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Vericel Corporation (VCEL)

Q3 2016 Earnings Call· Mon, Nov 7, 2016

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Transcript

Operator

Operator

Welcome to the Vericel Corporation's Third Quarter 2016 Earnings Conference. [Operator Instructions]. I would now like to turn the conference over to your host for today's conference, Gerard Michel, Chief Financial Officer,. Sir, you may begin.

Gerard Michel

Analyst

Thank you, operator, and good afternoon everyone. Welcome to Vericel’s third quarter 2016 conference call to discuss our third quarter 2016 financial results, as well as the progress of our commercial business and development programs. 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 and all of our projects and forward-looking statements represent our judgment as of today. These statements may involve risk and uncertainties that are described lawfully in our filings with the SECURITIZATIONS which are also available on our website. In addition any forward-looking statements represents and used only as of today and should not be relied upon as representing our views as of any subsequent date. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, Vericel’s Chief Operating Officer; Dr. David Recker, our Chief Medical Officer and Dr. Ross Tubo, Vericel’s Chief Scientific Officer. I will now turn the call over to Nick.

Nick Colangelo

Analyst

Thank you, Gerard, and good morning everyone. Before I turn the call over to Dan and Gerard to review our third quarter and year-to-date commercial and financial performance I would like to take a few minutes to comment in our business as we enter a very exciting time for the company. Over the past two years our goals have been very clear. First, stabilized the commercial business that we acquired Sanofi and second build a solid foundation for long term growth. We've been executing against these goals with relatively small commercial investments in order to firmly place the company on a path to profitability. Heading into 2016 which was a sound investment strategy as we essentially were optimizing business that consisted of two very mature products. We certainly have met our goals over the past two years as we take in a business that had declining revenues of approximately 42 million in the U.S. and negative gross margins prior to our acquisition and growing revenues that accumulative annualized growth rate exceeding 10%, as such we expect to achieve double digit revenue growth again for 2016 a gross margins of approximately 50% for the year, our second full year on in the business. Importantly with the FDA approval of the Epicel Humanitarian Device Exemption supplement earlier this year which now allows the company to sell Epicel without the prior profit restrictions and as we approached the PDUFA goal date for [indiscernible] of January 3, 2017 this quarter marks a transition from building a foundation for the business to investing for what we believe will be a period of significant growth for the company. The FDA approval of the Epicel HDE supplement which revised the label to include pediatric patients and specify the probable survival benefit of that Epicel allows the company…

Dan Orlando

Analyst

Thank you, Nick. Starting with our third quarter commercial results. Total net revenues for the quarter ended September 30, 2016 were $10.9 million and included Carticel revenues of 8.3 million and Epicel revenues of $2.6 million. Total Carticel and Epicel net revenues for the quarter were essentially flat compared to total net product revenues in the third quarter of 2016. Carticel net revenues increased $0.6 million and Epicel net revenues decreased $0.6 million compared to the same period in 2015. Given that Epicel offset revenue from Carticel that increased it's important to provide some context around Epicel's Q3 performance. First the third quarter which includes the late summer month is by far historically the longest quarter of the year for Epicel graft [indiscernible]. The lower volume in the third quarter creates extreme variability as demonstrated by the fact that in the past five years third quarter volume had fluctuated between 60% growth and 30% decline versus the prior year third quarter and in fact that still volume increased 46% in the third quarter of 2015 versus the prior year. This year Epicel orders remained flat in the third quarter but the average number of grafts per order was lower than the previous year. This is a function of the apparent variability at patients injury and several other factors. More importantly we believe that's a fundamental and the ethics of business remains strong. Since the acquisition of Epicel we have achieved cumulative annualized revenue growth of 33%. This growth is a direct result of expanding our sales force to five representatives and a dedicated sales director and we expect this growth to continue. In addition as a result of the HDE supplemental approval for earlier this year we implemented a price increase for Epicel as of October 1, which will further…

Nick Colangelo

Analyst

Thanks, Dan. We share your enthusiasm for the growth prospects for Epicel and our cartilage repair franchise and I believe that the investments we're making in expanding our medical and commercial teams and implementing impactful new programs will yield benefits for patients, physicians and shareholders and drive significant growth for our business going forward. I will now turn the call over to Gerard to review our third quarter financial results.

Gerard Michel

Analyst

Thanks, Nick. Total net revenues for the quarter in September 30, 2016 were $10.9 million and included $8.3 million of Carticel net revenues in $2.6 million of Epicel net revenues. Total Carticel and Epicel net revenues for the quarter ended September 30, 2016 were approximately equal to total net product revenues in the third quarter of 2015, but Carticel net revenues increased 600,000 and Epicel net revenues decreased approximately 600,000 compared to the same period in 2015. For the nine months ended September 30, 2016, total Carticel and Epicel net revenues were $37.9 million and included over $26.1 million of Carticel net revenues and over $11.7 million of Epicel net revenues. Total Carticel and Epicel net revenues increased approximately 8% compared to the first nine months of 2015 with Carticel revenues increasing 9% and Epicel decreasing 5% respectively compared to the same period in 2015. Gross profit for the quarter ended September 30, 2016 was $4.1 million or 37% of net revenues compared to $4.5 million or 40% of product revenues for the quarter of 2015. The reduction in gross margin was primarily due to a decrease in the average number of grafts per order for Epicel and increase in certain material usage and increased facility run expense. Gross profit for the first nine months of 2016 was $17.1 million or 45% of net revenues compared to $16.5 million or 46% of net revenues for the first nine months of 2015. As noted in our earnings release during the third quarter we received FDA approval for in-house manufacturing of 3T three cells which are used in the Epicel manufacturing process as a feeder layer for the growth of patient cells. This changes prospective yield more than a $1 million in annual savings in cost of goods sold once the current…

Nick Colangelo

Analyst

Thanks, Gerard. It's an exciting time Vericel as head into our historically strongest quarter of the year, prepare for the potential launch of MACI and expand our promotional efforts for Epicel. We believe that MACI will appeal be a much broader audience for orthopedic surgeons, in addition to simpler administration MACI will be differentiated from its competitors based on it's clinical profile as demonstrated in the Summit Study, its long history of successful use outside the United States and numerous published academic studies. We believe that the clinical profile of this exciting potential new product coupled with expanded medical fairs and commercial teams and an improved surgeon and patient experience will drive significant growth for our cartilage repair franchise in 2017 and beyond. Likewise with our expanded Epicel sales force a new brand plan initiatives we also expected to continue our long term Epicel growth trend as we train more burn centers and surgeons on techniques to best utilize Epicel. As we increase investment in our commercial products we'll continue to carefully manage our investment in the ixmyelocel-T program as we attempt to monetize this valuable asset in the near to medium term timeframe to meet our obligations to treat patients in the open label crossover portion of the study. Finally with the expanded credit facility in term loan the Silicon Valley Bank and Midcap Financial and the at the market sales agreement with Cowen, we believe that we have adequate access to capital to fund the business as we continue our march to profitability. That concludes our prepared remarks. Now I'd like the operator to open the call to your questions.

Operator

Operator

[Operator Instructions]. And our first question comes from Chad Messer of Needham & Company. Your line is open.

Chad Messer

Analyst

I think like you I'm getting more and more excited about the potential launch of MACI in just a couple of months or at least people would say in a couple of months. Just a few questions as we look through the end of the year for the year. For Epicel you mentioned a price increase going into the fourth quarter. What's the per unit sort of increase percentage wise and price there?

A -

Analyst

I hope -- I'm not going to give you the specific number, I will say probably relatively modest but we think it's important to be careful as we raise the prices for these burn centers because they need a fair amount of lead time to budget for increases. So it's probably the first step but again we're trying to be modest and make sure we don't impact the business on the volume side with the increases.

Chad Messer

Analyst

And then the second I just I just wanted to check on something I think I heard you just said and if I heard you right you seem to have a lot of optimism for even the fourth quarter here of '16 so a double digit increase in lowest double digit number I know being 10% off of last year implied something that the north of $19 million for Q4, did I hear that right? You guys got excited about your fourth quarter?

Nick Colangelo

Analyst

Well I will start and Gerard can add some commentary as well. So you know we've been saying and I think we talked about this a lot on our last call that you know this is a highly variable business, we have had quarters that are up 30% down low single digits this quarter kind of fell within that range but overall on a rolling fourth quarter basis we have typically been in the 10% to 20% growth rate and yes we have said all along that we expect that to be the case ahead of the MACI launch and then we expect higher growth prior or post the approval or potential approval.

Gerard Michel

Analyst

I wanted to add -- I was just very specifically to do 10% this year fourth quarter has to be fantastic I think that would be great if it's true.

Nick Colangelo

Analyst

It definitely reflects the seasonality we have seen in the past. I think if you look at what we've disclosed in the K and the Q about seasonality you take with what we've done to-date this year, I don't think it's much of a reach to get there.

Chad Messer

Analyst

OK. I think it's fantastic, I'm trying to gauge your level of confidence. It's 10% for the year it's great, it would actually be a much bigger number increase over what you've done in the fourth quarter and that's already understanding very well that fourth quarter is your best quarter. You turned to be expense side, I know you talked about a couple of items drawing up SG&A in the third quarter and namely a new reimbursement provider and some may see professional expenses and preparation for launch those make good sense to me and sounds like some of that may or may not be a onetime just if you can comment on that and then irrespective of that we were understandably now going through about eleven quarters of pretty steady increases on the SG&A understandable for all that you guys have been out there doing and trying to accomplish. Just wondering if we could take a step back and if you could comment on what you think the right level of investment through the end of the year and into '17 on the SG&A side is for the business opportunity you feel is ahead of you?

Gerard Michel

Analyst

I think you put your finger on the right dynamics regarding the increase with SG&A. There were some things we had increase spend on just to be a compliance pharmaceutical company. So we are not thinking with Sanofi that we need to be relied upon certain services from them or we had to build a couple things out. So there will be some -- there is something baked in there. There definitely were some startup costs associated with our collaboration with [indiscernible] at one time. We do have annual regular fees will be paying them now but some of that expense you see this quarter are one time startup costs. But we're definitely going to be increasing SG&A, moving into the launch quarter significantly, I would expect SG&A to be fairly higher in a launch year but then the drop down after a couple of quarters to a more reasonable steady state right. One thing I would reinforce is something that that Dan and Nick have both said in the past, it doesn't take very many grafts or implants for one of these reps to pay for themselves. So you know we're not putting a lot out but we don't think we can get a payback on rather quickly.

Operator

Operator

And the next question comes from Kevin DeGeeter of Ladenburg. Your line is now open.

Unidentified Analyst

Analyst

This is actually Jay Coby [ph] on for Kevin. So on Epicel now that you’ve had the label -- the revised label for a few months. Can you comment on how the discussions with your sales reps and perspective burn centers have progressed?

Dan Orlando

Analyst

Sure. It's gone from the physicians who aren't using it are not impressed by a new label, they really have seen that first hand. So that doesn't really change their mind but we have had physicians that have used the product for some period of time for years and they really didn't know that the product has demonstrated survival benefit and to have it in the label I know the hurdle with the agency to have that kind of claim. So it's been important and it becomes important for us as we gear up for 2017 and preparing peer to peer training education, broadening the products voice and that being a critical message within it. In addition we've had a very steady since we've purchased this business, we've had one representative, now we're upto five so we've had a very steady increase in the number of new facilities coming onboard and certainly survivability gets their attention and we've been able to bring people you have used the product or burn centers that have used product five years ago back into the fold with new promotional messaging emphasis and enhanced our training because of that.

Unidentified Analyst

Analyst

And then what's typical stales cycle look like to get one of these centers that used to use the product in fact using it again?

Dan Orlando

Analyst

Not as rapid as -- obviously these patients are critical and if you're treating typically about 70% burn area, 60% to 70% burn area so patient could be treated anywhere from 40 over a 100 grafts. So the preparation of the patient starts days before the actual grafting and then of course -- grafting is a fairly major event and then there's a takedown later on and rehabilitation for the patients so it's a fairly involved process. So we start with training the staff and making sure that reimbursement, hospital facilities and support staff are all trained prior to the first patient coming in and really if the facility has been done Epicel say the last two or so years you almost have to start from scratch. So we're really pleased to have a very consistent base of customers growing and I would say the cycle is a minimum of about three months if you have a very engaged and well-intended burn center but it can take up to six months.

Unidentified Analyst

Analyst

And then just lastly how should we think about the build-out of the Epicel team over the next year as you work on the Epicel brand plan? Thank you.

Nick Colangelo

Analyst

We have target in mind that we can potentially grow to I will say that and we have five today, if not two times that number but if we continue to bring on new burn centers and they continue to order a regular basis then we can see this group continue to grow by a rapture over the next several years but we've measured our additional headcount based on the number of new accounts that are coming on board and we'll continue to evaluate that, but given the referral patterns for burn centers and the critically burn patients it's maybe 10 less than 10 representatives to be able to cover the universe.

Operator

Operator

[Operator Instructions]. And that does conclude our question and answer session. I would now like to turn the call back over to Nick Colangelo for any further remarks.

Nick Colangelo

Analyst

Okay. Well let me just close by thanking everyone for your questions and your continued interest in Vericel as we have stated here today we're extremely excited about the opportunities ahead and look forward to reporting on our progress on our next call. Thanks and have a great day.

Operator

Operator

So ladies and gentlemen thank you for participating on today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.