Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Second Quarter 2021 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 will now turn the conference over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Vericel's second quarter 2021 conference call to discuss our financial results and business highlights. 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. 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 second 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'm being 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. The company continued to execute extremely well in the second quarter as we delivered another quarter of strong financial and commercial results. From a financial perspective, we reported total revenue of $39.5 million for the second quarter, an increase of 97% compared to the second quarter of 2020, and 51% compared to the second quarter of 2019. We also generated positive adjusted EBITDA and operating cash flow for the fourth consecutive quarter. Based on these results, we're raising our full year total revenue guidance to $168 million to $171 million, and adjusted EBITDA margin guidance to 23% to 25%. Joe will provide further details regarding our updated 2021 financial guidance in a few moments. From a commercial perspective, we continued to deliver strong results with respect to the key underlying growth drivers for both MACI and Epicel. MACI biopsies, which grew more than 50% in the first half of 2021 compared to the same period in 2020, achieved record quarterly and monthly highs in the second quarter. We also had a record quarterly high in the number of surgeons taking MACI biopsies with strong performances across both our legacy and expansion territories. Importantly, the 2020 expansion territories led the country in terms of new biopsy surgeon growth and overall new biopsy surgeons added in the first half of the year. Based on the efforts of our expanded sales force as well as the strong surgeon engagement resulting from our highly effective virtual and in person marketing programs, we're well positioned to meet our target of growing the number of surgeons taking MACI biopsies by more than 20% this year. We believe that the strong growth in biopsy surgeons, which is a primary growth driver, not only for this year but for the years…

Thanks, Nick. Starting with the income statement. Total net revenue for the second quarter increased 97% to $39.5 million compared to $20 million in the second quarter of 2020, and included $26.5 million of MACI revenue and $12.2 million of Epicel revenue, compared to 15.1 and $4.9 million of MACI and Epicel revenue, respectively, in the second quarter of 2020. Total revenue for the quarter also included approximately $0.8 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI revenue grew 76% compared to the second quarter of 2020, and Epicel revenue grew 148% compared to the second quarter of 2020. Compared to the second quarter of 2019, MACI revenue grew 27% and Epicel revenue grew 128%, reflecting the strong underlying growth of both franchises compared to a pre-COVID-19 baseline. Gross profit for the quarter was $26.9 million or 68% of net revenue compared to $11.4 million or 57% of net revenue for the second quarter of 2020, which was more than double the gross profit in the prior year. Total operating expenses for the quarter were $30.6 million compared to $19.7 million for the same period in 2020. The increase in operating expenses was primarily driven by higher non-cash stock compensation expenses related to our higher share price as well as incremental spend across all areas of the business when compared to the constrained spend in 2020 due to COVID-19 related factors. Net loss for the quarter was $3.8 million or $0.08 per share compared to a net loss of $8.3 million or $0.18 per share in the second quarter of 2020. Non-GAAP adjusted EBITDA for the quarter was $7.8 million or 20% of net revenue compared to a loss of $3.5 million in the second quarter of 2020. Finally, we generated approximately…

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

I want to start with Epicel for a moment here, continues to perform very well. And I'm just wondering, Nick, if you could elaborate a little bit on the dynamics within Epicel in terms of market dynamics and the incidents of burns versus the higher grafts per patient that you're seeing. And give us your thoughts around your expectations for those 2 dynamics in the interplay going forward?

Yes. Thanks, Ryan. As we've talked about -- we made changes recently to our sales force leadership and the customer-facing roles in terms of sales reps and clinical support specialists. And we continue to believe that, that has had a very significant impact in terms of the number of burn centers that we're engaged with, where we now have greater coverage. And then obviously, as our reps and clinical support specialists continue to educate surgeons on the optimal use of Epicel, that's led to an increase in the grafts per patient and obviously, led to the increase in Epicel volume. So that remains -- it's kind of a theme we've been talking about all year. And I think the performance over the past 3 or 4 quarters has demonstrated the impact of those sales force changes. In terms of market dynamics, I know there's a lot of commentary out there around reopening and greater incidents of burns and so on. And I would say for our patient population, which, as you know, are really the most critically and severely burned patients. I don't really feel like -- and there's really any reopening dynamics that's driving -- it may contribute a little, but certainly not at the same level as our sales force effectiveness in that patient population. So we had talked about even earlier this year that in Q4 and Q1, cumulatively, it was the highest buy ups we had seen, and that was obviously before any reopening dynamic. So I really think it weighs more towards the sales force effectiveness than any market dynamics.

Got it. That's very helpful. And then maybe just one on guidance. If I think about the past 2 quarters, Vericel's beat expectations on the top line by, give or take, 8% or so. And so -- be it MACI or Epicel or a combination of the 2. And yet, guidance has increased by roughly about 2% in each of those past 2 quarters. So maybe for both of you, Nick, and Joe, help us understand your guidance philosophy and what may or may not be constraining your decision to nudge that guide slightly higher than you are right now.

Well, Ryan, I think I'll start, and Joe can chime in as well. But we've had a consistent guidance approach for several years now, where we model out a bunch of scenarios, and we've tried never to get out over our skis. And yes, we've updated the guidance already twice this year based on outperformance. And we think that's a pre-approach, especially given there's always -- as we talk about Epicel, given the sort of low, smaller patient population is, there are challenges forecasting in Epicel. So we really never want to get too far out ahead on that. And then with MACI, I think we've been -- we upped the guidance in the first quarter to mid-30% growth. I think that's a pretty healthy growth rate, and we're just comfortable where it is right now, especially as you've had some dynamics out there around reopening and patient behavior and things like that. So really no reason to get too aggressive at this point of the year.

Yes. And this is Joe, Ryan. Thanks for the question. Just to add, if you go back a little bit in time, we started the year above a 30% growth rate when you think about the total company on guidance. And then again, Epicel, which last year, we were talking about high single digits. If you look at the progression there, you're talking mid-teens to high 20s to low 40s. So certainly, as we've seen Epicel continue to perform, that's certainly factored in as we think about guidance. And then really from a MACI perspective, as Nick talked about, we started the year above 30%, in line with that total growth rate. We continue to see the underlying drivers. So we're certainly thoughtful on that, but there's certainly a full year aspect to think about as well as the quarter-to-quarter aspect.

Understood. Congrats on the progress.

Thanks, Ryan.

Thank you.

Your next question is from the line of Danielle Antalffy with SVB Leerink.

Just a quick question on the reopening dynamics, and any lingering COVID impact? I mean, are you seeing the referral funnel? Is it back to 100%? Or how can you characterize the recovery here at this point in time?

Yes. Danielle, number one, I think a couple of things we track are whether it's general market commentary or market research we do with some of our top surgeons, looking at their surgical volumes and where that is compared to pre-COVID levels. And I'd say that's still probably 5% to 10% down versus the pre-COVID time frame. Clinic visits were lagging that a little bit, but seemed to have -- seem to be catching up a little bit more now since December. So those dynamics, they're not quite back to pre-COVID levels but are catching up. I would say in terms of the recent commentary around the delta variant or the situation, we really haven't seen any impact at this point in terms of no widespread facilities, restricting surgeries and so on. I think one thing we do think about there is that for any surgical procedure, patients will have a pre-op COVID test. And as cases tend to surge or spike, you'll have patients that will have to reschedule if they test positive, and so keeping our eye on that. And then from a reopening dynamic, lots of commentary around patients, physicians, taking vacations and things like that. And I think it just generally leads to a little less linear or a little choppier month-to-month kind of dynamic. But overall, again, we take a step back and look at the significant increase in surgeons taking biopsies, the record number of biopsies that we're receiving, and we feel really good about the underlying growth drivers in the business.

Understood. That's helpful. And then just one quick follow-up on the growth in biopsying surgeons. I think you said 20% growth, correct me if I'm wrong there. But how are those new surgeons that are starting to biopsy ramping relative to past years as surgeons would come online?

Yes. So it's kind of early days when we just get new biopsy surgeons in terms of how the -- what their implant behavior will be. But I think we'd say consistently -- consistent from year-to-year that the patterns for new surgeons are the same as we've seen in prior years. So we expect that to remain the case.

Your question is from the line of Chris Cooley with Stephens.

Congrats on the great quarter. Just 2 for me, if I may. I just wanted to follow back up on Epicel little bit here. When you think about the step-up in TAM and in the revised guidance, if I'm doing the math right here, it really kind of applies that now on average, you're still in early days in terms of stepping up the number of grafts for a patient. Just wanted to, one, see if I could confirm that. And when we think about -- I realize each case is different but in terms of that step up, you're still -- I say -- would say, sub-50% in terms of the step-up in the number of grafts for a patient when you look at the increase in the TAM relative to the implied annual growth guidance. So just trying to think about where we were in that adoption curve.

Yes. So thanks, Chris. I'll start, and Nick wants to add he can. If you kind of take a step back on the Epicel guidance, right, more near term, obviously, we've had some really strong quarters of late, run rates' $9 million plus over the last few quarters. But if you look back historically, prior to those quarters, you're talking more about a $6 million to $7 million run rate, right? So I think the business has really shifted a bit and as we think about guidance, I think we're mindful of that in the sense that we're certainly at a higher run rate. We think the execution on the sales, the field force has improved, as Nick has talked about here. It's above prior run rates, but not quite at the last quarter. And obviously, this past quarter was much higher. As you think about that relative to the TAM, I would say, I think what you're talking about is that 90 to that 120 average grafts per patient, I believe. But if you take a step back, I think what we said a couple of years ago or a few years ago is we think the TAM is at that, call it, $100 million plus number. And really what that means is -- and now what we're saying is we think that's $200 million plus. And I think the key difference there is what we're saying is, on average, we are seeing higher utilization or a higher number of grafts per patient. So historically, that number was around 90 per patient. Now it's actually closer to about 120. So I think we've taken a look at that trend over the last few quarters, and we think it's a bigger addressable market. Certainly some rounding there, at an average price of $3,000, that's changed a bit as well. But certainly, we think it's $200 million plus. So as we think about where Epicel is now, we still think there's a fair amount of opportunity as we think about that TAM. So certainly, that TAM has increased a bit. And again, there's a bit of rounding there, I think, which is part of the answer to your question. But as we think about guidance, we've continued to take that up based on what we're seeing in the underlying trends and the performance to date.

Super. That's really helpful. And then just as a quick follow-up for me. The passing of the baton here on the NexoBrid resubmission. Could you just maybe, I guess, Nick, in broad strokes, paint what's transpired there? And what specifically you think you can bring to the table here that might expedite the process and any challenges you see post the prior notification from the agency.

Yes. Thanks, Chris. As I mentioned in my prepared remarks, we have a clinical regulatory and operations team with a great deal of experience and a great deal of success on the regulatory front, not just during their Vericel tenure with respect to the MACI BLA, the Epicel label expansion and probably a couple dozen prior approval supplements, principally related to CMC matters for MACI and Epicel over the past several years. So it starts with the leadership, Mike Halpin, our COO, was Head of North American Regulatory Affairs for the Sanofi Genzyme business unit, so highly experienced leadership. And then the members of his team are in that realm of experience as well, whether it's on the CMC side, clinical side, et cetera. So I think we just bring a great deal of experience and a track record of working well with the FDA. And then we're in a great position to leverage the vast experience that NexoBrid bring -- or MediWound brings, given 20 years of history with NexoBrid. So we feel good about the path forward. Obviously, we still have a great deal of confidence in the clinical data with MediWound and look forward to bringing it to the market. And I would say for us, it's probably a little bit less about how fast we can do it and a little bit more about making sure we put a quality package together that will ultimately lead to approval from the FDA.

Your next question is from the line of Jeffrey Cohen with Ladenburg Thalmann.

So a couple from our end. If you can just follow-up a little bit from Chris' comments on the resubmission. Any effect on your R&D that you'd call out beyond your OpEx number for 2021?

Yes. I don't think -- we don't really see that having a material impact on the operating expense line.

Okay. Got it. And then secondly, can you give us a little further flavor on MACI as far as Q2 being pretty strong biopsies and pull throughs. Do you think that was as effective -- people waiting on the biopsy side and then the pull through on the implant side? How do you see that pulling out on the other end and sowing COVID into that scenario for us, please?

Well, yes, I'll start just on the biopsy side. Again, we continue to see strength in not only biopsy surgeon growth, which is we've always consistently been stating that, that's the key primary growth driver right now. And that's really what is driving the growth in biopsies. The average biopsies per surgeon, which is another key driver is consistent with where we were in 2019, and we expect that to increase in the second half of the year. So we think all those dynamics are set up really well for not just the second half of this year, but into 2022 and beyond; so that's number one. In terms of the pull-through on the implants, as Joe mentioned in his prepared comments, our assumptions for the back half of the year -- and I think it is important to recognize that our guidance suggests that 40% first half, 60% second half of the year revenue for MACI, which is -- which has been consistent since 2017, other than last year where it skewed a little more heavily into the second half of the year. So that's the dynamic that we would expect to see, absent any changes that, as you mentioned, any COVID related factors might have on timing of conversion and so on.

Okay. So no material pull through percentages that you're factoring versus what you've been thinking over the past number of years?

No.

I'd say it's consistent, as we talked about in the prepared remarks, really consistent with historical patterns and what we've seen in other years.

Got it. Okay. Perfect. Strong readout, nice quarter.

Your next question is from the line of Sam Bordovsky with Truist.

Just to start off on Epicel. You touched on it in the prepared remarks, but I would be curious to hear a little bit more about the account dynamics and surgeon wins coming from the new sales force. Any deeper you can go into maybe the number of burn centers you're in now? And if these new reps are helping to drive new account wins there?

Yes. I think, Sam, the way I would say it is, we've talked in the past about -- we are definitely seeing activity in burn centers that, I think we mentioned it on our last call that either never had used Epicel or hadn't used Epicel in a number of years. And so there's no doubt that our sales representatives are having an impact in terms of broadening the customer base. You also have to keep in mind that at the tail, there are some burn centers that may not see Epicel patients routinely. And so there's a little bit of churn on that tail end of things. But I think we absolutely are seeing an impact from our new reps in terms of broadening the customer base. Within those centers, I think it's, as you'd expect, the more they're present, the more often they see patients who are admitted, and they can have educational discussions with our surgeons about appropriate patients, appropriate treatment plans, et cetera. And we do think that's also having an impact in terms of the number of grafts per patient that we've seen over the past several quarters.

Great. That's helpful. And then just as you start to think about the sales force getting a little more mature and -- maybe it's a little early here, but thinking about the sustainable amount of growth rate for surgeons, is maintaining that 20% surgeon growth, right into '22, a reasonable assumption going forward?

Yes. So this is Joe. So we haven't obviously given guidance on '22. I think as we talked about, we think we're in a strong position to exceed that 20% target. We talked about in terms of number of surgeons on MACI this year. I think as we look forward, we still believe that will be a material growth driver. So what that percentage looks like, I think we'll see. But I think that, as we think about the MACI growth drivers, that's one of them. And the biopsies per surgeon, the conversion rate over the long-term are also growth drivers. So that will certainly continue to be important. But we'll have to see where -- what that looks like next year. But we think that will still be pretty robust into '22, for sure.

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

I want to follow-up on the prior question with regard to how to think about sustainability of growth. And maybe from the perspective of how we should think about the relative volume of potential MACI samples from the surgeons you're bringing on now. It's great to see the high-growth rate. Should -- are there still a number of high-volume sports medicine surgeons that are coming on with some of these more recent adds? And given the success you've had over a now ascended period of time in that market, and maybe you can provide an update as well as to how you would characterize the potential volume and throughput from some of the general orthopedic surgeons, which I know you're calling on as well. But I'm trying to appreciate if whether these 20% adds have the same amount of potential MACI volume pull-through, say, same number of surgeons being added 3 or 4 years ago.

Yes. Thanks, Kevin. Good to talk to you this morning. So I would say that we still believe it's kind of early days in terms of adding surgeons. And I'll follow-on to Joe's response that even in 2019, when we had our 3,000 initial targets, we were adding 25% more biopsying surgeons in 2019 versus 2018 when we were 3 years into launch at that point. Obviously, we expanded our target universe to 5,000 surgeons when we added the reps, and we ended 2020 with 1,500, so less than 1/3. We said we'll grow 20-plus percent. So you can do the math and, call it, 1,850 or so. So you're still barely more than 1/3 penetrated into that surgeon base. So we think there are several years ahead of strong growth in terms of adding surgeons, and there's no reason to think we won't see the same dynamic that we saw based on our initial target surgeons; so that's number one. In terms of the potential for those surgeons, as you know, we're calling on high-volume cartilage repair surgeons. And so from my perspective, at this point in -- as we're penetrating this expanded surgeon base, there's no difference really in the potential for these surgeons. The numbers are really still on a per surgeon basis quite low. They see a very large number of patients with cartilage injuries. And so we don't put any, I guess, governors on what we think any of our target surgeons can do.

Great. And then maybe just a follow-up question on the TAM for Epicel. Appreciate the high area of revenue per patient, higher graft volumes. But can you just comment in a little bit more granularity as to what's driving that in your assumption? Is it a level of medical education and the surgeons are using Epicel in a different way than when going all the way back to when you inherited this product many years ago? Is it -- now that you broadened out more centers you're just seeing numerically more patients who are the optimal users for Epicel is more severe patients. I mean, I just want to understand if there's an opportunity to expand the TAM. I'm just trying to understand how much of it is for the docs using the product differently versus Vericel doing great job of making sure access is more broadly available, so you're getting more of the kind of optimal patient.

Yes. So as I mentioned, we're certainly seeing an expansion of the customer base. And then on an individual patient basis, I think you referenced at a very important point that a lot of it has to do with medical education from our reps and our clinical support specialists. And the -- certainly, there's -- in our medical affairs team as well, where, for instance, at a meeting earlier this year, one of our largest customers presented data on the use of Epicel on posterior surfaces. So that's an additional use for some centers who may have felt comfortable with Epicel on anterior surfaces, might have not used it as routinely, might have used autografts on posterior surfaces. So there's that educational initiatives that we believe are having an impact. And then just given the size and severity of these burns, we've seen, as we've implemented an extra graft program where if during the manufacturing process, we have extra grafts, we ship them, and they get used quite often, which might tell you that the initial estimates of the number of grafts needed might be a little low. And that has a role in Epicel volume as well. So it really is about our clinical support folks and sales reps, engaging earlier in the process, putting together treatment plans and educating the surgeons on optimal use of Epicel that we think is having the biggest impact.

Your final question comes from the line of Arthur He with H.C. Wainwright.

This Arthur for RK. I just had a follow-up on the NexoBrid BLA submit -- resubmission. I may missed -- I just wonder, have you guys scheduled meeting with the FDA? And also between your communication with the regulator, how you're feeling about for the regulatory perform the site inspection timely up to do the resubmission?

Yes. So number one, this -- we certainly, as I mentioned on my -- in my prepared remarks, are actively planning for a Type A meeting with the FDA. So that's a meeting that you request within 3 months after a regular -- an FDA regulatory action. Once that's requested, the FDA has 14 days to respond, and the meeting is typically scheduled within 30 days. So that's kind of the time frame within which we are operating. So obviously, we are looking to do that as soon as possible. In a Type A meeting, it's a little different than, for instance, a pre-BLA meeting, in that you have to submit a meeting package along with the meeting request. So there's more front-end work to be done in a Type A meeting versus, for instance, a Type C pre-BLA meeting where it gets scheduled 90 days out. So you request it early, but then you have to submit a package 30 days ahead of that. So it's just a difference in the timing. Once a package and meeting requests are submitted, the meeting gets scheduled in pretty short order. Again, that's the time frame we're working within. And beyond that, we're not going to comment on when the meeting is scheduled and so on, but we'll certainly update investors and analysts at the appropriate time. In terms of the inspections, that's not a discussion that has -- we've been engaged with at this point. But as we mentioned before, you certainly can resubmit and the inspections just need to occur prior to an approval.

Congratulation on a strong quarter.

Okay. Thank you very much.

At this time, there are no further questions.

Okay. Well, I'll just close by saying thank you to everyone for joining us this morning and for your continued interest in Vericel. As we mentioned today, obviously, the company executed extremely well in the first half of 2021, and we remain focused on continuing to deliver on our long-term strategy to bring our products to even more patients and drive significant growth and profitability in the years ahead. So, thanks again, and have a great day.

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