Ladies and gentlemen thank you for standing by and welcome to the Vericel Corporation Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today. Gerard Michel, Vericel's Chief Financial Officer. Thank you. Please go ahead.

Thank you, operator and good morning everyone. Welcome to Vericel's second quarter 2020 conference call to discuss our financial results. 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 and forward-looking statements represent our judgment as of today. These statements may involve risks and uncertainties that could cause actual results to differ from expectations and are described more fully in our filings with the SEC, which are also 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 will now turn the call over to Vericel’s President and Chief Executive Officer, Nick Colangelo.

Thanks Gerard, and good morning everyone. In light of the ongoing COVID-19 pandemic, we're very pleased with our second quarter results, which exceeded our base case scenario from April across several measures including revenue, profitability, and cash utilization. Total net product revenues for the second quarter were $20 million including approximately $15 million of MACI net revenue, and $5 million of Epicel net revenue. As we'll discuss in more detail, we saw a very strong recovery as the quarter progressed, and COVID-19 restrictions on elective surgeries were lifted across the country. Total revenues which decreased 23% for the quarter, declined approximately 78% in April and 32% in May, compared to the same periods in 2019, and increased approximately 29% in June compared to June of 2019. Beginning in March, we implemented several measures to ensure that we maintained our near and long term growth opportunities, and that we were in a strong position when we emerged from the initial COVID-19 restrictions. In addition to continuing to manufacture MACI and Epicel and provide case support to surgeons and patients, we also implemented appropriate reductions in discretionary spending across the organization and deferred non-essential capital expenditures. These actions allowed us to partially offset the decrease in revenue, thereby minimizing the impact on profitability, and importantly allowed us to keep our talented workforce intact to ensure that we maintain operational readiness for what turned out to be a more rapid recovery and elective surgeries than originally anticipated. The reductions in expenditures together with a significant accounts receivable balance entering the quarter allowed us to minimize cash utilization. We ended the second quarter with approximately $81 million in cash and investments and no debt, compared to $79 million at the end of 2019. So all in all, we were able to deliver a solid…

Thanks Nick. Starting with the second quarter results, total net product revenues for the quarter ended June 30, 2020 decreased 23% to $20 million compared to $26.2 million in the second quarter of 2019. Total net product revenues for the quarter included $15.1 million of MACI net revenue, and $4.9 million of Epicel net revenue compared to $20.8 million of MACI net revenue and $5.3 million of Epicel net revenue respectively in the second quarter of 2019. Gross profit for the quarter ended June 30, 2020 was $11.4 million, or 57% of net revenues, compared to $17.1 million or 66% of net revenues for the second quarter of 2019. Total operating expenses for the quarter were $19.7 million, compared to $37.3 million for the same period in 2019, which included $17.5 million upfront license payments to MediWound for North American license of NexoBrid. Excluding the $17.5 million license payment operating expenses remained essentially flat as reductions to discretionary spend and variable cost reductions offset the cost increases associated with the MACI salesforce expansion earlier this year. Vericel’s net loss for the quarter ended June 30, 2020 was $8.3 million or $0.18 per share, compared to $19.8 million or $0.45 per share for the second quarter in 2019, inclusive of the $17.5 million license payment for NexoBrid. Non-GAAP adjusted EBITDA loss was $3.5 million for the quarter compared to positive adjusted EBITDA of $1.8 million in the second quarter of 2019. Turning to the third quarter, we have based our guidance on our standard biopsy conversion model, which projects implants based on biopsies received and historical conversion rates, and then adjusted this output to take into account key COVID-19-related factors. While biopsies were down 25% in the second quarter, June biopsies were up 23% a robust trend closer to the underlying…

Thanks Gerard. As I mentioned earlier, we're pleased with the second quarter results in light of the current environment and while uncertainties remain we expect our business to further strengthen in the third quarter. We're also looking forward to working with the FDA during the Nexobrid BLA filing and review process as we seek marketing approval for Nexobrid BLA in the U.S. in 2021. That concludes our prepared remarks. As a reminder, the presentation available on our website provides highlights of today's call. And now I'd like to turn the operator to open the call to your questions.

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

So I wanted to just follow-up on the commentary about the third quarter and the patient flow that you expect into the third quarter. I think Gerard, you said about 80% will be normal patient flow and 20% is catch-up and I'm just curious if you could elaborate a little bit on those metrics. And kind of how you came to that only because I guess the question that people may have is? Are those 80% in anyway being made up from patients that just didn't show up necessarily in the second quarter. And so, to parse out some of those dynamics in the third quarter in terms of biopsies that we know we're loss versus new patients, and those patients that are being made up. I'll stop there, and let you elaborate?

Sure. So we have as you know, a bit of visibility into the back end of our pipeline because of the biopsies that come in. And if we look at the biopsies that came in hands okay, that we know we have sitting in liquid nitrogen at the moment, we can predict how much should have converted in the very end of the first quarter and throughout the second quarter. We know those that didn't convert, and we don't know exactly which ones should have converted but it’s a large number if those that did not convert we view that as our catch-up pool that we know about all right. And we're predicting that about 20% of the third quarter numbers will come from that cash-up flow, and that will almost fully exhaust not quite properly fully - some close to full exhausting that catch-up pool. Going forward after that, we think the normal biopsy flow and conversion flow is going to normalize. And therefore looking into the fourth quarter, for example, we think we'll probably under this normal placement flow at about the same growth we're expecting in the third quarter just to give you a little bit of light as to what's going to happen a little later in the year based on the model. Now we're not assuming this as a dramatic increase in biopsy catch-up, we're not looking for a big tidal wave of biopsies to catch-up that might happen. We're not taking that into our forecast. We don't think that's prudent. We think things are going to - just kind of get back to normal, we'll get a catch-up out of the biopsies that are reoccurred. And then things are going to kind of get some more steady state thereafter. Nick, I don't know if you want to add anything or.

Yes no, I think you covered it well, thank you.

Perfect.

And, and just lastly, you talked about surgical capacity, and I think it was around 10% in April, 16% in May, 18% in June. What do you estimating for capacity into July?

It’s a good question. We see numbers all over the place. 90% Nick, would you say is where we are roughly?

Yes, I think that's fair. I mean, I think obviously, the practices are up and running, whether they're seeing as many patients as they normally would. I think the commentary would suggest maybe not quite as many. On the other hand, the patients they're seeing are the symptomatic patients that for instance, in our case are more likely to end up moving on to surgery. So it's a bit of a moving fluid situation, but I think that sort of accurately captures it.

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

Thanks so much for taking the question. And congrats on delivering a pretty good quarter, all things considered. Gerard, when we had spoken after the pre-announcement, you sort of cited two things that make Vericel unique in this recovery, one of which was the patients are actually younger, so you don't have as much of the dynamic of patients fearing coming to the hospital because of COVID. But the other thing was that you have access to these patients from a consent perspective, you can track them through the system. And I was just wondering how many patients you have consent from it at this point in order to follow up with them and help move them through from biopsy to procedure. That's my first question?

Okay. So there are like two components there. One is when a patient gets a biopsy if they do consent for us to contact them before there is any communication from the physician's office of intent to treat, those we can reach out and contact and check in how are you doing, do you still have pain, remind them that we have their biopsy, tell them a little bit about MACI. That's one set. There is another set of patients where the physician's office actually indicated that there was an intent to treat and those we can very much shepherd through the system. And those are the ones that we weren't very rapidly were able to catch up. And as we said, we'll probably get to them 70% or so of those by the end of this quarter. And then the consent from that's less of a ability to shepherd them through, but more an ability to remind them that we have their biopsy or if they're not doing very well, the reps know how many biopsies came from particular doctors, so they can also follow-up directly under HIPAA compliant matter of course. But I think that the patients that were activated that there were some indication, hey, we'd like to look into reimbursement et cetera. Those are the ones that we can really get rescheduled very quickly, and I think we've done a - frankly, the team's done a great job.

And then my second question is around NexoBrid. And now that that's becoming closer to a reality sort of how you guys are thinking about it from a revenue contribution perspective, because I will say - I was thinking more about it leveraging NexoBrid to get Epicel into more centers, but it sounds like NexoBrid itself might be a pretty meaningful products. So can you talk a little bit about the launch strategy of NexoBrid and also how it will be a complimentary, I guess, I would say, and potentially drive sales synergies of Epicel. If that's the right way to think about it. Thank you so much.

Yes, thanks, Danielle. Well, just to clarify, so there are two components to the revenue from NexoBrid. The first one, Gerard mentioned that the procurement under the BARDA contract, we expect to recognize revenue starting this third quarter with another order in the fourth quarter and the remainder in 2021. So that's one source of NexoBrid revenue, and in total, that would be about $1 million this quarter next, and then the remaining $3.8 million or $9 million next year. So that's one component. In terms of the commercial revenue contribution from NexoBrid. Obviously, we wouldn't have done the deal if we didn't think it could be a substantial contributor to our burn care franchise. As you know, I think you've seen in our corporate presentation, we believe the addressable market for Epicel is about $100 plus million and the addressable market for NexoBrid is $200 plus million based on the number of hospitalized patients in the U.S. each year, which is about 40,000. And you know, the numbers of patients who might benefit from NexoBrid. So we believe we haven't obviously issued any forecasts or guidance around the product, but we certainly believe it could be and will be a meaningful revenue contributor to the company.

Your next question is from the line of Chad Messer with Needham and Company.

Thanks for taking my questions. Historically, sort of pre-COVID what's the lead time from a mean, you know, average, I know it's going to vary, but mean lead time from biopsy to implant in the cases where you get conversion?

It actually compressed for about a year and a half ago till you know recently, but it's about four it's about four months. And I don't know if it's meaningfully well too soon that it’s meaningfully change - post COVID but four months is the medium.

And then on your OpEx guidance for going up $2 million obviously, you have some sort of discretionary things you're able to pull back on and as sales go up, you'll put those in place. Would you characterize that that guidance for up $2 million in 3Q is as a return to a normal run rate are there other things that maybe held back on and or perhaps other things that you're playing catch-up with?

I think for the foreseeable future for the next few quarters, I would say that is probably a normal run rate. There's not a lot of dramatic things to catch-up on.

And just on Epicel I'm trying to understand here I know you referred to, an inability of salesforce to, for example access the sites during the COVID lockdown. But it seems from an end user demand level, that severe burns are the kind of thing that would just be less impacted by COVID. I mean a patient that has a very severe burn and needs to be treated for it. You can't put that off. So maybe try to help me understand, is this something to do with the way sales are recognized is this a product that's, kept on the shelf and they had to restock or how could it be so cyclical when I don't know, maybe people just gotten less accidents during the lockdown. But how could it be so cyclical when this wouldn't be the kind of procedure that could be restricted?

Yes, so Chad I'll take that one. Number one, our strategy for Epicel of 120-ish burn centers in the U.S., we're pretty active, and then typically around 40 a year. So part of our strategy for Epicel is obviously to broaden and deepen the penetration in the burn centers across the country. And just to clarify, my comment was, there could be some headwinds around access in centers where we're not that active now. Just because sales calls are relatively restricted from a case support standpoint, there's essentially unfettered access we're at, you know, we could be at the biopsies, but obviously, certainly at the surgeries. Our clinical support team is there and then during the takedown procedures and so on. So when it comes to, patients where we have a biopsy and they are moving on to surgery, access is not an issue at all. What I was referring to, is the aspect of our growth strategy in terms of, penetration at centers where Epicel had not typically been used. And in those cases, it's a little harder to do sort of just cold sales calls in this kind of environment. So that was it, but obviously, we saw great strength from Epicel in May in June. There is no backlog of patients, with Epicel for the reasons you stated that these are critically ill patients. And so, we saw good growth in Q1 up 22%. We saw a good growth in May and June. So, we still expect Epicel to do well going forward.

Yes, I appreciate that clarification. I was just wondering if you had any reason why there would have been - a drop off in April. For example, were there just fewer burn patients or were fewer burn patients being treated, it would seem like if you had a severe burn in April, we have to treat it?

Yes, Chad you’re absolutely right. If it's a severe burn, they have to be treated. There are two component or three things going on here. One is there's so much normal variability, small numbers - it's really hard for us to be definitive about when there's a big spike up or down, what the driver was. The second thing is, we did hear from some reps that yes there are fewer industrial accidents. We also heard from other reps, it doesn't seem like they are seeing much difference. It was hard for us to be definitive as to whether that was a driver. Now we certainly couldn't get reps into facilities as freely as we otherwise could. And the reps are very, very important in helping to identify Epicel type of patients, which patients would most benefit from Epicel. So that, it's unlikely that didn't have an impact for lack of access. Whether or not a drop in industrial accidents was also a big factor or not, it's certainly feasible but clearly can't be shared sure, because we didn't get a consistent feedback from reps or surgeons we talked to.

Okay, yes I understood. I get it small enough number is probably difficult to pin down.

Right well said.

We went through this in July, but congrats again on positioning yourself well for this recovery?

Right, thank you.

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

Nick and Gerard thanks for the comments with regard to surgical capacity utilixation. I guess on a unrelated question are you seeing similar type of seasonal slowdown here in July into August that we typically associated with summer travel and vacation for many surgeons? In short, our surgeons going away and kind of similar rates and does that have any impact on how we should think about your seasonality in the second half of the year?

I think it's really tough to use past seasonality patterns this year, as everything is kind of out the window. What we're seeing, we've baked into the guidance that we've shared.

Obviously to make that point, Kevin, that obviously we said we expect revenue to increase this third quarter versus last year, third quarter and I think that. As Gerard just mentioned, sort of captures all the dynamics that we normally take into account.

And the follow-up on the questions with regard to your commercial channel for burn centers. Can you just walk us through how you're thinking about the timing of prelaunch activities for NexoBrid will those begin in earnest, really in the new year or should we think about some of those in the second half? And as you think about a product like NexoBrid, that does have a different, kind of, selling profile than Epicel? In a world where we're perhaps you know COVID remains a real issue for particular the burn center setting. Yes how are you thinking about strategies, perhaps where there's a need to use more remote and perhaps even digital, sales and marketing and the impact that could have on a go-to-market strategy for NexoBrid?

Yes, so I'll just start with sort of the commercial activities, the cadence is pretty standard in terms of there's payer development activities, brand development activities, disease, state awareness, et cetera. And we've already rolled out the first parts of that which is around disease state of awareness. Interestingly, at the ABA Meeting this year, we ended up doing it digitally and actually, there was a top five abstract NexoBrid was one of those. And that was delivered virtually by Dr. Hickerson. So things are happening just been in a more virtual world. So our cadence, we've already begun disease, state awareness, the brand activities, pricing studies, payer access development, et cetera will all be happening in the fall this year and through launches would typically be the case. So, that's pretty standard. In terms of, yes it's a different product, but again, these are hospitalized severe burn patients. So, clearly in our wheelhouse, there'll be a different sort of distribution model where likely to be hospital pharmacy dispensed versus manufactured here and shipped to the burn centers, but these are centers that we're in typically anyway. And, I don't think there's sort of a big hill to climb in terms of our ability to effectively commercialize the product in what's a pretty concentrated set of burn centers. Gerard I don’t know if there is anything you want to add to that.

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

So just three that I wanted to touch upon. So firstly, could you talk about the margins a little bit? I think you did about a million better than what we thought for Q2 ,and I guess talk about your previous normalized rate, which is probably 10 points away from Q2, and step back or just set a kind of linearly increase over Q3 and Q4 in '21?

Yes, so I think we're going to get back - I think the margin is really, obviously are heavily driven by volume. We gave guidance that we thought on an operating margin basis that we see things flex such that there is kind of a 25% change on the marginal revenue dollar downwards as volume declined and we're going to see roughly the same thing going forward on the other direction. We've got it that we should expect to see margins around 63% in this coming quarter, and I think that will continue to increase, really if you look at past years and look whatever volume revenue number you saw the past years, you can probably use that to pick up what margin do you expect to see going forward on the gross profit line. On the operating expense side, operating margin you have to throw in an extra about $2 million a quarter now with this full sales force. But if you kind of plug that in, you again can look at past years to estimate what our operating margin should be.

Second question, as far as BARDA goes, it sounds like the contracts coming earlier than your commentary last month, I just wanted to kind of check that or more in line with probably…

What we said last month earlier in the year was that, we are hopeful that things will come in this year, but we asked investors and analysts not to bake it into their model because we're not a direct party to that contract and we don't want to put out statements, to put things and models and we don't have direct control. I think that won’t only just benefit normal job managing the relationship with BARDA. BARDA had to postpone the procurement for obvious reasons, they're their hands were rather full with other matters as we all know. And I think MediWound has managed to get a firm schedule in place with BARDA, and we're confident they'll execute on that.

And then lastly for me for some of Ryan's questions, I want to just circle around you talk about Q3 MACI or Q3 as a whole mid-single digits that call it $10 million or $11 million bump in there on the MACI side a percent a year. You think it comes from the catch-up pool and the percent that's coming in and more of a normalized fashion. That theoretically catches up with you in Q3 or some in Q4 as well?

Yes. At least, you know, mid single-digit growth that we expect to see in MACI over the same period of the prior year, we saw that 80% of that we think is going to be from normal patient flow. And then 20% of that will be basically patients that were delayed from the second quarter that otherwise should have come in.

And just on the sort of magnitude or absolute dollar value of that. I mean, Q3 MACI revenue was, I believe around $20.6 million or something like that. And so obviously, that's the starting point from last year upon, which to bake the increase for Q3 this year.

But I guess the question is rather the 20 from the pool, how much of the pool based on historic do you think that it's…

I think by the end of the third quarter, most of that catch-up pool will have been depleted.

Right. That was Gerard's point that, we expect just based upon sort of biopsies to date through July plus what we expect going forward for Q3 in the remainder of the year, that we would see sort of a similar level of growth that we're projecting for the third quarter, in the fourth quarter, and you know, by definition that essentially means that the pool is essentially exhausted, but.

And we're - basically back to that back to more organic growth from normal patient flow.

[Operator Instructions] Your next question is from the line of Swayampakula Ramakanth with H.C. Wainwright.

Thank you, good morning, Nick and Gerard. Most of my questions have been answered, but I have couple of them. On the Epicel growth for the third quarter that you're stating about $1 million or so increase. What, I'm just trying to understand the confidence behind it - behind that Epicel growth?

Yes, so $1 million increase over Q2 of this year and - we all know that Epicel is highly variable limited, it's frustrating for anyone trying to put models out. But what we're looking at is orders in hand and biopsies in hand. And then obviously, we need to make certain assumptions about it's one variable that really is a [FAD] variable is, it's hard to predict how many of these patients will pass away before they can be treated, but we kind of take an average number there. And then we pick the middle of the road number for the back end of the quarter because we just don't have that visibility to the very end of the quarter. So we're using the facts at hand and then plugging kind of average rates for the back end of the quarter. And that's how we do it.

Okay.

To do that.

No, that's helpful. Talking about conversion rate, could you give us the percentage change in biopsy conversion for MACI that you saw in the second quarter versus the first quarter?

It's a very good question. And it's a difficult question to answer because conversion rates really are - we don't know what the conversion rate is, for any particular quarter two or about two years past it, because the cohorts have to age over time. Now when we look at the model, what happened is conversion rates for all the different quarters in the back - in the past, they all dropped somewhat because the implants weren't occurring. When catch-up occurs they pop up a bit. Now for any specific cohort, it might be a few percentage points down and a few percentage points up. Overall, putting aside this COVID world they haven't moved very much in the last couple of years. But yes, they've dropped maybe three or four percentage points in the quarter. And then popping right back up for the recovery, but that'll be a temporary dynamics that I think, again, by the time we get to the fourth quarter will work its way through.

So the last question from me is a general question. You seem to have almost three quarters behind you by the way in the sense that you have an idea what the third quarters looking. So what's the hesitancy and I am talking for the year itself?

Well, that’s simple. None of us know what the future holds. And I think, from October, could we find out that we're right back close to where we were in April? I don't think so but it's certainly not outside the realm of possibility. So we don't want to, put forward a degree of confidence in the future that I don't think anybody should have at this point. We think we're very confident in the fundamentals of our business. We can control the overall environment out there. And as we all know, that can kind of change in a dime. And that's pretty much it.

There are no further questions. I will turn the call back over to the speakers for any closing remarks.

Great, well thanks again. I just want to thank everybody for joining us this morning, for your questions and for your continued interest in supporting the company. So stay safe and have a great day. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.