Good day, ladies and gentlemen and welcome to the Vericel Corporation Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Vericel’s Chief Financial Officer, Gerard Michel. Sir, you may begin.

Thank you, operator and good morning everyone. Welcome to Vericel’s fourth quarter 2016 conference call to discuss our fourth quarter and year end 2016 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 on 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 today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, Vericel’s Chief Operating Officer; and Dr. David Recker, our Chief Medical Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good morning, everyone. I would like to begin today’s call by reviewing our business highlights and the progress Vericel has made since we acquired Sanofi’s cell therapy and regenerative medicine business in 2014. Our strategic goals at the time of the acquisition were clear: stabilize and grow the existing commercial business while building a strong foundation for long-term growth of the company. We have been diligently focused on operational execution over the past 2.5 years in order to accomplish these objectives. First, we have taken a business that had declining revenues of approximately $42 million in the U.S. and negative gross margins prior to our acquisition and grown revenues at a cumulative annualized growth rate of 10% since the acquisition, achieving $54.4 million in revenues in 2016. Second, over the past year, we have created the drivers for long-term growth by achieving significant regulatory milestones with the FDA approval of MACI and the approval of a pediatric indication for Epicel. These important approvals combined with our expanded sales and marketing infrastructure and a strong balance sheet positioned the company for significant growth in the years ahead. I will begin my discussion regarding the significance of these regulatory approvals with MACI, our third generation autologous chondrocyte implant, or ACI product, which is the first tissue-engineered autologous cellularized scaffold product approved by the FDA. MACI is indicated to treat single or multiple symptomatic full thickness cartilage defects of the knee, with or without bone involvement in adults. Importantly, MACI is indicated as a first line treatment without the requirement of a prior surgical procedure as was the case with Carticel. Moreover, the indication encompasses cartilage defects of the entire knee, including the patella versus only femoral condyle defects in the case of Carticel. There is no limitation on…

Thank you, Nick. Total Carticel and Epicel net revenues for the fourth quarter and for the year ended December 31, 2016 were $16.5 million and $54.4 million respectively, representing an 8% increase for the quarter and the year compared to the same periods in 2015. Carticel revenues increased 13% in the fourth quarter and 10% for the year compared to the same periods a year ago. With the launch of MACI, we believe that the 5% average annualized revenue growth rate that we have achieved since acquiring the Carticel or cartilage repair franchise should steadily increase as more surgeons complete MACI training and paramedical policies are changed to replace Carticel with the expanded MACI indication. We believe that the growth will come from these three segments; first, current Carticel users, who will expand usage given that MACI implantation procedure facilitates a use in a broader patient population, second, former Carticel users or surgeons that used Carticel sparingly because of the technically demanding nature of the procedure who recognized the advantages of ACI as demonstrated in the SUMMIT trial and finally, surgeons who do open knee procedures, but have not considered Carticel to-date, who will be attracted to MACI as both a simplified surgical approach and as a new alternative technique that they are relatively unsatisfied with such as micro-fracture. To capitalize on this opportunity, we are increasing the number of sales territories from 21 to 28, hiring experienced orthopedic sales representatives into these roles and expanding the marketing, market access and medical affairs teams. We are closing in on the final two representative hires and we will complete that expansion of the new territory alignment and we will be implementing this alignment as of April 1. The MACI launch activity is initiated in late January who bought – were initiated…

Thanks, Dan. We certainly believe the investments we are making in MACI and Epicel to expand our medical and commercial teams and implement impactful new programs will yield benefits for patients, physicians and shareholders and drive significant growth for our business. I will now turn the call over to Gerard to review our fourth quarter financial results.

Thanks Nick. Total net revenues for the quarter ended December 31, 2016 were $16.5 million and included approximately $12.7 million of Carticel net revenues and $3.8 million of Epicel net revenues. Total Carticel and Epicel net revenues in the fourth quarter increased approximately 8% over the same period of 2015. Total net revenues for the year ended December 31, 2016 were approximately $54.4 million, including approximately $38.9 million of Carticel net revenues and approximately $15.5 million of Epicel net revenues. Total Carticel and Epicel net revenues for 2016 increased approximately 8% compared to Carticel and Epicel net revenues for 2015. Gross profit for the quarter and year ended December 31, 2016 was $8.9 million or 54% of net revenues and $26.1 million or 48% of net revenues respectively compared to $8.2 million or 53% of net product revenues and $24.7 million or 48% of net product revenues for the quarter and year ended December 31, 2015 respectively. Research and development expenses for the quarter and year ended December 31, 2016 were $4.3 million and $15.3 million respectively versus $7.4 million and $18.9 million for the same period in 2015. The decrease in fourth quarter and full year R&D expenses is primarily due to higher research, development and regulatory expenses incurred in the fourth quarter of 2015 associated with the MACI Biologics License Application and the Humanitarian Device Exemption supplement submitted in December 2015 to revise the labeled indications for use of Epicel offset in part by additional clinical trial expenses associated with the open-label crossover extension portion of the ixCELL-DCM study. Selling, general and administrative expenses for the quarter and year ended December 31, 2016 were $7.9 million and $27.4 million respectively compared to $5.7 million and $22.5 million for the same periods in 2015. The increase in SG&A expenses…

Thanks, Gerard. In summary, 2016 was an extremely productive year during which we created two growth drivers for the business with MACI and Epicel and expanded the organization to capitalize on those opportunities. Over the past 2.5 years, we have managed to take very late lifecycle products, one of which had almost no commercial support and achieved 10% annualized growth. With the approval of MACI and the pediatric label change for Epicel, we are confident that our annual growth rate will increase moving forward. The MACI launch is proceeding as planned and orthopedic surgeon interest is strong. We have a solid plan in place for the next phase of Epicel growth. In the year ahead, we will continue to focus on increasing share for both MACI and Epicel and generating operating profit from our commercial business. That concludes our prepared remarks. Now I would like the operator to open the call for your questions.

[Operator Instructions] And our first question comes from the line of Edward Tenthoff of Piper Jaffray. Your line is now open.

Great, thank you very much and thanks for the update. I am excited about the MACI launch. Nick if I may and Dan you guys have spoken about a broader patient population for MACI. And if I recall from your slides, it usually come out somewhere around 19,000 eligible U.S. knees that were appropriate for Carticel, how much larger is that number now with the expanded MACI label?

Well, actually, Ted, that is – I will start and thanks for joining the call and then Dan can add any further comments. But that actually was the patient population that we have talked about in the past. So there is about, as we have talked about before, three quarters in a million cartilage repair or surgical procedures that are done each year, 40,000 to 50,000 of those involved large full-thickness defects. But when you take into account sort of patient age factors, insurance factors and so on, we have consistently said that the addressable patient population is in the 10,000 to 20,000 range. So that doesn’t change in terms of the addressable patient population with the launch of MACI. What we think will happen always that we will be able to access a broader group of those patients. We currently treat about 1,000 patients a year. So clearly, that addressable market is 10x as large as our current business.

The physician base that we expect to be able to penetrate we have increased our sales force from 21 to 28. So that’s reflective of the size of the audience we expect to be able to promote to and are likely to adopt MACI.

Great, that’s helpful clarifications. So not necessarily a larger pie, just more of it?

That’s right.

Awesome. And then a quick question on Epicel, if I may, what is the competitive either product or wound healing options to Epicel, what is really kind of the choice factor that a burn specialist would be considering why they may or may not use Epicel?

Again, I will start Ted and then Dan obviously can add some additional comments. But right now certainly, the most common treatment alternative is autografts for these patients. And the less severely burned patient has enough healthy skin, autografts may be the choice in treatment for these patients. As Dan mentioned on the call, part of our next phase of growth is not to look at Epicel or at autografts, but some of the leading burn centers use those both procedures or therapeutic options on a given patient, given burn location and so on and so forth. You might use autografts in certain areas of the body, and Epicel on other parts and so on. So it’s really not either or, but it’s complementary. And other than that, there are no other approved products on the market.

Yes, it’s [indiscernible] allografts, which we are challenged with. We spoke a bit about the unfortunate scenario, where we are getting biopsies in and Epicel is not being used early enough in the treatment paradigm with the new centers we have engaged with and they are either using serial allografts in the meantime or attempting to use autografts, and the patient’s health unfortunately declines, where we see in our best thesis and where they are really able to influence the patient outcome is to plan for Epicel use upfront, treat the patient aggressively and that’s why there is a survival benefit demonstrated with Epicel.

Excellent, so that really sounds like education, just getting the new centers educated, really important product there. Thanks for the color.

Thank you.

Thanks Ted.

Thank you. And our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Great. Thanks for taking the question. Can you guys hear me, okay?

Yes, we can hear you Ryan.

Hey guys, nice to do here. So on the – just a little color, I appreciate that you are not giving guidance, but I do appreciate the color on the Carticel ceasing orders and limiting production over the next few quarters, just a little more color on how that ramp maybe plays out versus the relative increase in MACI orders that we should expect over the coming quarters would be really helpful?

Yes. So you are right Ryan, we are not – it’s Gerard. We are not giving guidance. I think there is definitely pent-up demand for MACI as evidenced by the increase in biopsies that have come in, also I think by the docs who are surfacing or haven’t used Carticel or haven’t used it for a long time and are getting themselves trained. What we have to be careful with is not trying to sell to all those new docs if what they are going to be faced with is some insurance pushback and requirement of peer-to-peer selling, which we think will leave a bad taste in their mouth. One of the gating items for Carticel over the years has been it’s not the easiest thing to get approved all the time. It takes a bit of work in some cases. So what we are trying to do is not hit the accelerator as hard as possible. Now we are pulling some MACI cases through that we are not 110% sure, 100% sure we will get reimbursed for. There are a few here and there, but we think it’s important to do that to allow the pressure to build on the payers. So I think once we get the payers all sorted out, that’s when we will see a real significant ramp on MACI usage above and beyond our base ACI or Carticel business, but that will probably take – it’s tough to predict whether it’s a couple of months or couple of quarters, but somewhere in that timeframe, we expect that Dan’s team has been different payers all converted to the medical policies and such and then we will start seeing the significant ramp up in demand.

Yes. Interesting Ryan that Carticel historically had a prior authorization, which included have you had a prior surgical procedure, an on-label indicated defect. Now with MACI, we have the opportunity as we have changed policy to include first line and include a broader defect population, patient population. So the prior authorization we expect for MACI long-term will be easier than that of Carticel. But given our price point, we still expect that there is going to be a prior authorization process. What we don’t get too much of with Carticel today because of the current policy, broad policy for Carticel is we don’t get a lot of peer-to-peer and MACI not being on policy is causing a lot of peer-to-peer and virtually almost all approvals right now are doing the peer-to-peer. But what it does do is when we get peer-to-peer approval, it ensures that we are going to get reimbursed on the back end. So that’s the kind of cautious approach we are taking right now. So we are encouraged by the interest.

So I am just going to add, our core prescriber base, they are excited about MACI [indiscernible] the peer-to-peer, no problem. We will go through it, alright. The new docs who are trying to say, hey, you got to get back into ACI [indiscernible] years somewhat simpler. We don’t want them to be placed in peer-to-peer. So again, we are purposely not pushing real hard on that front. So we know they are going to have a totally smooth experience.

Okay, I appreciate the color, that’s very helpful. And then just another question around the physicians, you talked about the three growth areas Dan, I think around the current physician, the former users and the future users and just wondering if you can maybe bucket those categories a little bit and put some numbers around, particularly your former Carticel users, how should we think about that physician base just as we model…?

Yes. I think the best way to – I can put some numbers to that. I think we have a very steady hard-core support group of physicians that are a bit north of 100. They are really our core ACI champions, if you will. We have got another group of physicians who fall in the kind of sporadic, inconsistent user group that get up to at least 500 in any given year. We do have physicians who have sent in biopsies periodically over the years out to 1,000, close to 1,000. So it’s a fairly broad population. I think as I have shared before that a good indicator of where we think there is huge potential is demonstrated by our 33% increase in our sales force, right. We went from 21 reps to 28 reps and that’s a good indication of how broad we think the physician population is that will influence our growth for MACI.

Yes, I think that’s a good summary, Dan. So Ryan just to sort of tie a bow on it, we probably have orders from 400 surgeons a year, 500 surgeons a year, 1,000 are sending in biopsies. There is probably another 1,000 net are potential targets for us out of the 4,000 to 5,000 orthopedic surgeons, sports medicine folks in the U.S. So that’s probably the best way to think about it.

One gating factor is doing open procedures, there is a lot of physicians that only view arthroscopic procedures and they really are not good targets for us at this time.

Appreciate the color, guys. Thanks for taking the questions and congrats on the progress this year.

Thank you, Brian.

Thank you. And our next question comes from the line of Kevin DeGeeter of Ladenburg. Your line is now open.

Hey, good morning guys. Thanks for all the additional detail with regard to MACI market launch and positioning. Can you talk a little bit more about the rehab procedures for MACI, certain opportunities for perhaps more accelerated rehab and just how we should think about rehab? Are most patients who are eligible for MACI good candidates for a more consolidated rehabilitation schedule or there is certain characteristics that may make certain patients more appropriate for aggressive rehab?

Well, thanks Kevin. This is Nick. I will start again and Dan can jump in as well. Certainly, in choosing a treatment, a surgeon will look at the patient and with any knee surgery decide whether they are really going to be candidates for a good rehab protocol. One of the advantages as we point out, there is a slide in our corporate presentation on our website that sort of shows the published data for MACI rehab protocols being in the 6 to 8-week timeframe versus up to 12 weeks for Carticel. So, there has clearly been an evolution in thinking, not only for MACI, but generally about rehab and a little more aggressive rehab for patients with these kinds of knee surgeries. So in summary, it’s a consideration that I think every orthopedic surgeon would take into account in deciding on the treatment for patients and then yes, for MACI, the published accelerated rehab protocols we think are very important and is part of our training.

Yes. And specifically, that’s the weightbearing, so what Nick was referring to was the accelerated time to weightbearing and then that translates back into activities like walking, running, pivoting etcetera and the like. And so it shaves some time off of each of those...

Milestones.

Milestones, yes. It’s very difficult to give a one-size-fits-all, very frequently with Carticel and MACI treatment. There is other repair that’s happening in the knee. So that’s – every rehab is custom to the patient needs.

Fair enough and appreciate that. And just one more if I may. With regard to Epicel, can you just comment on general growth trajectory of that product? I guess fourth quarter was the – the third quarter we have seen a decelerating growth there. Is that just due to the lumpiness of the product or is there something more fundamental we should be considering as we will think about 2017 outlook for Epicel growth?

Well, again I will start and Dan, you can add commentary as well. As we sort of walked through already, there was sort of one leg of growth, which was having restoring similar promotional levels as Sanofi had or Genzyme had 5 or 6 years ago and really reengaging with centers who, for the most part, had used Epicel in the past and now use it more frequently. So that clearly was the first leg of growth. What I look at is sort of the top of the funnel and say how are we doing in – when we get a MACI or I am sorry an Epicel biopsy, there is a strong intent to treat unless the patient again either expires, is not doing well enough for the surgical procedure or in some cases, if they have had autograft, they may heal and very few instances may just kind of progress enough that they don’t need to order Epicel. So, biopsies increased significantly particularly in the fourth quarter. We did have much higher cancellation rate in terms of the number of grafts that were canceled this year and really that took a lot of the edge off our growth and it’s hard for us to say, is that a new normal or not? Had we not had that level cancellations we would have seen what I think was pretty good growth. So time will tell, Kevin. I do think that the broader engagement with institutions and then the number of biopsies coming in are sort of the lead indicators that I focused on. And if those were going in a different direction, we probably had the different outlook.

I appreciate the additional color. Very, very helpful. Thank you.

Thank you. And I am showing no further questions at this time. I would now like to turn the call over to Mr. Nick Colangelo for closing remarks.

Okay. Well, I want to say thanks to everybody for your questions and your continued interest in Vericel. We are excited about our opportunities this year and look forward to reporting on our progress on our next call. So have a great day and thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.