsy. So, you know, for biopsies essentially taken in 2024, which had not yet converted and were amenable to arthroscopic administration, again, based on the size and location, we were able to arm our reps with, you know, the surgeons and patients that they could have a discussion about would it be appropriate for Macy Arthro. So, you know, I would say, though, that it's not, we obviously couldn't promote the Arthro approach until it was approved. So, there wasn't a whole lot of discussions kind of ahead of the approval or moving towards it, as you referred to. It was really once we got approval, then they're armed to go out and, you know, have those discussions with the surgeons about the approach.

Excellent. And then thanks for that. And just wanted to get an update on Macy pricing and how to think about price increases in 2025 and kind of within that, just remind us, you know, the incremental revenues from Macy Arthro instrumentation in those cases. Sorry for the multi-part question here, but also just wanted to ask about just to review the commercial thrust to attack these 2,000 high-volume arthroscopic orthopedic surgeons and And just to make sure that there's, you know, you guys feel well equipped and positioned to maintain that kind of farming of your current accounts and hunting those new arthroscopic, that new arthroscopic camp that you're unlocked. Thanks.

Yep. So I'll just start with kind of the general Macy pricing. You know, we typically take a mid to high single digit price increase each year. And, you know, we'll expect to do that in 2025 as well. In terms of the Macy-Arthro instruments, those are disposable instruments. So unlike an open procedure where we have an implant kit that we basically provide to the surgeons and then we have to actually kind of process that, sterilize it, et cetera, these are disposable instruments that we sell to the surgeons in the Macy-Arthro cases. And so, yeah, you'll see kind of what was in our 10Q previously as the biopsy kits as a line item for MACIE. We'll also now include the instrument revenue that we generate there as well. Again, compared to sort of the reimbursement for the J code for MACIE, it kind of pales in comparison, but, you know, we are charging for the instruments in the MACIE ARTHRO pieces.

I think the last piece, Nick, was just a quick in terms of. Oh, yeah.

So the other, so the last piece of that is we are definitely planning early next year to kind of do a refresher on sort of Salesforce sizing as You might recall kind of pre-COVID, you know, each year we basically increased the size of the Macy sales force post-launch in 2017. So we did it in 17, 18, and 19. And then for 2020, we actually engaged ZS Associates and did a pretty comprehensive assessment. And that's when we went from, you know, roughly 48 to 75 territories. So it was a pretty big expansion. And That has served us well to date in this intervening period. We have, as I've mentioned before, added territory development representatives in some of the larger volume territories. And we did that again this year to kind of help with the volume in those territories. But we'll be kind of refreshing that for the very reason you mentioned, which is to make sure we have interest we're seeing in Macy Arthro. And, you know, again, if we end up expanding, kind of run the same playbook that was very productive for us. We've often mentioned that each year that we expanded the sales force, rep productivity actually went up in terms of revenue per rep. And so there's a playbook we follow when we do that. So we'll do the evaluation early next year and then, you know, to the extent we want to increase the sales force, we'll do that sort of in the back half of next year and rolling into 2026.

Excellent. Thanks so much.

Thank you. And our next question will come from Caitlin Cronin from Canaccord. Your line is open.

Hi, thanks for taking the questions and congrats on a great quarter. You know, so with ARTHRO, you're again increasing your serving base, as you noted, after reaching about 50% penetration from the previous base. I guess just with this larger base, do you think that there's a limit to the penetration you can reach with Macy longer term or if you have, you know, kind of a number that you're targeting there?

Well, you know, we kind of said, you know, we've got two data points, I guess. One is, you know, prior to the larger expansion that I just mentioned in 2019, you know, we had about 3,000 surgeons at that time, you know, the last year in 2019 that we had reported data. You know, we increased biopsy surgeons by 25% to about 1,400 that particular year. Cumulatively, it was greater than that on the original 3,000 targets. So we were around 50%, and then we expanded to 5,000 surgeons. And, you know, over the course of, you know, kind of last year into this year, we were approaching that 50%. penetration rate again, and now we're expanding, you know, with 2,000 more. And as we've said, we expect that dynamic will continue where we'll, you know, relatively rapidly, I think, get to kind of the 50% penetration. And we would never kind of run the experiment to get to a terminal sort of penetration rate. But, you know, as I said, cumulatively, it's typically more than you see in any particular year. So, You know, so we expect the same kind of dynamic. And as we've mentioned, you know, growth in biopsy surgeons will continue to be an important growth driver for the company over the next several years.

Great. And then just turning to EpiCell, you know, with the dormant accounts reengaging with EpiCell, how many have reactivated and, you know, how many burn centers are now actively using the products?

Well, you know, that's kind of typically in a, you know, the year is not done, obviously. And, you know, we have said in the past that, you know, of the 140 burn centers, there's kind of a subset that routinely treat, you know, kind of epi-cell patients. And often, you know, even if you're an accredited burn center, those patients will be transferred to some of the larger centers because they're the smaller ones don't necessarily routinely see or treat these kind of catastrophic burn patients. So I think in the past we've said in any given year we can get biopsies from 70 to 80 of those burn centers because not all the patients end up being treated because of health issues or patient expiry. You know, routinely you'd have, you know, roughly 40 to 50 centers that would end up ultimately treating the patient. So I don't think that's markedly changed yet. But, you know, there's obviously an opportunity to do that as we move forward.

Great. Thanks so much.

Okay. Thank you.

Thanks. Thank you. Our next question comes from Jeffrey Cohen from Lattenberg, Salomon & Co. Your line is open.

Hi, Nick and Joe. Congrats on a strong quarter. Just one question from our end, if you could... talk upon about the instrumentation for uh macy arthro and the training of doctors out there what are you finding as far as learning curve or lesson learned and then perhaps um talk about how that may play out in the future for uh ankle as well thank you yep well thanks jeff you know as as was the case with macy open procedures um you know the training is

often done online. And for the Macy-Arthur submission, we, you know, submitted online training materials. So for those who are really experienced, both, you know, with Macy and arthroscopic procedures, which are a lot of the surgeons, you know, they don't really have to do any additional training if they don't want to. So it's not sort of like a bottleneck you have to work through. Now, of course, you know, we do like we did at the orthopedic summit. And I appreciated the comments of standing remote only because it really was in the demonstration kind of in the middle of the center. But we also had training labs there. So surgeons could come in. do cadaver labs and practice doing ACR throw. And so, you know, often surgeons will do that. We have examples of, you know, a case that was scheduled for Tuesday, you know, the Friday before the rep goes down, they train on a cadaver knee, and then they go into the surgery. We also have models that we can provide surgeons, a model knee where they can practice not on a cadaver knee, but on the model. And we've had an example of that, the MARDI model, their first procedure so you know online cadaver training or using the marty model are the ways that the surgeons can train before they do their first procedure god and would you expect us to follow a similar pathway for ankle uh in terms of the administration um you know Right now, obviously, we're kind of working with the FDA on and getting prepared to submit an IND and start the study in the second half of next year. We don't currently have mesiarthroscopic instruments developed for that study, so it'll be kind of a traditional administration as they're treating ankle cartilage defects now. Certainly, that is something over the course the same playbook if that ends up being sort of a preferred route of administration, you know, for a Macy-Ankle procedure.

Got it. Okay, perfect. Thanks for taking our questions. Nice quarter.

Thanks, Jeff.

Thanks. Thank you. Our next question will come from Swayam Bakula-Ramakant from HCW. Your line is open.

Thank you. This is RK from Hitsy-Rainwright. Most of my questions have been answered. Just a quick question at a high level. So as we get ARTHRO going in the market, just trying to understand how we should start thinking about synergies on the operating margin, especially as ARTHRO gains adoption. And, you know, can that happen early, or is this going to be a little bit of a long-term gain from here?

Yeah, so good morning, Arkansas, Joe, and I'm sorry on that one. You know, I think as we kind of think about the outlook, you know, into 25 and beyond, you know, I think the real advantage here with Arthro is, you know, we essentially have, you know, a significant kind of built-in synergy already, right? So, you know, this is no change to the kind of field force, you know, same number of territories to start. As Nick said, we'll take a look and make sure we're kind of, you know, we have kind of the right reach and frequency, et cetera. But from kind of a margin P&L perspective, you know, there's really nothing, there's nothing really, you know, significantly different from an RFO perspective versus an open case. So as we talked about, there's actually some degree of revenue. So there's a bit of a top line contribution when physicians are, when they purchase the instruments, you know, there are some additional costs. They're pretty minor on the cost of goods sold side. But, you know, I wouldn't think of this, you know, kind of impacting, you know, where we're going from a P&L perspective. You know, I think, again, having the top line revenue to support And to kind of add to the total is helpful. I don't think that'll be hugely immaterial. It's a small number relative to the cost of the implants. But, you know, I think we're kind of well set up, you know, with Arthro, and that shouldn't impact our kind of long-term outlook. Thank you.

Thanks for taking the question.

Thank you. And our last question will come from Ryan Zimmerman from BTIG. Your line is open.

Hey, sorry, just a quick follow-up. I don't think I heard anything just on the fourth quarter implied guidance. Is there any contribution or impact from either the hurricanes or the IV shortages that are impacting particularly Macy procedures if there is continuous irrigation used for those cases?

Yeah, hey, thanks, Ryan. So, you know, to date, obviously it's something the industry and we are monitoring. To date, you know, kind of from an implant perspective, we haven't seen any impact. You know, a Macy open procedure is a pretty low IV fluid procedure. So, you know, especially compared to, you know, things like rotator cuff surgeries or ACLs, et cetera. So haven't really seen that, you know, Could there be a case if there's hospitals that, you know, are in short supply and they're trying to manage it? You know, an arthro case will use a little more fluid than an open case. And could one of the arthro cases be, you know, converted over to an open case? Sure. But to date, you know, we're not really seeing any impact at all on the kind of implant side. Appreciate it. All right. Thanks, Ryan.

Thank you. And I am showing no further questions from our phone lines. I'd like to turn the conference back over to Nick Colangelo for any closing remarks.

Okay. Well, I just wanted to say thanks again for your questions and your continued interest in the company. You know, we had a great third quarter. We're excited to deliver a strong finish to the year and continue with our high growth momentum into 2025. So we look forward to providing further updates on our next call. Thanks again and have a great day.

Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.