Oh, we're starting. Sorry.
Good.
Perfect. Thank you very much. This is Peter Harrison from Morgan Stanley's Investment Banking Group. I'd like to welcome you to the Vericel chat. Today with us is Nick Colangelo, the CEO, and Joe Mara, the CFO. With that, we'll get started. Thank you very much for attending the conference. We greatly appreciate it.
Happy to be here. Thank you.
Thanks for having us.
Let's start with MACI, of course. It's your lead product for cartilage repair in the knee. The TAM is $4 billion in the U.S. You're currently preparing to launch it outside the U.S. and conducting a trial for the product in the ankle. Can you provide an update on these two initiatives and how they will continue to drive what's been an extremely impressive growth profile?
Well, there's a bunch of sort of growth drivers that we talk about in the short term, but the ones you mentioned are really the longer-term growth drivers for MACI. Immediately after launch, we started to think about how do we continue down the pathway of sort of procedural advancements to continue to make it a less invasive, simpler, faster procedure, and that's kind of the launch of MACI Arthro that I'm sure we'll talk about a little later. In addition, you have articular cartilage in all joints. The knee is the greatest opportunity since it's the greatest weight-bearing joint, and that's why all the injuries occur in the knee. But ankle is a second opportunity for us, and so moving into other joints has been a long-term growth driver and initiative for the company, as has OUS expansion. I'll start there.
Just by way of background, MACI was actually developed in Europe by a German company there before Genzyme purchased that company back in the 2010s. The pivotal study for MACI, both in Europe and in the U.S., was conducted in Europe. So there's a long history, and it was marketed in Europe, so a long history of MACI in Europe. Once we completed our manufacturing facility in the U.S., that allows us to go back into Europe because we designed that facility with global CMC requirements in mind. That facility was completed and approved by the FDA for MACI production earlier this year. We announced last year that we intended to go back into Europe and in a staged manner, and that we would start with the U.K. We did that for a number of reasons.
Number one, there's a high degree of brand awareness and surgeon advocacy for MACI in the U.K. Because the clinical study was conducted in Europe, U.S. surgeons, when we launched in 2017, didn't really have experience with the product, and it was surgeons from the U.K. that came over and trained our trainers, who then went out and trained other surgeons in the U.S. So long history there. Number two, there's an expedited approval and reimbursement pathway in the U.K. If you have a product that's approved in the U.S., Japan, Europe, other countries, then the U.K. has a mutual recognition procedure which we qualify for and we're following. So it's an expedited approval process.
From a commercial standpoint, there really are, if you're in the national health system there, which most patients are, there are 12 or 13 centers of excellence, joint restoration or preservation centers of excellence in the U.K. where these patients will be treated. So a very sort of concentrated call point for us. We're really excited about the opportunity there. We submitted our marketing application in the second quarter. The process is that you have to go through a validation of that application. You have to have a facility inspection, just like we did by the FDA earlier this year, and then the clock starts ticking. Hopefully, sometime next year, we'll be in a position where the product's approved, and we can launch in the U.K. So really excited. Then we would move beyond that to other countries in Europe, potentially Canada, and so on. So really nice opportunity-
Yep
... For us in the back half of this decade to sort of continue to drive growth for MACI outside the U.S. MACI ankle, as I mentioned, we've always been focused on other joints, and MACI Ankle, really, the ankle represents the second-largest opportunity behind the knee. Just like we did in terms of the opportunity for knee cartilage repair in the U.S., a quantitative market assessment, we did the same thing for ankles. There's about 170,000 or so cartilage resurfacing procedures that are done in the U.S. each year in the ankle. Our TAM is probably about 20,000 patients a year. But at our price point of call it roughly $70,000 per implant, it represents a really nice billion-dollar-plus market opportunity for us. That's really somewhat of a longer timeframe for us, in that it'll be, call it a three-year enrollment, a two-year-
Yep
follow-up, couple years for regulatory approval. That's more of a 2030, early 2030s kind of opportunity. When you take a big step back and you say, we launched MACI in 2017, we're kind of in our 10th year on the market. We've had a 24% CAGR in terms of revenue growth over those years, really strong momentum in the business. We launched MACI Arthro last year. That allows us to access another part of the addressable market. That's an important one. You can layer on OUS opportunities and then MACI in the ankle, and you can see this multiyear, multi-decade opportunity for MACI, especially because there's no MACI-like products on the horizon.
Okay. Super helpful in the longer term. When I think about that 24% CAGR in the last couple years and in the near term as you bridge to OUS and the ankle, what has been the driver of MACI over the last couple of years? Is it price? Is it volume? Is it patient awareness?
Yeah. I would say, like our whole portfolio, and we can use MACI as an example, but essentially, we have a product portfolio, including MACI, where it's the only FDA-approved product in its class. We can talk about the burn care products a bit later, but they follow a similar model where these are, because they're the only FDA-approved products in their class, they are sort of, kind of the most clinically proven products. There's a great deal of clinical data for all of our products. Essentially, we have a model that is premium price products, concentrated call points. That has supported both the revenue growth, but also sort of the profitability and cash generation that we can talk about as well. For MACI, in particular, there's a very large addressable market. I mentioned the ankle addressable market.
It's probably three times the size for the knee, about 60,000 patients each year. It's a large addressable market. Relatively low penetration for restorative therapies like MACI, but that market is shifting pretty dramatically towards restorative therapies. Obviously, there's a pricing component to our growth as well, but it's really driven by continued penetration into our target surgeon base. As I mentioned, as a less invasive, simpler procedure, it's kind of a tried and true med tech play where you're less invasive, simpler to do. The number of surgeons that use the product grows. That's been a principal driver to date. We also look at depth of penetration, so how many biopsies per surgeon are we getting as they adopt MACI into their practice, how those biopsies convert into implants. Yeah, that 24% CAGR is not over a couple of years. It's over a decade.
It has been very strong growth, and we think there is a lot of opportunity as we go forward. MACI's growth has actually inflected somewhat since we launched MACI Arthro and a couple other initiatives over the past year. Rolling four-quarter growth is about 23% versus 19% the four quarters before that. So we are seeing sort of good, strong growth. It has grown 20%+ each of the last three years. We think there is a lot of room ahead for us with MACI that will continue to drive durable growth, not only through the back half of this year, but into 2027 and beyond.
On that room for growth, you did a Salesforce expansion at the end of last year. How is that going? How is the productivity of the Salesforce ramp up as we move into the second half of this year and beyond? Do you think you will see additional Salesforce increases in the foreseeable future?
Yeah. The Salesforce expansion was sort of one of a few initiatives that we engaged in. So mid last year, we were kind of on a path to get to about a quarter billion in revenue, and we said, "That is great," but a lot of times companies do not transition from that to our next goal, which is about half a billion in revenue by 2029. We have set that as a midterm target along with our margin targets. What got us to a quarter billion may not be what is necessary to get us to half a billion. We did a number of things.
We accelerated our planned Salesforce CRM expansion at the end of last year. That is when we did the hiring. They actually went into their new territories, all the reps, as of January 1st of this year. That is a relatively new development. We obviously talked about it on a bunch of our earnings calls. We had launched MACI Arthro at the beginning of 2025. That is kind of contributing to our growth. Then we invested multi-millions of dollars in commercial excellence initiatives.
Yep
That also have combined with the expansion in MACI Arthro contributed to the growth. I would say on the expansion itself, it has gone exactly to plan. Obviously, folks worry about disruption when you are expanding a Salesforce CRM. We have done it a number of times, and each time we have done it previously, we see our rep productivity go up often in the same year that we expand, which is somewhat unusual. We made a comment on our first quarter earnings call that we had double-digit biopsy growth. That was the reps' first quarter in place, and biopsy growth in new territories was particularly strong. They were doing exactly what we would want to see, which is taking the existing biopsies, converting those into implants, but also building their own pipeline as they were moving forward.
Second quarter, we said both biopsy and implant growth had accelerated in the new territory. I think they are doing really well, and I think the important point that we mentioned is not only does it set them up for a strong second half of the year and our business overall, but we look at how reps progress over time, and we looked at cohorts of post-COVID hires, and they clearly contribute immediately. Again, they are not walking into white spaces and starting from scratch, so they are able to move the needle pretty quickly. But it is really in years two and three where their growth rates in both biopsies and implants are actually the highest versus legacy territories or other new territories. For us, what that means is, again, we feel we are set up well for the back half of 2026.
Yep.
But also for 2027 and 2028 as those, it is a pretty big percentage of our Salesforce , about 30% expansion, get up to speed. Just the time it takes to go from a biopsy to an implant, it all makes sense. In year one, they are converting business, building a book of biopsies, but those convert over multiple quarters and sometimes multiple years, and so they are just building this foundation where you really see the strongest growth in years two and three.
Helpful. You mentioned in passing the commercial excellence initiatives in that answer. Can you go into a little more detail on what those have been and how they have also contributed to the growth we've seen?
Yeah. I think a lot of it has to do with the fact that we're now able to access better procedural data for the surgeons that we target. That allows you to segment the surgeons at a different level. Our growth, we've always talked about the fact that there are four MACI growth drivers. It's adding more surgeons who are taking biopsies. It's getting more biopsies per surgeon. That's the depth into their practices. It's how those convert, and then it's price. For the past few years, our growth has principally been driven by more surgeons adopting the product, taking biopsies. So you're getting more biopsies because you have more biopsying surgeons, and price. Last year, we started to talk about the fact we're starting to see an uptick in biopsies per surgeon.
As surgeons mature, they typically end up taking more biopsies and treating more patients. That has become sort of a growth driver for us as well. It's really focusing through these commercial excellence, sort of the segmentation, first of all, which surgeons are really going to grow your business. Because you can see the number of qualifying procedures they do. You can target those surgeons better. It's also about standardizing the playbooks. So there are different segments. If you have a surgeon that doesn't take a ton of biopsies and could take more, but the biopsies they take, they convert at a very high rate. Okay, you want to run plays that allow you to grow their biopsies because you know they're going to convert.
You might have the opposite with some other surgeons, where they take a lot of biopsies but don't convert at such a high rate. So how do you get them to convert at higher rates? There's different things you can do, and really just standardizing best practices across a larger sales force is an important piece of that. Then implementing what will be a Salesforce CRM, so it ties everything together and allows them to do better account planning, focus on the right surgeons. It's a great performance management tool. All of those things combine to just have more productive reps out in the field that can really drive our business.
Makes sense. The last question on MACI before we move on, you mentioned Arthro a couple times. What did that do from a competitive position, and how do you see that contributing to growth over time?
Yeah. So as I mentioned, continuous procedural advancements is an important and tried and true playbook, right?
Yep.
The predecessor product, Carticel, was highly invasive. MACI is a less invasive surgery. MACI Arthro is really designed to continue down that pathway. What it did, basically, MACI, over the years, became sort of the go-to product for larger defects, just the way the product works. We take a patient's cells, we put them onto a collagen membrane that's surgically implanted, where the cells then migrate down to the subchondral bone and basically generate the cartilage, what's essentially a pothole on the surface of the knee. Because it's a simpler procedure, that's what initially catapulted MACI growth. MACI Arthro, but again, its position prior to MACI Arthro was in larger defects.
Yep.
And then defects on the back of the kneecap, because there really aren't other good alternatives for treating those kinds of patella defects, and that's a big part of the market. So those were always the go-to as MACI continued to grow post-launch. The MACI Arthro instruments are designed for smaller defects, 2 sq cm to 4 sq cm on the femoral condyles. That's a place where we have business, but we had lower penetration, lower overall volumes. Because there are other things that surgeons can do. So our whole goal there, it's probably a third of the addressable patient market have smaller femoral condyle defects, and that's why we developed the MACI Arthro instrument so that we'd have the most competitive positioning in a very large part of the market. So that's been an important evolution for us. We did a full launch last year, early 2025.
At that time, we probably had 2,500 surgeons out of our 5,000 or so targets that were taking biopsies in any given year, probably higher than that cumulatively. Out of the gate, we trained around 1,000 surgeons last year. It was kind of a critical mass of getting surgeons trained on doing a MACI Arthro procedure. They represented that trained surgeon cohort more than half of our implants last year. We saw that while patella defects not only is our highest volume, but it's typically been our highest growing segment. We saw those small femoral condyle defect, that growth rate at par with patella. That was an important development for us. We've seen continued strength in the leading indicators. I think it refreshes the brand.
It allows us to access a different part of the addressable market with a more competitive offering, and it will allow us to continually innovate because this was just version 1.0. We're working on additional enhancements to the MACI arthroscopic instrument set. We'll look at developing a specific set of instruments for use arthroscopically in the patella. It's kind of as you would expect, a less invasive procedure is better for the patient.
Yeah.
We're also focused on publishing data. Like MACI when it was launched, we didn't really have clinical data in the U.S. because the pivotal study was run in Europe. We have a registry now to generate MACI U.S. patient data. We have some publications out there already. The Arthro instruments were approved with a human factor study, so we didn't have to do a clinical study. We just had to demonstrate that surgeons could follow the instructions and implant the MACI membrane properly. Now we're focused on demonstrating what surgeons would expect to be the case, and we know is the case, that with a less invasive surgery, you have better postoperative outcomes and that less postoperative pain, better range of motion, back to full weight bearing more quickly. We're generating that kind of data that we think also will help with MACI Arthro uptake.
Interestingly, MACI was on the market in Europe and Australia for years. About a month or so ago, there was an arthroscopic long-term publication coming out of Australia that demonstrated after 13 and a half years of follow-up patient satisfaction with arthroscopic administration, not our instrument set, but they just used standard arthroscopic instruments. They had the highest patient satisfaction outcomes after that period that we've seen. They're all typically pretty high.
Right.
in the 90%+ range. This was like 100% patient satisfaction, 13 and a half years on average after treatment. We know the long-term outcomes will be great. We also want to have data that our sales reps can use, showing those shorter-term postoperative outcomes are better as well.
That's helpful. Before we go on to the Burn franchise, let's step back a little bit and what this has built is a company that has both growth, very strong margins and cash flows, which is fairly unique in med tech and company I spend time with. What do you think contributes to this kind of durable top line plus the margin pull-through and cash flow generation you all bring to bear for investors?
Yeah. We've talked about MACI and its growth over the last decade, but the company as a whole, since we launched MACI in 2017, has grown at a 20% CAGR. Not far behind MACI. That's both because MACI's had strong growth, but also Burn Care as well. As I mentioned, all of our products sort of fall into this category of being highly innovative products, great clinical outcomes, premium pricing, and then concentrated call points. Again, we're generating what would be close to $300 million in MACI revenue this year with 100 sales reps. I mean, the rep productivity is very strong. We obviously have the whole infrastructure, case management team and other support around them, but that's a pretty high sort of productivity for the reps.
In our Burn Care franchise, we've guided to like $46 million-$50 million this year, so it's a smaller part of our business. There we have 17 territories. Again, it's a very concentrated call point. There's only 140 or so burn centers in the U.S. You take that combination of innovative products, premium pricing, concentrated call points, and yes, we've taken our margins up to this year. We've guided to about 75% with our midterm targets in 2029 being high 70% range, which is typically what we see in the fourth quarter.
Yeah.
Which is our seasonally strongest quarter. Our adjusted EBITDA margins this year will be 27%, is what we guided to. In the fourth quarters, those strong quarters, I think we were at 40% last year, and that's a good proxy for what we grow into over the next couple of years as the business scales. Yeah, it's a uniquely, I would say, profitable company in addition to the revenue growth. I think when you look back over the past four quarters, our company revenue growth is 23%, Burn Care is 23%, MACI 23%, adjusted EBITDA is up 40%.
Yeah.
We generated this next piece, which was about $60 million in free cash flow or operating cash flow over that timeframe. We kind of hit the profitability inflection point a couple of years ago, and that's continuing to increase. Now with our new facility behind us, which is about a $100 million investment that we self-funded and grew our cash balance while we were doing that.
Now we're at a point where our CapEx will be, call it, roughly $10 million a year, and our adjusted earnings are a good proxy for operating cash flow. You can do the math if you look at our long-term targets, not only for this year, but our midterm targets, I should say, in 2029, get to half a billion in revenue, close to 40% adjusted EBITDA margins. That's a good proxy for operating cash flow minus a little bit of CapEx. It's a pretty strong cash generation engine as well for us.
It's a very powerful engine for sure. On the Burn Care franchise, NexoBrid has been a bit slow since the launch. As we saw in Q2, it appeared to be a relatively strong quarter. Are there signs that we're seeing an uptick in that launch and increased revenue growth there?
Yeah, just to take a step back quickly. In the Burn Care space, we focus on severe burn patients that are hospitalized. That's kind of where we are, which is why I said it's a pretty concentrated call point. So two products there. NexoBrid first is what you use, enzymatic, topically applied to remove the burned tissue, and then you figure out how you're going to cover the wounds, which is where Epicel comes into play. Epicel has been on the market for about 30 years now, so we can talk about that later, the only FDA-approved permanent or full thickness skin replacement product. NexoBrid we launched a few years ago. The interesting thing there is that it's a really important product for patients. The standard of care before NexoBrid was launched was surgical removal of the eschar.
You take a patient into the OR, and they basically cut away the dead skin. It's very traumatic. There's a lot of blood loss. To have a product now that's basically a mixture of proteolytic enzymes that you can simply apply, and it dissolves the dead tissue and leaves the healthy skin, that's a big deal from a patient perspective. You're basically going to burn surgeons and say, "Don't do surgery anymore. Use this product.
Right.
It takes a little while to change the standard of care. It's more about operationalizing it. They're used to saying, "Okay, I'm the surgeon. I need a nurse. I need an anesthesiologist. I need OR time for an hour." Now you have a different flow, and how do you staff that? How do you operationalize it? It may sound trivial, but in a hospital with certain workflows that they've used for decades, that takes a little time to change. When we launched the product, there were about 90 centers we were targeting. When we got the pediatric indication, we added, call it 20 more. To date, we've had about 80 centers that have used the product. I think that's a good testament to surgeons and healthcare providers understand the benefit of NexoBrid.
It's really about how do you get them up the curve on continuous use, get those protocols operationalized. We said in the second quarter, we're starting to see that momentum build, and we expect that to continue. Also layered on top of that is sort of this BARDA contract. BARDA's very worried about mass burn casualty events in the U.S. If you have that kind of an event, you don't have enough surgeons, and you don't have enough OR space to surgically take care of those patients. That's, excuse me, why they funded the development of NexoBrid, and that is kicking in now. We are generating revenue from the BARDA contract. I can touch upon that for a minute.
Yeah, go ahead.
It's close to a $200 million contract. The first piece of that is about $35 million. Whether it's the full contract or that first funded piece, about two-thirds of the benefit of that goes to us. First in the form of procurement for stockpiling. Again, they want to have an available inventory of NexoBrid if there's a mass casualty event. We recognize that as revenue. Of the $35 million up front, $10 million of that will be procurement revenue that we're recognizing. We gave guidance on that $3 million this quarter, $3 million next quarter, $4 million first quarter of 2027. The rest of it is, BARDA is very interested in developing a new room temperature formulation, a new blast indication, and so on.
We manage those subcontractor activities, and the other part of the two-thirds, call it $10+ million comes to us over a period of a few years, sort of for managing that project as cost offsets. The same sort of dynamics apply for the full contract where they're interested in ramping up procurement, maybe procuring the new formulation.
Yep.
Et cetera. But they typically, those are options that they exercise over time.
Before we go on to the P&L, maybe real quickly on Epicel, talk a little bit about the competitive positioning of the product, how it's been growing, and the synergies. You mentioned a little bit, the synergies with NexoBrid.
Yeah. Well, clearly from a treatment pathway, it's highly synergistic, because again, once you remove the eschar, if it's a full thickness burn, really Epicel's the go-to product there. Again, we're treating catastrophic burn patients who can have 80%, 90% of their body burned. You don't have enough healthy tissue to do sort of serial autografts. So it's a life-saving, very important product. It's had very strong performance over the past four quarters, and it's kind of operating.
We're never going to be able to control the number of catastrophic burns that occur and how many patients survive to be treated. But of those that do survive, I think the team's doing an outstanding job of sort of converting the biopsies we get to create the skin grafts into sort of treatments for the patients. It's really through a sort of multidisciplinary, our burn care team, the sales reps really putting treatment plans together for these patients and it is like a capital sale in med tech sense where one treatment can be half a million dollars. It's a big investment for the hospitals and we want to work with them to make sure there's great patient outcomes.
Right.
That's really how we approach it, and I think it's really given the business some good, strong, consistent quarters over the past year and change.
Yeah, great. Quickly as we're wrapping up here, gross margin and EBITDA, as you referenced, have expanded. With your new facility, which is super impressive, where can they go in the next couple of years, Joe?
Yeah. Nick touched on some of this, but we've talked about in our midterm targets, we think we can get to the high 70% range from a gross margin perspective, the high 30% range adjusted EBITDA. We've also talked about that kind of $500 million rather from a revenue perspective. Generally I would say, margins have been pretty strong in the first half of the year ahead of our guidance in the first and the second quarter. Feel like we're on track for our full year guidance. This is a year we are absorbing some of the investments for some of the initiatives we talked about, everything from absorbing a new facility, the sales force expansion, the ankle spend for the trial there, and then some OUS prep as well.
I broadly say we know from a company profile perspective, we've had a history of strong revenue growth, feel like we're well positioned as we move forward there. We've had that inflection in profitability. We think that will continue, particularly with the strong revenue and the pull through there. As Nick referenced, the cash generation piece is just starting as we finish that new facility. So, moving forward, we think those are all key aspects of the profile.
Great. Lastly, as an investment banker, I was like, end with capital allocation. You all announced a $200 million share repurchase program. You have been selectively active in M&A over time to grow the burn care franchise. How do you think about your capital allocation evolving from here?
Yeah. Well, I think, we've always said that to achieve our growth objectives, the big CapEx spend was going to be the facility, right?
Yeah.
That's behind us. That's great. I'd say all the other things we're doing, whether it's sales force expansion, MACI ankle study, expanding OUS, that's in our operating plan, that's reflected in the margin guidance that Joe's given. So you're really down to business development transactions. You're right, we purchased this business from Sanofi back in 2014. We added NexoBrid through a license agreement. That's how we've built the company, and we will continue to add there. Or obviously capital returns to shareholders, and that's where the buyback or the repurchase program comes in. Fortunately, we ended last quarter with nearly a quarter billion in cash. We can do both things, right?
Okay.
We can selectively or opportunistically return capital to shareholders. We have got enough financial resources to do the kinds of deals that we would be interested in doing. I think it is a perfect position for us.
Great. With that, we are out of time and appreciate the chat today.
All right. Very good. Thank you again.
Congrats on your momentum.
Thank you.
Thank you.