Great. Thanks for joining us again. Our next fireside is with Vericel. We have Vericel CEO Nick Colangelo and Joe Mara, CFO. Thank you for attending. Really appreciate it. Actually, I would just want to say, if anyone has questions in the audience, please raise your hand. I'll try to keep an eye out and happy to try to ask on your behalf. Why don't we start off? Nick, do you want to just give a higher-level overview of the company, and then we can dive in?
Yep. Thanks, Rich, and very happy to be here. Thanks again for the invitation. Before I begin, I'll just remind the listeners that this presentation and discussion will contain forward-looking statements, and you should refer to our documents on file with the SEC for further information. For those of you who are not as familiar with Vericel, we're a leading provider of advanced therapies for the sports medicine and severe burn care market. We have a highly innovative portfolio of advanced cell therapies and specialty biologics that are designed to restore or repair damaged tissue and restore function. Our lead product is MACI, which is an advanced cell therapy that uses a patient's own cells to repair damaged cartilage and restore function.
It's a product that we launched in 2017 for the treatment of cartilage defects in the knee, and it's become the leading restorative biologic cartilage repair product on the market. In the second half of last year, we actually received FDA approval for label expansion for the arthroscopic delivery of MACI for defects up to four sq cm in the knee, which positions MACI as the only restorative biologic product that's been approved by the FDA for arthroscopic delivery, which we think will drive deeper penetration into a very large addressable market. On the burn care side of the business, we're really focused on the treatment of severe hospitalized burned patients. For these patients, the treatment pathway entails, first of all, removing the eschar or the burned tissue, and then covering the wound or grafting the wound in order to promote healing.
We actually have products that address both aspects of that treatment pathway. NexoBrid is an orphan biologic product in the U.S. that's indicated for the removal of this burned tissue or eschar in adult and pediatric patients and is a product that we think will change the standard of care over time from surgical excision of eschar, which is the current standard of care. Once that eschar is removed, again, that's where Epicel comes into play. Epicel is the only FDA-approved permanent skin replacement for adult and pediatric patients with large, full-thickness burns. We think that having kind of the only FDA-approved products in their class for these severe burn patients and treating both aspects of the treatment pathway really positions us with one of the premier portfolios in that space.
Just a last comment on our portfolio, one of the unique parts of the company is that we have very strong competitive barriers to entry with this portfolio. Both Epicel and MACI are regulated by the FDA as combination device biologic products. Because of that, there is really no established generic or 510,000 pathway for these kinds of products, and no near-term-like competitors on the horizon. That really provides us with a rather large moat for MACI and Epicel. Of course, NexoBrid, as a recently approved orphan biologic, in addition to patent coverage, also has seven years of orphan market exclusivity and 12 years of biologic data exclusivity. We think this is a really strong portfolio that really will support the company's growth in the years ahead.
I would just say that, Rich, from a financial perspective, we really do have a strong track record of financial performance and growth, both on a revenue and from a revenue and a profitability perspective. Since we launched MACI in 2017, we've had 20% compound annual revenue growth. For obviously eight-ish years, which is pretty impressive in our industry. From a gross margin perspective, because of the revenue growth and the leverage in our business, we've had a pretty meaningful expansion in our margins, ended last year with a 73% gross margin, which was up almost 400 basis points from 2023. We've had a consistent track record of positive adjusted earnings or adjusted EBITDA and operating cash flow every quarter for essentially the last five years.
We think that supports with continued revenue growth our midterm targets, which we talked about earlier this year of getting to 70%+ or high 70% gross margins and high 30% adjusted EBITDA margins. Lastly, we have a very strong balance sheet, ended the first quarter with about $160 million in cash after having invested in a new $100 million facility that was recently completed. As we finish up those CapEx investments, obviously, we think we're at a point where we'll see inflecting cash generation as that operating cash flow makes its way onto the balance sheet. That's kind of a high-level summary of our portfolio and our financial performance over the years.
That's great. Thanks for that, Nick. Definitely want to spend a decent amount of time on MACI Arthro. Before we get into MACI Arthro, and you started to already, can you just outline the sustainable growth engines for MACI separate from MACI Arthro for a minute? What outside of Arthro is going to drive growth? What is that growth rate looking like?
Yeah. So we kind of refer to the pre-MACI Arthro era as the core MACI business. I'd say there's a couple of dimensions to why MACI has become the leading restorative cartilage repair product on the market. First of all, MACI replaced a very invasive earlier version of this technology using a patient's own cells to regenerate cartilage. Unlike most tissues in the body, cartilage doesn't have intrinsic healing properties. That's why using a patient's own cells and delivering those cells into the defect in the knee, which is like a pothole on the surface of the knee, is what allows that cartilage to regenerate and restore function for a patient.
When MACI was approved at the end of 2016, first of all, it became the only FDA-approved product in its class, very broad label, and excellent clinical data in terms of demonstrating superiority versus microfracture, which is the FDA comparator. You have a very broad label, which means that more patients are eligible to be treated with MACI. That is the first piece of it from a patient perspective. From a surgeon perspective, as I mentioned, this is a much less invasive, faster, simpler procedure. You often see in med tech that when you make a procedure less invasive or simpler, it gets much broader adoption. That is why we have seen strong surgeon growth for MACI generally, because it is less invasive. It involves shorter rehabilitation times, which is important from a patient perspective. It has a very strong reimbursement profile.
MACI is covered by every major medical plan in the country. Because it's approved under a medical benefit, you have to have a prior approval before the treatment occurs. The approval rate is north of 90%, closer to 95% of the submissions are approved by insurance companies. That's sort of the basis from a product attribute perspective that has driven MACI's growth. From just the growth drivers that we typically refer to, again, we've kind of listed out four of them typically that include growing the biopsying or surgeon base, which is number one. That demonstrates the breadth of penetration into your target surgeon market. Number two is how many biopsies per surgeon are you getting? Just for everybody's benefit, MACI starts with a biopsy of a patient's own cartilage, which is then delivered surgically once the product is manufactured.
The number of biopsies that you're receiving per surgeon just demonstrates the depth of penetration into each surgeon practice. How those biopsies convert into implants or the conversion rate is a third driver. Because this is a highly innovative biologic product, we have pretty strong pricing power. Price is kind of the fourth growth driver that we talk about. I would say over the past couple of years, as MACI has been growing 20%+, that it's really been the expansion of the surgeon base and pricing that's driven that growth. You have more surgeons taking more biopsies, which then convert into more implants. That's kind of what has fueled the core MACI growth even before we launched MACI Arthro.
It is pretty impressive from our perspective to say that eight years into launch, MACI is still growing at 20% as it did last year, even before the MACI Arthro launch really kicks in.
Two questions. One, the pricing. Can you just remind us what that price uplift has been and what's factored into 2025?
Yeah. We typically take mid to high single-digit price increases. Again, MACI is a biologic product. Its WAC is prices listed in all the compendia. People can look it up if they want to. It has been sort of in the higher single-digit range the past couple of years. We do a lot of market research with hospital administrators and payers. I think the art of pricing is to understand sort of what's acceptable to the customers and making sure you maximize that opportunity. We do a lot of research to make sure that we kind of stay within sort of the expectations of those constituents, which we do, and which has allowed us to pretty consistently have some strong pricing power throughout MACI's history.
Yeah. I guess maybe this is a good pivot to MACI Arthro. Is MACI Arthro for now a go-deeper strategy more than it is a go broader strategy?
Yeah. I think it's probably a little of both. From a surgeon perspective, it's a go broader strategy. So we had.
This is like same-store sales. You're not necessarily bringing new MACI surgeons into the mix at an accelerated pace at this stage. It's more about training the existing MACI?
Yeah. I'd say that's fair. I'd say the goal with MACI Arthro, we had 5,000 surgeons before we launched MACI Arthro. We had about 2,500 of them. It was growing nicely. We had gotten to about 50% penetration with the MACI core product. There was a group of surgeons, call it 1,000-2,000 surgeons, that were really arthroscopic only or predominantly surgeons that have been added to our target list with the launch of MACI. From that perspective, it's kind of broadening out potentially the surgeon base and continuing because most of the cartilage repair procedures that are done are predominantly done through arthroscopic administration. That's true for the other things these surgeons do as well. If you're doing a meniscal repair, typically it's arthroscopically done. An ACL repair is arthroscopic, rotator cuff.
What these sports medicine and orthopedic surgeons are doing typically is done arthroscopically. Not surprising that there are some that really focus on arthroscopic cartilage repair. Those are the ones that we are adding. Within our existing MACI users, of course, because the MACI Arthro instruments are designed to treat smaller defects on the femoral condyle or the end of the thigh bone. MACI, the core MACI product, really has been a go-to product for cartilage defects on the back of the kneecap, which are very common. There are about 10,000 patients a year that have those kind of defects. It is really a difficult place to try to treat. You cannot do things like microfracture because there is not a lot of blood supply in the kneecap.
That plus larger defects, so greater than four sq cm, which is a very large defect, is kind of the go-to for MACI. These instruments were designed. There are about 10,000 patients that have patella defects each year, 10,000 patients that have larger, greater than four sq cm defects each year out of our 60,000 patient 10. That tells you two-thirds of the rest of the addressable market involves these smaller defects, less than four sq cm on different parts of the knee, principally in the femoral condyle, which is what we design those instruments for, two, three, or four sq cm defects on the femoral condyle.
From that perspective, it's a deeper strategy that even our existing MACI users, some of whom focused on patella cases and are broadening out their usage with MACI Arthro, or those who might have done larger defects on a femoral condyle who will now think about taking MACI biopsies for smaller defects, that's where you get deeper penetration into the largest part of the market.
Is it right that you're starting to get increased visibility as you move through the initial phases of the MACI Arthro launch into that second bucket of growth, the more procedures per surgeon?
Correct. Yeah. We've talked about it on our last two earnings calls, early days. The product was approved sort of late in the fall last year. We really did not launch in earnest until the first quarter of this year. Even on our fourth quarter call, there were a few dozen cases that were done in the fourth quarter. Of the surgeon segments that we think about, which were existing MACI users that were either patella-focused or kind of more broadly focused, the open targets who had not used MACI yet, or the 1,000-2,000 new surgeons that we added, we had actually had cases either done or scheduled from each of those buckets and getting a meaningful number of biopsies from those Arthro-only surgeons, even sort of before we began the launch in earnest.
On our first quarter earnings call, we really gave a lot more detail about, first of all, the number of surgeons we've trained. We ended last year with about 150 trained surgeons. By February on our fourth quarter call, end of February, we were at about 250. Early May on our first quarter call, we were up to 400. A really strong pace that was actually ahead of the initial MACI launch pace in terms of the number of trained surgeons. We talked about what their behavior is. For those who are not as familiar, the typical conversion timeline for cases that convert from a biopsy to an implant, the median time is about six months. Half a little before then and all the way out to 18 months to two years is when these biopsies convert typically.
The first thing you're going to see is changes in biopsying behavior. Two to three quarters later, obviously, our expectation is that you then see an inflection in those implants as well. What we mentioned on our first quarter earnings call was that for those 400 trained surgeons, when you looked at their biopsies through April versus through April of last year, their biopsy growth rate was up 30%, which was significantly higher than the overall biopsy growth rate for all surgeons. Obviously, that's a great leading indicator and not unlike what we saw in 2017 when we launched MACI. The first thing we saw was a pretty meaningful uptick in biopsies. I think in the third and fourth quarter of 2017, we were talking about 40 %+ biopsy growth versus the same quarter in the prior year.
That was a smaller base, really important advancement in the procedure. The next year, you saw really strong growth in implants and revenue. That is what we would expect to see. We're seeing a nice uptick in trained surgeons in terms of their biopsy growth. Overall, we would expect to see that start to manifest in implants and revenue in the back half of this year, and particularly into 2026 and beyond. When you take a deeper look at those surgeons, the surgeons that focused on patella defects were actually the highest growing group of those trained surgeons in taking femoral condyle biopsies, which is, again, an expansion of what they typically had done, made up a significant part of that.
That's kind of what gives you at least directional indicating confidence that MACI Arthro is potentially going to facilitate expansion into the white space, the two-thirds. You're seeing the move, the biopsies from patella to, well, actually, where are you seeing it outside of the patella?
Yeah. So again, for patella-focused surgeons before launch, they end up, you're seeing a lot of their biopsy growth coming from femoral condyle biopsies. That's one piece of it. The other thing we mentioned is that while these instruments were designed for femoral condyle defects, so again, the end of the thigh bones, we're actually seeing a significant number of the procedures that are done involve the trochlea or the area behind the kneecap, which that's a pretty difficult area to get to for other kinds of procedures. That was, it's a pretty big part of our addressable market, about 10,000 patients a year. We think that could add another sort of opportunity for growth for the product as well. That happens a lot when you develop instruments and surgeons start using them in different ways.
I mean, they've done a few patella cases here and there, tibial plateau. They use them even in areas that are sort of outside what we expected or designed those instruments for. That's another encouraging opportunity for us as well.
Just going back to the training, so you're at 400, I believe, exiting the 1 Q.
Yeah, at the end of April.
Right. I guess the question here is, should we think of an accelerated pace of training as we move through the year? Is there any reason why you couldn't be north of 800, approaching 1,000 by the end of the year?
Yeah. First of all, as I mentioned, we were kind of pacing ahead of the original MACI launch. Again, we had a smaller Carticel, the prior product user base at that time, and a much broader base now. Even 400 in the first several months out of the 2,500 users, because principally these were MACI surgeons that were then being trained for arthroscopic use. There were some naive surgeons as well. That is kind of the low-hanging fruit when you launch MACI Arthro. Getting to 400, we have not given a number, but it is not unreasonable to expect there will be hundreds more surgeons trained throughout the year. They can train just like was the case for MACI. You actually can train online. It is not a very complicated procedure for surgeons who are used to doing arthroscopic cartilage repair and other procedures.
They can train online. They can train at the major conferences. We have labs, cadaver labs that are set up there. We have, obviously, regional trainings periodically. We actually have synthetic knee models that they can practice with the arthroscopic instrument. There are a number of ways that they can be trained. Those models rolled out pretty recently. That could become an opportunity for growth in training as well. Again, without giving a particular number, we expect hundreds more trained by the end of the year. It will probably slow down a little bit in the fourth quarter because it is such a high-volume quarter for us generally, for MACI, for surgeons generally before the end of the year. You kind of do more of your trainings kind of through the third quarter, I would say.
Again, we expect significantly more trained surgeons, which sort of supports the point I made earlier, which is if you think about the behavior that we've seen from the first 400 trained surgeons, and if those trends continue, you're going to exit the year with obviously a pretty significant portion of our existing MACI users who are trained. If they're taking more biopsies like these initial surgeons are, it really does set you up well for 2026 and beyond.
Maybe turning to Joe for a little bit to get you some action here. You guys raised your guidance after the first quarter. I guess one of the things is what gave you the visibility to do that, especially how lumpy Epicel is? And there was clearly some, I don't want to say deferral, but push-out and more reliance on the back half. Can you just talk to the factors that gave you the confidence to kind of actually increase your guide coming off the 1Q of MACI and line-ish and Epicel a little short of your expectations?
Yeah. So I mean, first off, as you know, I mean, Epicel is always going to have that quarterly variability. And so we tend to look at that over longer periods of time where trends tend to normalize. But you will see that variability. And we've kind of certainly factored that thinking in. On the MACI side, there's always a degree of seasonality, of course, particularly with the fourth quarter being such a large quarter. So we're certainly going to factor that in as we think about the year. In terms of the guidance from the last call, we did increase our financial guidance a bit. So both the gross margin as well as the adjusted EBITDA, we took to the higher end of the range.
I think some context there that's important is our initial guide for the year was kind of in early January in our pre-release around kind of the early year conferences. Those were preliminary numbers. Once we sort of finalized Q4 and the full year, we actually had a really strong close to the year. Just given kind of where we ended up last year and as we kind of look on a full-year basis, we did tick those up a bit, but certainly factoring all of that into the equation, I would say.
What were the items with respect to leading indicators for 2Q and beyond that, again, gave you confidence to put those parameters around Epicel, knowing that one quarter in, it did not show up in the numbers yet?
Yeah. I mean, I think on Epicel, as we've talked about, if you step back on Epicel last year, it's obviously the first quarter was not we knew it would be directionally lower. It wasn't quite where we expected it to be. The last couple of quarters have been lower. If you step back and look at Epicel, it grew 16% last year. Burn Care actually had a higher growth rate than the company. It was extremely variable. It had some very strong quarters during the first three quarters of last year. We did make a point on the last call to talk about a stronger start for the second quarter. Certainly, it is difficult to predict exactly what quarters look like. We do think when we look at the past few quarters, some of those run rates have been strong.
We try to factor that all in as we think about not just the second quarter, but the full year as well.
Got it. And then maybe just thinking about the margin and free cash flow dynamics, you're essentially done, I believe, with the headquarter manufacturing investment, right?
Correct.
How quickly can free cash flow reaccelerate as a result of that? And kind of how should we think about capital allocation?
Yeah. If you kind of go back a couple of years, I would say we made a point to talk about sort of an inflection from a profitability perspective. I think we've done a good job in the last couple of years and kind of see with the margin expansion. That has played through. We expect that to continue. On the cash generation piece, as Nick talked about, our new facility that we self-funded, which was around $100 million in total, we actually grew our cash balance as we went through that build over the last couple of years. What we talked about is the first quarter had kind of the most substantive CapEx left. There will be a bit of a tail into the second quarter with the final equipment. Really, once we get through the second quarter, our cash generation should increase significantly.
Really, from a CapEx perspective, we're probably back into those single-digit millions on an annual basis from a CapEx perspective being through the building. Our adjusted EBITDA tends to be a pretty good proxy for operating cash flow. It does not always correlate exactly calendar-wise, but it gives you a sense for the potential cash generation as we exit the year in the second half and into 2026 and beyond. Lastly, from a capital allocation perspective, obviously, the building is behind us. When we talk about operating investments, that is within our operating P&L. Certainly, the other piece is really business development. We have a team dedicated to that. We're always actively looking at potential opportunities there. We know we have a very strong financial profile, a very innovative portfolio.
I think we have been and will continue to be extremely disciplined as we look at that BD, but we will certainly consider opportunities that make sense.
Maybe turning back to you, Nick. One of the questions I sometimes get from investors is MACI Arthro launch, is it going faster or slower than expected? And then more specifically, doesn't MACI Arthro need to facilitate expansion into doctor sets that were not doing MACI prior for this to really, aren't you surprised by that? Why is that not a problem? Can you address that?
Yeah. I would say when you take a big step back and say, regardless of segments and surgeons that typically did procedures in certain parts of the knee or others, if you think about our 60,000-patient TAM, there are areas like patella and larger defects where, on an implant basis, we're kind of in the double-digit to mid-teens penetration from an implant perspective based on conversion rates, probably more in the 30%-40% biopsy sort of penetration rate. Overall, we're sort of mid-single-digits penetration into that 60,000-patient TAM. Whether it's other surgeons that do high volumes of cartilage repair that weren't MACI users prior or even with our existing surgeons, again, if they focused on patella defects and didn't use MACI before for cartilage defects on the femoral condyles, that's a big expansion because it's the biggest part of the TAM.
If it was like my surgeon who did do femoral condyle defects but probably skewed toward larger ones and will now look at patients with two sq cm defects and take a biopsy, either one of those, especially given our current penetration rate, provides a significant upside opportunity for the company. There are multiple dimensions to the opportunity for MACI Arthro.
Great. We're right at time. Thank you, Nick and Joe. Really appreciate your time.
Thank you.
Thank you. Appreciate it.