Hello, ladies and gentlemen, and welcome to the Vericel Fourth Quarter 2019 Earnings Conference 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. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's Fourth 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 are described more fully in our filings with the SEC, which are also available on our website. In addition, all 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. Please note that a copy of our fourth quarter financial results press release is available in the Investor 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. Our fourth quarter results reflect a strong finish to another great year for the company, during which we continued to deliver significant revenue and profit growth and added an exciting new product to our portfolio. We achieved record revenues of $39.4 million for the fourth quarter and $117.9 million for the full year in 2019. Total revenues increased 30% for the full year, driven largely by continued strong uptake of MACI, which had revenue growth of 34% for the quarter and 35% for the full year. Epicel also had a solid year with revenues up 13% compared to 2018, marking the third consecutive year of double-digit growth for Epicel. This strong revenue growth drove record quarterly profits as we generated net income of $9.5 million in the fourth quarter. Importantly, excluding the $17.5 million NexoBrid upfront license payment. 2019 marks the first full year of profitability for the company as we generated adjusted net income of $7.8 million for the year. Moreover, excluding the onetime license payment, our cash and investments balance increased $13.6 million in 2019. As these results demonstrate, 2019 was a landmark year for Vericel, in which we advanced beyond being solely a high-growth revenue story, with expected sustained strong double-digit revenue growth ahead for MACI, together with continued growth for Epicel and the anticipated launch of NexoBrid in 2021, we believe that we are entering 2020 as one of the few high revenue growth companies that has also positioned to deliver substantial profit and cash flow growth in the years ahead. As we announced earlier today, we expect total revenues for 2020 to be in the range of $141 million to $146 million, including full year revenue of approximately $3 million resulting from BARDA's emergency stockpile purchases of NexoBrid.…

Thanks, Nick. We reported total revenues of $39.4 million in the fourth quarter and $117.9 million for the full year, representing growth of 26% for the quarter and 30% for the year compared to 2018. Our gross margin was 73% for the quarter and 68% for the full year, a 300 basis point improvement for the full year versus 2018. Our operating income was $9.2 million in the fourth quarter or 23% growth. We delivered $9.5 million of net income or $0.20 per share in the quarter compared to net income of $5.2 million or $0.11 per share for the fourth quarter of 2018. Excluding this $17.5 million upfront payment for the NexoBrid license. Our adjusted net income for 2019 was $7.8 million or $0.18 per share compared to a loss of $8.1 million or $0.20 per share in 2018. Adjusted EBITDA for the year, which excludes noncash stock compensation, interest and depreciation was $21.2 million. This is a strong leading indicator of future cash flow. And if you exclude NexoBrid payment, our cash and investments grew by over $13 million in 2019. You can find a reconciliation of non-GAAP measures to GAAP in our press release and slides supporting today's call. Turning to financial guidance for 2020, we expect total net revenues for the year to be in the range of $141 million to $146 million, including revenue of approximately $3 million from BARDAs emergency stockpile purchase of NexoBrid. We expect revenue growth for MACI of approximately 26% for both the full year and each quarter versus the same quarter in 2019. Epicel revenue growth in the first quarter of 2020 is expected to be in the high single to low double-digit range compared to revenue of $5.2 million in the first quarter of 2019. Finally, we received an…

[Operator Instructions]. Your first question comes from the line of Ryan Zimmerman with BTIG.

So I wanted to start with the guidance for 2020 if we could. Just maybe Nick or Gerard, you could talk about kind of the puts and takes of the implied MACI guidance. What the underlying assumptions are from new physician adoption? Does the guidance assume a price increase on MACI? And maybe the contribution from new reps that are coming on board through the balance of the year? And then I have a follow-up.

Okay, Ryan, thank you. Sure. So in terms of assumptions, as you well know, Ryan, for the near part of the year, we rely heavily on the biopsies we've seen come into date. Then for the mid- to back-end of the year, we make certain assumptions about increasing the number of biopsying docs, number of biopsy built set in, send in as well as the behavior of existing docs. We have been giving the leading metric of the number of new biopsying docs, that's 25% right now is what Nick had mentioned. So that's a core assumption for the forecast. We assume conversion rates stay about where they are, which is the other important factor. And we assume that the average number of biopsies per doc maintain about the same. Of course, we have a variety of Monte Carlo type analysis or we tweak that one way or another, but you can assume maybe just roughly about the same. In terms of the contribution from the sales, the new reps, we expect them to take several quarters to really get up and running and make a significant difference. I think by the end of this year, they will be making a difference. But I think the bulk of the growth this year is primarily going to come from business development that the existing reps have already and the efforts they've already put in, and we'll put in the near term.

Okay. And then, Gerard, if you could just clarify the timing. I heard you on the stockpiling for the BARDA, the $3 million. But I apologize if I missed this, there is a $5.8 million number in there. And just to cadence that we should expect -- does is that imply $1 million in the second quarter, third fourth? Just maybe clarify something.

Yes. It's roughly -- it's going to be roughly $1 million a quarter for 6 quarters. It's a little under that. That's why I say $5.8 million. The timeline has gotten pushed back by one quarter. I'll give a little bit of color on that. On MediWound and BARDA are really -- are the ones that according to the agreement, we get a piece of the economics. As I understand it, there is an awful lot of logistical details that need to be sorted out whenever you put together a stockpile of products for emergency use. There isn't a commercial label available. It needs to be imported into country. It need -- they need to have special processes set up to, rapidly within a day or so, get it to the place, in spite of the emergency. And all that needed to be ironed out prior to the procurement starting and that's the result of a -- which is a slight delay in the start of the stockpile. But the overall amount that's going to be purchased hasn't changed, it's just gotten pushed out one quarter.

The next question comes from Danielle Antalffy with SVB Leerink.

Congrats on a solid year. Gerard just wanted to follow-up on the guidance for a second here. So you talked about seeing biopsies grow 28% in 2019. I think it was -- so why are you assuming a step down from that growth in 2020 for MACI if the conversion rate isn't changing? Just a little bit more clarity there would be helpful.

Yes. So we said we saw a 25% increase in the number of biopsying docs. So that's the leading indicator we gave. So -- and we're guiding to about 26% growth for MACI. So that's in line. It's always good to get a little bit of maybe a cushion here and there because one doesn't know where things are going to turn out for the year. We don't have a perfect crystal ball. But again, we're using the biopsies we've seen come into date. We haven't given a number on that, but we're using the biopsies we've seen to come into date to kind of help heavily model the front end of the year. In the back end of the year, we have to look at the number of new biopsying docs that come on board and make certain assumptions about the rate of biopsying, rate of conversion, which again, roughly we've held those constant in our model.

Okay. Got it. And then on the conversion rate, you guys have talked in the past about the direct-to-patient initiative. I think we're now, what, 12 to 18 months into that. If I'm remembering correctly, I thought you had been seeing a little bit of a tick up in the conversion rate. Are you seeing continued success with that initiative? Just trying to get a sense of where you stand with that, how that's progressing as it relates to the conversion rate?

Yes. So, Danielle, this is Nick. Thanks for the question. And we are still implementing that program. We're probably, as you mentioned, probably about 4 quarters into it now. And we're very pleased with sort of the capture rate of consents we're seeing from patients and now in the process of sort of optimizing and doing market research around how we can be most effective in terms of communicating patients to drive growth over the long term. As we've talked about a lot when you hand a significant number of new surgeons who are entering the fold and adopting MACI. Obviously, when they take their first biopsy, the conversion rate is 0 until they do a first implant. So we have a bunch of moving parts here. We certainly believe, over time, that we'll be able to increase the conversion rates at the current time. It's kind of bounced around the historical norms, but we do expect that to increase over time.

And your next question comes from Kevin DeGeeter with Oppenheimer.

Congratulations. Staying a bit on theme of guidance here. Maybe I'll turn to Epicel here. As we think about, I guess, your guide of kind of, give or take, 10% growth for next year. How much of that with regard to Epicel is incremental burn centers or expansion versus kind of deeper into existing accounts? And can you just comment generally about competitive landscape in the burn market? What are you seeing? Is there any change?

Yes, Kevin, thanks for the question, and I'm glad you actually asked this question about the 10% because we slip something in the transcript here that we haven't done before. And we actually gave a little bit of guidance for the first quarter, for Epicel. Because we recognize how difficult that is for analysts and investors. And frankly, us at times to model it. So we have some visibility of how the first quarter is turning out. So we said mid-high to low double digits for growth in the first quarter. We didn't say anything for full year growth for Epicel on the call. Granted, since we have 2 products that are moving, you can make a variety of different assumptions. But we're probably erring on the side of conservatism for Epicel in our guidance. And if you do the back calculation, you probably would get to mid- to mid-high single digits for Epicel baked into the guidance. Now in terms of...

Great. And then maybe a little bit -- go ahead, Gerard.

Well. A little bit of color on where the business will come from. I think it'll continue to come from more institutions using the product. It's been a very steady -- slow but steady increase in the number of institutions with the expanded salesforce in the new model where we have a subset of the field personnel focused on just supporting cases and other subset out there selling. I think we will see an expansion in the number of sites using the product. But again, we'd like to add on the conservative side for this product, given it's so difficult quarter-to-quarter to see where it's heading. But we are confident that over time, it will continue to increase because, again, it is a life-saving product for a very small percent -- small number of these terribly burn patients.

And then just on the competitive landscape?

Sure. On the competitive landscape, we don't -- we really don't see any real strong pressure from Avita's, RECELL, which is the product you're referring to in all likelihood. That's not to say it's not a good product for lower TBSA burns, which is a good market for them. That in the worst of the worst patients we treat, I think, maybe it is 10% or 15% overlap, but I think we're treating very different patients, which is based on the docs ample tools out there, but I don't see much competitive pressure.

Got it. And then maybe just a separate follow-up and it's actually pertains to NexoBrid. Can you remind us with regard to the NEXT Protocol, essentially training surgeons, how much feedback do you got -- does Vericel gets in terms of the surgeon experience under the NEXT Protocol? And how should we think about your ability to sort of incorporate some of that learning into pre-commercialization somewhat this year, but probably more 2021.

Yes. That's a great question, Kevin, this is Nick. We certainly do -- we have actually hired, and this is part of the subcontract through BARDA. One of the clinical recruiting managers for the NEXT Protocol. So we clearly get direct feedback on surgeon experience with the product. It's still early in ramping up for the NEXT Protocol. We probably have 10 or a dozen sites up and running now 20 by the end of the quarter and will be fully up to the 30 sites shortly. And so we'll be very much involved in getting the sites up and running, getting feedback on experience with the product. And obviously, we have an opportunity to be up and running at 30 sites, treating the number of patients, we'll be able to see pre-commercialization. We believe that will have a very meaningful impact on the uptake upon approval.

And your next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Just two questions. So firstly, Gerard, what are the jump in receivables for 2019? How does that look now? And maybe just kind of a forward look on it?

In terms of receivables, well, given that fourth quarter is our highest valuing quarter, kind of a natural cadence. So you'll see a similar pop every fourth quarter for the last several years.

Yes. Okay. And then secondly, could you talk about MACI as far as the sales organization and you reach into the utilization trends per docs or per centers? And how you're thinking about sales force? Are they covering 20 facilities, 40 facilities? And how is that kind of rolling out also into 2020?

Yes. So in terms of our -- the coverage of our two sales forces with MACI, with the expansion in the sales force, the 76, we're going to cover 5,000 of the highest docs in terms of cartilage procedures. In terms of Epicel, our other sales force, with the 10 field based personnel, we have now a subset, again, doing supporting burns care and the subset actually out there selling hard. We can probably cover the full 100. I think we've target probably 60 to 70 that are higher volume ones, but we can cover pretty much every burn center in the country with the expanded sales force.

Okay. And Any insight into utilization trends from the MACI side?

Yes, we -- it varies dramatically by physician. We have some physicians who do dozens and dozens a year and some will do a few a year. And we do try to track penetration by patient type, location of defects and such. I'd say, at a high level, we saw on a biopsy basis. We have under 10%, probably, roughly 10% penetration on an implant basis still under 5%, if I do my math correctly into the overall TAM. So there is a long, long way to go in terms of penetration, which is a surrogate for utilization.

Yes. And I'll just add some -- Jeff, we've obviously defined our target addressable market is 60,000 patients a year, and that's what Gerard was referring to in terms of penetration of biopsies and implants. If you look at what was our 3,000 surge in target audience prior to this expansion, we mentioned that we had received biopsies from about 1,400 surgeons. So that's a pretty good penetration number in a relatively short period of time. On the flip side, as we expand to 5,000 target surgeons, it gives us a whole lot of headroom moving forward.

Got it. That's very helpful. And then lastly, any commentary on M&A? Any focuses out there? Any activities out there, spaces that you'd like to be?

Well, as we've talked about before, there are 3 principal areas that we focus on. That's adding products to our existing commercial franchises in the sports medicine and burn care markets. So we continue to look at highly innovative products in those areas. And as we've also talked about, the hurdles are pretty high. We want to maintain our position as having one of the most highly innovative portfolios in our spaces. Financial hurdles need to be met and then technically de-risked assets. So we continue to look, but we're also fortunate to have a high-growth portfolio already. That will complement it if and when it makes sense to do so. The third area we look at, obviously, as we often say, we're the only company with 2 approved advanced cell therapies in the country. And we do look at other opportunities to establish new verticals with cell therapy products. But again, we want to make sure that those meet our high standards. And again, we will do deals if and when they make sense for us.

And your next question comes from the line of Sean Lee with H.C. Wainwright.

Congratulations on the end of a great year. I just -- most of my questions have been answered. I just have two quick ones. So for the NexoBrid, BLA, which we can expect in the next couple of months. What are the steps that you still need to complete before then?

Well, it's a pretty straightforward process. There is offer in each of the BLA sections and modules, and then an extensive amount of QC-ing of those modules. And so that's essentially what's left to do. As we -- we've mentioned earlier, we did need to wait for the 12-month safety follow-up data and that obviously, is incorporated into a clinical study report, which is also then included into the BLA. So it's really a relatively straightforward set of tasks. It's just anyone who's been through this now, it's a pretty complex process. And at the end of the day, you want to make sure that you are focused on a high-quality submission with the highest probability for approval. And that's the approach we're taking with our partner, MediWound.

Great. And my second question is, I think, in the prepared remarks, you mentioned that so far approximately 25% of your target audience has send in biopsies. So do you have any specific programs in place, to help reach out for the rest of the market?

Yes. So that's part of our target expansion. So as we have talked about through 2019 and into the fall. We've expanded our target surgeon population from 3,000 to 5,000 surgeons. So 1,400 out of 5,000 is about 25%. The whole purpose for increasing our sales force from 49 reps to 76 reps is to make sure that we have appropriate reach and frequency on each of the target surgeons. So that's the plan for deeper penetration into that target surgeon audience.

I see. And my final question is, could you provide a little bit of color and expectations on cost trend lines for this year?

Sure. In terms of cost trend lines, on the manufacturing cost basis, as I said before, I think we just keep assuming that the cost on the marginal revenue dollar is 20%, or in other words, 80% of every marginal revenue dollar should fall to the gross profit line. In terms of operating margin, what I would point you to is, excluding the $17.5 million payment to MediWound in 2019, our full year 2020 operating expenses are expected to increase by approximately $24 million over 2019 to $98 million. This increase, as I mentioned before, as a result of expenses related to the expansion of MACI and Epicel sales forces and prelaunch activities for NexoBrid and include some important noncash items. It's important to note that, that $4 million of increased share-based comp, that's largely driven by our increase in the share price and a $1 million increase in depreciation. So that cost -- the operating expenses, obviously, are growing kind of in a step fashion next year. In 2021, we do expect to return to a similar rate of marginal revenue contribution to adjusted EBITDA's we've seen since the launch of MACI. So that's about 50% of -- or more of each marginal revenue dollar hitting the EBITDA line, and that will return to that in 2021 and beyond.

[Operator Instructions]. And we have a follow-up question from Ryan Zimmerman with BTIG.

Just a few more for me. You commented on the MACI guidance being 26%. You didn't talk about seasonality. It's been a topic for both MACI and Epicel before and for the overall business. And so I just want to understand, are we to assume that the seasonality is essentially in line with what you saw in '19 as a result of the MACI guidance? And then I have a couple of other follow-ups.

Yes. Yes, Ryan. So for -- we expect to see the -- for MACI, we expect to see the same seasonality we saw in 2019. Or said in another way, I think, right now, we're guiding that each quarter of this year should increase approximately 26% over the same quarter in the prior year.

Okay. And then, Nick, you touched on the 1,400, it's been asked, there is potentially 5,000 surgeons out there training. But you do go to training with a lot of surgeons, so I was just wondering if you could comment on kind of the underlying training trends of the overall population that you're targeting in MACI from a physician standpoint?

Yes. So, Ryan, I think we've mentioned a number of times that training really, given the ease of the procedure, is kind of more of a lagging indicator. Essentially surgeons can be trained online, on an iPad, right ahead of a surgery. So it's really -- I view and we view engagement with the brand at the point where surgeons have decided to take biopsies from patients and make MACI part of their treatment algorithm. So we really focus on the number of biopsying surgeons and a lot less on the number of trained surgeons for those reasons.

I would say if you look at the training metrics they kind of more or less track the new docs to come on board.

I'm showing no further questions at this time. I would like to turn the conference back to Nick Colangelo.

Okay. Well, I just wanted to say, thanks for your questions and your continued interest in Vericel. We're obviously very pleased with another strong year in 2019 and excited about our revenue, profit and cash flow growth opportunities for our business in the years ahead. Have a great day, and thank you.

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