Good morning. My name is Josh Jennings from the TD Cowen Medical Devices team. We are excited to have the executive team from Vericel joining us today at the forty-fourth Annual TD Cowen Healthcare Conference. Thank you guys for traveling across town and joining us here. With Nick Colangelo, President and CEO, and Joe Maher, Chief Financial Officer. Gentlemen, thanks so much for participating. I know you've participated in the past, but not recently, and it's great to see you guys in person.
Good to be here. Thank you. Thank you. Thanks for having us.
Absolutely. Before we get into the more specific questions, I'll turn it over to Nick and Joe to give a little bit of a background and set the stage with a look at the company's investor presentation. And so I hand over to you, Nick.
Yeah, thanks. And again, great to be here. And, you know, before we begin, I will say that I'm sure this discussion will contain forward-looking statements, and you should refer to our documents on file with the SEC for further information. And as Josh referenced, we do have a corporate presentation up that we can refer to during this presentation. So, I'll just start with a high-level overview of the company, and then we'll go into more details as we go along. But Vericel is a leading provider of advanced therapies for the sports medicine and severe burn care market.
And, you know, we combined innovative biologics with medical technologies to create what we think is a highly differentiated portfolio of advanced cell therapies and specialty biologics that repair tissue and restore function for patients with cartilage injuries and, and severe burns. So our lead product is MACI, which is a product that uses a patient's own cells to repair cartilage, and we launched MACI back in 2017 for the repair of cartilage defects in the knee, and it's become the leading restorative cartilage repair product on the market. From a burn care perspective, we're focused on hospitalized patients, and for these patients, essentially, the treatment pathway entails, first of all, removing the burned tissue or eschar, which is where NexoBrid comes into play. It's an orphan biologic product that enzymatically removes eschar.
And then you figure out how you're going to cover the wound, which is where Epicel comes into play, and it's the only FDA permanent skin replacement that's been approved to date. And so, you know, I think one of the unique aspects of our portfolio really relates to the competitive barriers to entry that we have. Both MACI and Epicel are regulated by the FDA's combination device biologic products, and so there's no established generic pathway for products to enter our markets. And there's really no like competitors in the market or in development. And with NexoBrid, it was approved by the FDA as an orphan biologic, so there's seven years of orphan market exclusivity, 12 years of biologics data exclusivity, plus patent protection.
So we think that, you know, this portfolio just represents a, an excellent foundation to continue the strong growth from both the revenue and profitability standpoint that the company's experienced since we launched MACI back in 2017. Just quickly on that, the financial profile of the company, I think, is one of the more interesting aspects. You know, we've been a, a high revenue growth company since we launched MACI, growing at about a 20% compound annual growth rate. And we expect with, our pipeline of MACI Arthro, MACI Ankle, just launching NexoBrid, that we're going to continue that strong revenue growth.
The profitability profile is pretty unique for a company at our scale, where, for instance, last year, and we can go into more details about our fourth quarter and full year earnings call, you know, top-line revenue growth of 20%, but profit growth of 40%, both, you know, kinda same ratios in the fourth quarter and then for the full year. So I think that positions the company in a pretty unique fashion. And again, with both the momentum of the core business plus new product launches, we think we're going to be able to maintain that high revenue and profit growth as we move forward.
Excellent. Thanks for that intro and download. MACI results have been strong for the last several quarters and, you know, since really the launch a number of years ago. But what has been the key to driving the strong performance? So it's been, as you mentioned, I think 2017, 18 was when MACI was launched in the US.
Right. Yeah.
And, uh,
And MACI's been a high growth product for quite a number of years and reached about $165 million in revenue last year, and it grew 25% for the year. And really, when we think about the growth drivers for MACI, maybe just a little background that, you know, MACI itself consists of a patient's own chondrocytes or the cartilage or the cells from cartilage seeded onto a resorbable collagen membrane, and that's what's surgically implanted. And, you know, when we think about the growth drivers for MACI, it's really about sort of expanding the number of surgeons taking biopsies, which is kind of the breadth of penetration into our target universe. It's the biopsies per surgeon, which is kind of a measure of the depth of penetration into their practice.
It's a conversion rate of how those biopsies convert into implants and then pricing. Really, what's been driving the growth over the past several years is a dramatic expansion of the surgeon base. So whenever you take a product like MACI, which replaced an older generation approach that was highly invasive, and you make it minimally invasive, you see this sort of widespread adoption. It's kinda a tried-and-true med tech commercial pathway, and that's really what's been driving. We've had double-digit compounded surgeon growth rate. When we launched MACI, we had 3,000 target surgeons. By 2019, we were getting biopsies from about half of those surgeons and more cumulatively.
We did a big project to expand our sales force and then increased our target surgeons to 5,000, and as of last year, in 2023, we were starting to approach that 50% penetration again. And similarly, as we'll talk about, you know, we're hopeful to be able to launch an arthroscopic version of MACI later this year. There are a large number of surgeons, based on the prior work we had done, that do a lot of cartilage repair procedures, but do it arthroscopically, and that's a new segment that we'll be able to open up the business to, and that will increase our target surgeons to 7,000. So we think that biopsy surgeon growth, the biopsies that they bring in price will keep us sort of in that high growth area.
At some point, as the customer base matures, then things like even further penetration into the, the practice on average, and then conversion rates going up will serve as further growth drivers for the company going forward.
Understood. And if we just think about the clinical evidence that's driving some of these strong surgeon adoption trends and-
Right.
You know, I think there was just a publication earlier this year you cited on the-
Right
earnings call, 10-year follow-up results that really may have gotten better as,
Right
... as we moved out into the, well, out into the out years. But how has that clinical evidence been a factor? And clearly, it's been a factor, I'm sure, a meaningful one, but-
Right
... in terms of driving surgeon adoption and also just utilization rates.
Yeah, no, I think that's what is clearly, you know, we come from kind of more of a pharma biotech background where-
Mm-hmm
... you kind of get a rapid uptake and then plateau, and this has just been a consistent sort of growth over a number of years that we think will continue, and a lot of that happens when you change standard of care. So, you know, 7 years in, people will say: "How can you continue to be adding this many surgeons?" And a lot of it has to do with what you mentioned, the clinical outcomes. There was the predecessor product, Carticel, that has positive outcomes out to 20 years. MACI's the newer generation product, so as part of our label, there was a 2-year follow-up study where MACI demonstrated superiority versus icrofracture, which is the FDA-required comparator.
There was an extension study that showed those clinical outcomes were maintained into 5 years, and then just last week, as I mentioned, or you mentioned, that we had 10-year data that was published in the American Journal of Sports Medicine. And so clearly, it's kind of that clinical outcomes over the long term that surgeons are interested in. We also mentioned on our earnings call that, you know, we had the highest number of peer-to-peer programs we've ever had in the fourth quarter, so there's just a lot of continued interest. And maybe the acceleration would have been a little faster without COVID, but I still think this is just kinda gonna be a long progression of increased surgeon adoption.
And again, when we go to 7,000 surgeons with the launch of MACI Arthro, we'd expect that this will be a growth driver for the company for a good number of years.
Excellent. I mean, it sounds like, and our understanding is, our view is that MACI Arthro is gonna be a meaningful driver of growth as you move forward. You described some of the dynamics in terms of the orthopedic surgeon base, and-
Yeah
... we are arthroscopic approaches for thousands of them. So that surgeon base increases, but can you just talk about the life cycle management of the product? This is a nice step forward.
Right.
I think you guys have been talking about this for a number of years. But I guess what I want to finally get to my question here is, you guys will have approval in the second half and third quarter.
Right.
Biopsy will be taken, you'll have, maybe have some revenue contribution in Q4, but then most likely-
Right
... really start to contribute in 2025. Maybe just describe those dynamics of the launch and-
Yeah
... and how MACI Arthro can contribute to revenue in 2024 and then more meaningfully in 2025.
Yeah, and we do think it's a big opportunity. So again, in our corporate presentation, we have an addressable market slide that starts with about 750,000 cartilage repair procedures that are done each year. We kind of, MACI has a very broad label, so no limit on the size, the number, the location of defects, whether there's bony involvement a lot or not. And so, you know, a lot of patients that surgeons see would fall within MACI's label. We know there are pretty sort of complicated treatment algorithms, where surgeons think about, you know, certain patients and certain options. And so when we ask that question, it kind of, you know, reduce the addressable market to about 125,000 patients.
Then insurance plans, which all cover MACI, typically require that the defect be 2 square centimeters or above, and so that's how we get down to our 60,000 patients. You know, we know that most cartilage repair procedures now are done arthroscopically.
Mm-hmm.
Of those 750,000 patients, about 500,000 or more are chondroplasties, and that's when a biopsy is taken from MACI.
Mm-hmm.
So a surgeon will do a scope of the knee. They'll clear away, maybe shave off any fragments on the cartilage, and it provides some pain relief for those patients, but, you know, obviously doesn't address the cartilage injury, which is like a pothole on the surface of the knee. Another 200,000 plus are microfractures, where they drill into the bone and the bone marrow bleeds into the defect, with the theory being that the precursor cells for chondrocytes will differentiate into chondrocytes and produce cartilage, but it's more of a fiber cartilage scab. And those are all done arthroscopically. So the vast majority of cartilage repair procedures are done arthroscopically, and MACI again made the progression from a highly invasive prior version to a minimally invasive mini arthrotomy. And this arthroscopic delivery is really a progression along that pathway.
And the reason why it's an interesting and compelling opportunity for us is that of those 60,000 patients, right now, MACI is a go-to product for cartilage defects on the back of the kneecap or the trochlea behind the kneecap, the patellofemoral joint. It's also a go-to product in larger defects. But, you know, the largest segment of the addressable market, about a third of the patients each year, have smaller 2-4 square centimeter defects on the femoral condyles or the end of the thigh bone, and that's exactly what these instruments are designed to address. And so, you know, we have a fair amount of business on the femoral condyle, probably half of it, but our penetration rate in patella, for instance, is double what it is on the femoral condyle.
So if we can get to the same penetration rate, it'll have a huge impact on our business. And it really positions MACI well because some of the other alternatives, like osteochondral allografts, where you take a cadaver, punch a bone and cartilage, and fill the pothole, that way you can't do arthroscopically. So we think it'll be, you know, a great benefit to patients for the obvious reasons: less invasive, hopefully less postoperative recovery time and pain, better aesthetic outcomes, and so on. So we think it'll be very well received, and there's a high level of interest in surgeons who, you know, have been in our market research and have been working with us on the development of those instruments.
And then maybe just to help us think about the buzz that's been generated with some of that market research, some of, maybe some consultants that have helped you work through this project-
Right.
-and just, I guess, word of mouth and then some of your company's public statements. I mean, is it buzz-- I mean, how much pent-up demand is there? And you might not be able to quantify it, but it's-
Yeah, you know-
Our sense is that it's building.
Right. I think it will build, and it will build through the summer as we're kind of, there's some sports medicine conferences and so on. Obviously, because it's not on our label right now, you know, sales reps can't be out there talking about it.
Right.
But there certainly are a good number of KOLs who have worked with us on the development of the instruments, who participated in the human factors study, which was the study that was submitted to support the label expansion. Voice of the customer kind of labs to kind of refine how we're gonna train and teach surgeons to do this method. And so, yeah, there's a lot of interest in it, again, for the reasons that we mentioned. And so, you know, we think it, both for the market research we've done, both existing MACI users expect that they'll do more procedures with an arthroscopic option available.
And then for those surgeons that don't currently use MACI 'cause their practices are really built around essentially predominantly or exclusively arthroscopic procedures, you know, they would expect to shift procedures from things they would do right now to MACI Arthro, once that's available.
Great. And you guys aren't stopping there with MACI. You're moving into what's a pipeline effort to bring MACI to ankle cartilage defects-
Right
... and injuries. Can you just talk about that opportunity, and then-
Yeah
... I know it's, it's into the out years, but any timelines or milestones within that development program that investors should have on their radar?
Yeah. Well, we mentioned during our J.P. Morgan presentation that we would expect to start a clinical study for MACI in the ankle in 2025. And obviously, you know, the knee is the greatest weight-bearing joint in the body, so it's the largest opportunity for cartilage injuries and cartilage repair products. But the ankle is the second-largest opportunity, and there's a large number. We did the same thing, a quantitative market research project. You know, there's more than 150,000 ankle resurfacing procedures for cartilage injuries, and about 20,000 or so of those patients would be sort of viewed as the addressable market.
So at our price point, it's another billion-dollar market opportunity for the company, which, taken with $3 billion market opportunity for MACI in the ankle, you know, is really a large opportunity for the company going forward. So we're excited to start that study. That will be, unlike the human factors study to support the MACI Arthro launch, which was a, you know, a shorter study, this will be a clinical study, much like the pivotal study, the SUMMIT study for MACI in the knee. And so you're right. We kind of look at this as we've got very strong momentum for our current MACI indication, obviously growing 20%+ last year. Then you layer on MACI Arthro, and the principal impact of that, given the timing between taking a biopsy and doing the implant, will be in 2025 and beyond.
Then you follow up that down the road, 2030-ish, with a MACI ankle, and you can just see how this product can grow through the next decade. But there's really nothing else like it coming down the pike.
Excellent. Wanna touch on the burn care business as well, but maybe before that, Joe could ask about just the balance sheet, the $150 million in cash and investments, no debt, continue to be cash flow positive, currently. So, I mean, how do you - any capital allocation or capital deployment plans that you can share? And-
Yeah.
Start with that.
Yeah. So, you know, the company is obviously in a very good place to end the year. I think it's certainly a strength. End of the year with about $150 million in cash and investments is actually up about $12 million year-over-year, despite our initial investment in our new facility. So, you know, as we think about capital allocation, you know, when we think about things like, you know, life cycle management with MACI Arthro or MACI ankle or some investments in terms of, you know, maybe some new field force or marketing investments, we think of those more kind of within our product, kind of our operating P&L. More from a capital allocation, kind of what's one of the key pieces of that right now is to continue to invest in that new facility.
So last year, we had around $20 million of CapEx, which was above our typical run rates. This year will actually be the more substantive year, where there'll be more investment. We talked last week in our call of probably something more in the $50 million range from a net CapEx perspective on a full year basis. So that'll be an important capital allocation piece this year, and, you know, that'll continue a bit into next year. But importantly, you know, we had a strong year last year and generated around $35 million of operating cash flows. So, you know, we expect to continue to self-fund that during the year this year. And then the last piece from a capital allocation that we think about is certainly the business development side. So, you know, certainly there's...
We'll take a look at things in sports medicine and burn care. Could be a third vertical, just given our expertise in cell therapy. But, you know, given our financial profile that we've touched on, kind of our innovative product set, you know, we'll continue to, you know, be active and assess what's out there. But, and we have a pretty high bar from a company perspective, from a financial perspective. So, I mean, those are probably the key pieces as we think about capital allocation right now.
Excellent. And Nick mentioned just the unique profitability profile of Vericel, and would love to just hear a little bit more. I know you guys downloaded this earlier in the year at the J.P. Morgan conference, as well as on your earnings call. But just to review on how investors should be thinking about profitability profile as we move through 2024 and then into the out years.
Yeah. So, you know, Nick touched on some of this, but, you know, I think as a company, you know, we think this kind of makes us unique in terms of having a high growth profile on the top line. So, you know, last year, at a company level, we grew 20%. You know, it was great to get back to that high growth. And as we look at 2024 and even into 2025, we talked about we think we can maintain that high growth rate, you know, given the core momentum, adding NexoBrid this year and then MACI Arthro, to kind of your earlier question, which will be, you know, we're thinking is much more of a 2025 impact, given the sales cycle and the later launch this year. But, you know, we certainly think that can have an impact in 2025.
So that's, you know, sort of starts with that top-line foundation. As we move up, down the P&L, you know, we've also talked about kind of our longer term targets, you know, first on gross margin. We talked about being in that 70%+ range, as a company. And so, you know, I think it's first good to look at it. If you look at the last couple of fourth quarters, you know, we've been over 70%, including 75%, this past Q4, so I think that's a good marker to give you a sense when the company kind of grows to scale. And then last year, we actually ended up pretty close, in the high 60s, at 69% on a full year basis.
We think we can be around 70% this year, and that, you know, keeps us right on track to our long-term target of, of 70%+ on the gross margin side. You know, the other thing we, we take a look at, and, and Nick referenced, is really our adjusted EBITDA in terms of margins and, and growth rates. So again, I would start with kind of a similar concept of Q4. If you look at the last couple of Q4s, last year was 28% for Q4, and then Or two years ago, rather, and this past Q4 is actually at 34%. So again, I think those are good markers to kind of see how we can grow under our long-term target, and, and we've talked about being at the 30%+ range from an adjusted EBITDA perspective.
So on a full year basis in 2023, we're in the high teens at 17%. We've talked about being at 20% this year in 2024. And as we think over the mid to long term, you know, we think we can meaningfully trend toward that 30% adjusted EBITDA margin in 2025. And then certainly as we get beyond 2025, you know, we would expect to be at that 30% or more adjusted EBITDA over time. So, you know, you put that all together, and I think as Nick talked about, it's a pretty unique profile where, you know, we grew our revenue at 20% last year, and it was 40% on the adjusted EBITDA line. In the fourth quarter, it was even higher.
We grew at 23% in the top line, and it was 50% adjusted EBITDA. So, you know, we think it is kind of a unique profile and, you know, certainly our goal is to kind of maintain both the top and the bottom line growth that we talked about.
Yeah, definitely hitting that profitability stride, no doubt, and a whole another intriguing element of the story, layer of the story. Wanted to touch on burn before we run out of time. You have two franchises now or two product lines, Epicel and NexoBrid.
Right.
I know Epicel historically was, you know, challenging to predict, you know, cases as they come in because they involve significant TBSA, percentage of body-
Right
... of surface area burn cases. But it seems as if NexoBrid, the addition of that to your portfolio, maybe there may be some incremental growth or benefit on the Epicel side as well, as you're now marketing two products. Can you talk about that dynamic? It's still early days, but anything to share there?
Yeah. So, you know, the advantage of our burn care franchise is that there's, you know, a very concentrated call point. There's 140 burn centers in the U.S. And, you know, when we had just Epicel, we would typically, you know, call on, call it 70-80 of those centers that would typically see these kind of catastrophic burn patients that have 30% TBSA burns or greater, and we're routinely treating patients with 60%, 70%, 80% body surface area burns. And so, again, a subset of those, those hospitals. You know, when you think about the addressable market, there's about 40,000-
... hospitalized burn patients each year. The vast majority of those, probably three-quarters of those, are gonna have to have some kind of eschar removal procedure, either surgical or, or not with NexoBrid. So, you know, that caused us to say, "Well, we need to be in those hospitals," because every hospital is going to, you know, need to do some sort of eschar removal procedure. So we increased our sales force relatively modestly, but again, it's only 140 centers, and, you know, that will certainly allow more of a pull-through for Epicel.
I think even last year on our second quarter earnings call, when we first started adding a couple of NexoBrid reps, we mentioned that we had already seen biopsies coming in from what we call dormant cell centers, those that either had never used Epicel or hadn't used it in a number of years. You know, that continues to be the case. So yeah, we absolutely believe that, you know, that will help sort of increase Epicel utilization, and we've seen that. You know, the exit rate coming into this year of about $8 million a quarter for Epicel-
Mm
... is significantly higher than it was-
Mm
Coming out of 2022, and a lot of that has to do with, as we mentioned, sort of a larger share of voice. We had the highest number of biopsies for Epicel patients in Q4 that we've had since 2021. So, you know, you're seeing good strength there. And we'd always said that when we launch NexoBrid, we expect to have a second high-growth franchise, and the two products were up 31% in the fourth quarter.
Mm.
Higher than the company growth rate, versus Q4 of 2022.
Maybe we can just wrap up this session-
Yeah
... with a NexoBrid question.
Yeah.
Thinking about, you know, the dynamics of a debridement agent. We cover MediWound, so we're familiar with the asset and its capabilities, but early days in the launch, but maybe talk about how this is a game changer debridement side, and then the early indicators of the launch that give you guys confidence that this can be a meaningful growth driver for Vericel.
Yeah. Well, we absolutely believe this will change the standard of care. As I mentioned earlier, you know, when you have these hospitalized burn patients, or really any, even if a burn patient is treated in an outpatient setting, you have to get rid of the eschar-
Mm
... because, again, it causes infections, burn progression, et cetera. Right now, the standard of care is surgical. They take patients into an OR, and they-
Yeah
... they slice away the dead tissue. Well, burns are a variable depth, so you end up taking a lot of healthy tissue, and there's a lot of blood loss, and so obviously, it's traumatic for the patient. So NexoBrid is essentially a topical administration. So it's a mixture of proteolytic enzymes that recognize how collagen proteins in the skin are denatured during thermal burns, and it basically dissolves away-
Mm
- over a four-hour period, that tissue, and then, leaves the healthy tissue intact. So much better approach for the patients. And again, versus a surgical incision, which is traumatic-
Mm
or even there's a couple of other non-surgical approaches that aren't particularly efficacious. And so there's clearly a need in the market for a selective and effective eschar removal agent, and that's why we think over time, you know, NexoBrid should very well become the standard of care in the U.S.
Excellent. Well, gentlemen, thank you guys so much for spending time with us this morning and participating in the conference. Looking forward to keeping in touch as we move through this year.
Yeah. Sounds great. We appreciate it. Thanks.
Yep. Thanks for having us.
Okay.