Ladies and gentlemen, thank you for standing by. Welcome to the Vericel’s Fourth Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. I would now turn the conference call over to Eric Burns, Vericel's Head of Financial Planning & Analysis and Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Vericel's fourth 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 fourth quarter financial results press release is available on 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'm joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. I will now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'd like to begin by welcoming Joe who joined us in January from Biogen where he held several finance leadership roles, including most recently Vice President of Finance and Head of Investor Relations. Previously Joe served as Head of Global Financial Planning & Analysis and Strategic Corporate Finance and also as Divisional CFO for Biogen's U.S. business. We're excited to have Joe join the Vericel team and he'll discuss our fourth quarter and full year 2020 financial results and our 2021 financial guidance later on this call. Turning to our financial and operational performance, we delivered strong fourth quarter and full year results in 2020 despite the challenges presented by COVID-19. For the full year, we achieved record total revenue and delivered record product volumes and revenue for both MACI and Epicel. This strong revenue performance generated significant profitability and cash flow as we reported full year positive GAAP net income for the first time in the company's history and generated over $18 million in non-GAAP adjusted EBITDA and over $17 million in operating cash flow, ending the year with $100 million in cash and investments and no debt. We also had a strong finish to the year with quarterly records across several financial and commercial measures. From a financial perspective, we generated record quarterly MACI revenue and total revenue in the fourth quarter, record fourth quarter and the second-highest quarterly Epicel revenue in history, as well as record quarterly gross margin, net income, adjusted EBITDA and operating cash flow clearly demonstrating the strength of the company's financial profile. From a commercial perspective, we achieved record quarterly MACI implants and the second-highest Epicel graft volume in history in the fourth quarter. We also had a record quarterly high in the number of surgeons…

Thanks Nick. First, I wanted to start by saying that, I'm very excited to be part of the Vericel team. And I look forward to getting to know many of you, over the coming weeks and months. Turning to the income statement, total net revenue for the fourth quarter increased 15% to $45.2 million, compared to $39.4 million in the fourth quarter of 2019 and included $34.7 million of MACI revenue and $9.6 million of Epicel revenue, compared to $33.6 million and $5.8 million of MACI and Epicel revenue respectively, in the fourth quarter of 2019. MACI revenue grew 3% and Epicel revenue grew 65%, compared to the fourth quarter of 2019. Total revenue for the quarter also included approximately $1 million of revenue related to the procurement of NexoBrid by BARDA, for emergency response preparedness. Gross profit for the quarter was $33.6 million or 74% of net revenue compared to $28.8 million or 73% of net revenue for the fourth quarter of 2019. Total operating expenses for the quarter were $21.4 million compared to $19.6 million for the same period in 2019. The increase in operating expenses was primarily driven by incremental employee expenses related to the MACI sales force expansion in 2020. Net income for the quarter was $12.2 million or $0.25 per share compared to $9.5 million or $0.20 per share for the fourth quarter of 2019. Non-GAAP adjusted EBITDA for the quarter was $16 million or 35% of net revenue compared to $12.8 million or 33% of net revenue in the fourth quarter of 2019. Our non-GAAP adjusted EBITDA of $16 million in the fourth quarter increased approximately 25% versus the fourth quarter of 2019. On a full year basis total revenue increased 5% over 2019 to $124.2 million driven by the growth in both MACI…

Thanks Joe. I wanted to take a moment to thank all of our dedicated employees for their contributions in 2020. Despite the challenges that resulted from COVID-19, our manufacturing and quality teams continued to manufacture and deliver our products without interruption and our commercial and clinical support teams continued to partner with surgeons to ensure that patients in need had access to our important products. The entire Vericel team looks forward to continuing to execute on our long-term growth strategy, provide our therapies to even more patients in need and in the process create significant value for both patients and our shareholders. Thank you. And now, I'd like the operator to open the call to your questions.

[Operator Instructions] Ryan Zimmerman with BTIG.

Great. Thanks for taking the question. Nick and Joe, I want to start with NexoBrid for a minute and just get your sense around timing of that launch. Previously the PDUFA date was or it is I assume still January 2021. So, maybe why start expecting sales in 2022 and not maybe first half -- or excuse me second half 2021?

Yeah. Hey, Ryan, it's Nick. So just to be clear the PDUFA date, which remains the same, is June 29, 2021 not January. And so that remains the case. Obviously, we're excited to have an opportunity to launch NexoBrid in the US. MediWound, of course, who submitted the BLA is working with the FDA during the review process and that process is moving forward. As we had talked about with a mid-year approval, you still go through a quarter or so of P&T Committee reviews at the individual burn centers and then go through the approval process. And so, we've been very consistent in saying, we expect a more meaningful uptake in revenue from NexoBrid in 2022.

Okay. Yeah. Thank you for correcting me. I meant June 2021. The second question is just around MACI. You expect to get back to that kind of pre-COVID growth rate above 30%. Are we to assume that that's a sustainable growth rate, maybe looking out longer-term on the MACI business over time? And I think if I do the math correct and correct me if I'm wrong Joe. But the implied growth in MACI in, at least the first quarter is, something in the mid-teens based on that seasonality cadence. So, just comments around that business would be appreciated.

Yeah, I'll start Ryan. So just in terms of the long-term growth rate, I think we've said pretty consistently that the increase in biopsying surgeons is kind of a good floor for sort of the longer-term growth rate. Obviously to the extent, as we've talked about previously that we get more biopsies per surgeon, and we take a little bit of a price increase that is what sort of gets you from growth in biopsying surgeons to sort of the revenue growth. And an example of that was 2019, where we had 25% growth in biopsying surgeons. But because we got more biopsies per surgeon and then obviously a little bit low-single-digit price increase, we ended up with closer to 35% growth. So, that's how we look at the business going forward. We think those growth drivers remain pretty strong as we talked about. But again, baseline over years, yes, I mean we expect strong double-digit growth.

Yes, Ryan. So, in terms of kind of the quarterly question, I think going back to the guidance, we talked about kind of low to mid-30s range for the full year in MACI. In the prepared remarks, we talked about kind of 2019 being a good kind of estimate. I think at this point, there certainly can still be some variability, but that's kind of our best estimate. And I think if you kind of get into the math you do get -- and you apply that mix -- you do get into the double-digits in terms of MACI in Q1.

Okay. Congrats again there. Thank you.

Thanks, Ryan.

Our next question is from Danielle Antalffy with SVB Leerink.

This is actually Rebecca Wang on for Danielle. Thank you for taking the question. I guess, I'll start with the adoption ramp in MACI. I wanted to get a sense of the same-store sales in early adopters versus new physician growth for MACI. How many new physicians sent in biopsies over the last 12 months, how does that compare with historical trends?

Yes. So Rebecca as we've mentioned in 2019, the number of biopsying surgeons increased 25% over 2018. In 2020, which obviously was a disrupted year, we still were able to grow those surgeons, obviously not at the rate we had anticipated prior to COVID-19. But we were up about 7% or 8% to about 1500 surgeons. We've mentioned and did so again today that we expect biopsying surgeons in 2021 to grow more than 20% over 2020. So you can kind of do the math and see that we'll end up somewhere around 1,800 biopsying surgeons for 2021 would be our expectation.

All right. Got it. Thank you. And that's very helpful. Another question on sales reps, I remember you guys normally hire new reps increase reps in Q1. Can you give us an update on that front?

Yes. Well, obviously in 2020, we did a relatively meaningful sales force expansion from 49 to 76 territories. And our perspective is that that was where we would be for a couple of years. So we're not planning to expand the sales force again this year. We'll look at it at the end of the year but this was intended to be sort of an expansion for a two to three-year time period at least.

All right. Thank you.

Your next question is from Kaila Krum with Truist Securities.

Hi, guys. Thanks for taking our questions. So first, has there been any update on NexoBrid pricing that you can provide? I think historically, you said maybe something in the range of 5,000 to 7,000. Does that range still seem reasonable at this point? Are you more comfortable at the high or low end of that per-patient rate? Just any additional color there would be helpful.

Yes. Kaila, thanks for your question. And yes that was our perspective when we sort of introduced the addressable market for NexoBrid. And it was really based on a benchmark product that's out there. We're in the midst of a pricing study right now. I think when we laid out sort of our pre-commercial launch activities this was something that was going to be going on through the first quarter. So we haven't made any final determinations. I'd say we're certainly comfortable with that entire range. And really the question is what kind of premium will we end up taking given the compelling clinical data for NexoBrid.

Great. No, that makes sense. And then I think you guys have had a month under your belt now with the UnitedHealthcare positive coverage decision. I'm just curious, if you've seen any benefit or it sounds like you guys are pretty excited about it. Just how would you help us sort of frame up the opportunity there in 2021? Thanks.

So, we actually are under a month because we announced it in January, but the policy went into effect on February 1. So it's very early days. But the way we look at the opportunity is is first of all you can kind of look at our TAM and say that about 15% of our business is UnitedHealthcare business, about 20% of cartilage defects are patella defects. And so you can do the math and say, if I want to look at it in terms of the TAM, it's probably a $60 million, $70 million piece of the TAM. And obviously, we have some of that already because patella cases were approved but just on a case-by-case basis for United. So that's kind of the market opportunity. We can then obviously look at, as we mentioned before UnitedHealthcare patella cases were approved at a much lower rate than our average rate. As I mentioned in my prepared remarks, the approval rates generally for MACI are over 90%. And it was much less for UnitedHealthcare patella cases. So you can look at that and say, well, that's business that you can expect to capture. I think the bigger picture issue is that surgeons knew that UnitedHealthcare didn't cover patella cases. And so the real question is, sort of how many patients that they saw who were UnitedHealthcare patients with patella defects that they otherwise, would have treated did they not even bother taking biopsies for and that's the bigger piece of it. So that relates more to the TAM portion obviously. But yeah, we're excited about it. We think it will allow us to not only capture more UnitedHealthcare patients, but there's kind of a halo effective, just continuing strong reimbursement and access for MACI.

Great. Thank you.

The next question is from Chris Cooley with Stephens.

Good morning. And thank you for taking my questions. And congratulations on the litany of records there, I think I lost track of the number there in the fourth quarter. If I could just follow on, Kaila's question for my first, when you think about, the change in the UnitedHealth coverage policy, do you think that will be more impactful going forward within sports med or the general orthopedic surgeon community? I'm just curious, if one was a little bit more skewed and as a result if that could be maybe more beneficial from an uptake standpoint. And then, I have one, quick follow-on.

Yeah. I don't think we feel, like there's a particular segmentation. I think the benefit will apply across the board to our 5,000 surgeon targets. And again that's almost a 60-40, roughly 50-50 split of sort of designated sports medicine surgeons versus general orthopedic surgeons. So I wouldn't say it skews one way or the other. I think it's a benefit that we can realize across the board.

Understood. And then, just looking back at the Epicel growth, in the back half of last year which was obviously very impressive, I'm just curious, if you feel like this is now kind of the overall level of productivity that we should think about on a per rep basis? Or is there still leverage there or opportunity to improve that going forward? And here in calendar 2021 independent of the NexoBrid launch. I mean are they hitting stride now? …

Yeah.

…Or is there still some room to go there, I guess in short?

Well, I would say, we're always careful about calling trends with Epicel, just because of the small numbers and variable nature of severe burns. But I do think, we've pointed folks to look at in 2019, we had three quarters that were below $6 million. And then, the record quarter of $9.9 million in the third quarter. And that was in an uninterrupted year. When you look at 2020 where clearly there were access issues, and things sort of ground to a halt in Q2. Each of the quarters was above $6 million other than, the second quarter. And so, we do think that there's probably a stronger baseline there. But we by no means, feel like, we're done or we're capped out. Our goal obviously would be to continue growing Epicel, on its own. And we think with an expanded sales force ahead of a NexoBrid launch, that we'll get further uptake for Epicel as well.

Thank you. I appreciate it.

All right. Thanks, Chris.

Your next question is from Jeffrey Cohen with Ladenburg Thalmann.

Hi, Nick and Joe. How are you?

Good Jeff.

Well, thanks.

So, a few questions from our side, very strong margins for Q4, and what's the pull-through on the margin potential? Should we still be thinking about low-70s, as per your guidance two or three years out? Or does BARDA drive those revenues higher or keep them kind of in the same range?

Sorry, can you repeat the second part? I got the gross margin.

Sorry. How that looks in 2022 and 2023. And the ramifications from Nexobrid on those call it low to mid-70s.

Yeah. So I would say if you kind of go back to our guidance we talked about from a gross margin perspective, being in that 70% to 71% range for the full year. Obviously, it was kind of strong in the fourth quarter of 2020, when we typically see higher revenues. More broadly, I would say, and we talked about this in the prepared remarks. So as we move forward, we're still kind of focused on as marginal revenue comes in, I'd say approximately kind of 80% of that converting on the gross profit line and also about 50% on the adjusted EBITDA. So those remain kind of the longer-term goals both in 2021, and certainly beyond. In terms of NexoBrid, there's kind of two components there in the margin. There's a royalty, which is kind of in the high single digits and then there's a fixed cost component. So I think from a P&L perspective that kind of fits in with our current portfolio. So we expect that to be consistent from a margin perspective relative to where we are now.

Okay. Got it. And just to review your commentary on the OpEx, what you said was $115 million and that's a GAAP number and then that's inclusive of approximately 15% stock comp. Is that correct for 2021?

I think what we said was, so year-over-year about 50% of the increase, when you kind of look back at 2020 versus the guidance on 2021 is related to stock comp, and that kind of if you exclude that stock comp component the underlying growth rate is more like 20%.

Okay. Got it. And then any read into conversions over the past few quarters, Nick? It sounds like there's some strong trends, but any read recently into uptake or downtake or throughputs or time from biopsies through manufacturing?

No. I think we've said, and this underlies our assumptions for 2021 that the biopsy-to-implant conversion rate has remained relatively stable within historical ranges. Even though, we're adding obviously a large number of new surgeons who typically have lower conversion rates as they engage with the brand and then sort of move up as they become more experienced and higher volume users. So I'd say to be remaining stable is good now, but of our three drivers of adding new surgeons, getting more biopsies per surgeon, and then increasing the conversion rate over time; right now growth is clearly being driven by adding new surgeons and getting more biopsies per surgeon. Over time, as we saturate our current 5,000 surgeon target universe you'd expect those latter two drivers to really start to take prominence in the outer years.

Okay. Perfect. Thanks again for putting out 2021 guidance, it's appreciated and for taking our question.

Okay. Thanks, Jeff.

Thank you.

Your next question is from Kevin DeGeeter with Oppenheimer.

Hey, guys. Thanks for taking my questions. Maybe the first one on MACI, I appreciate the guidance is very strong. Nick, can you provide an update as to how you're thinking about the percentage of the sports medicine doc portion of the TAM that you think you've penetrated? And as we think about that 20% year-over-year growth in ordering surgeons do those increasingly look – the mix shift a little bit more towards general orthopedic surgeons? Or do you think sort of the historical mix of new surgeon ads, which skew sports medicine is still the right way to think about the business? I'm just trying to get to kind of ordering patterns and whether there might be some differences in those new docs as opposed to the longer-term sports medicine docs?

Yeah. Well, I'll just go back and sort of give you the historical background as I get to the answer of your question, which is we started with 3000 target surgeons when we launched in 2017. And those were principally, those were folks who were – who had used Carticel in years gone by. And then you can go to the sports medicine societies and sort of get the lists of surgeons and call through them and so on. And so it was probably obviously, more heavily focused towards sports medicine surgeons, when we launched. But I wouldn't say, it was exclusively so. We penetrated call it roughly 50% of that initial 3,000 targets by 2019, when we said, we had gotten biopsies from about 1,400 surgeons. And now we've expanded to 5,000 surgeons. So I guess, if you just look at it proportionately, there were still 1,500 of those original targets we hadn't penetrated yet plus 2,000 new general orthopedic surgeons, so roughly evenly split in terms of potential new customers. And I think that's probably the best way to look at it.

That's super helpful. And maybe a follow-up on that and then I'll just ask my second question. And the follow-up is just have you seen any differences historically in terms of kind of conversion rates or other features between the two pools, sports medicine and general orthopedic surgeons? And my separate question is really on Epicel. I mean tremendous results particularly against some of the industry commentary towards decrease in overall sort of burn volumes related to COVID restrictions in portions of 2020. And I guess my question on Epicel is does your guidance imply from a rate of severe burn standpoint a return to kind of pre-COVID dynamics in terms of the macro market? Or just how do I think about any feed-through from new really behaviors and the size of the overall addressable market in your guidance?

Right. Well I'll start with MACI and just the conversion rate historically versus new customers. I mean you started with a bit of an enriched pool with the original MACI users right because they were Carticel users typically sports medicine surgeons had pretty high volumes obviously more so than new users in either case. So that skewed it a little towards heavier volumes with sports medicine surgeons. But when we did our sales force sizing, exercise with ZS Associates, we were really look -- we had the claims data and the new surgeons we added were really high-volume cartilage repair surgeons that did open knee procedures. And when you think about sort of the lower levels of utilization for MACI generally, it doesn't take many patients to become a pretty important volume user. So I think there's potential across the board with the surgeons that we're calling on. In terms of Epicel just sort of the dynamics, we had a lot of discussions sort of when in the early days of COVID-19 about what the impact would be when you had reduced industrial activity and maybe reduced activity generally and then folks who were going to be at home more often. And what we said back in sort of the midst of all that was we really didn't see a change in the top of our funnel. The mix might have changed. I think a couple of our burn centers who typically treat a lot of industrial accidents their activity went down a little. But obviously it was made up in other areas. And that's because these unfortunate accidents happen for many reasons at home or at work. And so we really didn't see a meaningful change in the top of the funnel. I think what's driven Epicel as we said was getting business from some new centers, the way our new sales force structure and leadership is approaching the treatment protocols for how you treat these patients with severe burns. So we're seeing some more re-treatments and then more grafts per patient. And I think that's a pretty focused effort on our behalf.

Once again, congrats. Great quarter, guys. Thank you.

Thanks, Kevin.

Thank you.

Your next question is from Swayampakula Ramakanth with H.C. Wainwright. Your line is open.

Hello. Sorry about that. Good morning, Nick and Joe. A couple of quick questions. Based on your guidance it looks like you're looking for like 2019 like growth. So can you highlight for us some of the things that you are looking at which is kind of giving you the confidence that you pretty much are quite close to a pre-pandemic situation?

Yes. Well I think RK, we'll -- good morning and thanks for the question. We'll kind of take a look at both products. So for Epicel, obviously as we mentioned on the call, we've had two of our three highest revenue quarters ever in the back half of 2020. So I think bumping our expectations from high-single to low double-digits to sort of mid-teens, just reflects kind of how the product has been performing through the pandemic year. So that one's pretty straightforward. With respect to MACI obviously, we have a view into part of the business through the biopsies and sort of the conversion rates and in light of sort of how that performed in 2020. So using models that have served us pretty well, we're able to have a pretty good feel for where things are going. I would say, obviously, in terms of reasonableness of assuming 30% plus growth for MACI, we have -- it's a very large market, obviously, as I mentioned early innings, relatively low penetration. So there's a lot of room to grow both on surgeon penetration, patient penetration. We've got a larger sales force now that will be in place and is experienced that will be in place for the full year, and then obviously more surgeons to call on as well. So we think it's pretty reasonable. And I'd say if you looked back at our initial guidance last year, which was in the $141 million to $146 million range and how we characterized that, you would have expected MACI in the mid 100-teens right, 115 or so. So to say applying 30% to the $94 million from this past year, you're into, kind of, in the mid-20s, so a $10 million uptick with all those dynamics at play, we're pretty comfortable with that.

Yeah. No, that's great. So a couple of things which you just said and so let's, kind of, tease them up a little bit. So on Epicel, congratulations on two quarters. I'm not sure two quarters makes a trend, but certainly it's very, very promising right? What were the drivers for some of those clinics that never had ordered Epicel for them to up now? And Part B is in terms of sales force expansion for the burn franchise in 2021, should we expect some -- or will this merge along with what you're expecting for NexoBrid as well?

Yeah. So just in terms of the dynamic of new centers, I mean, first of all as I mentioned, we brought in new leadership in 2019. We restructured the sales force into sales representatives and then clinical support specialists. So it's always about having the right people in the right roles. We brought on a few new representatives. They, obviously, come to the business with existing relationships. So I think it's just very strong sales execution, and obviously good work in explaining the profound benefits with Epicel to these centers who may not have been using it previously. So that's I think really the explanation for why we're seeing that.

Perfect. And then any specifics on the sales force expansion for the bone franchise specifically?

Yeah. We'll probably -- we're planning to follow the same playbook that we've done when we expand MACI that when we get closer to a potential launch, we'll end up bringing the reps on ahead of that. So they, obviously, can get trained up do their home study, their office study and then field training. So we would expect to do that a quarter ahead of launch. So we're kind of entering that zone hopefully.

Okay. One last quick question. Congratulations on the UnitedHealthcare coverage. So should we expect additional payers also to jump in now that you have UnitedHealthcare in 2021? Are you having -- with the other folks?

Yeah. Well, as I mentioned we have outstanding access for MACI. So, more than 85% of covered lives in the US have access to MACI all the major plans. The nuance here was that, when MACI was approved, all these plans had existing medical policies that were really based around the Carticel label, which was more limited in that it was only for defects on the femoral condyle or part of the knee. It was a second-line therapy. So MACI, as a first-line therapy, labeled to cover defects anywhere in the knee, had a much broader label. And plans just took different time periods -- time frames or time to get there. Some of them reviewed the MACI label and updated their policy immediately. Some just took it off the investigational list, but didn't update other parts of the policy. And so this was really just an update. We had mentioned a couple of years ago that Aetna and Cigna had done the same and United was really the last of the major plans to kind of just mirror the policy to the current MACI label. So, we'll continue to focus on any incremental enhancements, but there's no sort of big one left out there that we're waiting on.

Great. Thank you, very much for taking all my questions, Nick.

Okay. Thank you.

At this time, there are no questions.

Great. Well, I just wanted to thank everybody for joining us on the call today. We appreciate your continued interest and support. And so have a great day and look forward to talking to you again soon. Thank you.

Thank you for participating in today's conference. You may now disconnect.