We have Vericel Corporation here, CEO Nick Colangelo and CFO Joe Mara. Thank you, thank you guys for taking the time out of your day to come up here and come to the conference.
Great to be here, thanks.
Thanks for having us.
So I wanted to, you know, just jumping right into it, start off on sort of coming back to 1Q and guidance and how you're thinking about the year. So you know, beat the street by about $2 million on the top line for the total company, raise guidance by about $1 million. So just walk us through your thought process there in terms of how you raised and how you're thinking about the rest of the year shaping up.
Yeah, so on the last call we talked about, you know, we had a very strong first quarter, you know, across the company on both franchises, very strong first quarter from a profitability perspective as well. So what we talked about in the last call and really kind of the framework for the guidance in the last call was, you know, we did see upside on both franchises, but given that it's early in the year, you know, we just want to be kind of prudent from a guidance perspective.
And so what we talked about is we haven't given sort of specific kind of franchise or product breakouts, but we have talked about a framework across MACI and the Burn Care franchise. So we essentially said you can think about that kind of MACI upside relative to our first quarter expectations as an increase to our guidance, our overall guidance, you know, went up by about $1 million.
You know, it's still pretty, it was still pretty early in the year from a Burn Care perspective to kind of change the framework and the thinking there. And, you know, if you look back a year ago, I think we were at a very similar place where we had some upside in Q1, but, you know, just given the nature of those products, you want to be a little bit more prudent, you know, given Epicel's volatility and NexoBrid really in the launch. So that's really kind of the thinking coming out of the last call.
Yeah, and so digging into MACI a little bit, I think $195 is sort of the ballpark where we're looking for this year. And, you know, that implies, you know, with $42.5 million, I think you had guided to for Q2 revenue, implies about 42 or call it 43% of full year revenue in the first half.
You know, that's about in line with what we saw last year, but a little higher than what we've seen in sort of excluding COVID prior years. So can you just talk to us about any puts and takes on how seasonality has changed as MACI has matured and that market has grown and how you're thinking about that 2Q dynamic, first half, second half dynamic?
Yeah, I mean, I wouldn't say, I mean, there can certainly be some kind of modest puts and takes relative to other years, but I think you kind of hit on it in the first part of the question. You know, it's pretty consistent to what we've seen, you know, last year in terms of the mix of the year, you know, in terms of kind of the cadence of seasonality. I wouldn't say anything materially different.
You know, we typically see in our business, as you know, a pretty big step up in the fourth quarter. So, you know, we would expect that certainly this year. And so as we take H1 and H2, you know, I'd say largely consistent. You know, we've generally seen some more consistency across quarters, which is good to see. That's really based on, you know, kind of the higher surgeo n base and just the utilization overall. That's probably one component.
Great. So shifting to arthroscopic for MACI, thinking approval should be coming relatively soon here. Just any update on timing and how you're thinking about when we could see that approval and, you know, just sort of the visibility you have overall into the arthroscopic approval?
Yeah, so as you know, we submitted a supplement to the MACI BLA in the fourth quarter of last year. And the FDA in the normal process has 60 days to review your submission and decide if they're going to file it for review, which they did, which obviously then takes us into the third quarter for a potential approval.
So, you know, it's kind of the normal review process and we're going through that and we're still anticipating at this point a launch in Q3. Of course, there's other work streams that are going on. So that's the regulatory work stream.
There's the instrument development, the validation, the testing, and everything you need to do to have commercial instruments that are ready to be launched. And then, of course, all the pre-commercial activities that are going on as well around messaging and physician training and so on. All of that is sort of culminating, hopefully, in the third quarter launch that we're currently anticipating.
Have you given any color as to sort of when in the third quarter? Is that just sort of July or maybe later in the third quarter?
No, we've just said we would expect to launch in the third quarter.
Okay. On the instrument side, are you able to build up instrumentation ahead of the launch or are you waiting for clearance from the FDA for that?
No, we have, you know, again, we have a lot of builds going on right now. Some are for V&V or validation and verification testing and so on. And the others are for commercial builds so that we have instruments ready to go upon launch. We're not waiting at all.
As post-approval, assuming approval, how are you thinking about rolling out arthroscopic into the MACI burn or excuse me, MACI sales force? And how long do you think it's going to take to get the sales force fully up to speed and comfortable with training docs on the procedure?
Yeah, so we have, I mean, training is going on right now. So there are going to be some mid-year pre-launch training activities because we typically do sort of mid-year and then sort of early in the year sales training meetings or national sales meetings. And so we have those scheduled for the summer ahead of launch. So there's different, you know, phases to that training. But the idea is when it's approved and when we're launching, our reps are out there selling. So.
And then similar question for docs. How do you envision the training process in terms of timeframe for both sides of the equation, whether it be an existing MACI doc learning how to do it arthroscopically or a new arthroscopic-only doc learning to do MACI?
Yep. So the whole, you know, program here is around expanding the MACI label as it currently exists. MACI's administered via a mini arthrotomy. So there's a step-by-step set of instructions in our label on how to do that procedure. We would be updating the MACI label to include an arthroscopic delivery kind of step-by-step of how you would do that.
So it's going to be pretty straightforward. I think if you take a step back, you say the majority of all the cartilage repair that's done right now, be it microfractures, chondroplasty, everything's done arthroscopically. So these are surgeons that are used to treating cartilage injuries through arthroscopic procedures. So there's no requirement that they have to come in and do a cadaver lab or anything else like that. It can be just like they do for MACI now, which they can do online training.
It's a pretty straightforward set of instruments. Of course, we'll have live trainings available at different points in time if that's what they would like to do. And so I think for existing MACI users who are used to the product, they're doing a lot of other things arthroscopically, right?
And it goes beyond just cartilage repair. If you're doing an ACL repair, if you're doing a meniscal repair or rotator cuff, all of that's done arthroscopically. So it's just, you know, probably having a rep or an MSL there with them as they're doing their first case. And then, you know, for new MACI users, they may want to be trained on MACI generally. And then again, it's a pretty straightforward process.
You know, as we're thinking about it, sort of two general drivers in terms of accelerating or potentially impacting MACI growth with arthroscopic, and that would be increasing the number of patients that get biopsied from existing docs and adding new arthroscopic-only docs into the MACI user group. Which one of those do you think would be more impactful from a near-term perspective as you think about the rollout?
Well, I think, you know, I would guess that you're going to see the early adopters being physicians or surgeons who already use MACI and who could very well have, of course, when we get a MACI biopsy, we get a biopsy transmittal form that has the size and location of the cartilage defects.
And so we certainly can go back to surgeons right out of the gate and say, here are the 6 patients, you know, that you have that have a 2-4 sq cm defect on the femoral condyle. Are they good MACI candidates? And so there may be an existing pool. There certainly will be of existing biopsies.
But then, as you mentioned, you know, our surgeons who use MACI now, who might have seen a smaller defect on a femoral condyle and not taken a biopsy, certainly wouldn't expect to do that when they have the MACI arthroscopic instrument. So I just think the knowledge and the understanding of the clinical benefit of MACI and so on just leads you to say probably that's where the first, you know, that's the lowest hanging fruit.
But, you know, I think it's not sort of a long path necessarily to get MACI naive surgeons up the curve as well, at least as our market research indicates, they would expect when just even hearing and seeing sort of the instruments and hearing about the procedure and the clinical benefits of MACI, they already expect that they'll be shifting procedures to MACI Arthro.
Yeah, and you started to touch on an interesting point there when you, I mean, for any patients that have gotten a biopsy that hasn't been converted, are you able to associate a biopsy with a specific patient? And do you plan to say, go to those patients, have a rep go to those patients and say, hey, we have this new arthroscopic delivery method. Why don't you think about getting a MACI again? Is that part of the plan for arthroscopic?
Well, I think, you know, we would plan to, so certainly we associate every biopsy with a patient because it's a patient's own cells. So we're not going to treat somebody else with or treat a patient with somebody else's cells. So, but we would, I anticipate sort of go through the doctors to say, these are the patients that you have with the appropriate defects.
You know, what's your treatment plan for that patient? Are they, you know, a potential appropriate candidate? We can't contact patients directly unless we have a HIPAA consent, which we do get HIPAA consents in a good portion of our biopsies. That's more they're consenting to receive marketing materials and so on. And, you know, it's certainly potentially available to us to talk to them about a new, you know, the new arthro instrument set.
But I'm guessing as a patient generally, I'm not sure they're thinking at the level of when I'm ready to go forward with a MACI. Am I currently thinking about an arthro versus a small open procedure? That's probably something their doctors would explain the benefits of in terms of not only better outcomes from an aesthetic standpoint, but also less postoperative pain, faster recovery, et cetera. That's probably something I would expect the surgeon to do.
Okay. And then I don't know how much information you can necessarily give us here, but one thing, understanding doctors haven't actually seen it yet since it isn't approved. But the one question we've got in terms of the actual technique of the procedure is managing saline flow and how do you ensure that the cells aren't washed off the graft? Just I'm assuming you're very confident that's not going to happen, but.
Yes. So the way the procedure will work, so for those who aren't as familiar, so you insufflate the knee and that's typically done with saline. You can do it with gas, but it's most often done with saline and it helps with visualization when you're doing an arthroscopic procedure. So the question is when you have a membrane with live cells on and if you're irrigating the joint, what's going to happen to the cells?
So actually what ends up happening is the defect prep is done, you know, with the irrigation occurring. And then once that's done, the knee is drained, the irrigation stops, and then you basically dry the defect like you would, I mean, there's fluid in your joint if you're doing an open procedure as well.
So you have to dry the defect area, apply the fibrin glue, and then the implant is administered. It's going to be the same once you turn off the irrigation and you dry the defect as if you were doing it in a mini-a rthrotomy procedure.
Great. Taking a step back to the MACI growth algorithm more broadly, you know, we think about it generally as we model it, call it low double digit new doc adds with a layer of ASP growth on top of that. As you think about expanding into the arthroscopic-only doctor opportunity, is that something you think can sustain a double digit growth rate of new surgeon adds or is that something you think could potentially drive an acceleration of that driver of the business?
Yeah, I mean, it could be either, to be quite honest. I mean, you're saying over time, you know, we still have a pretty significant growth in our current 5,000, you know, target surgeons in terms of surgeons taking biopsies, right? It was up double-digit. So to your point, if it's low double-digit growth, would that go down a couple points over time?
But then, you know, the new surgeons make up for that plus more. I mean, I think all of that's on the table. I'd like to think, you know, that we can see with 2,000 new surgeons that we're calling on, you know, they haven't used MACI before, so it may take a little time, but, you know, it's a pretty fertile ground. They do a lot of cartilage repair. You know, they obviously will have heard of MACI, whether they incorporated it or not. I just think time will tell whether it sort of inflect it a little or maintains a strong growth, you know, post-launch.
You're reminded of the sales force dynamics haven't done a major expansion since 2019, right?
Right.
Are you expecting to add reps or add resources in some way or another to address this new doc population?
Yeah. So when we went from 3,000 target surgeons to 5,000, we went from 50 to call it 75 territories. So a pretty proportionate expansion in the sales force. Here we'll be adding 2,000 new surgeons. And rather than sort of realign all the territories, what we will do is in the higher volume territories, we'll have, you know, call it half a dozen what we call territory development reps, which are essentially junior reps that support the cases and biopsies and things like that as the more senior rep is out focused on demand generation.
We'll also have a handful of arthroscopic specialists. So when a surgeon's doing their first procedure, you'll have somebody who's been in a number of these procedures to help guide them through and make sure they have successful outcomes. And there'll be a few other ancillary folks.
So I'd say all in, you know, we'll probably add 10-12 folks for the MACI Arthro launch, which again, it's just a, it's a perfectly synergistic kind of launch when, you know, you can open up a pretty, what we think is a pretty significant opportunity. And that's essentially the commercial investment plus some marketing, of course, that goes along with that.
No comp changes to the Salesforce resulting from.
No, I mean, we will, well, generally our sales force is compensated based on the number of implants that are done. So it's obviously a base salary, an uncapped commission based on the number of implants. We will be charging for the disposable arthroscopic instruments. And I'm quite sure we'll have some incentive comp tied to that as well.
Okay. And I mean, the last five years effectively have grown MACI revenue strictly through rep productivity, which has been really impressive. I mean, is that sustainable over the long term or do you think at some point you'll need to get to the point of splitting territories?
Yeah, we really don't follow that typical med tech sort of mantra of get to $2 million in revenue and split the territory. Because, you know, when you have a premium price product like we do, so, you know, revenue per implant is, you know, north of $50,000.
Even if you're at $2,000 or $2 million per rep, which we're actually above that, you know, it's only on average 40 implants a year, one a week or less. Of course, they're doing a bunch more biopsies. And so there's a lot of activity. They're calling on surgeons, et cetera. So for us, it's less about a dollar, you know, a revenue driven kind of metric and more a volume-based approach.
And so in the instances that I mentioned around territory development reps, the idea there was if you've got a territory that's both large in terms of volume and large in terms of geography and you bring in another rep to support that, ultimately you're probably going to end up dividing up that territory, which is what we did in one case. So it's more of a volume-based geographical sort of set of considerations than strictly a dollar a mount.
Got it. And last one on MACI before we switch to the burn care and then margins, but your conversion rate has sort of been the, I don't want to call it the missing piece, but the last element of potentially driving longer-term MACI growth.
I think that's still sitting in the, call it mid- to maybe low-30% range lately. What do you think is going to ultimately unlock that moving higher? And, you know, maybe can you give us a range where you see, you know, your more experienced MACI surgeons, what their conversion rate sits at today versus some of the newer docs coming on board?
Yeah. And that's a big part of the dynamic. So as you know, sort of our growth drivers are, you know, how many biopsying surgeons are you getting each year? That's your, you know, the breadth of your penetration into your target universe. How many biopsies per surgeon? That tells you how deep into their practice, how are those biopsies converting into implants, and then price.
And right now the growth has been driven, you know, principally by surgeon expansion and price. And, you know, we've seen an uptick in biopsies per surgeon, but to your point, you know, we have a set of experienced surgeons who have higher, you know, biopsies per surgeon, higher conversion rates. You have a lot of new surgeons who have to build up over time. And so you get a little offset.
So things on the surface or at a high level can look like they're just stable, but there's a lot going on underneath when you double click. And so yes, the new surgeons have lower conversion rates, but the existing surgeons have, you know, typically much higher, especially once they start implanting. So, you know, we have some of our larger users are more experienced.
Their conversion rates are 40%, 50%, 60% plus. So it definitely can get up into those ranges. And, you know, our perspective is that as the surgeon base matures over the next X number of years, you'll start to see these other growth drivers in terms of biopsies per surgeon and conversion rate become the dominant drivers of growth. But that's in probably a little bit more of a static surgeon base environment than we currently have.
Okay. Switching to Burn and Joe, you started to touch on this at the beginning, but strong, strong 1Q Epicel performance. And I'll sort of ask two questions here, but one, it does feel like there's a little bit more visibility into Epicel this year. You know, correct me if I'm wrong on that. And then, you know, what would give you more confidence? You outperformed us on Epicel in 1Q. What would give you more confidence to think about raising that full year sort of range for burn care?
Yeah, I mean, I'll start and then Joe can jump in. I'd say with Epicel, you know, we're always going to have the variability that comes with treating a relatively small number of patients. And that's sort of the beauty of adding NexoBrid to the mix. You're treating a lot more patients once that's up and running and hopefully will dampen some of the variability that you can see with Epicel.
We're treating a couple dozen patients a quarter. You know, three or four patients one way or the other can have dramatic sort of impacts when the average order size is, you know, call it $300,000-$400,000, right? So what we basically said was coming into 2023, we're at about a $6 million run rate, you know, performed pretty well through 2023 and kind of came into this year at about an $8 million run rate.
Obviously outperformed in the first quarter, but I, you know, my view is you should think about it as that variability will just, you know, work around a higher base run rate, but the variability is not going to go away with Epicel.
With that one, there's also an ASP lift component to the Epicel story. How are you thinking about the long-term growth profile of Epicel?
Yeah, I mean, generally, I think Nick kind of hit it from a framework perspective, which is if you kind of look back, you know, 2021 and 2022 was, you know, a bit of a different trajectory just based on the incidence of large burns and some other dynamics. But, you know, generally Epicel was able to grow kind of on an annual basis, you know, a combination of volume and some price.
And so going forward, you know, as we think about the business, and I agree with Nick, you need to look at kind of run rates and things like that over kind of longer periods of time to reset that. But, you know, we generally think, you know, this certainly from a franchise perspective with NexoBrid, this can be a second high growth franchise for us, which is the goal.
You know, Epicel specifically, you know, over the kind of mid to long term, we should be able to continue to get into some of those dormant accounts or new accounts potentially with NexoBrid. We do think this can be a growing product as you think about kind of each year it's kind of run rate to start the year.
Got it. On NexoBrid, we're coming up on time here, but on NexoBrid, you know, it feels like the qualitative dynamics seem to be good. You know, Rx are still good on it. The number of centers getting on board, it feels like it's still going well. When do you think you're going to have a little bit better visibility into when that can inflect more meaningfully? You know, I think the street has a pretty big step up in 2025 from 2024. When do you think you could at least see that that's coming?
Yeah, I'll start. We have characterized this as a build year, right? Because you do have to get through the P&T committee process at each hospital. They then have to get the product into their system so that they can order and then start working it into their protocols.
And, you know, there are some who have gone through that whole process and are sort of where you'd want to see them in terms of reordering and patient treatments and so on. It's just that, you know, the rest of, you know, you just need to go through that process with sort of all of your targets. And that's just going to take time over the course of this year. So as Joe mentioned on our last call, we certainly expect a sequential increase in Q3 or Q2 over Q1.
We'd expect throughout the year, as you have more centers at each kind of step of the funnel, you know, you should be seeing sequential increases throughout this year. Then once it's all, everybody's sort of up and running and stocked and treating patients and reordering, that's when you're going to see an inflection. You know, I don't know if it's at the end of this year or into next year, but I think if we consider this a build year, then 2025, you know, seems like we're pretty well set up for that with respect to NexoBrid and quite frankly with respect to MACI Arthro as well.
Okay. And then shifting to margin guidance and I'll ask 2024 and then sort of longer term in the same question for time here. Really nice step up in 1Q, maintained margin guidance for the year implies a relatively limited step up in the back half. You know, I know there's some additional sales resources coming on board, but just how are you thinking about that? And then the 30% EBITDA margin target has been out there for a while. You know, how are you thinking about that as it relates to long term nowadays?
Yeah, so, you know, a couple of things there. So, I mean, you know, overall from a company level perspective, you know, our focus remains, you know, on driving high top line growth as well as that profitability. You know, strong profitability growth.
We've been enhancing the margins over the last couple of years. We think that can continue. So, you know, first on the gross margin line, you know, kind of long-term target's been at that 70%+. We're kind of in that zone. We were there in Q4 pretty close in the first quarter, which was a great start to the year.
You know, to your question around, you know, kind of what it looks like for the rest of the year, you know, probably similar from a philosophy perspective as the earlier question, which is, you know, we're one quarter into the year, things can ebb and flow a bit, but, you know, certainly a great start I think on margins, both kind of bottom line, adjusted EBITDA, and certainly in the gross margin in the first quarter.
In terms of the longer term, you know, profitability and the adjusted EBITDA, you know, we had a nice step up last year from kind of mid- to high-teens called 17 to this year, the expectation to be around 20% on a full year basis. And we obviously had a really strong fourth quarter in the mid-30s.
So, you know, that gives you a sense of where we can be at scale. So we think we can get to that 30%+ adjusted EBITDA long-term target over the next few years. And what we've said is, you know, starting in 2025, based on those product launches, and it really starts with that top line, you know, we can trend toward that 30% number.
And then in the years after, you know, we think we can be at 30%+. So, you know, we think we're well positioned overall on the top line with the portfolio we have, but really focused on profitability as well.
Great. And we're a little over time here, but just sort of wrap up takeaway message for investors. You have three good franchises here, inflecting margins. You know, how are you thinking about the business longer term from a growth profile perspective? And, you know, you're a rare SMID cap med tech company generating cash. How are you thinking about using that as well? Let's start with that.
Yeah. You know, of course, our goal is to maintain sort of strong 20%+ revenue growth. We've been doing that for a number of years now. Our profitability is now growing faster than our top line. And, you know, we do think that puts us in a pretty unique position. You're right. We've been generating cash each quarter for almost four years now in addition to adjusted EBITDA.
So we think that will continue. And where that takes us is obviously, you know, the incremental investments in our business, be it MACI Arthro launch, MACI Ankle clinical study, NexoBrid launch, that's sort of incorporated in the operating targets that Joe mentioned. You know, we're building a new facility. This will be a pretty heavy CapEx year, which is, you know, for the most part self-funded by our operating cash flow.
And, you know, that's one capital allocation piece, if that's your question. And then second would be more kind of corporate development transactions. I mean, we built this company when we bought the Genzyme biosurgery business from Sanofi.
We did another licensing deal to bring in NexoBrid. We're constantly looking at other products that can, you know, continue to fuel our growth and profitability. We're pretty disciplined given sort of what we have in front of us, but we're always looking and, you know, that would be sort of a use of capital as we go forward.
Great. Thank you, guys.
All right.
Thank you.
Thank you.