I think we can get started. Thank you all for joining. My name is Mike Kratky. I'm the Senior MedTech Analyst over here at Leerink, and I'm really pleased to be joined today by Vericel's CEO, Nick Colangelo, and CFO, Joe Mara. Thank you both for joining.
Great, Mike. Thanks. It's good to be here, and before we begin, I guess I would just say that our discussion will contain forward-looking statements, so folks should take a look at our documents on file with the SEC for further information.
Perfect. Yeah, with that, you know, would love to maybe just kick it off with an overview of the company. I mean, for reference, Vericel was one of our three top picks coming into 2024. So far, so good on that front, so I appreciate the help there. But yeah, if you could just kind of start with an overview of the company, some of the key upcoming milestones, and maybe just the setup for the rest of 2024. It's probably a good place to start.
Yeah, well, thanks, and we appreciate being a top pick, and, and hopefully, making you look good for the rest of the year as well. For those who are not as familiar with Vericel, so we're a leader, in the leading provider of advanced therapies for the sports medicine and severe burn care markets. We have a highly differentiated portfolio of innovative cell therapies and specialty biologics that are used to treat damaged tissue and, and restore function and, and lives for our patients. Our lead product is MACI, which is an advanced cell therapy that uses a patient's own cells to repair damaged cartilage tissue and restore function.
We launched MACI in 2017 for the treatment of cartilage injuries in the knee, and it's become by far the leading restorative cartilage repair product on the market, and it's the only FDA-approved product in its class. On the burn care side of the business, we're really focused on hospitalized patients with severe burns. For these patients, the treatment pathway entails first removing the damaged or burned tissue, which is called eschar, and then figuring out how you're going to cover the wound or graft the wound so that the wound can be, can heal. From that perspective, NexoBrid, which is a product that we recently launched in the U.S., is indicated, it's an orphan biologic product that's indicated for the removal of eschar on severe burn patients.
And then Epicel, which is our second product in this space, is. It's an advanced cell therapy that, again, uses a patient's own cells to form the skin grafts, which are then used to cover the wound, and it's the only FDA-approved permanent skin replacement. So, you know, it's a really interesting and unique portfolio, and especially in the sense that we have very strong barriers to entry. So MACI and Epicel are regulated as combination products by the FDA, and there is no generic pathway for combination device biologic products, so, you know, no biosimilar pathway, 510(k) pathway, or otherwise, so, you know, really no like, competitors on the horizon for either of those products.
And then with respect to NexoBrid, which was approved in December of 2022, in addition to its patent life, it has 12 years of biologics data exclusivity, and because it's an orphan product, it has seven years of market exclusivity. So a really exceptional foundation for us as we move forward, and, you know, provides us an opportunity to continue to have sustained strong revenue and profit growth. And just a quick comment on the financial profile of the company based on this portfolio. You know, we've had a very strong track record of both revenue and profit growth since we launched MACI in 2017. From a revenue perspective, we've had 20%+ compounded annual growth rate for revenue since we launched MACI, really based on the strength of MACI and Epicel growth.
We've had nearly, you know, four years now of each quarter having positive operating cash flow and adjusted earnings, and we ended last quarter with about $150 million in cash and no debt. So this portfolio has really led to us having a great financial profile. We had a really strong close to 2023, came into 2024 with a lot of momentum, and that continued through the first quarter. We had record first-quarter revenues. We were up 25% to around $51 million in revenue. And so that translated again into really strong profit growth. So we had record gross margins of up to 69%. It was up 400 basis points versus Q1 of 2023.
Our adjusted earnings grew 325%, and so just a really strong profile that has continued into this year, and we think that the strength of our core portfolio, plus our new product launches, which again include NexoBrid and hopefully Arthroscopic MACI, later this year, will help us sustain that strong revenue growth in 2024 and beyond.
Perfect. Yeah, I mean, lots to be excited about. You know, it might be helpful just to start with maybe some of the recent Q1 results. You know, MACI's sustained a really strong growth over the past few quarters-
Yep.
but what have been some of the key drivers for the brand during that time?
Yeah, so MACI has had really strong growth since its launch, and that did continue in the first quarter, where revenues were up 18% to over $40 million, and so record first-quarter revenue for MACI. And we've always talked about four main growth drivers for MACI. So we have a target surgeon population for MACI currently of about 5,000 orthopedic and sports medicine surgeons. And the growth drivers for MACI have always been the number of biopsying surgeons, so how many surgeons have adopted MACI into their practice? How many biopsies per surgeon, which demonstrates the depth of penetration into a surgeon's practice, the conversion rate out of these biopsies 'cause you're using a patient's own cells. So you take a biopsy to get the starting material for the product, how do those convert into implants?
And then because it's an innovative product, we've had pretty strong pricing power and, you know, consistently take, you know, meaningful price increases each year for MACI. And really, as the adoption has grown, the predecessor product to MACI was a product called Carticel, which was a similar kind of procedure where you took a patient's own cells, but it was a more difficult surgical procedure 'cause it was a cell suspension, and so it was more of a niche product for sort of the top cartilage repair specialists in the country. But as we've had a simpler, less invasive product with MACI, that adoption has really grown. So it's really been continued double-digit, even through last year, expansion of the surgeon base that has driven MACI's growth over the last couple of years.
So, you know, Q4 of 2023 was a record quarter for MACI in terms of the underlying growth drivers, where we had highest number of implanting surgeons, implants, biopsying surgeons, biopsies, and that's, you know, strength continued into the first quarter. So we had the second highest ever biopsying surgeons and biopsies. And again, you know, usually Q1 is kind of a seasonally lower quarter for us, and so to have the second highest number of surgeons taking biopsies and biopsies just demonstrates the strength and the continued adoption of the product. And, you know, we're at about 50% penetration now in terms of our target surgeons, and so we expect that to continue to be a source of growth for us, especially with the launch of arthroscopic MACI.
Yeah. Yeah, understood, and we'll definitely get into the arthroscopic launch coming up. You know, I guess one quick one. In terms of the biopsying surgeons and the biopsies, to some extent, does that become a leading indicator, and what's the average time between the biopsy and then when the patients come back for the implant?
Well, it's definitely a leading indicator in the sense that, you know, you have to have a biopsy before... And a lot of the dynamics that go on are that, you know, if a surgeon takes a biopsy from MACI, they're certainly sort of going to move forward if the patient wants to, for the implant procedure, right? And it's really a patient decision of whether they decide to move forward with a surgery or if they're just going to adapt their lifestyle and, you know, for instance, stop jogging or running on the road and just sort of living with the pain or dialing back their activities. So, you know, the median time for conversion of the biopsies, we can cryopreserve them for up to five years.
The median time to conversion is about four months, so half convert within four months. The remainder convert typically over an 18-month to two-year period, so.
Got it. Super helpful. So on the last earnings call, you did talk about the significant increase in MACI program attendance. So why do you think you're still seeing such strong interest from surgeons this long after launching MACI?
Yeah, it is kind of remarkable to be seven years in and just have this kind of growth and the surgeons adopting the product. But, you know, we're changing the standard of care. MACI's become sort of a standard of care for these larger defects, and so as we mentioned on our fourth quarter call, you know, we had the highest number of peer-to-peer programs ever in Q4 of last year, and that's really a customer-based, customer demand-based metric, right? If surgeons, they want to learn from their peers, their the specialists in their communities. And so when we have a large number of programs, it's because surgeons would like to participate in those programs.
So in the first quarter, we mentioned that we had doubled the number of programs as the prior year, tripled the number of attendees, so that really demonstrates the continued interest by surgeons in MACI. And it's really driven by, I'd say, three key things. First is the clinical profile for MACI. So MACI, you know, was approved under a BLA based on a randomized controlled Phase III pivotal study, and it was the first product to ever demonstrate superiority versus microfracture, which is the comparator that the FDA requires in these procedures. And so that data demonstrated 90% response rate for patients on pain and function scales at two years. There was an extension study out to five years. So you can see you get this long-term benefit once you regenerate the cartilage with MACI.
In the first quarter, we had a publication of 10-year outcomes, which demonstrated excellent outcomes over 10 years, really in both the patellofemoral joints, which is where we have the highest penetration, so the back of the kneecap, where you have a lot of cartilage injuries, as well as femoral condyle defects, which is the end of the thigh bones, which is where we're really focused on with the MACI arthroscopic program. It's, as I mentioned, a much simpler, faster, less invasive procedure, so it moves out from the specialist community into the broader community orthopedic surgeons. And so that promotes adoption, and it's got a great reimbursement profile. So all major medical plans have a medical policy that covers MACI. Well over 90% of cases are approved, so you have to have a prior approval, but that approval rate is 95-ish%.
So, high, strong reimbursement profile, high approval rates, and all of those things have led to what I mentioned before, which is of our 5,000 targets, you know, we're at about a 50% penetration rate already, and even higher than that on a cumulative basis.
Yeah, that's great. And this is probably a good time to just introduce the arthroscopic option for MACI. You know, are you on track for 3Q, and what could that mean for just the overall MACI story?
Yeah. So, first of all, we submitted a supplement to the BLA in the fourth quarter of the last year, like all supplements. The FDA has 60 days to review the submission and decide whether they're gonna file it for review, which they did in the fourth quarter, which, you know, leads to our anticipated launch in the third quarter of this year. So as of, you know, now, you know, we're in that review process, we certainly expect to be able to launch Arthroscopic MACI in the third quarter. And so we're working hard on that. And a lot of, as you might imagine, instrument development and pre-commercial launch activities underway, at this time. We're really excited about it because, you know, our addressable market of patients is about 60,000 patients per year.
Based on a very large quantitative market assessment project that we had done, you know, several years ago to size the market, you know, we're able to sort of get a sense of the size and location of those defects from our target surgeons as you go through that kind of market assessment project. And so right now, MACI really is sort of the go-to product for patella cartilage injuries, so if you have an injury on the back of the kneecap, and that's really because some of the other alternatives out there, like microfracture, which entails drilling into the bone and having bone marrow bleed into the pothole that's on the surface of the knee, that's really not done in the case of the patella. There's not a lot of bone marrow in, like, your kneecap, so that's not a great option.
And then osteochondral allografts, which is, you know, another product that surgeons use, where you take a cadaver knee and a punch of, you know, bone and cartilage, and you fill the pothole that way. That's difficult to do on the back of the kneecap as well. So patella is kind of a go-to for for MACI. We have double-digit or mid-teens penetration. There's about 10,000 of those 60,000 patients a year that have patella defects, so we have a pretty good penetration rate there. And then in large defects as well, so if you have a 4 sq cm , which is a large defect, right? It's essentially 2 x 2 inches on the surface of your knee, where you've got a defect all the way down to the bone.
It's a large injury, and again, because MACI comes in a membrane that's about 14.5 sq cm , they can cut the membrane out, glue it in place, and it's kind of a go-to product for larger defects. The Arthro MACI program is really designed for smaller defects on the femoral condyle, so 2sq cm–4sq cm . There's about 20,000 patients a year, or, you know, a third of the addressable market, which is about a billion-dollar market opportunity for us at our current pricing. And we do get business there. We just have a lower penetration rate because there's other options.
These instruments are designed; they're either a 2sq cm, 3sq cm, or 4 sq cm set of instruments, but really, we think it will allow us to get greater penetration in the largest part of the market, which is why we're really excited about it. We've said for a number of quarters that if we're able to get the same penetration in these smaller femoral condyle defects that we have in the patella cases, you know, we'd essentially double the business over the next few years.
Yeah. Wow. I mean, you mentioned earlier that right now, your target surgeons is about 5,000. So how do you expect that target surgeon market will change? And then maybe just to your point, how quickly could you start to see the penetration in those surgeons?
Yeah, and so for historical reference, when we launched MACI, we had 3,000 target surgeons, and we had, by 2019, gotten up to about 50% penetration there while we were still growing 25%, you know, biopsying surgeons that year. So we were still in a high growth phase of adoption. But we did a, you know, again, a sales force sizing exercise where we looked at sort of the number of surgeons. We bought CPT code data on about 12,000 surgeons. We looked at cartilage repair procedures for those surgeons and then open procedures, and that's how we ended up with our current 5,000 target universe. We added a couple of thousand surgeons that were doing high volume of cartilage repair and open procedures.
There were about 5,000 surgeons that we didn't have any open data on, so these are surgeons that principally do arthroscopic procedures. And, you know, they were the same tiers where you had, you know, 2,000-3,000 of those surgeons that did high volumes of cartilage repair. They just didn't do open procedures. And so those are the surgeons that we plan to add as we move forward, and, you know, we expect to go from 5,000-7,000 target surgeons. These are surgeons that do high volumes of cartilage repair. And, you know, I think, if you take a step back and you say, "Of all the procedures that are done in cartilage repair," you know, we talk often about the fact there's about 750,000 procedures done each year.
Again, our target addressable market is about 60,000, but 500,000 of those procedures are chondroplasties, where they go in and arthroscopically clean up the knee, so arthroscopic-based. And then microfracture is another couple hundred thousand plus, and that's done arthroscopically. So the vast majority of what these surgeons do in the cartilage repair space is done arthroscopically, so we think it fits right in the wheelhouse of how they're treating these patients.
Yeah, that makes total sense, and it seems like just based on that logic, it could be kind of a white space beyond even that 60,000 over time. But, yeah, I guess we'll see. And the other one I wanted to ask about, that we get asked about from clients, is just the idea that, is there any reason to expect that the surgeons that are doing MACI today could see an increase in utilization once arthroscopic becomes available?
Yeah, well, we've done a lot of market research, and, you know, when we do that, we look at the current MACI users and then sort of naive MACI surgeons. And what we're talking about in the naive category is obviously these surgeons that do arthro only and don't currently use MACI. So again, we think that's a nice opportunity because... You know, it's, they're used to doing cartilage repair procedures arthroscopically, as we've done sort of the instrument development studies. Really, there's no—it's not any more complex or any more time-consuming than what they're already doing arthroscopically to treat these.
So we think for that segment, you know, there'll be a nice adoption curve, and then for existing MACI user, users, you know, the market research indicates that they certainly expect to shift their procedures to MACI Arthro, the appropriate ones, you know, that they, they currently do, either open or, you know, a lot of surgeons who say, "Hmm, if I had seen a 2 sq cm defect, I might not even have even thought of MACI. I might think of it if it's 4 sq cm or above." So they certainly expect to shift their procedures to MACI Arthro, even the current MACI surgeons. And that could very well be the quicker of the two, right?
Yeah. Yeah, no, that makes sense. And even on the, you know, conversion rate that you talked about earlier, it seems like right now, if that's something that, you know, having the arthroscopic available could ultimately end up seeing that inch higher over time.
Yeah, well, we think there's certainly an opportunity because, as I said, if a surgeon's taking biopsies, there's no reason that they wouldn't want to move forward with a MACI procedure. It's a very well-reimbursed procedure for the surgeons as well. Great clinical outcome, sort of all lines up for surgeons' sort of willingness to move ahead. If a patient isn't treated with MACI, it's just because, as I said, they decide to live with the pain, dial back their activities.
And so I would like to believe, and I think over time, we will see that if, if the sort of talking points now are, "I'm gonna do a scope, I'm gonna take a biopsy, see what's going on, and then you'll come back, and we'll administer the product arthroscopically," there's obviously, in the surgeon's mind, and we know sort of a belief that obviously it's less invasive, so there's less postoperative pain, faster recovery, better aesthetics, and those are the kinds of things that should lower the hurdle for patients deciding to move forward.
Got it. Now, maybe last one on MACI before turning to the burn care franchise, but, you know, another area that we've done some work on, and we've started to hear pretty positive things from KOLs, is just looking ahead would be the ankle opportunity. So I recognize it's early days, but how are you thinking about the size of that commercial opportunity, and next steps?
Yeah, well, the whole, you know, in our lifecycle management approach, the arthroscopic delivery of MACI is really sort of just the continued journey of, you know, having a better administration for MACI from a highly sort of invasive Carticel procedure to minimally invasive current MACI mini-open procedure to arthroscopic. So that's a procedural advancement that you see all the time in the med tech space, sort of opens up the market. But you have articular cartilage in all your joints, and so, you know, you often kind of... MACI's used even currently in ankle cases, which is the second-largest opportunity, could be used in hips, shoulders. You know, there's a lot of places where you have cartilage injuries. The ankle, as I mentioned, is the second-largest market opportunity. Knee, by far, is the biggest, right?
It's the greatest weight-bearing joint in your body, so you have the most injuries in the knee, but there are a lot of cartilage injuries, as you can imagine, you know, the forces on, on the ankle. So we did the same kind of market assessment project. There's about 165,000, what are referred to as cartilage resurfacing procedures in the ankle that are done each year. You know, same sort of dynamic as you see in the knee when you ask surgeons, you know, of the patients they see, how many would be appropriate for MACI? They think about, about the size of the defect, the patient characteristics, and when you come down to it, about 20,000 procedures a year, they deem to be eligible for MACI.
So, you know, at our current price, price point, that's another billion-dollar market opportunity for us. Combined with the knee, it's about a four billion dollar market opportunity for MACI and obviously supports the strong growth that we've been seeing with the product.
Got it. Yeah, well, we'll certainly stay tuned on that side. You know, moving to burn care, you know, this has been something where you've talked about the potential for a second high-growth franchise. You know, how are you thinking about the early progress of the NexoBrid launch?
Yeah, so you know, with NexoBrid, this is, again, is a product that's used to remove the burn tissue, and right now, the standard of care is surgical excision for these hospitalized patients. So you take them into the operating room, they basically take a knife and slice away at the damaged tissue, which is obviously very traumatic for the patient. The only way you know you've gotten rid of the eschar is you get to healthy tissue. So you, there's a lot of healthy tissue loss, a lot of blood loss, and so just a great need for a selective and effective eschar removal product, and that's what we believe NexoBrid is. So it's a mixture of proteolytic enzymes that somehow can, can recognize collagen proteins in the skin that are denatured from a thermal burn. It's amazing because if it's an electric burn, it doesn't even work.
And most burns, obviously, are thermal burns, but you basically topically apply it. After four hours, it dissolves the dead tissue, leaves the healthy tissue, basically take a tongue depressor and clean off the wound, and then they can move on to the, you know, the treatment phase or, or grafting phase. So it's a remarkable product. You know, we are changing the standard of care of what these surgeons have done for decades, right? And so that takes time. You have to go through P&T committee approvals, and then just sort of, they have to incorporate it into their, their workflow and practice. And so we're, we're in the middle of that right now. We're making... You know, there's about 140 burn centers in the U.S.
We're targeting, you know, our Tier One, Tier Two centers as we launch the product, which there's about 90 of them. So we have over 60 P&T committee submissions. This is when a surgeon says, "I'll take it to my hospital P, Pharmacy and Therapeutics Approval Committee so that it can be added to the hospital formulary." We have over 40 approvals, and then, you know, 30 centers that have, you know, made initial orders. So, you know, that all is progressing, but we've always said 2024 is gonna be a build year, where you get all of this stuff in place, and then it will be really patient utilization that, that will drive revenues as we go forward. So we're excited about it. You know, again, this product is gonna have a long runway with no like competitors, so pretty exciting.
Yeah. No, understood. And maybe just sticking with NexoBrid, you know, how has that initial launch kind of tracked relative to your internal expectations so far? And then, you know, just looking ahead, you kind of talked about 2024 as, you know, maybe a rebuilding year there or building year. What's gonna really help accelerate those revenues?
Yeah, so there's again a dynamic for our current products with MACI and Epicel. We ship directly to the hospitals where the products are used. Here, it's a more traditional biologics distribution system. So we have Cardinal, the 3PL that holds our inventory. They take orders from specialty distributors, Cardinal, McKesson, AmerisourceBergen, and then the hospitals order from the specialty distributors. So we recognize revenue when specialty distributors order the product and ship to them. The hospitals then order, and, you know, so they can be treating whatever number of patients, but again, that doesn't reflect, you know, or is not when you're in the stocking phase and sort of just getting up to speed. It doesn't really reflect patient utilization. So once the whole system has product in place, all the approvals, that's when you'll see patient utilization sort of reflected in revenue.
And once it's incorporated... And, you know, hospitals are huge bureaucracies, so they can get approvals and still not be able to order the product for weeks or months or whatever. But once that happens and, you know, the burn teams, you know, learn how to incorporate it into their protocols, it's so much better for the patients.
Yeah.
I think you're gonna see an inflection once that whole process plays out.
Understood. Well, yeah, looking forward to updates there. You know, Joe, maybe turning to you, one thing that was very exciting for us kind of coming into this story is just the idea that this is gonna be a GAAP profitability year for the first time. So how are you thinking about after the strong 1Q results, you know, the margin and overall profitability profile, both near term and then in the coming years?
Yeah. So, you know, I'd say as a company, and Nick referenced it in his company overview, you know, we're very focused on not just driving that top line across both franchises, but really our profitability, growth, and kind of seeing the progress in the key metrics there. And so certainly, Q1 was strong, but if you actually look back, you know, last year on a full year basis, you know, we started to see, I would say, an inflection point in our profitability. So we grew our top line 20%. We grew our bottom line, adjusted EBITDA, double that at 40%. If you look over the last 12 months, our top line is over 20%. Both franchises are over 20%, which is very important, but our adjusted EBITDA is over 70% growth.
So broadly, I think you're starting to see that, that inflection point from a profitability perspective. You know, from a margin perspective, you know, we've talked for a while of kind of a long-term targets of 70%+ on the gross margin side and 30%+ on the adjusted EBITDA side. So, you know, again, if you look at 4Q of last year, and Nick referenced it, you know, we were in the mid-70s in gross margin, the mid-30s on adjusted EBITDA, and that gives you a great sense of the company at scale. And I think we had a, you know, after a strong Q4, I think a very strong Q1 from a profitability perspective, so, you know, gross margin up about 400 basis points from the prior year.
You know, adjusted EBITDA, you know, kind of more than tripled, so, you know, great start to the year there. And so if you think kind of where the company, you know, is this year and kind of where it's going, from a guidance perspective, you know, we expect to already be in that 70% range in gross margin this year, and certainly over the coming years, you know, we think we can continue to grow that number. On the adjusted EBITDA side, you know, we're expecting around 20% margin this year. That'd be another year of very strong adjusted EBITDA growth on the bottom line. And then, you know, we think as we get into 2025, we can start trending toward that 30% number, and beyond 2025, kind of, you know, get to that 30%+ margin.
It's very important from a company perspective, and ultimately, as Nick talked about, you know, I think as you think about the current portfolio, you know, coupled with the product launches, you know, we think we're well-positioned on the top line and the bottom line, which we think makes us unique.
Yeah. No, understood. You know, maybe last 30 seconds or so, you know, you mentioned $150 million in cash and investments, no debt. What could that look like in terms of deploying that capital?
Yeah, so certainly, you know, kind of in a good position from a balance sheet perspective. You know, actually grew our kind of cash balance year- over- year, last year, even though we started to fund our new facilities. So we are using some of our capital over the, you know, last year and into this year and a little bit of next year to fund a new facility, kind of new kind of headquarters and manufacturing facility that we need to kind of make sure we hit our long-range plan targets. So that's, you know, gonna happen, you know, this year into next year. You know, generally, we're gonna fund that kind of out of, really, all out of operating cash flow. So, you know, that'll, you know...
Once we get through kind of this year and next year, we expect that to continue to increase. So, you know, as we think about capital allocation, certainly, you know, things like life cycle management initiatives, kind of pro-- you know, sort of funding pro- product launches to make sure that's successful, that's within our operating kind of P&L. You know, for-- the last piece is certainly business development. So, you know, we, you know, if we see something either in the sports medicine space or in the burn care space, that could be a strategic fit, that's certainly something we'd take a look at. You know, potentially a third vertical from a cell therapy perspective, but, you know, we'll-- I would say we're gonna be very disciplined to kind of hear your question around the financial profile of the company.
We think it's very strong, so we're gonna be very disciplined from a financial perspective. You know, we also have a set of very innovative products that are kind of best in class in their areas. So, you know, we'll, I think we'll continue to look and be active, but we'll stay very disciplined from a capital allocation perspective.
Awesome. Well, with that, we're up on time, but Nick, Joe, really appreciate you both joining, and thanks again.