Welcome to Vericel’s fourth quarter 2014 conference call. [Operator instructions.] I will now turn the conference call over to Vericel’s chief financial officer, Gerard Michel.

Thank you, operator, and good afternoon, everyone. Welcome to Vericel’s fourth quarter 2014 conference call to discuss our fourth quarter and year-end 2014 financial results as well as the progress of our commercial business and development programs. Before we begin, let me remind you that on today's call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995, and all of our projections and forward-looking statements represent our judgments as of today. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC, which are also available on our website. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. With us on our today's call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, Vericel’s Chief Operating Officer; Dr. Dave Recker, our Chief Medical Officer; and Dr. Ross Tubo, Vericel’s Chief Scientific Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good afternoon everyone. Before we discuss our fourth quarter and year-end financial results, I’d like to take a few minutes to review the business highlights for Vericel during the past year. 2014 was a highly transformative year for our company. Following the restructuring of our business in 2013 to focus on our orphan disease program for the treatment of advanced heart failure, we entered 2014 focused on strategic growth initiatives for the company. As part of that strategy, we acquired Sanofi’s cell therapy and regenerative medicine business in May of last year and established Vericel as a commercial stage cell therapy company. Through this acquisition, we acquired worldwide commercial rights to three approved autologous cell therapy products, a U.S. sales and marketing organization, and a commercial stage [G&P] cell manufacturing facility in Cambridge, Massachusetts. We now have a robust product portfolio with two marketed products in the U.S. generating substantial revenues and a high potential late stage pipeline. In addition to substantially expanding our business last year, we enhanced our senior management team by adding accomplished senior executives with strong track records of developing and commercializing products in the United States and deep experience in restructuring and integrating acquired businesses. We also substantially strengthened our financial position. Our successful $40 million equity raise in September has put us on a very solid financial foundation for the business that we’re now building. Our new business attracted a strong institutional shareholder base of leading fundamental healthcare investors and we view their participation in the financing as a strong vote of confidence in our current business strategy. Finally, in the fourth quarter we changed our corporate name to Vericel to reflect our expanded business and relocated our corporate headquarters to Cambridge, Massachusetts. In January, we announced the expansion of…

Thanks, Nick. I’m pleased to report that we had [strong] fourth quarter sales performance for our two marketed products. We’ll start with Carticel. Net sales for Carticel implants and surgical kits was approximately $11.4 million for the fourth quarter and approximately $22.3 million for the seven months in 2014 that we owned the acquired business. As Gerard will review in a moment, Carticel revenues are subject to seasonal fluctuations, with sales traditionally being strongest in the fourth quarter. We believe, however, that our fourth quarter results also reflect the positive impact of several ongoing initiatives designed to improve Carticel’s gross margin and ultimately provide long term top line growth. To date, we have realigned our sales territories, created a new incentive compensation program, and hired new sales leadership. We are now in the midst of building a high performance team of sales professionals to serve our customers and expand Carticel utilization. At this time, nine of the 21 sales representatives or more than 40% of Carticel’s sales force are new, talented sales professionals with orthopedic and operating room experience who are being trained by our very best performers. It will take some time to see the impact of these new representatives in terms of consistent Carticel growth. Our Carticel sales representatives work closely with our orthopedic surgeon customers to assist in identifying appropriate candidates for Carticel implant and in providing additional patient and customer support. These relationships, of course, take some time to build. Our goal is to minimize the disruption from turnover in the sales force as we build a high performance sales team that can deliver consistent future growth. Carticel enjoys a very loyal following among orthopedic surgeons, many of whom who’ve used the product for over 20 years. However, expanding the Carticel prescriber base and utilization is…

Thank you, Dan. I’m very encouraged by the performance of our commercial and operations groups and congratulate you and your entire team on the progress that you’ve made during the past six months. We’ve accomplished a lot in a short period of time, and the actions taken by your team have significantly improved the opportunities and prospects for our business moving forward. I’ll now turn the call over to Gerard to review our fourth quarter financial results.

Thanks, Nick. Vericel reported a net loss for the quarter and year ended December 31, 2014 of $3.4 million or $0.17 per share and $19.9 million or $2.23 per share respectively, compared to a net loss of $2.9 million or $0.97 per share and $15.6 million or $6.95 per share for the same periods in 2013. Net product revenues for the quarter were approximately $14.7 million and included approximately $11.4 million of net sales of Carticel implants and surgical kits and approximately $3.3 million of net sales of Epicel. Total Carticel and Epicel net revenue for the fourth quarter increased by approximately $1.5 million compared to the fourth quarter of 2013. Net product revenues for the year, which included seven months of sales of the acquired products, were $28.8 million and included $22.3 million of Carticel net sales and $6 million of Epicel net sales. Total Carticel and Epicel net revenues for the June through December period increased approximately $2.5 million compared to the same period in 2013. Gross profit for the quarter ended December 31, 2014 was $8 million or 54% of net product sales. Gross profit for the year ended December 31, 2014 was $11.5 million or 40% of net product sales. Cost of product sales for the full year includes $2.5 million in restructuring costs. The improved margins in the fourth quarter resulted from improved implant to biopsy ratios and higher fourth quarter volumes. Research and development expenses for the quarter and year ended December 31, 2014 were $5.8 million and $21.3 million respectively, versus $3.3 million and $15.1 million for the same periods a year ago. The increase in research and development expenses in the fourth quarter is due to a net increase of $1.6 million in clinical expense due to an increase in the number…

Thanks, Gerard. We’re making great progress in transforming our business into a dynamic new organization and achieving our goal of commercial and scientific leadership in this field. In the year ahead, we look forward to increasing product revenues by expanding the number of prescribing physicians for Carticel and the number of treating burn centers for Epicel, increasing margins by improving the Carticel implant to biopsy ratio and introducing manufacturing process improvements, initiating the required next steps to submit a BLA for MACI in the United States, and obtaining a pediatric label change for Epicel. That concludes our prepared remarks. Now I’d like to turn the call over to the operator to open the call for your questions.

[Operator instructions.] The first question comes from Kevin DeGeeter from Ladenburg Thalmann.

First, I’d love to start off with gross margin. Significantly above I guess what we were looking for, and I was hoping you could provide us a little more granularity as to the contribution of volume to that improvement in gross margin versus the more structural changes in terms of improved biopsy to unit sales and other factors. Specifically, as we’re looking at potentially a little more modest Carticel contribution in Q1 historically, how should I think about that coming in on gross margin? Can we stay above 50% or do you think with the lower units, that comes in a bit?

I think with lower units, that comes in a bit. The biggest driver for the fluctuations you’re seeing right now are volumes. I think the biggest driver to getting our gross margins down will be increased volume over time, which we anticipate coming. Without a doubt, the improved biopsy ratio is having an impact. I think that’s probably a third of it, and about two thirds right now is likely the volume, with the same [unintelligible] in two quarters.

I’ll note that the biopsy to implant ratio that we quoted, 38%, so the 4% improvement was the entire year. The majority of that came in the second half of the year, when we changed the incentive program, etc. So we really saw very aggressive improvement there driven by our sales force’s execution. So it was a very good job, and we expect that to continue and contribute. Also, Ross Tubo and his group is doing a great job of identifying opportunities to improve the margins. So we’re working as hard externally with sales as we are internally to improve our margins.

And you mentioned 13% year over year growth for the combination Carticel and Epicel. Can you comment on just the growth rate year over year for Carticel. I don’t want to talk about Epicel. I recognize there’s small numbers there. But for the more mature Carticel business, was it similar to 13%? A little higher, a little lower?

We’re going to hold off on giving product comparison period to period, primarily because business wasn’t in our hands before, and we want to get a solid foundation of managing our sales before we start giving direct period comparisons. I think it’s best also, due to the volatility, of the low volume of these products, for now let’s keep it combined and in a few quarters, we’ll be able to start comparing product to product, period to period.

Do you have a specific date set for a meeting with the FDA regarding the MACI Phase III discussion?

We do have a meeting date set for later in the second quarter, and obviously, we’re in heavy preparations for that meeting, Dave and his team. And we would expect sometime midyear to have a little more clarity, obviously post meeting, post meeting minutes, etc. So sometime in the third quarter, likely to have some more clarity on the path forward.

The next question comes from Jason Kolbert from Maxim Group.

This is actually Jason McCarthy for Jason Kolbert. I just was wondering, it looks like there’s progress that’s being made, and that’s great. And I wonder if you guys could go back to the cardiac space, and maybe talk about what the plans are. With data likely coming maybe even at the end of this year or early 2016, then what the plans would be to move ixmyelocel-T forward beyond that, whether you’d seek a partner or you’d go it alone, or maybe what the internal discussions might be.

That’s a good question. Obviously, we announced in January that we completed enrollment of the Phase IIB study, which was a great job by David and his team, with the support of our steering committee, etc. That positions us to have data as we had previously guided, top line results, by the end of Q1 2016. At that time, if the data looks compelling, as Gerard would say, a high class problem to have. We will decide with this orphan indication whether it’s something that we want to bring forward on our own or seek a partner. So we think we’ll have a lot of optionality in that case.

The next question comes from Jason Napodano from Zacks.

Just a little more questions on the gross margin line. I understand the implant to biopsy ratio that you reported, and it’s great to hear that that is up from the old Sanofi Genzyme days. You mentioned the change in incentive to the sales force. Can you give us a sense on ultimately where you think that number could go? 38%, again, it’s nice that it’s up from the Sanofi Genzyme days, but it still seems that there’s a lot of room to improve that.

I don’t know of Sanofi was as low as 38%. It may have been. But yeah, there’s quite a ways to improve this. Clearly it’s not a small molecule. These are fairly labor intensive products to produce. But the easy fix was getting the biopsy ratio down, and that’s what we’re doing, or Dan is doing a great job of. The next thing to do is to get some process improvements going and Ross is working hard on those. We already have some of those implemented, but other ones coming down the pike. And then I think we can probably trend towards, after getting the volumes way up, because that’s a big driver as well, with the same headcount, I think we can trend to something north of 60%. When exactly that will happen, that’s probably a two-year timeframe to get well north of 60%. But that’s kind of our internal goal.

[Target] margin. As far as the ratio, we think that the top end of that is maybe around 50%. Because in some patients, based on what their insurance carrier is, they have to do a different procedure before Carticel, so physicians have to work through that and we think that it’s reasonable. We know that our best implanting physicians are well north of a 50% biopsy to implant ratio, but we think on average we’d like to target around 50%.

So I guess besides improving on the cost side, the other way to get higher gross margins is to raise the price. So I’m wondering if you guys have taken a price increase on Carticel either this year or since you acquired the product and kind of where you are with that versus like I said the old Sanofi Genzyme days.

I think we have given some people a price increase. Seven percent was the increase we took at the start of the year. Just to be clear, that did not run through all of the first quarter, as people are getting their sharp pencils out right now. It takes some time. We don’t put that price right through orders that are coming in. This is a several week lead time type product. So it’s not until a good part of January is past before most of the orders coming in are at that price.

Last question, just on Epicel. I’m wondering if you could get a sense of what percent of the business is pediatric use right now, and then when you go in and petition to allow for profits because you potentially get the pediatric label, is that the kind of thing where really anyone can say, hey, our product can be used in a pediatric indication? Or do you have to have some kind of pediatric data or some kind of use to mount that is within pediatrics, like 10% of the business or 20% business has to be within pediatrics before they say okay, we’ll grant you that allowance?

Dave, let me just give a top line, and then you can go into more detail. Just in terms of our current utilization, about a third of business is used in pediatric, or the product is used in pediatric patients. That’s defined as through the age of 21. The second part of the question, you know, you have to have clinical data to have an indication for use in pediatrics. So you can’t just say we could be used in pediatrics, you have to have the data. And in our case, there was a substantial portion of the original clinical package that included pediatric patients, somewhere around 30% to 40%. And when it was originally submitted, it was submitted as a group and analyzed as a group, and Dave and his team have been hard at work analyzing separate adult and pediatric populations to be able to have a discussion around why the labeled indications for use should be revised, and then separately [unintelligible] for use in adult and pediatric patients and then obviously separately present the pediatric clinical data etc. to help healthcare providers in their use of the product in that patient population.

I was just going to add that, as Nick said, you don’t have to have a certain percentage of population or a certain percentage of use in the pediatric population. What you need to demonstrate to the agency, as with any kind of an approval, is that there’s safety and efficacy. I’ll remind you that Epicel is approved in a unique situation, as a humanitarian use device, under an HDE or Humanitarian Device Exemption process. The level of evidence required for an HDE to be approved is not the same as that for a traditional BLA or NDA. You have to show safety, but only probably efficacy in the population whom it’s being indicated. Having said that, there are so few of these products available. The agency really has a hard time trying to decide exactly what it’s going to take for a pediatric approval and thereafter to be able to charge a profit for their product. So it’s a bit of an unknown on both sides, both for Vericel as well as for the FDA. We’re convinced, as Nick said, that we have enough data from the original filing. There’s substantial pediatric evidence and we’ve had a fair number of pediatric patients since then. We hope that we can go in and have a nice discussion with the agency and they’ll agree that in fact the product is safe and reasonably beneficial in a pediatric population.

Is that something that they decide at that meeting, or is there a time period that they’ll take to review?

So the good news the time period, again for an HDE, is not as long as for an NDA. The time period is 75 days. And to the first question, they won’t give us an answer. They have most of the data, but there still needs to be a submission after that meeting. And as I said, once the submission is put in, they’ve got 75 days to review.

The next question comes from George Zavoico of Jones Trading.

It sounds like you’ve put in a lot of initiatives going forward to increase the sales, increasing reps and that sort of thing. Has that plateaued, or do you think in 2015 you’ll be adding more reps? And will SG&A continue to increase quarter to quarter because of the implementation of the new educational strategy.

The approach we’d like to take is a measured approach where we see the opportunity to expand as the demand expands or the prescriber base expands, etc. Epicel’s a good example. We’ve seen that as we’ve gotten back into institutions that weren’t actively promoted to that we’ve started to generate new patients. So we have a strong signal that if we increase the promotional effort, we’re going to get a positive return. So that’s why we’re jumping ahead now and adding a fourth representative. And we’re looking for the same basically out of Carticel. We think that the ideal footprint for Carticel is somewhere around 25 representatives. We currently have 20. And so, again, we’ll continue to expand, but it’s going to happen in a measured fashion. In fact, I’ll give you a good idea. We’re already looking to add to that group of 20.

And do the 20 reps now cover the entire country?

Yes.

And the new ones you’ll parse the territories out into smaller, or are there parts of the country that aren’t covered yet?

We cover the entire country. Remember, our target physicians are just orthopedic surgeons, but typically they’re sports medicine physicians or they have a subspeciality or have identified themselves as cartilage specialists. So a lot of patients get referred towards these physicians, so we don’t necessarily have to cover every small city. But certainly, the ability of the rep to be there, to help the physician identify patients and to be there to service the facility, etc., there are limitations to geography. And we recognize that as well. But we have a clear path to profitability and we are taking a measured approach to adding that headcount as we go.

That’s good. I hope that as the efficiency and the experience of these reps improves, that their sales to rep ratio goes up too. [laughs] With regard to the incentive changes, the changes in the incentive program, it seems that this is a particularly important move on your part. Exactly what was put in place to drive the incentives?

The easiest way to picture it is think about a grid. On the left hand side is volume and on the top is ratio. And it’s basically the better you perform, the higher your volume, and the less biopsies that you need to get to that volume, the further you go higher up into the right in that grid and you can accelerate your income and payout. So it’s pretty simple. One of the nice parts about it is that it is simple, and a rep can measure their own success on a monthly basis. So we’ve seen good, strong response to that.

Because pretty much delineating it precisely and simply… So the reps can track their on progress, that was enough to light a little bit of a fire under them, huh?

Yes.

Let me just give one bit of background. When we acquired this business, the previous incentive compensation system included extra payments for additional biopsies. So when Dan refers to intent to treat, it’s really focused around having a discussion with the physicians about intent to treat the patient, not just send in biopsies and so on. So it’s kind of this combination of helping people understand how you drive profitability for your territory and the company by being more efficient and not sending in biopsies that the operations group has to process that really there wasn’t the intent to treat that patient. So it’s a function of having full P&L responsibility and having the business managed in a vertically integrated fashion for the first time, or the first time in a long time.

And final question regarding the process improvements that you’re talking about, for increasing efficiencies. From a regulatory standpoint, how much can you change the process before you have to take any steps with the regulators or pass it by the regulators? Or do you not have to do that at all?

I’ll let Ross answer the question, but just like any process change, there are some that you can report in your annual report, there are others that you can implement with a CB30 and there are others that require additional discussion before you would implement those. So these initial ones are ones where there was existing data or data that Ross is generating that will allow us to implement those changes relatively quickly. Other changes fall into the bucket of requiring additional data and additional time to get those approved.

So it’s an ongoing process, then, over the next year or two probably, or more?

I think that we’ll actually be able to implement perhaps towards the end of this year is what we’re shooting for, with these process improvements.

The next question comes from Kevin DeGeeter from Ladenburg Thalmann.

I actually just had one more. I wanted to better appreciate our understanding of the sales cycle for particularly I guess Carticel in the context of trying to appreciate when the nine or so new reps really fully hit their stride. Is that sort of a six to nine month cycle, longer than that? Any guidance on that would be very helpful.

That’s a good question. Kevin, the typical rep is going to take a minimum of six months. Some of that is just the relationship with the physician as well as getting patients into the cycle, getting biopsies from good target patients who then get through the insurance discussion and turn around for implant. We have been able to hire a very impressive group of individuals who, as I mentioned, have both orthopedic and operating room experience, some with sports medicine experience as well. So we’re very encouraged that they’re going to come up the curve quickly. But you’re right, it’s going to take a good six to nine months to really see a consistent contribution from these new reps.

And I’ll just kind of sing harmony on that. We’re trying to be balanced, as I mentioned in my comments. To balance disruption, we’re bringing in a really high performing sales team. And so we look for the results of that. We’re getting close now, and we expect the results of that to be really more consistently demonstrated in the second half of the year.

I’m showing no further questions. I would now like to turn the call back over to Nick for closing remarks.

Okay, well, thanks everyone for your questions and continued interest in Vericel. We’re obviously very excited about the opportunities ahead and look forward to reporting on our progress on the next call. Thank you.