Ladies and gentlemen, thank you for standing by. Welcome to the Vericel's Third Quarter 2022 Conference Call. At this time, all participants are in listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now turn the conference call 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 third quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, let me remind you 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. 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 financial results press release and a short presentation with highlights on today's call are available on the Investor Relations section of our website. I am joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer, Joe Mara. I'll now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'll begin today's call with a discussion of our third quarter financial and business highlight and our expectations for the remainder of the year. I'll then turn the call over to Joe for more detailed review of our financial performance and fourth quarter financial guidance before opening the call to Q&A. The company delivered another solid quarter from a financial and operational perspective as we generated strong Macy revenue growth, record third quarter total revenue, continued profitability and operating cash flow, and made meaningful regulatory progress with respect to NexoBrid and our MACI lifecycle initiatives, which we believe will position the company for further growth in the years ahead. Third quarter total revenue was $38.6 million with product revenue growth of 14% compared to the third quarter of 2021. The company generated more than $3 million of adjusted EBITDA and $4.1 million of operating cash flow, which was our ninth consecutive quarter of positive adjusted earnings and operating cash flow. MACI had another strong quarter with revenue of $31 million as we generated the highest quarterly revenue outside of the seasonally high fourth quarter since the launch of MACI. MACI revenue grew 30% compared to the third quarter of 2021 and sequential revenue growth was 8% over the second quarter, which is noteworthy given that third quarter revenue typically is flat to down compared to the second quarter due to summer seasonality. MACI's 30% growth also was the highest year-over-year quarterly growth since 2019, excluding the comparison to the second quarter of 2020, which was impacted by the widespread shutdowns due to COVID-19. Importantly, we continue to see significant growth in surgeon adoption and remain on track to generate double digit growth in surgeons taking MACI biopsies this year. The majority of surgeons…

Thanks, Nick, and good morning, everyone. Starting with our Q3 results. Total net revenue for the quarter was $38.6 million and was comprised of $31 million of MACI revenue, $7.3 million of Epicel revenue and $0.2 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI had another strong quarter with 30% revenue growth versus the prior year and also increased sequentially with 8% growth versus the second quarter after strong quarterly sequential growth in the second quarter as well. Gross profit for the quarter was $25.2 million or 65% of net revenue, an increase compared to gross margin of 64% in Q3 last year. Total operating expenses for the quarter were $32 million compared to $27.1 million for the same period in 2021. The increase in operating expenses was driven by an increase in employee expenses, continued investment in commercialization initiatives and additional stock-based compensation expense. Net loss for the quarter was $6.6 million or $0.14 per share compared to a net loss of $4.9 million or $0.11 per share for the third quarter of 2021. Non-GAAP adjusted EBITDA for the quarter was $3.3 million and we generated $4.1 million of operating cash flow, representing our ninth consecutive quarter with positive adjusted EBITDA and operating cash flow. We ended Q3 with approximately $133 million in cash and investments and no debt. Turning to our financial guidance. For Epicel, our guidance had assumed that growth would be driven by adding new burn centers and driving additional biopsies within existing centers. Although these key metrics remain above pre-2021 levels, the lower incidence of burn this year has made it more difficult to drive growth over 2021, which have impacted our results. Based on this market dynamic and Epicel revenue performance over the past 2 quarters,…

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

Nick and Joe, I guess to start on guidance, I want to talk about first MACI and then Epicel. We've seen back in the second quarter, I think you guys were up maybe double-digits on, I think, both biopsies and new surgeons. And correct me if I'm wrong on that. But the implied growth was in the mid- to high 30s in the fourth quarter coming into the third quarter. So help me understand kind of what dynamics are specifically impacting [indiscernible] because it would seem that the conversion rate for the biopsy to procedure period is elongating relative to what seen historically?

Thanks, Ryan. So I'll start off on MACI here. So first off, I would say we had a really strong Q3, as we talked about in our prepared remarks, we think the second half is still grow in that mid-20% range. Despite an importantly, the continued decline, double-digit decline on a year-over-year basis in the ankle repair market. So I think it's important, we're up 30% for the quarter after being kind of as you talked about and in that high single-digit growth range over the last 3 or 4 quarters. So [indiscernible] has certainly performed well in Q3. I think on your question around kind of Q4 and the full year. So at this point, we expect kind of a range of $130 million to $132 million, which is just outside of our initial range of $132 million to $141 million -- and I think importantly, to your question, our initial range assumes some improvement in both the market and patient flow, which we have not seen happen and then a corresponding increase in conversion rates which, again, is stabilized but hasn't improved. So I think if you take a step back and kind of think about where we are, we're kind of near that initial guidance despite these challenges in the market, and our other metrics have generally kind of tracked as you talked about, our new surgeon adds we're kind of in that double-digit range, biopsies have continued, but that conversion rate, particularly in Q4 which is our largest quarter as you kind of see the year play out, will have an impact on the second half of the year.

Just to push back, Joe, just to be clear, with the new docs up, are you seeing lower conversions with these newer docs? Or is that specifically lower patient volumes in the door? I'm just trying to understand because it seems like somewhat of a change from maybe historical precedent.

Yes. Ryan, this is Nick. So I don't think we've seen any difference in sort of the uptake for biopsying surgeons. As we said, we are on track for double-digit growth for the year. And just you said, correct me if I'm wrong, we had not said that biopsies were double -- up double digits. We just said they were tracking more in line with sort of implant volume. So there's really -- to your point, it's really all about patient flow. That's the point. When we give you market data that's basically sort of patient flow data, right? And as Joe mentioned, the lower end of our guidance for the year assumed some improvement over 2021. The higher end of the guidance range assumed more gradual normalization. And we haven't seen either of those. The market is down double digits versus last year overall, kind of in line with what you're hearing about procedures generally or physician visits or specialty visits, and so despite those issues around patient flow, we're continuing to point to the lower end of the guidance, which again assume some improvement. And we think that's just good execution by the team. MACI, obviously, the product attributes remain strong. And as Joe said, a lot of momentum in the second half of the year and especially as we look forward into 2023 and beyond as that patient flow should normalize, market should normalize, et cetera.

Okay. And then just turning to Epicel for a minute. I mean, you did guide Epicel similar to the second quarter kind of midway through the third quarter. So kind of a similar question here. I mean -- at what point did you see a change in burn that forced such a drastic change to kind of your expectations on Epicel both in the third quarter and then as we look ahead?

Yes. So Ryan, as we mentioned on our last call, we've recently and right ahead of our last call have been able to access some similar market data, which showed a relatively strong first quarter. We started to see a decline in the second quarter in terms of these large 30%-plus total body surface area burns. And obviously, in July on our earnings call, or early August, you're 1 month into the third quarter. And this data lags, so you don't really kind of get it until a quarter ends. So as we had always talked about, we never call a trend on Epicel on an upside. And because the burns were down for one quarter, and we weren't where we expected to be in the second quarter, it's a little early to say this is what we're going to see going forward. So clearly, we saw a continued decline in these larger burns in Q3, and that sort of lines up with the anecdotal feedback. We're getting consistently across the sales force that the burn center admissions for these larger burns are just down. And so that's kind of why we sort of maintain the similar to Q2 level expectations in Q3 until we kind of saw how it played out a little. So that obviously played out in the third quarter. I would say, as we mentioned on the call that despite these lower patient volumes, which are sort of more in line with the lower pre-2021 levels, we did see a big increase in 2021 once we're able to get the data overall in these larger burns. We continue to have a much broader presence in terms of the burn centers and all the metrics are up versus pre-2021 levels. And even in the third quarter, we did have, despite these challenges, essentially the same number of biopsies as we did even in 2021. The issue is once you have that, and that reflects the fact that we have a broader customer base as the sales forces continue to expand Epicel for the centers using Epicel. Once that happens, though, then you're kind of subject to the variability of episode. So you can have the same biopsies in the quarter like we did, but depending on the timing, depending when the patients are stabilized and ready for treatment, you just can't really call exactly when those treatments are going to occur and that had an impact in the third quarter for us.

And is the fourth quarter Epicel guidance at a level that sufficiently accounts for the variability at this point in your view?

Yes.

[Operator Instructions] Our next question comes from the line of Sam Brodovsky of Truist Securities.

Just ask the first one, just thinking about MACI into next year. Can you just -- what gives you confidence that the product can reaccelerate to 20% growth? And then when we think about the mix of drivers, whether it's surgeons or biopsies or the conversion rate, how should we think about that mix driving growth next year and sort of through the market expansion items with ankle and ankle arthroscopic delivery?

Yes, I'll start with that, Sam. So I'd say in terms of reaccelerating to 20% plus growth, obviously, we just posted a 30% growth quarter in 20-plus percent -- mid-20% for the second half of the year. And I think if you kind of do the math, it will be sort of in the high teens for this year overall. In light of a declining market, right? So I'd say as we think about next year and beyond for the reasons I mentioned earlier, we certainly expect patient flow to normalize, continued surge in growth and so on. And that's what would be the driver for next year. So continued surgeon growth primarily. And if the market doesn't change, we'd certainly expect to be able to grow in the same range. But as things strengthen and normalize, we'd expect growth to reaccelerate.

And that -- when you say assuming you're talking about, second half '22?

No, just for the year, I mean, just for the year, right? If the market doesn't change, we'd expect we'd be able to sort of grow at a similar rate to this year. But that market improvement that we expect in the coming quarters and years will be more of a tailwind for 2023 and beyond.

Got it. That's helpful. And then on NexoBrid, any items there that would lead you to believe there may be any delays towards the PDUFA date and the -- how should we be thinking about the timing of a full launch into the market next year?

Yes. So obviously, we can't comment on the interactions, but I'd say we sit now less than 60 days out from the PDUFA date. The manufacturing inspections are ongoing, which is great and we continue to actively plan for a launch in the first half of 2023. So we're the January 1 PDUFA date. As we've talked about before, we do have to go through the P&T committee approval process for the burn centers. And so -- we've called it kind of more of a set Q2 launch when product will be available and you make your way through that process. So maybe a little bit of revenue in Q2, but really the back half of the year -- second half of the year is when we'd expect to sort of be fully ramping on that. So with all that said, we don't control the FDA decisions, but at this point, we remain on track.

Got it. Just one back on MACI if I can sneak one more in. When you think about the potential for market improvement, do you think you see that as early as the first half of '23? Or is that likely more going to be in the second half weighted?

Well, I can't really opine on that, right? I mean, I think it's hard to call exactly when patient flow will start approaching pre-COVID levels like we saw, for instance, in the second quarter of 2021, certainly feels like we're set up for that, but it's a little hard to say what the exact timing is.

[Operator Instructions] Our next question comes from the line of Jeffrey Cohen of Ladenburg Thalmann.

Nick and Joe, how are you?

Good, Jeff. Thanks.

I guess, firstly, I wanted to circle on with one of Ryan's questions and talk a little bit about biopsies and implementations on the MACI side. Does it seem like that there's a more pronounced drop off period after a certain amount of months or quarters after a biopsy? Or perhaps could some of that be correlated to the general economy?

No, I don't think there's been a pronounced sort of delay. I mean, I think it's just really sort of patient. Again, we use that market data as sort of a proxy for patients going into the office, whether it's for initial visits or after a biopsy is taken, how soon they go in after that. At this point, there's not really anything that we hear about sort of economics around MACI. Obviously, employment is strong, insurance for employees should remain pretty strong. So we haven't really -- that hasn't been an issue at this point.

Okay. And could you give us any color on historic Q4 biopsy levels? What have you found in the past few years? And what would you anticipate on the box side for the fourth quarter? It's not something you necessarily want to break out or discuss.

Well, yes, I mean we don't give sort of quarterly biopsies, but I would just say, generally, the fourth quarter is the strongest quarter across medtech and obviously with MACI as well kind of across the board in terms of biopsies, implants, et cetera. So we'd expect a strong biopsy quarter just like every fourth quarter.

Got it. And then is there any update on -- you had spoken previously about a facility -- moving facility, adding manufacturing space. Is there any update there from the quarter?

Well, the -- nothing in particular other than construction is underway. And so we remain on track as we've talked about before for expecting commercial production once you go through the FDA approval of a new facility in early 2026.

Got it. And then lastly, for just a quick one for Joe as far as modeling purposes. What would you anticipate we should be factoring in for BARDA for Q4 in the first half of '23? Would there be anything that we should be modeling?

No. I think at this point, we're kind of through our initial kind of agreements, and we recognized kind of that through the third quarter this year. So at this point, we're not anticipating certainly anymore in Q4. And certainly, at this point, I wouldn't say in 2023, either would be more potential commercial launch on the NexoBrid side.

Got it. So I expect it to little for the front half of '23 followed by a commercial launch in the back half?

Yes, exactly.

[Operator Instructions] Our next question comes from the line of George Sellers of Stephens Inc.

Thinking about MACI growth into next year, how should we think about the sort of puts and takes, I guess, with the drivers there? How much of that is due to expectations for greater physician adoption and -- versus your ability to sort of drive higher biopsy conversions?

Yes. So consistently spoken about kind of the 3 growth drivers, the first of which is adding biopsy and surgeons. And as we said, we're on track for double-digit growth in biopsy and surgeons this year. And we certainly expect growth in biopsy surgeons for next year. So that will be a significant driver. Patient flow impacts the biopsy per surgeon, right? So as patient flow increases, you expect -- that's been -- typically will grow in a given year, so that would be a contributor as well. And then the conversion rate, we're always focused on that, right, whether it's the sales force sort of having the list of biopsies and patients to talk about with the surgeons or marketing efforts, medical affairs efforts around lesion progression, so address the coverage defects more quickly. So we'll continue to take efforts to drive that conversion rate. And first job is to try to get back to pre-COVID levels, which we would expect over time.

[Operator Instructions] Our next question comes from the line of Arthur He of H.C. Wainwright.

Nick and Joe, this is [indiscernible]. I had -- I had a follow-up on the MACI growth regarding the patient flow into the certain office. So in your view, this is more impacted by your surgeons capacity side or it's more impacted by the patient's intention or willingness to get into the office?

Yes. No, I don't think we've had any discussions with our commercial team around sort of surgeon capacity. Obviously, we continue to add surgeons. They're very enthusiastic about the product. This is always we've been consistently stating just sort of a different in the patient flow dynamics when they go back for surgeries, et cetera. And so that's been consistent throughout -- the past couple of years.

All right. And so my second question is regarding the life cycle management for the MACI [indiscernible] part. So could you just give us more color of the Type C meeting with the FDA for the arthroscopic delivery system? So how -- what's the next step? And how soon we can see these coming to the market?

Yes. So the issue there will be sort of presenting to the FDA our proposed development plan and gaining agreement there. And that's really what will dictate the timing depending on whether the FDA requires clinical development or we can do something more like a human factor study that just demonstrates that surgeons are able to use the instruments, deliver the product, et cetera. And so that -- once we kind of have that discussion with the FDA, and we'll have much more clarity on the time line. We've talked about sort of a mid-decade opportunity for MACI arthroscopic, could be a little earlier with a human factor study, could be a little later if it's more of a clinical safety development program. So that's the nature of the discussion with the FDA.

At this time, I'm showing no further questions. I would now like to turn it back to Nick Colangelo, CEO, for closing remarks.

Okay. Well, thanks, everyone, for your questions and your continued interest in the company. Obviously, the Vericel team here is continue to focus on delivering strong financial and operational results for the final quarter of 2022 and preparing for a potential NexoBrid launch in the first half of 2023, and we look forward to updating you on our progress on the next call. So thanks again, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.