Good day, ladies and gentlemen. Welcome to the Vericel Corporation Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference, Gerard Michel. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to Vericel’s fourth quarter 2018 conference call to discuss our financial results. 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 judgment 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 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. Our fourth quarter results reflect a very strong finish to a great year for the Company in 2018. Net product revenues increased 41% compared to the fourth quarter of 2017, marking the 7th consecutive quarter with record revenues for the reported quarter, and we delivered 45% net product revenue growth for the full year. Our growth was driven largely by the continued strong uptake from MACI, which had revenue growth of 56% for the quarter and 54% for the full year. The strong revenue growth generated significant improvements in profitability and operating cash flow for both the quarter and the year. Gross margins in the fourth quarter increased to 72% of net revenues, and we delivered net income of $5.2 million or $0.11 per share on a fully diluted basis. We also generated positive full year adjusted EBITDA for the first time in the Company’s history. In light of the significant expansion of the targeted addressable market or TAM, our continued commercial investments and the lack of any near-term competitive product entrance, we expect strong growth for MACI to continue in 2019. We also believe that this revenue growth will lead to strong profit growth, given our low margin of product costs and the significant operating margin leverage in our business model. As announced earlier today, we expect total net product revenues for 2019 to be in the range of $108 million to $112 million, that approximately 80% of marginal revenues over 2018 will contribute to incremental gross profit, and that approximately 50% of marginal revenues over 2018 will contribute to adjusted EBITDA. Gerard will provide further details regarding our financial guidance for 2019. We’re obviously very pleased with our commercial and financial performance for the fourth quarter and the full year. The underlying drivers of near- and mid-term revenue growth from MACI that we’ve seen to-date are consistent with the larger TAM that we discussed last quarter. And I’ll now turn the call over to Dan, to provide more detail regarding our commercial performance and activities.

Thank you, Nick. I’ll start by welcoming the new sales representatives, who recently joined Vericel, and are now on training. On April 1st, they’ll move into their new territories, increasing our MACI sales force by 20% to 48 representatives. The sales force expansion is a direct reflection of our confidence in the market research that substantiated the increased MACI TAM and confirmed the continued strong adoption of MACI by both previous advocates and new adopters. As we look back at the previous MACI sales force expansions, which were implemented at the same time of year in 2017 and 2018, we find that the biopsy rates increased significantly in the expansion territories in the first year and that the expansion territories led the nation in percentage increase in implants the following year. We expect this dynamic to be repeated with this expansion as well, and we will continue to closely assess our sales force sizing as we balance the vital sales representative and surgeon relationships with the desire to best serve the potential 60,000 annual patients who could benefit from MACI. Given that 2018 is its first full year on the market, MACI is still early in its life cycle. So, we maintain focus on continued growth and expanding the targeted and trained surgeon population, which is now over 900 surgeons. And we are continuously improving our payer medical policies to best reflect the full indications for MACI, which in turn reduces case approval finance. In addition to these HCP and payer efforts, we're also focused on several patient-focused marketing initiatives to increase the biopsy to implant ratio and drive MACI demand. We’re launching a MACI Ambassador program, that will highlight compelling patient success stories and integrating this program into our celebrity spokesperson campaign, which together will form the cornerstone of…

Thanks, Dan. We reported total net product revenues of $31.3 million for the fourth quarter of 2018, an increase of 41% over the quarter of 2017. Total net revenues for the quarter included $25.1 million of MACI and $6.2 million of Epicel net revenue compared to $16.1 million of MACI and $6.1 million of Epicel net revenue respectively in the fourth quarter of 2017. This represents revenue growth of 56% and 2% from MACI and Epicel, respectively. Our full year 2018 net product revenues were $90.9 million, or approximately $900,000 above the top end of our updated revenue guidance, which represented full year product revenue growth of 54% and 23% for MACI and Epicel, respectively, versus 2017. Please note that 2017 product revenues and comparisons exclude $1.2 million in revenue related to the Company's license agreement with ICT. Gross margins for the fourth quarter of 2018 improved to 72% versus 64% in the fourth quarter of 2017, and for the full year, increased to 64% versus 53% in 2017. Total operating expenses for fourth quarter of 2018 were $16.7 million compared to $13.8 million for the same period in 2017. The increase was primarily due to $1.4 million in service fees paid to MACI pharmacy distributors and incremental $1.2 million in employee-related expenses associated with the expanded MACI sales force, and an incremental $500,000 in stock-based compensation expense. Non-GAAP adjusted EBITDA was $7.7 million for the fourth quarter compared to $2.2 million in the fourth quarter of 2017, for details reconciling non-GAAP measures to the table in this morning's press release. Vericel's net income for the quarter ended December 31, 2018 was $5.2 million or $0.11 per share on a fully diluted basis compared to approximately $300,000, or $0.01 per share for the fourth quarter of 2017. As of December 31, 2018, the Company had $82.9 million in cash and short-term investments compared to $26.9 million in cash at December 31, 2017. We ended the year with a very clean balance sheet, having retired all outstanding debt in the fourth quarter and with all, but approximately 27,000 warrants have either converted or expired. We announced earlier this morning that we expect the total net product revenues for the full year 2019 to be in the range of $108 million to $112 million. We expect the majority of revenue growth for the year to be degenerated by MACI with the Epicel growth in the single-digits. We expect revenue growth to continue to drive increased margins. In 2019, we expect the marginal cost of goods for MACI and Epicel to be approximately 20%, resulting in about 80% of marginal revenue over 2018 revenues to contribute to gross profit. Likewise, given our premium products and concentrated call points, we expect approximately 50% of marginal revenue over 2018 revenues to contribute to adjusted EBITDA. Quarterly seasonality, which impacts both revenues and margins is expected to follow the same pattern as 2018. That completes my finance review. Now, I'll turn the call over to Nick.

Thanks, Gerard. Our business continues to perform very well, and the Company is in a strong position to execute on both our operating and strategic business plans. We look forward to sharing our progress with you throughout 2019. That concludes our prepared remarks. And now, I'd like the operator to open the call to your questions.

Thank you. [Operator Instructions] And our first question comes from Chad Messer with Needham. Your line is now open.

Great. Good morning, and thanks for taking my question. My question is actually on your sort of cost of goods and margins. At an annual level, the sort of guidance you’ve given about your marginal revenue makes sense and has tracked very well, but it's a lot harder to figure out what's going on, on a quarterly basis. So revenues -- the breakdown of revenue across the quarters at seasonality looks very different on the cost line. Just wondering if there's something about your fixed versus variable cost structure that explains that, so I can try to understand it a little better for the future.

Sure. Good to hear you, Chad. It tracks actually fairly well, if you just kind of follow the following framework, and I’ll give an example for let's say Q2 of 2019. If you took the midpoint of our guidance, which would yield $23 million in net revenue, we did $19 million in Q2 of 2018. So, the midpoint of that -- the incremental revenue is about $4 million, right right? So, I'm assuming you can follow the same seasonality, it’s about 21%, as I said, take the midpoint of our guidance, that would yield $23 million in revenue for this year. Incremental $23 million over $19 million is $4 million. Okay? We’d expect 80% of that $4 million to hit the incremental gross margin line. So, you’d have $3.2 million above what we did last year, which is about $11.3 million in gross margins. So, it's just 80% of the marginal revenue over the same quarter prior year. And it works the same way for adjusted EBITDA; you’d use 50% instead of 80% off the revenue. So, it should track pretty closely, and it did track pretty closely this year -- this past year of 2018, according to that framework.

I could give you some counter examples, I won't do it on this call, maybe that's something we can take offline. But, thank you.

Yes. All right.

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

Great. Thanks for taking the question, guys. Congrats on the strong end to the year. So, I want to talk about your guidance here. And just you're growing in line with the Street's expectations. But, maybe if you could just speak to how you view the drivers of your growth in ‘19 and what some of the levers are that give you confidence in not just meeting those expectations but then potentially beating them? I have a follow-up.

Sure. Ryan, as you know, giving guidance is as much of an art as a science. In terms of the growth drivers, what gives us confidence is, Dan’s team is seeing good healthy biopsy growth, still coming in line with what we’d expect with our models, so conversion rates stay steady as they have. They tick up and down half a percentage point here and there, may be slightly up. But, if conversion rates stay steady, we should see -- and the new doctors continue to send in biopsies as new doctors did last year, we've got about maybe 60% or 70% of our model -- the revenue for 2019 kind of in the bag. Now, in the bag means people behave the way they used to. Then, there’s a certain number of new docs we need to get on board and behave like new docs did last year. So, our model is, again, we look at biopsy trends, we look at conversion trends, we look at new doc start trends, and we project to what extent do we think that will continue. I mean, it's prudent to have new docs tail off a little bit on a percentage basis. You can’t continue to grow at the same percentage year-on-year out. So, obviously, you see our percentage growth has tempered a bit versus what we actually did in ‘18. Similarly, we make the same assumption for ’20, and we're not giving guidance to that, but we wouldn't expect exactly the same percentage growth over ‘18 and ‘19 that we'll see ‘20 over ‘19. So, we’ll probably knock that back out a couple of percentage points. So, I gave you a bit to chew on there. Does that answer your question?

Yes. No, it's very helpful color and I appreciate the thought process behind it. And then, I have two questions. One, just can you speak qualitatively, I know you're not speaking to biopsy trends quantitatively, but can you speak qualitatively the biopsy trends in the early part of the year? And then, my last question is, you did mention competitive entrants in the burn market. Maybe help us understand how that’s either butting up against that Epicel or how you see it interacting with Epicel? Thank you.

Sure. On the biopsy front, I think what I'll say is, it is trending per our expectations and it's trending in a manner it gives us comfort to issue the guidance we just gave this morning, which is probably a great non-answer for you, Ryan, but the best I can give you right now. And in terms of Epicel new entrants, Dan, can you comment on that?

So, the ReCell is the new entrant, and it's indicated for partial thickness and full thickness along with I’ll call, I guess support up to 50% TBSA. Now, Epicel, as you know is normally used in a patient that’s burned well beyond 50%, only maybe about 10% or so of this utility is used in patients burned under 50% TBSA. So, there's really not a lot of cross-talk or crossover when we're discussing with physicians the use of ReCell and Epicel. There could be some patients where they’re extensively burned in some areas of their body where they're being treated with Epicel and maybe on some peripheral surfaces, they are treated with ReCell, but that’s yet to be determined. It’s still fairly early. We haven't seen a lot of that.

Great. Thank you.

Thank you. And our next question comes from Jeffrey Cohen with Ladenburg Thalmann. Your line is now open.

Good morning. So, Q4, I guess topline a bit of a blow out. Can you talk a little bit about the seasonality and the pull through as far as procedures, is it one time in nature where these were newer biopsies that were being converted or not, and what kind of pull through should we expect in seasonality for ‘19?

Well, I’ll start, Jeff, and then turn it over to Gerard. As I think, our fourth quarter is always the strongest quarter for MACI and a strong quarter for Epicel generally as well. So, on total revenue basis, fourth quarter is always our strongest quarter. And that's probably been increasing a bit over the past couple of years where we continue to see even more strength in the fourth quarter. So, that's just sort of the normal dynamic for the company. And Gerard, if you want to get more details on percentages... (Audti End)

Yes. And this year, combining MACI and Epicel, the seasonality was -- and I’ll just give the numbers, 20%, 21%, 25%, and 34%, people can do the math on their own, but hopefully I did that correctly. One reason that the fourth quarter in the last couple of years is getting larger is in any growing -- whenever you have growth, if you're breaking things down by seasonal buckets, you're going to see the later quarters look larger than they would in a flat revenue scenario. So, that's another factor, pushing things into the fourth quarter. But, as I said before, I think for those of you modeling ‘19, I would recommend using those seasonality percentages. That's our best estimate of what's going to happen this year as well. I think, it's the same drill that Dan and his team have been doing for the last few years.

Yeah, as far as the timing of biopsies and things, there’s no shift in dynamics there.

Okay, got it. Secondly, can you talk a little bit about any data which you expect as far as the studies, podium presentations around any significant conferences upcoming in the coming quarter or two?

Sure. So, we do not have any specific company sponsored data that will be released anytime soon. We do have an ongoing pediatric trial that is well underway, our sites are up and running and patients are being recruited. So, that's probably the next big significant investment for MACI on the clinical front. There are a number of investigator initiated observations that will be presented this year and in the coming years. So, their own personal data on say patients and populations with patella, things like that are published. So, you will see data but it will mostly come from independent investigator initiated result.

Okay, got it. And then, lastly, for me, could you discuss a little bit about the commercial expansion and how that may relate to your M&A appetite going forward? Do you feel like currently, with the more recent understanding of the TAM out there that you’ve got plenty on your plate to address with only arguably 1% market share, or is it that you're looking for other products which may fit well into the space?

Yes. I think, our position on that Jeff has not changed. We don't view sort of business development activities and sort of in line activities as mutually exclusive. So, Dan and team will confident to execute on the commercial front with our current products. At the same time, Gerard and his team will continue to look for opportunities as we’ve discussed before, to support our two commercial franchises, either in sports medicine or burn care or potentially looking at other cells that would be vertical. So, our position on that has been relatively constant. And again, from our perspective, we do have a pretty high hurdle, right? We certainly understand the value drivers for the Company. We have two great products that are the only FDA approved products in their class. And so, anything else when you bring in needs to have a similar profile and those are the types of opportunities we spend time looking at.

Okay, got it. Thanks for taking the questions. Thanks for your time.

Thank you. And our next question comes from Kevin DeGeeter with Oppenheimer. Your line is now open.

Hey. Good morning, guys. Congrats on a really nice quarter and some nice growth. A few things, with regard to surgeons trained, I think you called out over 900 in the quarter. Can you just provide us a little bit of context to how to think about the assumptions within 2000 and guidance with regard to your newly trained surgeons versus going deeper in terms of penetration with surgeons who are already trained on MACI?

So, Kevin, we trained 500 in 2016, so that was about -- 2017, excuse me, as we launched MACI, we trained 400 last year. So, that's where we sit at over 900 now today. We expect to continue to invest there as much as we have previously. We've got large meetings as we've already attended this year with considerable training opportunities and we've got a few here in the coming weeks. So, we'll continue that investment. With the sales force expansion, we get more time in front of physicians who are now aware of MACI. So, we expect that to help drive our surgeon training as well. I think you'll see a continued decline in the rate of new physicians being trained. But, we will continue this to make that investment. I think, what's most important is that we offer [indiscernible] because we found that some physicians want to train online, they want to do it in the convenience of their own home or office; others want to attend lab and touch and feel the product first. So, it just depends on the physicians’ appetite, and we make sure that we create those appropriate opportunities.

And then, a separate question kind of going back to one of today’s themes to have financial guidance. Guidance seems to imply MACI growth 27%-30%, somewhere in that general range, if my math is correct. And that's as a percentage of growth is significant step down from what we saw both in the fourth quarter and 2018. How do we think about -- through the course of 2019, the relative pacing of recognizing you're not giving Q1 guidance, but it's pretty meaningful, percentage wise, deceleration to think about, is it -- should we think about it as somewhat linear through the year or being more kind of second half of the year for that spend now.

Kevin, I think, the best way to think about is -- in your models, come up with a full year number for ‘19, whatever you think it should be based on our guidance in your own analysis. And then in terms of -- see the seasonality for that total number, the midpoint of the guidance, I think would be roughly $110 million. In terms of seasonality, I would use the same seasonality that we saw this year for both products 20%, 21%, 25% and then 34%. And then, we did -- your sense of Epicel, we think single-digit growth there so you can back into MACI from that I think.

Fair enough. And then, just last one foray with regard to insurance coverage, which has always been healthy for MACI, but specifically in terms of any evolving language with some of the recovered policies for covering the patella or sort of -- other sort of subpopulations for MACI. Anything you sort of see or expect any change through ‘19 in terms of specific language with regard to coverage MACI policy decisions and how does that sort of factor into potential puts and takes on that guidance for ‘19?

So, Kevin, I think we’ve mentioned before, as you suggest that MACI has strong coverage and access across the board, all the top plans cover MACI. Dan and the team did a great job in getting that access probably within six to eight months after launch as we announced a year ago, in the third quarter when we guided, updated its medical policy to include MACI. So, all the plans cover MACI. There were some plans that didn't cover patella right out of the gate, just because as you know MACI’s label is much more expansive than for Carticel, so an easy way to update plans was just to say, MACI is not investigational, but it really reflected the Carticel policy. So, throughout the year, Dan and his team have been working on updating those few plans that still have not formally added patella. We announced last quarter that Cigna had updated their policy to include patella. So, there's really only a couple left that we want to try to knock out. But, even so, with those plans, the patella cases are still approved. They just end up being approved on a case by case basis. And we just want to make things as smooth as possible and have all policies reflect the breadth of the MACI label.

Thank you. And our last question comes from Danielle Antalffy with SVB Leerink. Your line is now open.

Thanks so much. Good morning, guys. Thanks for taking the question. I have two. First, I was wondering if you could talk about how high volume centers are growing versus low volume centers. I guess, what I'm trying to get at is where you're seeing the most growth. Is it on newer centers coming on board or is it actually existing centers that are already using it, but are using it a lot more? And then, I have one follow-up.

Danielle, thanks for the question. So, we've assessed that and certainly that is one of the factors we consider in the sales force expansion sizing, territory alignments and things like that. And in our models, it's been about 50-50 growth coming from, I don't want to call it necessarily small centers, but it's centers that have not traditionally used Carticel or MACI, and 50% from centers that are expanding their use. And you know the names of the largest centers. Those has been a big growth driver for us early on here as well.

Okay. And then, just a follow-up question to, Gerard, just something I think you -- I think it was you that referenced, not really seeing a meaningful change in the biopsy conversion rate? Tell me if I got that wrong. But, just curious, I mean, I know with this direct to patient initiative, I feel like that's something that could move over time. A few questions there. Why hasn't it moved the needle yet if in fact it has? Number one. And number two, when can we see that start to move the needle? Do you have the right initiatives in place to do so? Will we see you guys have to take a broader approach or a different approach to really move that? Thanks so much.

All right. So, for the conversion rate, I think, we've seen them tick up before slightly. So, I don't want to -- they're definitely not going down, let me put it that way. But we certainly haven't seen a multi-percentage increase in it today. Maybe we’ve had a 1% tick up, and it takes a bit of time before we can comfortably say that’s trend. In terms of changing that conversion rate, there are a lot of components to it. And you have to start with why isn't the conversion happening. A lot of patients just do chondroplasty, they feel better, they go on their way. One way to change that is to try to reach out to patients, and that's what Dan’s team is doing. But, we have to -- we're not going to call the patients a day after surgery. That's probably not a good idea. And Dan, go ahead…

I would just say, Danielle, we've spoken to this before, we have a strong program now to capture patient consent and that's really the start of biopsy -- improving the biopsy conversion ratio because with that consent we can then start to communicate with the patient. We've invested last year in making sure that has an easy opportunity for the patients. We've increased the volume of that and it's a steady increase, just like we're seeing a steady increase in biopsies. We're seeing an increase in the percentage of patients where we capture consent. Second piece of that is just how do we speak to the patients? So, we have our launch materials for rehab and et cetera. We have -- this year, we are reassessing all of our patient materials and how we speak to it. An example is something like weight bearing. What does that mean when you translate that to a patient, how quickly can I walk? What kind of work can I do over weeks to months? And what kind of activities can I engage in, such as driving and things that are important to a patient as they get back to activity? So, we're changing the way we speak to patients and the timing of when we speak to them. So, we've got metrics as to when we engage with the patients versus when they have follow-up with their physician. The piece that I spoke to during the call here, we now have a strong group of patients who have had success with MACI because of the experience over the last couple years. Now, we're capturing some of in our new patient ambassador program and we're marrying that with the Dara Torres campaign, so that when patients go on to maci.com, they’ll see the aspirational Olympic athlete and they’ll see a patient that looks maybe a little bit more like them, and they can connect there and see highlights on rehab. The next piece of that that we're initiating is working with physical therapists who have now successfully treated patients and moved them through rehab quicker than they had prior with Carticel. And that's an important rate limiter for biopsy to implant in the patients’ mind when they are considering MACI. So, it’s like I ran through my three children right there. So, Danielle, we're really confident that we're on the right track. We have seen early signs of improvement in conversion ratio and we're confident that these further investments will reap the results as well.

In terms of modeling, Danielle, we view increasing the conversion rate a multiyear effort. We view that as a second leg of growth after we have probably done far more penetration into the surgeon base, got more business for those individual surgeons. So this is kind of a multiyear effort. I don't expect to change dramatically over quarters, this can change over years. So, I think our predominant growth is going to come in the near to medium term from more docs, more biopsies and then longer term higher conversion rate.

Yes. That's fair. That's very helpful. Thank you so much, guys.

Thank you. And that does conclude today’s question-and-answer session. I’d now like to turn the call back to Mr. Nick Colangelo for any further remarks.

Okay. Well, thank you, and thanks for your questions and continued interest in Vericel. We're obviously excited about the opportunities ahead and look forward to reporting on our progress on our next call. Have a great day.

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