Good morning, ladies and gentlemen, and welcome to the Vericel Corporation’s Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Gerard Michel, Chief Financial Officer.

Thank you, operator, and good morning everyone. Welcome to Vericel’s second quarter 2019 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 at any subsequent date. Please note that a copy of our second quarter financial results press release is available in the Investors Relations section of our website. We also have a short presentation with highlights from today’s call that can be viewed directly on the webcast or accessed on our website. I will now turn the call over to Vericel’s President and Chief Executive Officer, Nick Colangelo.

Thank you, Gerard, and good morning, everyone. We reported outstanding financial results for the second quarter, driven by significant revenue growth for MACI and Epicel. Total net product revenues increased 38% over the second quarter of 2018, marking the ninth consecutive quarter with record revenues for the reported quarter. And our trailing fourth quarter revenue rose to over $100 million for the first time. Based on the strong revenue growth and the momentum we’re seeing in the third quarter we’ve raised our full year revenue guidance for 2019 to $112 million to $116 million, up from our previous guidance of $110 million to $114 million. Importantly, our revenue growth continues to generate strong profit growth. Gross margins and adjusted EBITDA increased significantly compared to the second quarter of last year. And we generated positive adjusted EBITDA. And excluding the upfront license payment for NexoBrid, positive cash flow for the quarter. MACI’s strong growth is being driven by an increase in both new surgeons and the average number of implants per surgeon. We expect this momentum to continue as biopsy growth rates are best leading indicator of future demand and remained very strong through the first half of this year. In terms of new surgeons, we’ve already added more new implanting surgeons in 2019 than in all of 2018. And new surgeons are contributing more to our growth than ever before. Nearly two-thirds of our rolling fourth quarter implant growth is coming from surgeons that never used CAR T-cell, with the balance of growth coming from historical CAR T-cell users increasing their implant volume. On an absolute basis, approximately one-third of our first half MACI volume came from these new surgeons. The growing surgeon customer base and increasing MACI utilization is driven by the simplicity of the surgical procedure, compelling clinical…

Thanks, Nick. We reported total revenues of $26.2 million in the second quarter and $48 million for the first half of 2019, representing growth of 38% for the quarter and 29% in the first half of 2019. We saw strong sales performance across both products in the quarter with MACI revenue growing 47% and Epicel revenue growing 9%. Our gross margin was 66% in the quarter, an increase of 700 basis points from the second quarter of 2018. On a GAAP basis, our second quarter operating expenses and, more specifically, our R&D expenses included the $17.5 million payment to MediWound related to the NexoBrid license agreement. Excluding that payment, operating expenses in the quarter were up $4.3 million, versus the prior year to $19.8 million. As a percentage of revenue, operating expenses excluding the one-time payment dropped 600 basis points to 75% percent. And we expect that to continue to improve as top-line revenue continues to grow. The primary drivers for the increased operating expenses in the quarter were noncash stock-based compensation, which was up $1.4 million in the quarter versus last year, as a result of our stock price appreciation over the last two years, and the increased MACI sales force and case management support costs which grew $1.6 million over 2018. Our operating loss on a GAAP basis, including the $17.5 million NexoBrid license payment, was $20.2 million. Excluding the license expense, our loss was $2.7 million, compared to a loss of $4.2 million in the second quarter of 2018. The GAAP net loss for the quarter was $19.8 million or $0.45 per share. Adjusted net loss, excluding the $17.5 million one-time expense, was $2.3 million or $0.05 per share, compared to a loss of $4.7 million or $0.12 per share last year. Adjusted EBITDA for the quarter…

[Operator Instructions] Your first question comes from Danielle Antalffy with SVB Leerink.

Hey, good morning, guys. Thanks so much for taking the question. Congrats on a really solid quarter. Just curious how to think about the expanded target customer here as it relates to orthopedic surgeons that you’re targeting from a training perspective. Does that change the ultimate TAM and how we think about that? Or is it really just the ramp into that TAM? And I guess really the question is, so what changes now from how we think about the go-forward outlook over the next few years as you penetrate that 60,000-patient population?

Hey, Danielle, this is Nick. So I think the latter is the proper way to think about it, that this helps us penetrate into the TAM that we discussed last year. And so, as we think about it moving forward what we believe it will allow us to do is obviously have broader reach and frequency and help to maintain these higher growth rates as we go forward.

And one other – just a quick follow-up on that. One of the things that you have been doing is trying to drive the conversion rate higher for biopsies. And just curious to see direct-to-consumer efforts are starting to move the needle at all, where you stand on that. Thanks so much.

Yes, so as we’ve talked about, we believe that increase in conversion rates is a long-term project for us. We’re sort of in early days, having launched this mid last year, and as you know, biopsies convert over anywhere from three to six to 12 to 18 months. And so I will say that early signs are that for cases that weren’t otherwise immediately or there about activated, we are seeing a little higher percentage of cases being activated, which obviously leads to higher implants. So still early days, but we’re confident in the program going forward and will remain a focus for us.

Okay. Thanks so much, guys.

Your next question comes from Ryan Zimmerman with BTIG.

Thank you for taking the questions. Congrats on the quarter. Just want to ask, the BLA submission for NexoBrid is slated for second quarter 2020. I know at the time of the call maybe there’s some hope that it could come sooner. What do we have left to do on the BLA submission? And is there any chance that it could come a little sooner than anticipated? Or is second quarter 2020 the key timeframe for BLA submission on NexoBrid?

Yes, thanks, Ryan. So if you recall, when we announced the deal we had stated that if the FDA requested that the 12 months safety data be part of the initial submission package that we would be targeting a Q2 2020 submission date. And in fact BLA – the pre-BLA meeting occurred at the end of July and in fact the FDA would like that data as part of the initial submission. So that sort of remains our current target date. Obviously, as we refine our timelines our goal would be to pull that in to the extent it’s possible to do so. So it’s very much consistent with what we said back in May when we announced the deal.

Okay, understood. And then just broadly speaking, I mean, it sounds like there’s numerous growth drivers for MACI, a lot of things going on to the sales force. Can you talk a little bit just about the durability of growth in MACI. I mean, not asking you to guide to 2020 or anything like that. But how do you think about the sustainability of that MACI growth just looking at kind of the penetration rates relative to what the opportunity is, and what you believe the right way investors should be thinking about the sustainability of MACI in outer years?

Well, as you alluded to, Ryan, we believe there’s a significant addressable market of up to 60,000 patients in the U.S. each year. Our current penetration rate from an implant perspective is less than 5%. So obviously we think there’s a lot of room to grow over a longer period of time. And again, increasing the sales force, we’ve done this three times. To-date I think our team is excellent at implementing sales force expansions. And we think this will create broader reach and frequency for us as we go forward. On top of that, as you know, there’s no near term competition of a like product coming down the pike. So we think this growth is very sustainable.

All right, great. Thanks for taking the questions guys.

Your next question comes from Kevin DeGeeter with Oppenheimer.

Hey, thanks a lot. I want to add my congratulations on a really nice quarter. Nick and Gerard, can you just comment a little bit with regard to the prescribing and usage profile of these sort of kind of incremental 2,000 high volume general orthopedic surgeons that you’ve identified? And perhaps as a related question, if 48 reps is kind of give or take the right number for 3,000 surgeons, is somewhere in the 80 range kind of at least over time kind of the right way to think about sizing for this 5,000 surgeon market that you are now identifying?

Sure. Kevin, this is Gerard. I think the way we think about these orthopedic surgeons that we’re going to add to the set of targets are these are docs that we know do cartilage repair procedures. And we also know are comfortable doing open knee procedures. They’re not arthroscopic-only doctors. And there are a variety of sources of third-party data on the physician now that you can purchase to identify that. So they are docs who do the right type of procedures where they should be interested in MACI. And a point of fact, we’ve been getting business from docs that fit that, that aren’t sports medicine docs but fit that description I just made without even us calling on them. So we’re pretty confident there’s a rich vein there to mine. In terms of the actual number of reps, territory, if it was simply homogeneous country, travel didn’t come into play, et cetera, efficiencies in travel, it would be easy just to kind of do a linear relationship like you said. In reality, we have to deal do a territory mapping. And that can really drive the numbers one way or another. So I want to – I hesitate to throw a number out there right now.

Okay, great. And then maybe just one follow-up question, if I may, and that’s on Epicel. It is an area where we get a firm number of questions from investors just trying to appreciate kind of where the core growth trend sort of sits for Epicel. So reasonably strong second quarter here. Can you just kind of comment what you’re seeing in the market kind of as we move into August here to kind of give us some sense as to the general trajectory kind of going back to last question, MACI, but kind of applying it to Epicel, the sustainability of an Epicel trajectory?

Yes, well, we’ve been saying for five years now that the growth for Epicel is variable. Obviously as we stated today, our penetration into what we believe is the addressable market is still relatively low. So we think there’s a long period of sustainable growth. As we mentioned in our prepared remarks, the breadth of the business Q2 this year versus Q2 last year was apparent in terms of the number of centers sending in biopsies, taking orders, the number of biopsies and orders, et cetera. And as I mentioned, we see that continuing into the third quarter. So we’re very confident in the long-term growth for Epicel. Again just with the caveat that it can be a little variable at times.

Great. Thanks for taking my questions.

Your next question comes from Chad Messer with Needham & Company.

Great, good morning. Thanks for taking my question, and congrats on a solid quarter. Gerard, I – you rattled off some extra guidance on gross margins and OpEx and stuff at the end of your remarks, and I just want to make sure I got all that right, because I don’t believe it anywhere in the printed remarks on the slides. $91 million and $93 million OpEx, excluding the $17.5 million, but does that include stock comp and all that?

Yes. So the operating expenses including stock comp and the $17.5 million payment should be between $91 million to $93 million. Excluding the $17.5 million NexoBrid payment, we’ll forecast the range to be between $73.5 million and $75.5 million.

Okay, great. Thank you. Glad I asked and thanks and I appreciate...

It’s a lot to capture as I’m running through it.

Yes. No, no, look. I appreciate all – all the extra details and stuff you guys provided on this call today. Thank you.

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Hi, Nick and Gerard. How are you?

Great, thanks.

I wanted to circle around on a couple of Kevin’s questions on Epicel. If you could kind of call out any trends maybe that you’re seeing as far as case volumes or sheet volumes or number of physician prescribers, et cetera, from the previous quarter? That’d be great.

Sure, Jeff. I think probably the most important trend that we’re seeing is expanded number of sites using the product. Again, with small numbers it’s always hard to see a trend. But I think on trailing four quarter basis, we see a consistent trend of more sites using the product. It’s hard to look at specific patient volumes because it is so variable. But we want to see the broader usage basis for the product. It’s not as we have before, product you just get and use, you need to be trained, get comfortable with it. So there is a long ramp to try to get a site up and running. So we are happy to see expanded usage. We see no encroachment. I think this is the underlying question that hasn’t been asked yet, but we see no encroachment from competitors in this very severe segment that we treat.

Okay, got it. And then my second question, could you talk a little bit about the throughput on your facility? It seemed to me that the facility was being higher and higher as far as capacity utilization. Is there enough space to kind of continue to expand the market at the rates at which you are growing? I am assuming that upcoming NexoBird would be manufactured elsewhere.

Yes, at our – yes, NexoBird will be manufactured elsewhere. At our projected growth rates we think we have between three to five years before we would start sort of feeling any pinch points as opportunities to move office employees out of this current facility and leverage it for QC labs or that sort of thing. But at our current growth rate, it’s certainly prudent for us to be thinking through, do we need another facility, whether it’s for capacity purposes or just redundancy purposes. And we are working through that exercise. But it’s not a near term initiative aside from thinking through it. But three to five years, I think, is a good estimate right now before we feel a pinch.

Okay, got it. And then lastly, do you expect to have any price increases on MACI for 2019?

For – in this – this particular – no, I mean we’ll do normal annual pharmaceutical level price increases as Nick usually puts it, but nothing extraordinary whether in terms of timing or level.

Okay. Perfect. That does it for me. Thanks for taking the questions.

[Operator instructions] Your next question comes from Swayampakula Ramakanth with H.C. Wainwright.

Thank you. This is RK from H.C. Wainwright. Thanks for taking my question. Most of my questions have been answered, but I just want to ask a quick question on strategy. So as you prepare for MediWound’s NexoBird to come to the market so probably in mid-2021, in the interim how do you – or what is the strategy for Epicel such – growth such that you get the market right for NexoBird since it has a bigger market since it can serve, not only the severe burn, but also any other type of burn because it’s a debridement agent?

Yes, so this is Nick, and so I’ll start, and, Gerard, you can add any comments. So as you – as we think about the addressable market, obviously NexoBird can have a larger target addressable market in terms of patients as we described in our corporate presentation. But it is focused like Epicel on hospitalized burn patients. So there is about 40,000 hospitalized burn patients each year. And we have defined the addressable market for Epicel in about the 600-patient range per year, whereas to your point virtually all of those 40,000 patients are eligible to be treated with NexoBird to the extent they require debridement. So we think there is a larger addressable market from a patient and quite frankly a revenue perspective, as well. In terms of how we’re preparing to capture that, again there is about 120 to 130 burn centers in the U.S. As we mentioned in our prepared remarks, we plan to add three more. We currently have about six commercial and medical clinical support specialists supporting Epicel right now. We are going to add three more this year with the goal of doubling our current size at least by the time we head into a launch next – well, in 2021 potential launch for NexoBird. So we think that will be adequate to cover the roughly 120 burn centers in the U.S. But if we need to add a little to that, then we’re certainly going to do that.

Thank you. Thanks for taking my question.

Okay. Thank you.

[Operator instructions] At this time I’m showing no further questions. I would now like to turn the conference back for closing remarks.

Okay. Well, I’d like to thank everyone for your questions and your continued interest in Vericel. We had a great quarter. And as reflected in our updated guidance, we’re excited about the trajectory of our business for the remainder of the year. So thanks again and have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participating and have a wonderful day. You may all disconnect.