Good day, ladies and gentlemen and welcome to the Vericel Corporation Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Gerard Michel. Sir, you may begin.

Thank you, operator and good morning everyone. Welcome to Vericel’s fourth quarter 2017 conference call to discuss our fourth quarter and year end 2017 financial results and full year 2018 financial guidance. 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 could cause actual results to differ from expectations and 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 we are representing our views as of any subsequent date. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer and Dan Orlando, our Chief Operating Officer. I will now turn the call over to Nick.

Thank you, Gerard and good morning everyone. Before I turn the call over to Dan and Gerard to review our fourth quarter and full year commercial and financial performance as well as our 2018 financial guidance, I would like to take a moment to comment on several key financial and business highlights for the quarter and the year. First, we reported record quarterly revenues in the fourth quarter and our third straight quarter of 30% or greater revenue growth versus the same quarter in the prior year. Total net revenues for the fourth quarter were $23.4 million, an increase of 41% compared to the fourth quarter of 2016. The strong revenue growth was driven by the momentum of MACI’s uptake in its third full quarter following launch as well as significant growth for Epicel in the quarter. Total revenue for MACI was $16.1 million, an increase of 26% over Carticel revenue in the same period in 2016. The total revenue for Epicel was $6.1 million, an increase of 62% compared to the fourth quarter of 2016. Total net revenues for the quarter also included $1.2 million of license revenue related to the initiation of our collaboration with Innovative Cellular Therapeutics, or ICT. In addition to strong revenue growth, we also reported a significant expansion in gross margin for the quarter, which increased to 64% of net revenues compared to 54% of net revenues in the fourth quarter of 2016. We also achieved both positive operating income and net income for the fourth quarter, a very important milestone for the company and to demonstrate the leverage of our revenue and volume increases in our business model given our relatively fixed cost structure. With accelerated revenue growth following the launch of MACI and significant gross margin and operating margin expansion potential, we…

Thank you, Nick. As mentioned earlier in the call, MACI revenue for the fourth quarter increased 26% over Carticel revenue in the fourth quarter of 2016 representing the third consecutive quarter of strong MACI growth following the launch. We also saw strong results across several key large performance indicators for MACI biopsies, which are by far the most important leading indicator for near-term MACI growth increased 48% in the fourth quarter and 33% for full year 2017 compared to the same periods in 2016. Overall, surgeon interest and demand for MACI continues to expand as we saw 22% expansion in the number of unique surgeons sending biopsies in 2017 compared to 2016 and about a 10% increase in the average number of biopsies per surgeon. This significant increase in MACI biopsies and the rapid expansion of our MACI surgeon customer base is very encouraging for MACI’s growth prospects, especially since the rate at which biopsies convert to implants has been very consistent over the last 5 years and we have not seen a material change from previous conversion rates since the launch of MACI. While we cannot be certain that conversion rates will remain confident in the future given this growth and biopsies, we are confident that implant volume will continue to grow. To help drive this growth, we have been very active in both marketing activities and medical education. To-date, we have trained approximately 600 surgeons on the MACI surgical procedure. And with sustained emphasis and investment, we expect to continue to grow our trained surgeon base this year. Given both the increased interest in MACI from surgeons who have not previously used Carticel or have yet to do a MACI implant and the expanding surgeon, MACI surgeon base, we announced last quarter that we are expanding the sales…

Thanks, Dan. The commercial team has done an outstanding job in driving MACI uptake expanding access to MACI and optimizing the patient and physician experience with our case management service has continued to expand the customer base and utilization of Epicel. At the same time, the operations team’s impressive execution in the fourth quarter resulted in delivering the record number of MACI implants to patients. A year ago, I said that I believed we had built a strong foundation for our next phase of growth. The fourth quarter results demonstrate that we have entered that next phase of growth and focused on continuing to execute and move the business towards sustained profitability. I will now turn the call over to Gerard to review our fourth quarter and full year 2017 financial results and provide additional details regarding our full year 2018 financial guidance.

Thanks Nick. I will begin with a review of financial results for the fourth quarter. Total net revenues for the quarter ended December 31, 2017 were $23.4 million, which included $16.1 million of MACI net revenue and $6.1 million of Epicel net revenue compared to $12.8 million Carticel net revenue and $3.8 million of Epicel net revenue respectively in the fourth quarter of 2016. Total net revenues for the fourth quarter also included $1.2 million in license revenue related to the company’s collaboration agreement with ICT. Total net revenues increased 41% compared to the fourth quarter of 2016 with MACI revenue increasing 26% and Epicel revenue increasing 62% respectively compared to the same period in 2016. Excluding the license revenue, net revenues increased 34% compared to the fourth quarter of 2016. Gross profit for the quarter ended December 31, 2017 was $15 million or 64% of net revenues compared to $8.9 million or 54% of net revenues for the fourth quarter of 2016. Total operating expenses for the quarter were $13.8 million compared to $14.8 million for the same period in 2016. Operating expenses for the quarter ended December 31, 2016 included $2.6 million from the write-off commercial use rights related to Carticel. Given the approval of MACI in December 2016 and the replacement of Carticel with MACI, it was determined that the Carticel related intangible assets, was fully impaired as of December 31, 2016. Excluding the impairment, the increase in the fourth quarter operating expenses is primarily due to an increase in the MACI sales force during 2017 as well as growth in case management services to support MACI. Income from operations for the quarter was $1.2 million compared to a loss of $5.9 million for the fourth quarter of 2016. Material non-cash items impacting operating income for the…

Thanks, Gerard. We had a very strong fourth quarter and a successful 2017 driven by the accelerating uptake in MACI as well as significant growth for Epicel. Our robust revenue growth and margin expansion reflects the success of our commercial team sales and marketing initiatives together with strong position enthusiasm from MACI and Epicel. We believe that these results positioned the company well for both near-term and long-term growth. Before we wrap up, I am pleased to announce that Vericel will host an Analyst and Investor Day in New York City on April 11. Speakers will include several MACI and Epicel key opinion leaders as well as Dara Torres. We look forward to providing further updates on April 11 and reporting our first quarter financial results in early May. That concludes our prepared remarks. Now, I would like the operator to open the call to your questions.

[Operator Instructions] Our first question comes from Ted Tenthoff with Piper Jaffray. Your line is now open.

Great, thank you very much and congrats on really solid year and great outlook for 2018. Certainly excited about the MACI launch and I had a question really to do with sort of the incremental margins, because there is really significant kick up there. Gerard or Nick, can you breakup sort of some of the components that are going into that gross margin expansion?

Sure, Ted. I can kind of give them to you in order of importance, I am not going to break down actual numbers, but the first and foremost cost is obviously people labor. The reason why we have so much leverage there is that we are traditionally staffed to peak for Carticel. With MACI, we have a bit more room in terms of smoothing out that demand just in terms of shelf life of biopsies coming in and shelf life of the product going out. So, we effectively when moving to MACI all of a sudden were to some extent overstaffed. And so we have excess capacity in labor for the foreseeable future. Again, you don’t want to downsize that group, because it takes a good year to train these people. The second component of cost is simply the infrastructure of the rents and that is spread obviously over all the products. Then thereafter, there is things such as insurance etcetera. The actual materials themselves are probably 10% to 15% of costs and overall the margin cost for the extra unit going out the door is about 15% to 20%.

Alright, very helpful. And I was pleased to see the profitability appreciating that that’s going to fluctuate that’s a great milestone for the company to have achieved.

Thanks Ted.

Our next question comes from Chad Messer with Needham & Company. Your line is now open.

Great. Good morning and let me add my congratulations on another solid quarter. You certainly have some great momentum behind you right here. Maybe just probe a little bit more into margins, I was wondering if you could give me any help in terms of how to think of your margins on MACI versus Epicel, I know in the past we have talked about Epicel probably had lower margins all else being held the same, but given this model with labor, obviously as you just mentioned being one of your biggest cost components, maybe that’s a little less so now, perhaps you can just give us a little more color on the profitability of those two products relative to each other?

I have tried – I have broken that out internally and there are multiple ways of doing it, there really is no true peer, because the teams are so intertwined in terms of QA/QC and even a lot of the operators are cross-trained between them that they flip back and forth. And there isn’t a dramatic difference in even material costs. So, in the past it was higher for Epicel that we brought in production of 3t3 cells which dramatically lowered the cost. So they are within spitting distance of each other. So, I really think yes, although I know people would love to have few marginal costs for this, I think you just have to look at it is one overall pie here, 15% to 20% again marginal costs, whether it’s Epicel or MACI is probably the right way to look at it. If by chance all of a sudden our Epicel orders became much smaller than they have been in the past that wouldn’t be probably have an impact on marginal costs, because it’s a fair amount of labor, but they have been holding steady – reasonably steady over time, so again I think 15% to 20% is the right way to look at it.

Alright, great. Thank you. That’s helpful. And maybe just one quick one on the biopsies as a leading measure, you have had great growth in bottom line sales with MACI up in the 20s. The biopsies have been running even higher than that consistently for a few quarters and I know you helped us out with conversion rates you have said have been steady and about 1 to 4 quarters of people could convert. If I just try to run those numbers in my head that implies we maybe on the verge of substantially larger uptick in MACI if all of those things you say you hope will hold true. Am I thinking about that the right way or am I missing some other elements as I try to process that?

Yes, hey, Chad, this is Nick. So, we are currently in our conversations and certainly in our corporate presentation to let folks know that it’s really a more accurate proxy is to look at the rolling four-quarter average of biopsies right. So as we ended the third quarter, you are at about 18% rolling four quarter biopsy increase and then of course we had the 26% increase in revenue. So, when you look at where we ended the fourth quarter, it’s 33% rolling four quarter biopsy increase. And so we said that’s a pretty good indicator of where things may end up in the following quarter or two. So, I think that is the way to look at it. And as we mentioned, we haven’t seen a significant difference in conversion rates since we launched the MACI.

Yes. And one of the reasons and we are not going to give, I just want to chime in, we are not going to be giving biopsy growth numbers anymore going forward. And part of the reason is the model we have, I have said – we have said rolling four quarters is roughly we could expect next quarter, well that would have meant 18% growth here and obviously we did better than that in MACI. It really is the more complex situation in terms of how the model works, what we achieved here was really kind of in between the 18% rolling 4-quarter we saw through third quarter and a 33% we saw for the fourth quarter. So instead of trying to let you read the tea laves of biopsy numbers, the best thing we think we can do now is provide revenue guidance and up that as appropriate as we see biopsy growth change.

Alright, great. Well, congratulations again on the quarter.

Thanks, Chad.

[Operator Instructions] Our next question comes from Ryan Zimmerman with BTIG. Your line is now open.

Great. Can you guys hear me okay?

Yes.

Thank you. So appreciate all the color and congrats on a very strong quarter and the year. Just given that this is the first time investors are assuming guidance from Vericel following the MACI launch. Can we just provide a little bit more color in terms of the levers both up or down that could impact that range in FY ‘18 and does the guidance assume a consistent conversion rate similar to FY ‘17 into FY ‘18? Thank you.

Sure. I mean, the model that we have built guidance to give this revenue guidance is based on historical biopsy rates to-date and how we see those conversions trending, we assumed the same conversion rates that we have seen in the past and we also assumed the same seasonality, the seasonality in biopsies or seasonality in conversion rate and the lag to conversion. So, we have a fairly sophisticated model built on about 5 years worth of data. But to your specific question, again, we are assuming the same level of conversion. So, historical biopsy to-date that’s an input, the next is we assume the certain growth level in biopsies going forward into 2018 and the conversion rate. From a business perspective, obviously, the drivers are continuing to get the existing docs to do implants, take biopsies, convert into implants at the same freight and growing rate and getting new docs doing implants, having them doing it in the past. Those are obvious levers for growth there as well.

Great. Appreciate the color on that. And then in terms of the sales force, you are hiring or you have hired 12 additional reps from previous, how should we think about the impact of those reps measured against the seasonality of the business? And then given that we have senior reps fluctuate in terms of productivity specifically within MACI, I mean, is there a productivity number we should be thinking about on an annualized basis for your reps in FY ‘18? Thank you.

Yes, Ryan, this is Nick. We are increasing to 40 reps. If you look at where we ended up even back in 2016 we had 21 reps did close to $40 million in revenues. The numbers are pretty similar when you think we scaled less than 21 to 28 during 2017 and you see the revenues that we are generating. So, we think over time we should at least be able to have the same productivity with the expanded sales force. Now, that can take 6, 9, 12 months for folks to ramp up to full productivity. We have new territories based on improved medical policies in certain places. So, those are territories that will take a little while to develop, right, there is a built-in base of biopsies there that can convert to implants. So, there are territories of that profile where it’s more Greenfield going to build. There are others where we are just sort of realigning territories, where there is some build business already sort of built in terms of biopsies, so there are different profiles, but again we expect there is no reason to think that productivity should be lower as we expand and again over time we think it will at least be where it was previously.

Appreciate the color guys. Congrats on the strong quarter.

Okay. Thanks, Ryan.

At this time actually we have a follow-up question from Ted Tenthoff with Piper Jaffray. Your line is now open.

Great, thanks. Can you hear me?

Yes.

Okay, great. I got that one just under the line. So, I am looking at Epicel and I am wondering how big of a market this ultimately could be and not asking how big the sales ultimately got, but with the number of burns how penetrated are you in that market and how far do you think you could ultimately go?

Well, Ted, we have some information in our corporate presentation where we talk about the fact there is about 40,000 patients that are hospitalized in the U.S. each year with burns, about 1,500 patients fit within our label of greater than 30% total body surface area burns. And then we take a little bit of a narrower cut and say typically we are treating patients with 40% TBSA burns or greater and there is about 600 patients in the U.S. each year that fall into that category. If you look at our cost and the average order, we think that’s roughly $100 million market. So we think there is a lot of room to grow. I’d say based on those numbers we typically treated when we pickup the business around 60 patients were treated each year and of course there is reorders for patients that get multiple treatments, but we are still probably less than 100 patients per year closing in on. So, biopsies from a larger number than that, but don’t survive to treatment. So, I think you can probably say somewhere in the 15% to 20% penetration rate. So, we think there is plenty of room ahead and I think the team ahs done a great job as we talked about from a sales and marketing and commercial execution perspective, we now have a sales manager in place with our 5 reps. We brought in a product manager sort of midyear, we brought in an MSO who has done a lot in terms of peer-to-peer training. We presented data for the first time probably in a decade at last year’s American Burn Association Meeting. So, I think everything that we can do feel little good about in terms of sales and marketing execution, one thing we can’t control is how many burn patients there are each year.

Great. Alright, I appreciate that additional color. Thanks, guys.

Alright. Thank you.

At this time, I am showing no further questions. I would like to turn the call back over to Nick Colangelo for closing remarks.

Okay. Well, thanks everyone. We really appreciate your continued interest in Vericel and obviously we are excited about the opportunities that lie ahead and look forward to reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.