Ladies and gentlemen, thank you for standing by. Welcome to Vericel's First Quarter 2024 Conference Call. [Operator Instructions] 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 Vice President of Finance and Investor Relations.

Thank you, operator. Good morning, everyone. Joining me on today's call are Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. 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 and 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 first quarter financial results press release and a short presentation with highlights from today's call are available in the Investor Relations section of our website. I will now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I'll begin today's call by discussing our financial and business highlights for the first quarter as well as our expectations for remainder of the year. Joe will then provide a more detailed review of our first quarter financial results and guidance for 2024 before opening the call to Q&A. We entered the year with a great deal of momentum after an outstanding close to 2023, and that momentum continued through the first quarter as we delivered another quarter of top-tier revenue growth including record first quarter total revenue and significant growth in profitability. Total revenue for the quarter increased 25% to more than $51 million, which was above the top end of our guidance range. With record first quarter MACI revenue and more than 60% growth in Burn Care revenue. This strong top line growth translated into significant margin expansion and profit growth as we generated record first quarter gross margin, which increased more than 400 basis points compared to last year and adjusted EBITDA growth of more than 300% as the company's profit growth continues to outpace our high revenue growth. Based on the strong start to the year, we're increasing our full year revenue guidance to $238 million to $242 million. MACI had another excellent quarter with revenue growing 18% to more than $40 million, which was above the top end of our guidance range for the quarter. MACI's first quarter performance was driven by strong underlying business fundamentals as we continue to expand the MACI surgeon customer base and drive growth in biopsies. While the first quarter typically is the seasonally lowest quarter of the year, we had the second highest number of MACI biopsies and surgeon taking biopsies in any quarter since the launch behind only the fourth quarter…

Thanks, Nick, and good morning, everyone. Starting with our first quarter results. Total net revenue for the quarter was $51.3 million, representing 25% growth over the prior year, which was above the top end of our guidance range for the quarter. MACI revenue increased 18% to $40.2 million, and total Burn Care revenue increased 63% to $11.1 million, both of which exceeded our guidance for the quarter. Epicel revenue was $10.7 million, an increase of 56% versus the prior year, which represented the second highest quarterly revenue for Epicel to date. NexoBrid revenue was $0.4 million, which, as anticipated, was similar to revenue in the fourth quarter. While underlying hospital orders and units grew significantly versus the prior quarter as previously noted, specialty distributor and hospital ordering patterns as well as inventory dynamics can impact quarterly revenue results. Gross profit for the quarter was $35.4 million or 69% of net revenue, an increase of more than 400 basis points versus the prior year and the company's highest first quarter gross margin to date. Pull-through of incremental revenue to gross profit also remained very strong in the first quarter at more than 85%. Total operating expenses for the quarter were $40.8 million compared to $34.7 million for the same period in 2023. The increase in operating expenses was primarily due to development activities for MACI arthroscopic instruments, increase headcount and related employee expenses and lease expense associated with the company's new facility that is under construction. Net loss for the quarter was $3.9 million or $0.08 per share compared to $7.5 million or $0.16 per share for the first quarter of 2023. Non-GAAP adjusted EBITDA for the quarter increased 325% to $7.2 million or 14% of net revenue compared to $1.7 million or 4% of net revenue in 2023 as adjusted…

[Operator Instructions] First question comes from Ryan Zimmerman with BTIG.

Congrats on a strong start here. I want to ask couple of questions in a multi-part manner. First, on guidance, I want to understand 2 things. Do you still expect -- I think you had mentioned before that you could do NexoBrid sales in the range of -- and correct me if I'm wrong here, Joe, $7 million to $8 million or $8 million to $9 million. I can't remember exactly what it was, but do you still expect that level of NexoBrid sales this year? And the second component of the guidance question is you beat by about $2 million. You kind of -- if you split that between the 2 franchises, guidance is moving up about $1 million, so just talk to us about kind of where you think you're "holding back" between MACI and Epicel for the guidance for the year? And then I have a second question.

All right. Well, I'll start with those and thanks for the question. So I may start on the total guidance and then talk a little bit how we're thinking about kind of the Burn Care on a full year basis. So in terms of the total guide, we had a very strong start to the year in Q1. We're raising our guidance to $238 million to $242 million. So if you look at the midpoint there, which is where our focus, we're up $1 million, so $239 million was our midpoint coming into the quarter. We've increased that to $240 million. In terms of kind of the mix on franchises to start, I would assume the $1 million increase is on the MACI's side and that kind of flows through to MACI. Given MACI, it was roughly $1 million ahead in Q1 in terms of our expectations and guidance. Our metrics are very strong into Q2. I think, relative to the estimate we gave last quarter, which, again, there's multiple scenarios. But the framework we gave, which the starting point for MACI was in the high teens, and I had referenced $194 million. I think you can assume that comes up in our base case, if you will, to $195 million, and the range picks up as well, call it, $193 million to $197 million if you think about kind of high-teens range. The remaining $45 million would stay on Burn Care, and that gets you to the $240 million in total. A couple of things kind of around your question. So one, we don't typically adjust our Burn Care guidance, particularly after the first quarter, we don't adjust it rather after the first quarter of the year. We had a very similar situation last year where we had a…

Yes. No, that's very helpful, Joe. I appreciate all the color. Second question, I should say. And not -- again, not to take anything away from profitability, it was nice to see. On MACI, I want to ask about MACI and the launch of MACI arthro a little bit. As you think about the broader segment of doctors that you can target, one, are you thinking about expanding your sales force? I mean should we think about that from an operating expense standpoint. And then two, you talked about 50% penetration over time by my estimates. I have you had maybe 2,400 docs today. So call it, 7,000 docs, it's 1,000 more. Why is 50%? Why not higher, why not 75% or so. I'm just curious kind of what's driving that thinking?

Ryan, this is Nick. So first of all, on sort of sales force expansion, I think we've discussed it before that this will not -- the launch of MACI arthro adding a couple of thousand targets over 76 territories. That's something that we think we can absorb without having to realign territories which, as you know, can be disruptive. What we will do is volumes continue to increase is to add some of the territory development managers that we had, for instance, last year as well in high-volume territories. And then arthroscopic specialists who can really help surgeons who are new to MACI arthro or MACI in general. And so all in, call it, half a dozen to a dozen folks maybe. So kind of obviously not a very significant expansion, but one that we think will aid with the MACI arthro uptake. The 50% reference that we kind of talk about, as you know, historically, we launched MACI with 3,000 targets, and we got up to sort of 50% penetration. And it was increasing pretty dramatically at the time from 2018 to 2019 the number of biopsies, surgeons was up 25% to, call it, roughly 1,400 for the year, but higher than that cumulatively and then we increased the sales force. So we never got to sort of a terminal sort of penetration rate with the initial size target universe. Obviously, we then increased 5,000. We continue to grow strongly, approaching 50% penetration, and we'll expand again. So again, not have gotten to an ultimate penetration rate. But the point is it will drive, in our view, continued surgeon adoption and growth. And yes, ultimately, there's no reason it can't go above 50%. We just sort of never got to the point where, again, it's matured enough before we had other opportunities to expand the business.

The next question comes from Sam Brodovsky with Truist Securities.

Congrats on the solid start and great profit number. I did want to dig into that profit side, I think a little bit, Joe, did I hear you right you said 2Q margins, we should expect them to be similar to 1Q?

Yes.

And then just sort of taking that in mind keeping the gross margin guide for the year at about 75% and presumably your lowest -- excuse me, 70% when presumably the lowest quarter of the year is 69% and hopefully, you can step off from that. Just how you're thinking about that and what can give you confidence to potentially think about moving that range up for gross margin or EBITDA.

Yes. No, I certainly appreciate the question. I mean, obviously, kind of a great start from a profitability perspective. As we've been talking about quite a bit, in particular over the last few quarters, our focus is driving the top line growth, but also kind of margin expansion and our profitability metrics. So I think to your point, in Q1, obviously, really strong kind of both from an adjusted EBITDA margin perspective, being the mid-teens gross margin in the high 60s. That was a bit ahead of kind of trends and expectations, if you will. I would say, as we think about the balance of the year, I mean that can certainly still ebb and flow a little bit. And I think the right baseline is obviously Q1 is up to a very strong start. You can look at the prior year, kind of mid- to high 60s, and we would expect on a full year basis, gross margin to expand from 6% to 8.5%, if you were last year to that 70% range. So again, it can ebb and flow a little bit throughout the year. But I think to the kind of a key part of your question, which is, I think based on that strong start, we certainly have the potential, and I think we're in a good position to potentially be higher than initial guidance, but given we're just kind of 1 quarter in, and these are kind of approximate numbers. We haven't updated them yet, but they continue to be a focus, and these are kind of both numbers in the bottom line and the gross margin that we want to continue to improve. And the other piece on the gross margin side that we look at is kind of the pull-through, which was very strong in the quarter, kind of the incremental revenue pull-through well above 80%, I think over 85%. So a good start and expect strong quarters throughout the year, and we'll kind of monitor that. But I think we're in a good position to be kind of on the higher side, if you will, particularly on the gross margin side.

Great. That's super helpful. And then shifting to NexoBrid. I wanted to ask a bit of a higher-level question there, obviously, without providing guidance. But just as we think about where the company is going to be positioned heading into 2025, you already have almost half of centers in the funnel to a certain extent. Should we think about most, if not a good portion of the target centers being fully onboarded and ready to go in '24? And then how do we think about the sales strategy changing in 2025 as can you fully shift to just driving surgeon utilization?

Sam, this is Nick. I'll take that one. So for NexoBrid, again, I think anyone who's done market checks or for instance, participated or attended the American Burn Association meeting you need to see sort of the super high interest in the product from the burn care community. Obviously, as you alluded to, sort of performing well on sort of the burn center KPIs in terms of P&T submissions, approvals, initial orders and most importantly, excellent surgeon feedback on patient outcomes for those who have started using the product. So we think as we've been kind of beating the drum on, this is a build year as you get through the sort of processes. I think it's pretty well understood in the industry. We think we'll be in a good place by the end of the year where yes, we would expect the vast majority of P&T submissions to have been completed and hopefully approved or in the process of being approved. And as we alluded to, once you get through the P&T committing process, there are still other procedures and processes that hospitals need to get through to be able to order the product and then start utilizing it. So we're hyper focused on that, as you might imagine, and at the level of sort of KPIs and getting the centers up and running, we're pretty pleased with that performance. Lastly, I would just say, as you know, changing the standard of care from a surgical excision procedure to a topically applied biologic. I mean, surgeons have been doing the same thing for decades. And so I think the adoption, again, moves at different paces in different hospitals, but we certainly have not changed our long-term view for NexoBrid just you go through the process.

Our next question comes from George Sellers with Stephens, Inc.

Congrats on the quarter. Maybe on Epicel. I'm just curious if you could give some additional color on what drove the beat in the quarter? Maybe how the underlying market performed? What firm sizes looks like, things like that? And also your perspective on the impact, some sort of halo effect potentially from NexoBrid, if that was a significant driver as well.

George, it's Nick. So just starting with the burn care market. As we've talked about, we do have access to market data around large 30%-plus body surface area burns. And I would say the market was kind of normal to be down a little bit. So that certainly wasn't driving Epicel performance. It really was just as we've talked about before, we do have a larger footprint now. We're in more burn centers than we used to be, as I alluded to in my comments, we certainly saw a significant contribution to Epicel revenue for more formerly dormant or newer accounts that we're calling on for NexoBrid, so that is a halo effect that we expect an additional pull-through on Epicel. And I think we're seeing that as we kind of move through the initial launch phase for NexoBird.

Okay. That's really helpful. And then maybe on NexoBrid, I'm just curious if you could give us some additional detail on some of the inventory and specialty distributor impacts, how we should really think about those 30 centers that are starting to see orders how that will flow through the P&L and then maybe the cadence as we think about the rest of this year, where inventory levels are now and how that compares to what you're seeing in terms of actual utilization.

Yes. So George, this is Joe. I'll take that one. So if you kind of think about NexoBrid revenue during the quarter, and we talked about this on the last call, we expect kind of a similar revenue range. We ended up about $400,000 kind of similar to last quarter, about $500,000. I think it's important, as kind of Nick talked about in his prepared remarks, the strength in the center level KPIs continue to be very strong as part of your question there. I think importantly, we saw increasing -- increases in the number of ordering centers a significant increase from hospital orders to our specialty distributors and also significantly more patients treated in the quarter. So I think as kind of in addition to that, as we think about kind of our revenue trends, particularly early on, I think this is as much kind of an early launch dynamic. If you think back, the first quarter in the market, Q3 of last year, we had kind of some destocking. The second quarter in the market in Q4, I'd say there was a fair amount of hospital stocking, if you will, where they were starting to order product and kind of get it on their shelves, particularly the early adopters. And then just as a reminder, again, we recognize revenue when our specialty distributors order, and this can vary each quarter depending on ordering patterns, their inventory levels, et cetera. And really what happened again during the first quarter the hospital orders to the SDs went up. But our orders from our specialty distributors to our 3PL, where we recognize our revenue came down. And essentially, what that means is the specialty distributors managed to a lower inventory level. And you do often see as kind of launches progress, the distributors will kind of get to different inventory levels. So I think as anticipated, a little bit choppy out of the gates. But I think as we continue to progress throughout the launch, it's really going to be about continuing to add centers, treat additional patients, see those metrics come up and also really that additional utilization as centers become more comfortable. So there's certainly going to be an element of inventory dynamics as we go through this. But generally, I think as we move forward, particularly in the back half and into next year, it's really going to be driven by patient utilization and hospital ordering, and this should be kind of a lower component, if you will, on the revenue side.

The next question comes from Swayampakula with H.C. Wainwright.

This is RK from H.C. Wainwright. A couple of quick questions. So, Nick, as your team continues to increase the targeted surgeons, right, from 5,000 to 7,000. And also in anticipation of the MACI arthro. I'm just trying to understand what sort of relative benefit could we start seeing from this increase in the cartilage repair business as some of the surgeons or most of the surgeons work on both types of injuries, the cartilage and arthro.

Yes. So MACI arthro is going to address cartilage defects as MACI [indiscernible] current product does. As we've discussed, the instruments that is targeted to smaller defects on the femoral condyle, which makes up the largest part of the addressable market or 20,000 patients in a year. So while MACI is certainly a go-to patellofemoral defects, larger condyle defects, this allows us to have a preferred way to administer the product on those smaller defects on the femoral condyle. So we think, obviously, that will allow us, as I mentioned on the call, to have greater penetration into the largest part of the segment. So the impact is presumably increased basically procedures when we have an arthroscopic delivery option.

Perfect. And then just trying to understand the commercialization, I'm not sure it's the right word, commercialization process for NexoBrid. So once the centers get the P&T approval and what's the time lag between -- I know you are saying that there are some additional procedures that need to get done before they order product, so I know it's still early, but to call it a trend. But what are you seeing currently as the time line between approval and initial order?

Yes. So that -- certainly, it differs by hospital and there could be some that are on the quicker side and there can be some that take weeks to months to be able to get what is called the Epic system, which is what they use in the pharmacy to order all their products essentially. And before a product gets into that system. In certain cases, it can take quite a bit of time. So we obviously are focused on helping centers kind of navigate that process if they happen to have an issue. But it really varies. Like I said, from -- it can be days or weeks to -- it can be months in certain cases. So those are just some of the kind of common processes and procedures that different hospitals have to go through before they're really able to start ordering product in treating patients.

So. One last question for me. Just within this burns franchise, as we had historically noticed how Epicel, we could -- I mean, at least I know in public comments, you always said that I cannot predict how Epicel business will grow from quarter-to-quarter and year-to-year for a bit of time. Are we going to see a similar trend with NexoBrid? Or do you think NexoBrid's growth will be quite a bit smaller than what we had seen with Epicel.

Well, I would say that the way we've always positioned it, RK is that with Epicel, if you think about the 40,000 hospitalized burn patients each year is really only call it, 600 to 800 surviving patients each year. So very small numbers, and that's what leads to the variability you see in Epicel. With NexoBrid, obviously, once you get through these initial quarters where you've got, again, centers coming on board at different paces, you've got inventory and ordering pattern dynamics going on because in our view, 3 quarters or 30,000 patients a year are eligible for NexoBrid treatment that over time as it ramps up and become more kind of consistent basis the overall franchise should have less variability.

Yes. And I would just -- Joe, I'd just add just kind of as we're thinking about the year, kind of more in the near term and just a couple of comments just to add to that. I think obviously, Epicel can vary, but we have seen certainly some strength now over several quarters. We came into the year kind of expecting to grow over last year's run rate. We'd like to think Epicel kind of sort of a baseline from a quarterly run rate perspective. We came in with an exit rate kind of in the low to mid. Obviously, we're well ahead of that in the first quarter. It's -- you can't really plan on that. I will say that -- I think we certainly have an expectation that it can stay at these higher rates, we came into the year and kind of said, 9 plus or mid-9s. So when you're thinking about the second quarter, we did around $10 million, I think we would certainly expect kind of Epicel to be in that $9 million plus range within that $10 million. There certainly could be some variability there, but I think that's a reasonable expectation. And similarly, I think for the rest of the year, which is kind of how we're thinking about Epicel as well. So there could certainly be variability. And I would agree with Nick, kind of over time, we would expect NexoBrid to continue to build and sequentially grow. That's sort of the expectation as we close out the year and into next year.

The next question is from Mike Kratky with Leerink Partners.

This is Brett on for Mike. Congrats on another great quarter. You guys saw a strong pull-through in 1Q '22, obviously. How should we think about the durability of this operating leverage into the second half of '24 and '25 while you drive penetration in both the existing market and the new arthroscopic market once approved. And then obviously, you have the ankle improvements or investments in 2025. So how is that going to impact the durability of the operating leverage?

Yes. And I assume you're referring to 1Q '24, 1Q '23, but. Yes, yes. So I think -- so as we talked about earlier, obviously, a great first quarter from a kind of P&L perspective across the board, margin expansion, the pull-through is very high, et cetera. I do think on the gross margin side, sort of our expectation for quite a while, our kind of, call it, midterm expectation was to get to that 70% plus on a gross margin level. And obviously, our guidance this year is at 70%. And I would say, certainly, as I talked about earlier, it could ebb and flow kind of within a year when you look at margins or pull through, but on a full year basis, that is kind of tracking in a very good place to kind of get to those targets. And I would say from a gross margin perspective as well, I mean there's definitely a lot of efforts right now kind of thinking about in the right way, where can we find efficiencies within our processes, across our spend, vendors, et cetera. And that's going to be pretty important as we move into a new facility in the next couple of years as well. So I think a lot of work on the gross margin side and sort of a lot of focus to kind of make sure we're driving kind of the right savings there. On the kind of operating expense side, as part of your question, I mean, there are some investments that we will need to make. I mean, we referenced arthro MACI, there's some development costs there, but obviously, that's an important initiative. Similarly on ankle over the next few years that will kind of make its way in the P&L. But that doesn't change from a bottom line perspective, our expectation to be trending toward that 30% adjusted EBITDA target that we've talked about for quite a while as well. So I think it really starts with the top line growth, but a lot of focus on kind of making sure kind of managing the rest of the P&L, but it also just shows just the operating leverage kind of within the business, particularly as we start to scale. So I think Q1, obviously, was a great quarter, but I think a good starts the year, but as we think over '24 and '25 and beyond, I mean, that's going to remain a focus, and we think we'll continue to see that leverage across the P&L.

Got it. That's helpful. And then 1 more. I guess I want to go back to arthro. You mentioned 6 to 12 new reps likely. How should we be thinking about that -- the difference in outreach for those reps versus existing MACI when they target those new surgeons. And then obviously, the shape of that penetration curve may be different versus what we've seen with legacy MACI, how should we be thinking about the steepness of that curve and if there's any differences to call out for the next couple of years?

Yes. So as I mentioned, we will be adding, I guess, a couple of different profiles. So number one is kind of territory development managers who can kind of be at biopsies at surgeries, et cetera. And then there's arthroscopic specialists who are really kind of training and kind of spreading best practices for the arthro delivery of MACI. So the really in support functions, as I alluded to on the call, when you think about an extra couple of thousand targets over 76 territories you're talking a dozen or 2 new targets per territory. Those could easily be targeted by existing sales reps in -- in terms of the -- so it doesn't again require a realignment or a wholesale increase in the sales force. When you talk about uptake, I think you can think about a couple of different surgeon segments. So there's current MACI users. We'd like to a lot of their procedures in certain parts of the need, they can expand towards if they focus on the patella with MACI and now they have an option, less invasive option for treating femoral condyle defects, that certainly can is an instance where you've take an experienced MACI user and they start using more broadly so that can have a very quick uptick as you might imagine. We also have new surgeons who because you take a biopsy and then the median time from biopsy to implant is roughly 4 months. There's always a time lag there. So there'll be kind of having a prospective impact on the business there. So it will differ by segment. But again, you're taking a well know the product with great clinical outcomes and offering surgeons and options where MACI can be administered less invasively in an area of the need with the largest number of defects. And so you could have a very pretty quick uptake for those who are interested in using MACI arthro.

This concludes the question-and-answer session. I would now like to turn it back to Nick Colangelo for closing remarks.

Okay. Well, thanks, and thanks, everyone, for your questions and continued interest in Vericel. Obviously, the company had a great start to the year, and we expect to deliver another full year of strong financial and operating results in 2024. So we look forward to providing further updates on our next call, and have a great day.

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