Ladies and gentlemen, thank you for standing by, and welcome to the Vericel Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nick Colangelo, Vericel's President and CEO. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's Third Quarter 2020 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that, on today's call, we'll be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are 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 third 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. This morning, we reported record third quarter total net revenues of $32.3 million. Our strong revenue performance, which exceeded our expectations, was driven by MACI as the V-shaped recovery that started in June continued in the third quarter. MACI revenue grew 18% over the third quarter of 2019. We also reported the second highest quarterly Epicel net revenue in history and reported our first NexoBrid revenue related to the BARDA procurement for emergency response preparedness. Our strong revenue performance generated significant profitability and cash flow as we reported a gross margin of 70%, record third quarter net income of $3.6 million, and positive operating cash flow of $4.6 million for the quarter. With these results, we've generated growth in total revenues year-to-date compared to the same period in 2019, and the company is cash flow-positive for the year through the third quarter, a…

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

Hey, thanks for taking the questions. Congrats on the Q like a one-man band today. I was hopping between calls, so I apologize if I missed this. But I guess I want to put a finer point around the strong growth for MACI in the fourth quarter. I think the Street's modeling about mid single-digit growth right now. But certainly, based on your commentary and the commentary for double-digit product growth, it would suggest something a little bit higher, assuming Epicel holds at its current levels. So, one, is my thinking around that correct; and then, two, any commentary to put a finer point on your expectations around MACI?

Well, yes, I do. I think your thinking around that is correct. Obviously, you can look at the product revenues from last year, which in total were about $39.4 million. So if you just apply double-digit growth to that and then back out the current Epicel run rate, then I think you get to that answer with respect to MACI.

Understood. Okay. You laid out kind of the drivers for MACI and what has -- the number of surgeons, the biopsy rates and surgeons. But just looking at it from a different perspective, particularly in the third quarter, given that you saw such an uptick in biopsies, I mean, if you could bifurcate a little bit what drove that in terms of the addition of the sales force, or the new heads in the sales force, versus physician adoption versus, say, patient demand that may be coming in from some of the marketing initiatives that you've been doing. I'd love to just understand it from maybe that perspective relative to the drivers of the underlying growth that you talked about previously?

Well, I guess I would start by saying we saw pretty consistent performance among our surgeon segments that we discussed on our Analyst Day, and then across all of the regions, so very pleased with the breadth of the performance. We did mention that, in the new 27 territories, there was the highest level of growth in terms of bringing on new surgeons who had never taken a MACI biopsy before. And again, that supports the rationale for why we expanded the sales force, to make sure we had appropriate reach and frequency on these surgeons. One thing we did talk about on our last call was the fact that we expected the majority of our volume in the third quarter to be essentially new patient flow. So we said maybe 20% would be, “catch-up”. And for us, that really has two components, number one, there were cases in late March and April that were canceled. And there were some cases, probably less than 5% of third quarter volume related to cases that were previously scheduled, being canceled, and then rescheduled. On the theoretical front, we said, hey, just based on historical averages, we would have expected a certain number of biopsies to convert to implants, and that was a little lower. So the rest of that call it, 20% catch-up in the third quarter related to biopsies that normally would have converted in the first half. But that was really a July-ish, maybe early August phenomenon. And by the time we got to September, the age of the biopsies, we're pretty much comparable to the age of that biopsy is converting to implants in 2019. So really, that supports our growth outlook, going forward. It's really mostly driven at this point, or almost exclusively driven now by new patient flow.

Okay. Appreciate the color. I’ll hop back in queue. Thank you.

Your next question comes from Danielle Antalffy with SVB Leerink.

Good morning. Thank you so much for taking my question. Nick, just to push a little bit on -- and I appreciate you're not giving 2021 guidance -- excuse me, specifically right now. But just as you look at where consensus is, you talked about growing rates of biopsies at physicians and growing utilization, I think, if I heard you correctly. So, even qualitatively, can you help us think about how to think of MACI growth as we head into next year, given the moving parts the easy comp in Q2? I mean, there's a lot of moving parts, so maybe you could talk to, sort of, some of the metrics that you're able to talk about and give us a sense of how this could shape out.

Well, yes. Thanks, Danielle for the question. And I would say that I appreciate your acknowledgment that we're not going to give 2021 guidance right now. What we're trying to do is say that, obviously, we are expecting the reference back to, sort of, the growth rate in new biopsying surgeons that we saw in 2019 over 2018. We had talked about that being absent our pre-COVID disruptions, sort of a good baseline growth for the company, going forward, and that was, sort of, the mid-20% range. And our commentary now is that we expect to get back towards those levels in 2021 in terms of the growth rate. That, combined with additional biopsies per surgeon, I think gets you to a point where you can kind of look at consensus and say does it seem to make sense from a MACI perspective.

Okay. Yes, that actually makes lot of sense. Okay. Thanks for that. And then just a follow-up on NexoBrid and Epicel, and maybe talk a little bit more -- I know Epicel is pretty -- I know volatile is probably the wrong word, but it jumps around quarter-to-quarter. There's not a lot of visibility there. So is this something that could also help drive more visibility in the Epicel business? More consistency it may be and can you talk about, how you're going to leverage having that NexoBrid in the sales rep bag to drive higher Epicel sales? Thanks so much.

Yes. Well, I would echo what I -- or reiterate what I said in the prepared remarks, that this is the first full year with our new sales force structure, where we have both sales reps and clinical support specialists, and we do think that is having a positive impact on the business. As you noted, Epicel typically has been extremely variable, but we're seeing pretty consistent monthly performance. And so our commentary around that for the fourth quarter is that what we saw in the third quarter seems to be sort of progressing or moving right into the fourth quarter, as well. And so I think that gives you a sense of where we think Epicel will be for the fourth quarter. In terms of moving into next year, you know, we intend to sort of run the same playbook on sales force expansion ahead of NexoBrid launch as we do for MACI, or have done for MACI previously. And that is we'll bring in the manager level folks at the beginning of the year. We plan to add seven new clinical support specialists and sales reps, sort of, ahead of the launch, a quarter or so. And so, yes, we expect -- certainly, we focus now on, call it, 70 or 80 of the top burn centers, and there's 140 or so in the country. With NexoBrid, we'll be broadening that reach, and we certainly do expect that it will help to increase utilization and penetration for Epicel.

Thank you.

Your next question comes from the line of Kevin DeGeeter with Oppenheimer.

Hey, guys. Thanks for taking my question. Nick, maybe can you just talk a little bit about -- capital structure as we go forward here with a business that looks like it's essentially sustainably profitable, pretty healthy balance sheet, pretty low cost of debt options out there as well. So you have a lot of potential levers to pull. So maybe you could just prioritize for us sort of internal investments versus external business development, M&A versus potential share buy by and other structures for reinvestment of capital.

Got it. Yes, I think, we will continue, as we've always done, to look at external opportunities that would allow us to expand our sports medicine or burn care franchises, or if we find new opportunities that have a profile in new cell therapy verticals, like our current products, in other words highly innovative concentrated call points, good financial profile. You know, we look at those as well. We'll continue to do that. Those, as you know, on the business development front, are more sort of sporadic opportunities, so we'll continue to look. But we have a pretty high hurdle, and those will happen when it makes sense for us. In terms of internal investment, obviously we have lifecycle management initiatives that are underway. We're always, sort of, upgrading facilities, and looking at capacity expansion plans over a five-year plus -- 5 year to 10 year period. So there may be capital requirements there over time as we continue with these very high-growth rates. I would say we certainly have not ventured into the share buyback territory yet. But obviously, we'll think about all those parameters as we move forward.

And maybe just following up on that topic. With regard to manufacturing structure, can you remind us as to how you think about what type of run rates, particularly with regard to MACI, made to a discussion about upgrades, expansion or perhaps geographic diversification of the manufacturing infrastructure, timely discussions? Kind of when does that sort of threshold of run rate on MACI kind of make that informative?

Yes. We've talked in years past, and it's probably been a couple of years now, about sort of the capacity here. And again, we've essentially doubled our volumes or more over the past couple of years since we've launched MACI. And so, we certainly, you have to look out three to five years and say, where do you think you'll be, and when do you need to start making those making those strategic moves. And so, we're at a point where we're looking out three to five years and saying, where are the pinch points in terms of capacity. Obviously, our December volumes are so high, you typically double any other month in the year, and that creates certain capacity constraints that we need to navigate around. And so, I would just say that, while we have adequate capacity for the next three to five years or so, three years, call it, you need to get ahead of it. So, we're looking at that now, different alternatives et cetera.

Great. Thanks for taking my questions.

Okay. Thanks, Kevin.

Your next question comes from Jeffrey Cohen, Ladenburg Thalman.

Hi Nick, how are you?

Good, Jeff. Thanks.

So I wanted to ask you about if you could discuss a little bit about plans for NexoBrid as far as the launch in the U.S. and kind of the Venn diagram on overlap with Epicel. You talked about bringing in some managers and some support sales launch. Can you talk about kind of go-to-market strategy as far as current centers, which are already being serviced as well as opportunities for new centers and how you see that overlap out there?

Yes. And I would point folks on the call to our Analyst and Investor Day presentation where we covered the sales force expansion plans, the pre-approval sort of medical and marketing initiatives and so on. And so, I would say, Jeff, the current activities kind of fall into three buckets. You have disease state awareness ahead of a product approval, and that campaign was launched at the American Burn association meeting this past year, virtual meeting, and that will continue ahead of launch. We have, obviously, brand development that is ongoing right now. And then, of course, market access initiatives, as well. So, all three of those buckets were sort of laid out by Roland on our Analyst and Investor Day call. It's kind of the typical sequence of events you do ahead of launch. And so there's a lot of those activities. Once the BLA has been filed for review or accepted for review by the FDA, that you kick those initiatives off. So we're deeply engaged in all of those activities. In terms of the sales force expansion, we currently have one national sales director and 11 sales reps and clinical support specialists. So as you think about getting towards 20 sales personnel, that's a little difficult for one person to have that many direct reports. So, we'll have a structure that again, is much like our MACI structure in terms of we'll have two regions with two regional managers, and then essentially 11 territories that are supported by both reps and clinical support specialists. So, we think that's about the right number to call on the burn centers, which is the next part of your question, which is sort of right now, as I mentioned, we probably focused on the top 80 burn centers out of the 140 in the country, because those are the centers that typically see sort of the catastrophic burn patients like the Epicel patients are, so not all the burn centers routinely will have Epicel-appropriate patients. So, we do focus on sort of the upper end of that. As we've talked about before, virtually all of the 40,000 hospitalized burn patients across those 140 centers are going to need some sort of debridement. And so, NexoBrid will allow us to focus our efforts on a broader set of the burn centers. And as I mentioned in my prepared remarks, we certainly expect that will provide opportunities to increase Epicel uptake in those centers that don't currently use the product. So, we do think there will be a lot of synergies there in terms of the Venn diagram portion of your question.

Okay. Got it. And then secondly for me, just wanted to review and go back to your Q4 commentary that Ryan has some questions about. You talked about double-digit growth for MACI for fourth quarter, double-digit annual growth, correct?

Yes. What we said was double-digit product growth. So, our current commercial products for the fourth quarter, and that certainly, our expectations have increased based on our Q3 performance, but double-digit product growth for MACI and Epicel combined. So last year, the products were at about $39.4 million, so you can sort of do the math from there.

Okay. And then one more question, if I may, lastly, on NexoBrid. In the near-term, the next four quarters, you would anticipate the BARDA procurement to continue at current levels, call it, approximately $1 million?

Yes. So we had $1.2 million in the third quarter. We said about $1 million in the fourth quarter. And then, I think there's about $3.8 million left for next year that, yes, we've suggested you spread over the four quarters.

Perfect.

So one last point just around that. In terms of our prelaunch activities, I'd just remind you that we do have the next study ongoing. So there will be, assuming all of those sites are up and running, about 33 centers in the country that will have experience with NexoBrid at launch.

Perfect. Thanks, Nick.

Thank you.

Your next question comes from Kaila Krum with Truist Securities.

Hi guys. Thanks so much for taking our questions. So first, I think that something a lot of companies are talking about is just learning how to be sort of more efficient with virtual training going into next year. And so I'm curious, are there any sort of cost efficiencies you guys think will stick heading into 2021 that perhaps we may not have otherwise considered?

Yes. We obviously have been employing a number of virtual tools. So on our Analyst Day, Roland covered, in particular for MACI, sort of a number that -- and this really falls into the peer-to-peer sort of category and how surgeons are interacting with their peers in these times. And so we've certainly been using platforms like Doximity, VuMedi, which is where they go and watch surgical procedures. Doximity is more like a LinkedIn for the surgeon community. We mentioned that we'll be making significant investments in something called KOLCast. And again, these are all peer-to-peer initiatives that surgeons are using. And we've had a tremendous response and tremendous success in using those during the second and third quarter. So we'll certainly plan to continue to do that. And what it does is allow us to maintain a bit of a lower cost structure as we've had this year. So we'll see how travel resumes. We're sort of planning that it might get back to normal by the middle of next year. And in the meantime, we'll continue to engage those highly effective virtual tools.

Great. Okay. And then I think, obviously, you guys have proven an ability to scale your sales force with MACI and do it effectively. I mean, is there anything that you call out that maybe you've learned from or can use as you guys scale up your burn sales force as well? Thank you.

Yes. Well, I appreciate that. First of all, this past year, we expanded the MACI sales force for the fourth straight year. This was a bit more of a significant one. And so this one for MACI is intended to last us at least two or three years, and we have been effective in how we've done that. And we there are certain dynamics around the MACI business where we kind of have a playbook where we hire the managers at the end of a given year, hire the reps in the first quarter of that year. They do their sort of home training, field training and then come into home office training and hit the ground running on the first day of the second quarter. And that involves extensive training and preparation. And that's why we think we've been effective in our sales force expansions we will do the exact same thing for Epicel and there will be opportunities obviously not only for home training and virtual home office training, but also to be out in the field during the surgeries and gaining that field experience as well. So all of the learnings that we have for MACI that have led to our successful expansions will be applied to the Epicel expansion, as well. And we've been just to be clear, we started 2019 with five reps in one clinical support specialists. So for Epicel, we're now up to seven reps and four clinical specialists. So we've doubled the Epicel sales force and certainly have done well and have not seen any disruption as last year was our third year in a row of double-digit growth for a product that's been on the market for 20 years.

Thank you. .

Thank you.

Our next question comes from RK with H.C. Wainwright.

Thank you. Good morning, Nick. Congratulations on a great quarter. Most of my questions have been answered, but I just have a couple of them. I know you gave a lot of metrics around the leading indicators for MACI. I just want to see if you can give a little bit more color. As far as the biopsies are concerned, you said by the end of 2019, you were talking about 14,000 biopsies. So at this point, year-to-date, could you give us roughly what the number of biopsies you have gotten so far?

Yes. Let me just correct you. What we said was there were 1,400 surgeons who had sent in biopsies in 2019. And we've not given out specific biopsy numbers, but I think you can get there on your own by looking at the revenues in 2019. The average price per the implant is known, so that gives you a rough implant number. The conversion rate we've said is sort of mid-to-high 30%, so you can sort of do the math to get to the number of biopsies in 2019. And we do expect some biopsy growth in this year even with sort of the market declines that we saw in Q2.

Great. Then just one quick question on the financials. In terms of gross margin, by end of 2019, there was actually a 300 basis-point expansion on your gross margin last year. Obviously, this year, because of what we are facing, there's been actually a decline in there. But do you expect the fourth quarter to help you revert that and at least get it flat to 2019, or even better, maybe?

Yes. Well, certainly, in the fourth quarter, as you know, it's our highest volume quarter by far and so the margins tend to be pretty high in that time. And so, yes, I think it will be roughly in line with last year. So we're very pleased with that, obviously, given sort of the second quarter results.

Thank you. Thanks for taking my questions. And I will talk to you soon.

Great. Thank you.

There are no questions at this time. Mr. Colangelo, do you have any closing remarks?

No, I would just like to say thank you very much for participating in our call today. We appreciate the interest and look forward to keeping you updated on our continued progress. So have a great day. Thanks.

This concludes today's conference call. You may now disconnect.