Good day ladies and gentlemen and welcome to the Vericel Corporation’s Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Gerard Michel, CFO. Sir, you may begin.

Thank you, operator, and good morning, everyone. Welcome to Vericel’s second quarter 2017 conference call to discuss our second quarter 2017 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 projections on forward-looking statements represent our judgment as of today. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC, which are also available on our website. In addition, any 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. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, our Chief Operating Officer; Dr. David Recker, our Chief Medical Officer; and Mike Halpin, Senior Vice President of Quality and Regulatory Affairs. I will now turn the call over to Nick.

Thank you, Gerard, and good morning. Before I turn the call over to Dan and Gerard to review our second quarter commercial and financial performance, I would like to comment on a several business highlights through the first quarter. First, we reported very strong revenue growth for the second quarter driven by the momentum of MACI’s uptick in the first full quarter following the launch. Total GAAP net revenues for the second quarter were $17 million an increase of 32% compared to the second quarter of 2016. Total GAAP revenues for MACI and Carticel were $12.9 million, an increase of 44% over the same period in 2016. As Gerard will discuss in more detail, GAAP revenues for the quarter included $1.4 million of revenue resulting from the settlement of a previously disclosed contractual dispute between one of the company’s service providers and a third-party payer. Excluding this partial reversal of revenue reserves, Carticel and MACI revenues increased 28% compared to the second quarter of 2016. We also saw a significant improvement in gross margins with margins increasing to 55% of total revenues compared to 43% of the net revenues in the second quarter of 2016. I am very pleased to report that all of our key launch performance indicators including the number of surgeons trained, the increase in biopsies, uptick by surgeons that were former on non-Carticel users and total orders for the quarter, all point to an acceleration in MACI uptake. We expect this momentum to continue particularly in light of the fact that we currently have less than 10% penetration into the patient population who could benefit from MACI on an annual basis. Dan will provide further details on both our promotional activities and key launch performance indicators. While MACI uptake is driven primarily by its favorable product…

Thanks, Nick. The second quarter represents the first full quarter of MACI market availability and the first full quarter with our expanded sales force of 28 representatives. Excluding the impact of the partial reversal of the revenue reserve that Nick previously mentioned, Carticel and MACI combined revenue for the second quarter increased 28% over the second quarter of 2016. Reflecting surgeon demand for MACI, Carticel represented only 15% of orders in the second quarter. Last Carticel order was filled on June 29th. And as planned, Carticel is no longer commercially available as of the end of the second quarter. With FDA approval for our MACI clean room expansion plan, we have already begun the process of decommissioning the Carticel clean room in order to expand MACI capacity to handle anticipated growth for foreseeable future. We are very encouraged by the overall surgeon interest and demand for MACI and in particular, that the surgeons who either have never used Carticel or have not used Carticel in the past two years, as they represent a key to long-term growth by expanding the number of implanting surgeons beyond those who routinely use Carticel. To that end, the number of new surgeons using MACI is up significantly in the first half of 2017 and this group represents the fastest growing segment of implants among our target surgeons. By far, the most important leading indicator for near term is biopsies. Biopsies increased 23% in the second quarter and 20% for the first half of 2017 respectively compared to same periods in 2016. As is the case with implant new surgeons and former Carticel users are leading the growth in biopsy. The number of new surgeons providing biopsies and the total number of biopsies from new surgeon has increased over 50% from the first half of…

Thanks, Dan. The commercial team has done an outstanding job in driving MACI uptake, expanding access to MACI and optimizing the patient and physician experience in case management and pharmacy provider services. I am optimistic that these efforts will continue to drive growth for MACI and that our commercial and medical initiatives for Epicel will increase the product’s penetration in the severe burn market. I will now turn the call over to Gerard to review our second quarter financial results.

Thanks, Nick. Total GAAP net revenues for the quarter ended June 30, 2017 were approximately $17 million and included approximately $12.9 million of MACI and Carticel net revenues and approximately $4.1 million of Epicel net revenues compared to $8.9 million of Carticel revenues and $3.8 million of Epicel revenues respectively in the second quarter of 2016. Total GAAP net revenues increased 32% compared to the second quarter of 2016 with MACI and Carticel revenues increasing 44% and Epicel revenues increasing 6% respectively compared to the same period in 2016. MACI and Carticel GAAP net revenues included a partial reversal of a revenue reserve established in the first quarter of 2017. In April 2017, the company received notification of contractual dispute between a contracted service provider and a third-party payer related to certain insurance reimbursement plans associated with Carticel and MACI surgeries performed in 2016 and 2017. This dispute was subsequently resolved and the negotiated reimbursement resulted in the company’s ability to recognize $1.4 million in additional MACI and Carticel revenues in the second quarter. Excluding the $1.4 million partial reversal of the revenue reserve, total revenues increased 21% and MACI and Carticel net revenues increased to 28% respectively compared to the second quarter of 2016. Gross profit for the quarter ended June 30, 2017 was $9.3 million or 55% of net revenues compared to $5.5 million or 43% of net product revenues for the second quarter of 2016. Excluding the impact of the $1.4 million partial reversal of the reserve, gross margins were 51% for the second quarter. Research and development expenses for the quarter were $3 million compared to $4.1 million in the second quarter of 2016. The reduction in second quarter research and development expenses is primarily due to a reduction in ixCELL-DCM clinical trial expenses. Selling, general…

Thanks George. We had a very strong second quarter driven by the accelerating update of MACI, a robust revenue growth and margin expansion reflect the success of our commercial team sales and marketing initiatives coupled with strong physician enthusiasm for MACI. While our focus remains on our commercial portfolio, the RMAT designation for ixmyelocel-T opens up a number of exciting possibilities for the future of the program. Likewise license of our product portfolio to ICT provides an opportunity to develop a global footprint for our product portfolio and to create another potential revenue stream for the company. We believe that these results position the company for both strong, short-term and long-term growth. That concludes our prepared remarks. Now I’d like the operator to open the call to your questions.

So quick question if I may just on this revenue reversal. It looks to me like the majority of that would be related to Carticel. Is that a correct assumption?

Yeah, the majority of that was Carticel, again in prior quarters.

And it looks like the organizational changes that have led to really maximize the MACI effort are taking effect. Do you think there is going to be a point when more sales reps are going to make sense to continue to broaden the distribution effort to more and more surgeons?

Well yes that is something we are looking at right now. Obviously, we are very pleased as Dan mentioned, that much of the growth in biopsies and many of the surgeons who have been trained are either former Carticel users or non-users of Carticel. So clearly there is a larger universe of physicians out there that fall into that category and the appropriate reach in frequency to make sure we are able to access those physicians is something we are considering right now.

Thank you. Our next question comes from the line of Kevin DeGeeter of Ladenburg. Your line is now open.

Hey, good morning guys. Thanks for taking my questions. Just a couple from me. With regard to biopsy growth, I mean really, really strong here. But can you just talk a little bit about how you’re structuring incentives for the sales force? I know you took Carticel over from Sanofi, you really sort of drove home the importance of revenue over and above biopsy growth, I recognize MACI had a different point into adoption curve. But how do we sort of think about the right way to incentivize the sales force to not just grow biopsies but ultimately to grow revenue and how do you work that into comp?

Yes, Kevin, this is Dan. Thank you. There is no incentive for driving biopsies from representative standpoint unless it’s converted to an implant. So, their incentive is solely on implant.

Got it. And appreciate the update with regard to market access for MACI and payer coverage. Can you just characterize on a high level the nature of discussion with kind of the other large payers who have not converted [indiscernible]? Are there substantial differences in just how they were thinking about the way to position MACI relative to the prior position on Carticel or would you characterize the discussions would be largely administrative timing?

Exactly that, it’s administrative timing. Some of the policy approach is that they do an annual review and others have accelerated that review because of the removal of Carticel. So that was strategic on our behalf to try and accelerate MACI approvals and changing policy by others like some of the large payers have their approach and they are sticking to it.

Okay, got it. And then …

As I shared though, it’s important to note that we do get cases approved on a case-by-case basis, it’s just that, that approach is slow for a physician, slow for patients, and can be not just time consuming but also there is other layers of review within that approach.

Understood. And then just lastly from me. With regard to ixmyelocel-T and the upcoming Type B meeting, how do you anticipate communication to investors to play out following that meeting? Do you anticipate coming back and providing us an update based on the acceptance of that or should we assume that no news is good news and you know just how do we sort of know, it's been pretty long updates and a pretty long road since we’ve had a kind of update on the next ixmyelocel-T progress?

Yeah, well as you know we went through this process obviously with the MACI regulatory strategy and so on. And so, you know we will meet with the FDA towards the end of the third quarter. As you know the processes, when it meeting minutes [ph] are then reviewed and exchange probably 30 days after that, we will get a sense on where things stand and so it kind of works nicely in terms of timing at our next earnings call in early November that we’ll be able to share some updates on our strategy going forward.

Okay. Great and then actually if I can just sneak one more related to that. Should we think about the potential timing of any business development around ixmyelocel-T outside the US as being anywhere related to the discussions with FDA or they’re really sort of independent tracks.

I think they are somewhat independent in terms of the start of the conversations, it's certainly as conversations with the FDA progressed, it's certainly assisted in getting the deal done.

Thank you. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Great, echo everyone’s sentiment on the strong topline execution in the quarter guys. So, if I could begin, in terms of -- you call the Carticel orders have been about 15% of orders in the quarter. Is that -- just a housekeeping question, is that 15% inclusive of the revenue reserve at sales because that would imply some organic Carticel revenue but my math and given that it ended on June 29, so we expect a little bleed over Carticel revenue recognition into the third quarter.

The Carticel, that percentage has nothing to do with the revenue reversal reserve and we would not expect any bleed over into the next quarter, as Dan mentioned we’re no longer producing Carticel.

Understood, thank you. And then in terms of the revenue that you guys did in MACI revenue in the quarter. Well how should we think about the productivity of the 28 reps that are up and running now relative to their total capacity given what you did in this quarter?

This is Dan. It really is dependent on how strong the biopsies were prior to the reps arrival in the geography because as we talked about there is about a six-month lag in biopsy to conversion here in plant. So, if a rep walked into a territory that was relatively healthy and that there is a lot of physicians already participating, saying Carticel or early on in MACI we find them to be fairly productive. But I would say in general we’re probably talking about 25% of their overall effectiveness. On the flipside, I will say you do have some standouts, we hired a lot of these representatives from other sports medicine, orthopedic companies that had surgical experience and relationships in place. So, we’ve seen some pretty quick starters but if I had to guesstimate on their overall effectiveness, I would put it in about the 25% bucket.

Appreciate the color there. And then just lastly from me and I will hop back in queue. I mean the gross margins are certainly tracking above expectation and growing in line with the growth that you are seeing in MACI. How should we think about your gross margins overtime given the growth you are seeing in MACI? Thank you.

Yes, we are modeling that approximately let’s say 75% to 80% of the marginal dollar probably close to 80%, on the top-line we'll drop to the gross margin line. Basically, the majority of our costs whether it is facility costs, here in low cost Cambridge or labor costs, [indiscernible] with QATC [ph] folks, the operators, they are here really staffed to our peak funds. So, we have plenty of excess capacity in those months to put more through that with the only marginal cost being materials.

Thank you. We now have a follow-up Mr. Ted Tenthoff, Piper Jaffray.

A question on gross margins too but since that was answered, what were shares outstanding at the end of the quarter?

$32.8 million.

$32.8 million, so right around that same amount. Okay, great. Thanks.

Thank you. And I am showing no further questions at this time. Please proceed with any further remarks sir.

Okay. Well, thank you everyone for your questions and continued interest in Vericel. We are excited about the opportunities ahead. And look forward to reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.