Thanks for joining us for day two of the Morgan Stanley Healthcare Conference . I'll point you to the conference website for the requisite legal disclaimer. I'm pleased to welcome Nick Colangelo from Vericel. Nick, maybe we can start off with, you know, a little bit of general information, particularly for investors who are less familiar with Vericel. Can you provide a little bit of background on the profile of the company and going forward?
Yes, certainly, and I wanna first of all say thanks for having us here. We're really excited to be part of the conference. You know, as always, we say that, you know, this discussion will contain forward-looking statements, and so investors should refer to our documents on file with the SEC for further information. Vericel is a leader in advanced therapies for the sports medicine and the severe burn care market. We have a portfolio of highly innovative advanced therapies that- advanced cell therapies, and specialty biologics that are really focused on changing the standard of care for patients with knee cartilage injuries and severe burns.
So we currently market two products in the U.S., MACI and Epicel, which are regulated by the FDA as combination device biologic products, with obviously the biologic component of those products being the use of the patient's own cells to repair tissue and restore function. Our lead product is MACI, which we launched in 2017 for the repair of cartilage injuries of the knee, and MACI is the leading restorative cartilage repair product on the market and the only FDA-approved product in its class. Our second product is Epicel, which also is the only FDA-approved permanent skin replacement for patients with large body surface area burns, both pediatric and adult patients. We recently expanded our burn care portfolio with the FDA approval of NexoBrid, which is highly synergistic with Epicel.
So NexoBrid is indicated for the removal of the burn tissue or eschar, which is done before you cover the wound with a product like Epicel. So a really exciting portfolio, and I think one of the defining characteristics of our company is that this is a unique portfolio with significant competitive barriers to entry. So because MACI and Epicel are combination device biologic products, there's no established biosimilar or 510(k) pathway. So any other products or companies that wanna enter these markets have to go through, you know, some pretty substantial clinical development programs, and it's hard to do in this area. So there's no near-term like competitors for either MACI or Epicel.
Because NexoBrid's an orphan biologic product in the U.S., obviously, in addition to its patent coverage, it also has biologics data and orphan market exclusivity as well. So we think it's an exceptional foundation for the company to be able to sustain long-term revenue and profit growth as we move forward. And what we're really focused on is, first of all, maximizing the growth drivers for MACI in the current indication for the treatment of cartilage defects in the knee, advancing our pipeline, which is really focused on MACI lifecycle management initiatives, arthroscopic delivery, and an ankle indication, and then expanding our commercial burn franchise with the launch of NexoBrid, which hopefully will be happening in the very near future.
Great. Can you talk a little bit about the financial profile of the company?
Yeah. Well, we have a very strong track record of success in terms of our financial profile since we launched MACI. From a revenue perspective, since 2017, we've generated 20%+ compounded revenue growth, and that's really based on strong growth for both MACI and Epicel. We just reported our 12th straight quarter of positive adjusted earnings and operating cash flow, and we ended the second quarter with $150 million in cash and no debt, so a really strong financial profile. In terms of our Q2 results, we kind of continued that trend. We had very significant revenue growth, 24% revenue growth overall, sustained profitability and operating cash flow, and really strong underlying fundamentals for both MACI and Epicel in the quarter. So again, revenues were up 24% to about $46 million.
Adjusted earnings was up 60%. We had about $10 million in operating cash flow, so again, very strong results. And importantly, we expect, you know, we ended up raising guidance for the year, in terms of revenue, to $190 million-$197 million for the year. And importantly, you know, we actually expect continued momentum in the business. And with the addition of a full year of NexoBrid next year and the launch of our arthroscopic MACI, we actually expect growth to accelerate next year and really over the next several years. We believe we'll maintain our high revenue, growth profile.
Because of the operating leverage in our business, where we have premium priced products, concentrated call points, we expect our margins to expand, with gross margins growing to over 70% and Adjusted EBITDA margin to over 30%. We're really excited about the outlook for the company as we move forward.
That's great. May we spend a little bit of time going through the product portfolio and starting with MACI?
Yep.
Can you provide a little bit of a background on the cartilage repair market and why you see MACI as a differentiated treatment option versus other?
Yeah. So, cartilage injuries of the knee represent a significant issue—you know, about 60% of knee arthroscopies identify a cartilage defect, which is really like a pothole on the surface of the knee. And these injuries occur through kind of acute or repetitive trauma or other degenerative conditions. And the issue with cartilage is that there really aren't—it doesn't have, like most other tissues in your body, intrinsic healing properties. There's no blood vessels that bring in repair cells, there's no lymphatics, there's no nerves. So once you have one of these injuries, you basically develop osteoarthritis, obviously pain and dysfunction, and then, you know, often move on to partial or full knee replacements, and that's what we're trying to prevent. And there are a significant number of these injuries that are treated each year, upwards of 1 million of those.
So, you know, the MACI itself is basically produced by taking a small biopsy of a patient's own cartilage from a non-weightbearing portion of the knee. We expand the cells. We seed them at a density of about 500,000 to 1,000,000 cells per square centimeter on a collagen-resorbable collagen membrane that's surgically implanted. And when the membrane is implanted, the cells migrate down to the subchondral bone. They start to replicate. They produce the cartilage that's naturally present in the knee, fill the defect, and allows patients to kind of resume their active lifestyle. So a very important product, and again, when these injuries don't heal on their own, MACI presents a really compelling opportunity.
And, you know, of those upwards of 1 million procedures that are done each year, many of those are chondroplasties, where a surgeon will go in and scope the knee and clean it out or microfracture, and those may provide pain relief for smaller defects. But we're typically focused on the larger, greater than 2 square centimeter defects in the knee. And so, you know, it's a very large opportunity for us. There's about 60,000 patients a year that have those larger defects, and at our price point, it's about a $3 billion market opportunity. So really, really exciting growth opportunity for the company.
Great. It seems like results lately have been, you know, phenomenal. What do you think has been driving this?
Well, clearly, as we mentioned on our second quarter earnings call, you know, the growth this year has been driven principally by a continued expansion of the number of surgeons that are utilizing MACI and the resulting biopsies that they bring in. So we reported on our second quarter earnings call that we had the highest number of surgeons taking biopsies in the second quarter-
Mm-hmm.
- since we launched the product, six or seven years ago.
Mm-hmm.
Really compelling growth there. We had, you know, essentially the highest or almost, you know, within a handful of the highest number of biopsies that we've-
Mm
... we've ever had. So that was really our third straight quarter, starting in the fourth quarter of last year, where we've had record number of surgeons taking biopsies in a quarter, our three highest biopsy quarters since we launched the product. And so there's this huge momentum, which, you know, we're really excited to see kind of post-COVID-
Mm.
headwinds, that MACI has resumed its high growth profile. So... You know, we kind of tend to look at things over a longer period, and over the last, you know, the trailing 12-month revenue growth rate for MACI is about 28%. So really strong growth, driven by the expansion of the surgeon base.
Yeah. What do you think is driving the surgeon adoption?
Well, you know, we're really focused on it because we know it's a near-term driver for us, right? Always expanding the penetration into our target surgeon universe is going to drive longer term growth. So our commercial team is hyper-focused on that. And, you know, before we expanded our sales force in 2020, we went from about 50 territories to 76, from about 3,000 surgeons to 5,000 target surgeons. More than half of those initial targets, you know, had taken MACI biopsies and basically were using MACI as part of their treatment algorithm. And so, you know, we expect the same to occur-
Mm-hmm
in our new 5,000 surgeon universe. We had last year, you know, approximately 2,000 surgeons taking biopsies. Obviously, we're continuing to have strong surgeon growth there, so over time, we'd expect kind of a similar kind of penetration and, and potentially with the launch of arthroscopic MACI to expand that surgeon universe further. And I think from a surgeon perspective, you know, they certainly understand that MACI is an important treatment option, particularly for these larger defects. And, you know, based on its clinical profile, the fact that it's a much faster, simpler, less invasive procedure, you often see in med tech, that is, as these surgeries become less invasive and simpler to do, you get broader adoption in a community, and that's what we've seen. And then, you know, MACI's got a great reimbursement profile.
Mm.
So it's kind of all of those factors-
Right
- that have led to a pretty significant expansion of our customer base.
Great. Yeah, and, you know, you touched on it a little bit, but how meaningful do you think the arthroscopic delivery option and the ankle indication for MACI would be?
Well, yeah, we've been... As I said, our pipeline is really focused-
Yeah
around these sort of MACI life cycle management initiatives. And, you know, we hope to be able to launch the arthroscopic. We've designed a set of arthroscopic instruments.
Mm-hmm
... specifically for MACI. We hope to be able to launch those instruments in the first half of next year, and we think it will have a big upside for us for a couple of reasons. First of all, the instrument set is focused on 4 square centimeter defects on the femoral condyles or the end of the thigh bone. And those are the most common defects in our addressable market. So of those 60,000 patients that I mentioned, about 20,000 of those, or a third each year, have those 2-4 square centimeter defects on the femoral condyles. And that's because it's kind of the greatest weight-bearing part of the knee-
Mm-hmm.
-so you get a lot of injuries there. And, you know, while we get a lot of business there, our business is probably split 50/50-ish between patella, which is the kneecap and the cartilage on the back of the kneecap, and femoral condyle defects. But there are so many more femoral condyle defects. So of our 60,000 patient TAM, about 10,000 of those patients have patella defects. We have double-digit penetration there, but we have single-digit penetration in the femoral condyle defects just because it's obviously a greater patient population. So we had said on our second quarter earnings call that if we were able to get an equal penetration-
Mm-hmm.
Over the coming years in those femoral condyle defects, that we'd essentially double our business. So it's a huge opportunity for us, and, and we're really excited about it. We also talked about on our earnings call, the fact that, you know, we've done extensive market research around the opportunity, and that market research confirms what we believe, again, is that a large opportunity. So first of all, there is high surgeon interest-
Mm-hmm
... in an arthroscopic delivery option across surgeon groups, whether they're current MACI users or not. That's really driven by the benefits that are obvious to the surgeons.
Right.
It's a less invasive procedure, less postoperative pain, faster recovery, better aesthetics. And so those are sort of the product- the attributes of a, an arthroscopic delivery that surgeons recognize. And, you know, whether they, again, were current MACI users or not, they would expect to shift a meaningful portion of the procedures from current options to MACI arthroscopic. So we really think this is gonna expand our penetration-
Mm-hmm
... within the current TAM.
Yeah.
Surgeons will now have both an open mini-open arthrotomy option and an arthroscopic option. And so we think it really will expand-
Mm-hmm
... our penetration in the MACI addressable market.
Okay, great. Yeah, look, a huge kind of expansion of your TAM, and-
Right.
I think the other question that has been on people's minds over the last few months has all been the GLP-1 news.
Yes.
I would be remiss not to ask that. So how do you think about the implications of GLP-1 taking off on MACI?
Yeah. Well, you know, we actually don't think it will have an-
Mm-hmm
... adverse impact on MACI, the MACI indication, and that's really because our patients tend to be kind of younger, active patients.
Yeah.
So like, if you look at our pivotal clinical study and even the publication of the first 1,000 patients that were treated in the U.S., you know, basically, the average age was in the thirties, kind of a bell curve from the teens-
Mm-hmm
... into the early fifties. These are, again, kind of weekend warriors. They want to get back to the activities they love. Typically, they do not have high BMIs.
Mm-hmm.
You know, there typically are, though, requirements from payers that require a BMI of less than 35. So if anything, it would be a tailwind, and that-
Yeah
... maybe some additional patients would be eligible for treatment. But again, we don't expect it to have any impact-
Okay
... adverse impact on MACI.
Okay, makes sense. May we pivot to the burn side of your portfolio? You know, with the approval of NexoBrid, you now have two products in your portfolio. How do you think that changes your kind of overall strategy going forward?
Yeah, well, you know, I think with NexoBrid and Epicel, that we have the premier burn care portfolio-
Mm-hmm
... in the industry. That's really because it allows us to have meaningful products and leading products in sort of the entire treatment algorithm for these patients. So you know, when you have patients with severe burns that are hospitalized, which are the patients that we focus on, you know, the treatment pathway is really determined by the size and depth of the burn.
So if you have a full-thickness burn, which means it goes all the way through all the layers of the skin, any size burn, you're gonna be admitted to one of the 140 specialty burn centers in the country. If you have a partial thickness burn, which means there's some dermal components left, greater than 10%, you're also gonna be transferred to one of these burn centers. Again, the treatment sort of algorithm is that, first of all, you have to remove the burn tissue or eschar.
Mm-hmm.
That obviously, if you leave it on, you have burn progression because the body has an inflammatory response to the damaged tissue. There's, you know, it's a cause of infections, et cetera. So very important to remove the eschar initially, and then you have to figure out how you're gonna cover the wound.
Mm-hmm.
So NexoBrid removes the eschar. Epicel is a covering for the, you know, full thickness burns. And when you look at the overall market size, you know, there's about 40,000 patients that are hospitalized each year. For Epicel, obviously, it's a very important product and a life-saving product, in that when you have these large burns, and we'll routinely treat patients with 60%-90% of their body surface area burned, you really only have a couple of options. One, are autografts. Skin is highly immunogenic. The body will. You can't do an organ transplant from someone else because the body will slough it off. So you either have to do autografts, where they'll take, you know, some of the patient's own skin, typically run it through a mesher so they can cover more, or use a product like Epicel.
You know, of those 40,000 patients that are admitted into hospitals each year, there's really less than 1,000 that are surviving patients with these large burns. So it's a smaller patient population for Epicel, but, you know, given our pricing, it ends up being about a $300 million opportunity. For NexoBrid, it kind of plays at the top of the funnel.
Mm-hmm.
So virtually, you know, the majority of patients who are admitted to the hospital are gonna have to have some kind of eschar removal. So about 30,000 of those products at our launch pricing for NexoBrid, that's another $300 million opportunity. So combined, it's a meaningful opportunity for us. And, you know, they're highly synergistic.
Mm-hmm.
Again, it's a very concentrated call point. There's 140 burn centers. Our current Epicel sales force focus is really on 70-ish-
Mm-hmm
... of those burn centers that routinely see Epicel patients. We have added about half a dozen NexoBrid reps that'll focus on the other institutions. You know, as we mentioned on our second quarter earnings call, we're actually seeing kind of a pull-through for Epicel-
Mm-hmm
... from those NexoBrid reps in the NexoBrid accounts. And so, that's kind of what we expected would happen, and it's nice to see that it's already started to happen.
Yeah. No, that's great, and look, burn surgeons are one who I think, you know, you're dealing with a really traumatic situation.
Correct.
They want the products that they want, and so when they-
Right
... have that kind of trust with Epicel, you know, the conversion factor, I'm sure you're seeing a little bit of data around that front, too.
Yep, we are. That's what we expect to see when we launch-
Right
... NexoBrid.
How will NexoBrid change the standard of care for treatment and severe burns, and how do you think about the penetration over the market over the long term?
Yeah. Well, right now, the standard of care for removing eschar is typically surgical removal.
Mm.
So they'll end up taking these patients into the operating room and really basically surgically excising the skin. So they take a knife, and they slice it away. Obviously, when you've got sort of a variable depth burns and a two-dimensional knife, there's a lot of trauma because you're taking a lot of healthy tissue. There's a lot of blood loss, and so very traumatic for the patient. There are some nonsurgical options that have not demonstrated particularly strong efficacy and don't you know, or have not shown that they reduce surgical excision. So there's clearly a need for kind of a selective and effective eschar removal product, and we think NexoBrid is that product. So NexoBrid is a mixture of proteolytic enzymes that somehow are able to identify the collagens in skin that's been denatured.
Mm
... or the proteins have been denatured through thermal burns. So it doesn't work if it's an electric burn.
Right.
It's just thermal burns, the way the proteins are degraded, those enzymes recognize that, and basically, you topically apply NexoBrid. It dissolves away over 4 hours, that burn tissue and leaves the healthy tissue. So obviously, great advancement for patients. And, you know, we think over time, it will change the standard of care from surgical excision to the use of NexoBrid, and we should have a very high penetration rate, just because it's so much better for patients.
Mm-hmm. Great. Now, you ended the second quarter with nearly $150 million in cash and investments and no debt, and you continue to be cash flow positive. How do you plan on deploying the capital?
Right. So yeah, I think, you know, again, the financial profile of the company is really strong, and as you kind of project out over the coming years, given sort of our current operating cash flow and how that will grow as revenues continue to increase and profitability increases, you know, we think we're in a, a really sort of enviable position from, from that perspective. And, you know, all the initiatives that we've talked about already today, whether it's expanding the sales force-
Mm-hmm
... you know, to support, you know, these new product launches, or, you know, just sort of the clinical development or of our lifecycle management initiatives, those are things that we just sort of include in our normal operating P&L.
Yeah.
So it isn't or they're not part of our capital allocation strategy. I'd say the two uses of capital going forward for us is, one, we're building a new manufacturing and headquarters facility, and that will require, you know, some meaningful investment over the next couple of years. But that's something we can fund from our current balance sheet and our operating cash flow, and that should be online and operational for us beginning in 2026, which is great. We're really excited about that. Second use, obviously, would be around strategic transactions-
Mm-hmm
... as we look at opportunities to add products to, you know, our sports medicine franchise as well as our burn care franchise. And kind of a third vertical that we look at-
Mm-hmm
... given our expertise in cell therapy development, manufacturing, commercialization, are there kind of MACI and Epicel-like opportunities out there?
Mm-hmm.
We spend some time looking at those as well. Between sort of our balance sheet, our operating cash flow, we have an ATM that we, is available, but we haven't used.
Mm-hmm.
We have a $150 million, you know, credit facility that we haven't used. So I mean, we - I think we have a lot of strategic flexibility-
Yeah
... to look at these business development transactions. Now, that being said, you know, we're hyper-focused on maintaining our revenue growth rate-
Right
... our profitability profile, and really maintaining a portfolio of innovative products like we have now.
Mm-hmm.
and so the hurdles are pretty high, but-
Yeah
... we're certainly in a position to do transactions, tuck-in acquisitions of companies, whatever sort of makes sense, if we find the right products that we're interested in.
Okay, perfect. Well, look, there's definitely an envious position to be in, and not many can say that, but there is a lot of opportunity ahead of you. I guess, are there any kind of closing remarks you wanna leave people with?
Well, no, I mean, I think again, or I should say yes. You know, again, I think the company's really well positioned as we move forward. You know, I guess we didn't touch on the ankle MACI expansion opportunity, but, you know, if you think about sort of the rest of this decade and beyond, you know, obviously, we have really strong growth based on the current product attributes of MACI for the current knee cartilage repair indication.
And then you kind of layer mid-decade on this arthroscopic delivery option, which we think will expand the growth opportunities for MACI pretty substantially. The ankle opportunity is another, you know, there's about 20,000 of those procedures that would be eligible for MACI each year, so another billion-dollar market opportunity, making a four billion dollar market opportunity overall for MACI. It's more of an end of decade, but you can kind of see, paint this picture of continued strong growth-
Mm
... through the decade and beyond, especially because there's no near-term competition. So between the growth opportunities there, expanding our burn franchise, which we think will become a second high-growth franchise-
Mm-hmm
... with the addition of NexoBrid, we just think the company is really well positioned as we move forward.
Okay, great. Well, thank you for taking the time and walking us through the story.
All right. Well, great.
Yeah.
Thanks for having us. Thanks, everyone.