Ladies and gentlemen, thank you for standing by. And welcome to Vericel’s Fourth Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. I would like to remind you that this call is being recorded for replay. I will now turn the conference call over to Eric Burns, Vericel’s Head of Financial Planning and Analysis, and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel’s fourth quarter 2021 conference call to discuss our financial results and business highlights. Before we begin, let me remind you, on today's call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are 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 fourth 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 am joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. I will now turn the call over to Nick.

Thank you, Eric, and good morning, everyone. I’ll begin today’s call by discussing financial and operational highlights for the fourth quarter and full year as well as current trends and our expectations for 2022. Joe will then provide a more detailed update on our financial performance and financial guidance before opening the call to Q&A. The Company delivered another year of strong revenue and profit growth in 2021 despite the continued impacts of COVID-19 throughout the year. Total revenue for the year increased 26% to approximately $156 million. Our topline growth which was at the higher end of the range that we pre-announced last month was also in line with our compounded annual revenue growth since we launched MACI in 2017. We also generated nearly $30 million adjusted EBITDA and operating cash flow in 2021, ending the year with $129 million in cash and investments and no debt as we once again demonstrated the strong P&L and cash flow leverage in our business as revenue continues to grow. With respect to our fourth quarter results, despite the unexpected emergence of the Omicron variant in late November and the resulting impact on MACI performance in December, MACI quarterly growth increased compared to the prior quarter and the same period in 2020 achieving record quarterly revenue in the fourth quarter. We also finished the year with another strong quarter for Epicel as we generated revenue of over $9.5 million for the fifth consecutive quarter. From a commercial perspective we continue to see strength across the underlying growth drivers for MACI and a high level of brand engagement from surgeons and patients. Importantly, we met our goal of increasing the number of surgeons taking MACI biopsies and generated biopsy growth of 30% for the year with a record quarterly high in the number…

Thanks Nick. Good morning, everyone. Starting with the income statement, total net revenue for the full year grew 26% to $156.2 million driven by strong growth in both of our franchises. MACI revenue grew 18% to $111.6 million, while Epicel revenue grew 51% to $41.5 million. Total net revenue for the fourth quarter increased 5% to $47.6 million versus the fourth quarter of 2020. While product revenues excluding BARDA related NexoBrid shipments grew 6% MACI fourth quarter revenue was $37.3 million growing 8% versus the prior year. Despite continued COVID-19 impact on volumes, due primarily to the Omicron variant, MACI fourth quarter revenue increased 56% sequentially versus the third quarter of 2021 compared to a 42% sequential increase for the same period in 2020. Epicel fourth quarter revenue was $9.7 million, similar to the strong results in Q4 2020 of $9.6 million in the fifth straight quarter above $9.5 million for Epicel. In addition, total revenue in the fourth quarter also included approximately $0.5 million of revenue related to the procurement of NexoBrid by BARDA for emergency response prepared. Gross profit for the quarter was $34 million, or 72% of net revenue, compared to 74% of net revenue for the fourth quarter of 2020. This decline in gross margin is mainly driven by the shortfall in revenue versus our initial expectations for the quarter, due in large part to scale up to meet expected demand. Total operating expenses for the quarter were $29.9 million, compared to $21.4 million for the same period in 2020. The increase in operating expenses was primarily due to higher non-cash stock compensation expense, driven by share price appreciation. Net income for the quarter was $4.5 million or $0.09 per share, compared to net income of $12.2 million or $0.25 per share for the fourth quarter…

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

Hey, good morning. Thanks for taking the questions and congrats on your progress this year. I guess I want to start with MACI and the guidance there. I appreciate your comments on the first quarter. Nick and Joe, help us think through the backlog though. There's I think by our estimates from the last quarter, there's about a $7 million backlog on MACI. And so how much of that is assumed in that guidance this year? It sounds like some of it, and kind of what that underlying growth rate on MACI, ex the backlog?

Thanks, Ryan, this is Joe, I'll start and take that question. So, I think as we think about the backlog, I think the way we're thinking about it is, as we talked about in the prepared remarks, we certainly want to be mindful of the operating environment we're in, we have a wider range in terms of MACI guidance for the year. I think as we think about the backlog, you're right. So in Q3, we talked about that number kind of being in the $7 million range. As we came out of Q4, we actually saw an increase. So I'd say the number is closer to $10 million. In terms of how that plays into the scenarios, what I would say is certainly on the higher end of our guidance, we would, we would assume, or we are assuming a more substantial or substantive part of that backlog is kind of pulled through as part of that revenue number. And in the low end, I would say it's certainly a much lower percentage. So, as we think about kind of MACI growth for the year, I mean, there's some competing dynamics. Certainly, we think that backlog can help. But as we talked about, we don't think conversion rates and kind of patient flow will fully normalize, we'll get closer to fully normalizing until the back half of the year. And we also have some kind of COVID impacts to start the year. So I think all of those are certainly part of the equation, we think about the full year.

Okay. And then, your costs as a follow up, so just Joe help me understand. I mean, your costs are largely labor related, right. And there's lower kind of material raw material costs for development of both Epicel and MACI. We're hearing a ton of companies talk about rising wage pressures, just given the inflationary environment. And so, I just want to get your thoughts about what to think about from that perspective, both, from an SG&A level and R&D level, and appreciating the guidance on adjusted EBITDA but just help us think through kind of, what kind of pressures you may be feeling on those loans? Thanks.

Yes no, thanks Ryan. So, certainly we're mindful of kind of the operating environment we're in from a cost perspective, and we're considering that as we're thinking about guidance for the year. As we talked about, we do think we can improve on our gross margin on a year-over-year basis. And similarly, on an adjusted EBITDA perspective, as we think about some of those potential cost kind of impacts, I think the good news is a lot of our raw material spend on some of our higher dollar items are tied up in kind of longer term contracts. I do think the team got ahead in some areas to make sure we had enough stock and whatnot on a materials perspective. But I think, to your point, I mean, we're certainly going to see some impact in terms of inflationary increases on some, some of our vendors spend some other pieces. On the labor piece, I think it's important to recognize and remember. We've been in the Cambridge area for quite some time, there's a lot of competition for labor here. So that's something I think it's kind of been here for a while, but certainly in the environment we're in that's, that's going to impact labor costs a bit more on a year-over-year basis. So, I think we're doing what we can solely to manage on the cost side. But there are some impacts kind of here and there, I would say.

Thanks for taking the questions.

Thank you.

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

Hey, good morning, guys. Thanks so much for taking the question. Just a question on the biopsy backlog and conversion rate. I mean, Nick and Joe, do you think that there's, I guess, how are you thinking about the potential to actually keep those patients in the funnel. I guess what I'm saying is, how much visibility or how many touch points do you have with those patients in order to ensure that at some point those patients do get treated? And then I have one follow up?

Yes. Hey, thanks, Danielle, good to hear from you. And that's a great question. And something we're really focused on here, right. So, I think Joe went through sort of the dynamics of how we're thinking about for the year, that backlog maybe worked down. And I'll just add one comment there on the first quarter. Obviously, the Omicron wave kind of carried into the first quarter. So, I don't think we're under any illusions that, backlog gets worked down in the first quarter, given the dynamics, but that's more something that we've consistently been talking about, we would expect to occur over the course of the year. To your point of the sort of biopsies that were collected last year that under normal circumstances would have converted, that is something that we are hyper focused on here. If you're running a commercial organization, you certainly we're in a unique position in that. We certainly understand, obviously, a biopsy comes with a transmittal form. We know the surgeon that sent it in the patient, the nature of the defects, etcetera. And so it's very easy for us from both a marketing and sales team perspective, to be able to create those biopsy lists, focus our reps on having those discussions with the surgeons, so that we're able to kind of make sure we don't lose those biopsies to the extent we can control that and, and that they don't go stale. So that is something we are really focused on. There are initiatives on the commercial team to be able to focus on, for instance, Q2, and Q3 biopsies from last year. So I think we're uniquely positioned to make sure we maintain those touch points. And of course, we have a very strong case management team that is routinely in contact with surgeons, offices and staff regarding patients that are in the pipeline. So we think we're, that's a focus for us. I'll just end there. And we think we have, certainly the ability to influence that to the extent possible.

Got it. Now that's super helpful. And then Nick, it's been a few years since you guys expanded the salesforce. Unfortunately, I guess your last salesforce expansion was literally right before COVID, or during the early days of COVID? Just curious about where you think the salesforce is today versus where it needs to go from here. Do you think you have you have the salesforce where it needs to be? Thanks so much.

Well, yes, we're certainly very pleased with that expansion. And the results we've seen, even during the COVID times. And I think we've talked about that a lot in terms of, the salesforce expansion was necessary for a bunch of reasons. One, we increased our target surge and universe. Two, we wanted to get sales territories down to kind of more manageable geographic size. And for those reasons, something we needed to do. We've talked it during the past couple years about the performance of the, the new territories and driving new surgeon, acquisitions, and so on. So we're very pleased. And these were highly experienced sales reps that we added. So from that perspective, we're very pleased. We'll take another look, as you'll recall when we expanded the salesforce back in 2020; it was intended to cover us through pretty much a two to three year period. So we will look again, sort of at the end of this year about what our needs are going forward. And I would just say that performance is kind of the bottom line here, right? I mean, we have access to procedural data, for the procedures that make up our market, microfractures, chondroplasty, osteochondral graphs etcetera. And that data tells us that since 2019, procedurals volumes for the market as a whole are down double digits. And over that time period, MACI revenues are up 20% plus. So I think that speaks to the effectiveness of our salesforce. And we certainly don't ever question kind of expanding it was definitely something that we thought was the right thing to do, and we certainly continue to think that.

Got it. Thank you.

Thanks, Danielle.

Your next question is from Chris Cooley of Stephens. Your line is open.

Good morning, and thanks for taking the questions. Just two for me, maybe first, when we talk about expanding the number of surgeons taking biopsies from MACI I think, then the target you gave there in the prepared comments was approximately 10%. Could you help us with maybe just how the salesforce is incentivized in that regard? Is it going deeper within existing practices, where I would assume those surgeons would ramp faster if their peers were already utilizing MACI and they were familiar with it to some degree? Are they more incentivized this time to broaden the reach? And then if I could just go ahead and ask my second question, now, and then I'll be quiet and get in queue. But maybe just help us think Joe a little bit about the sequential gating on the spend. Obviously, you're driving, much greater leverage; there better cash flow really impressive. But just help us think about, what the timing of the spend and ready for this submission for NexoBrid? The timing of the expansion just helped us think a little bit there about how we should think about that OpEx as it plays through the year if there's anything different this year, versus maybe the last two, so called normal COVID years? Thanks so much.

Thanks for your questions Chris, it's Nick. I'll take the first one regarding kind of the salesforce incentives and how you build a successful business. And then, and then turn it over to Joe. So as I think we've talked about before, at the end of the day, our sales reps are paid in, in addition to sort of cash and salary and equity on a commission basis for the implants that are done, right. That's when we recognize revenue. And that's when, their incentive how their incentive comp works. But just as we talked to investors and analysts about the growth drivers for the company at the high level, that's exactly what the reps are focused on at the territory level. And it's very clear throughout the organization to be successful. As a sales rep, you need to be doing everything we talked about, which is expanding the number of surgeons taking biopsies, penetrating deeper in their practices, which is represented by the biopsies per surgeon, and then getting those cases activated and converted. So that is the focus throughout the organization, and particularly with the regional directors in our sales reps.

Yes Chris, and thanks. Good morning. Thanks. On the second question, I would say if you look back in the last couple of years, kind of from an OpEx perspective, you look at 2021. I mean, they were there were some ebbs and flows during the year. But I wouldn't expect anything, hugely variable from a quarter-to-quarter perspective. There's certainly some things we're looking to get ahead of, in terms of some of the investments on the lifecycle side that started. There's certainly some spend in there as we think about NexoBrid, which will kind of balance those a year, and then, obviously, have some second half components. So, I wouldn't think of it as kind of hugely material differences from a quarter-to-quarter perspective, although it may ebb and flow, predict that full year number, and kind of work back to the quarters.

Thank you.

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

Hi, Nick, Joe, and Eric, how are you?

Good. Thanks, Jeff.

A couple of questions from herein [ph]. So looking at the Epicel guidance for 22, can you walk us through some of the trends you've seen thus far the first couple months and seems a little cautious on the aggregate numbers there, particularly given the fact that you're discussing, higher ASPs on an average case, or anything to read in there anything we should think about? I know, it's been a strong five quarters in succession now.

Yes thanks, Jeff. So when you look back at Epicel’s growth in 2021, it was obviously a phenomenal year, particularly for a product that as we often say, has been on the market for close to 30 years now. So, 50% growth, the big piece of that, as I mentioned in my prepared remarks was that we have seen consistently now over the past five or six quarters, sort of an uptick or an increase in the average number of Epicel graphs used per patient. And we talked about this last fall as well that, as we adjusted our Tam upwards that the average graphs per patient had increased from about 90 to 120 graphs, on average. And so that, if you look at that growth for last year, you can say, two thirds of it or, there about was due to sort of that increase in, in the graphs per patient. And that's, what that did was sort of move the market up to where the premier burn centers kind of the level of utilization per patient that they were using. So we may get some small incremental growth in that over time right, especially when you're treating these sort of large, total body surface area burns, but really where the growth is going to come from is adding more burn centers that are treating patients with Epicel and increasing the biopsies or the patients that are being treated. And we saw, both of those sort of increase last year, as I mentioned, as well. But I think it's a more realistic, forward looking perspective to say, we’ll kind of baseline it at low double digit growth. And then obviously, we're focused on exceeding them.

Yes, maybe. Just to add, yes, just to add as well. I think a couple points. So again, on those kind of average graphs, per patient, patient utilization, obviously there's a huge growth driver last year. If you look back, that actually has been pretty consistently high over several quarters. So, even as we compare to last year, kind of the first quarter, etcetera, that's, that's really, for the most part run rate. A couple of other things just to highlight. So, if you look at the last several quarters, that run rate has actually been right around $9.5 million. If you look across the last five quarters. If you take a bigger picture view, we think we can grow the overall kind of business. And again, it's really thinking about adding burn centers and driving up volume into that double digit range. But, if you look at last year, there's kind of that one outlier, of 12 million plus. So we think on a full year basis, again, we can get into that double digit growth range, and that's a realistic number for us. But what we're kind of seeing and where we are in Q1 right now, we're kind of more than that run rate, similar run rate at least at this point. So I still think given the nature of the product, there's going to be ebbs and flows, even as we tried to drive growth. Although, as you look back in the last few quarters, it's been more stable. I still think it will ebb and flow. But overall, we're still looking for that double digit growth.

Perfect picture commentary. And then can you talk about you said, year-over-year quarterly, sequential increases for 2022, just wanted to clarify that. You don't mean, the cadence of Q1 through Q4 and sequential, but you mean the year-over-year?

Yes, so. So I think when we talk and we're talking about MACI's specifically there. I mean, what we're saying is, if you kind of think about, the MACI progression throughout the year, what we said and the first quarter is, if you take our full year guidance for MACI, we'll be around that 18%, which is pretty typical percent of the business, or of the overall revenue for the year is think about seasonality. I think given kind of the trends we're seeing, we'll probably lean a little bit more kind of to the back loaded, when you think about the percentage of business H2 versus H1, or at least look more like some of the years that were more slanted toward H2. So if you play that out and assume, similar seasonality, what you'll see there on a year-over-year basis, when you look at kind of MACI quarterly is year-over-year each quarter will have increasing year-over-year growth rates. So just to clarify, we made year-over-year relative to 21.

Got it. And then lastly for us, just to recap, and there's been a couple questions on some of the conversion rates and biopsies. So anything any read into this quarter thus far for 2022 thus far, as far as any biopsy trends, specifically, I mean, excluding any conversion rate commentary for 5G trends for this year, versus, say, 20 or 19. As far as beginning of the year, is it similar?

Yes obviously, we're kind of early in the year and we've, as we mentioned, you have an Omicron carryover etcetera. I would just say that we certainly expect biopsies to grow for the year, and that hasn't changed. And so again, when you have this dynamic of increasing the biopsy, leading surgeons at a double digit rate, which Joe mentioned, and then continued penetration into those practices, which means higher biopsies per surgeon, sort of by definition, you're going to have biopsy growth, right. So, that is certainly something that we expect for this year as well.

Perfect. Thanks for taking the questions.

Your next question is from Sam Bordovsky of Truist. Your line is open.

Hi, thanks for taking the question. And I'll just start off with the high level just kind of [Indiscernible] upfront but just to kind of high level thoughts on the on MACI going forward, starting off with the salesforce and as the expanded group matures, and we hopefully are moving into a more normalized market going forward. Any kind of updated thoughts on how we think about peak or target productivity for reps on an annual basis? And then sort of as we think about biopsy growth in 2022, can you give us any granularity into where we should be expecting biopsy growth to come from whether it be sort of a difference between that pre COVID Doc group, the docs added last year, and then new doc's next?

Yes, well, I'll start with sort of the, the first question or the second question around biopsy growth. We kind of believe given the, the size of the addressable market, that biopsy growth is really coming from sort of all segments in terms of the initial, the existing users, new surgeons coming in. I mean, we've commented previously about the fact that we kind of see it across the board that, when new surgeons join, that they end up the -- that they end up kind of moving up over the course of a year or two to sort of the average level. So we see growth with existing users, we see new surgeons kind of getting to that level. And so, we don't expect that there will be anything other than what we've seen in the past, which is sort of across the board growth among our surging customers.

Yes. And just to add on the productivity metrics. So certainly, I think we talked about in the past, we're certainly looking to get back up to call that two ish range for revenue million range. If you look at last year, 21 versus 22, there's an improvement. We're not quite there based on where our full year guidance is, but we certainly think we're kind of trending back in that direction. And we can kind of get back to that number that we've been talking about.

Thank you, Samuel. Your next question is from RK Swayampakula of H.C. Wainwright. Your line is open.

Thank you. Good morning, Nick. And, Joe, quite a bit of my questions have been answered. But I'm just trying to understand certain comments that you made, obviously, by, by your announcement of getting into a new manufacturing facility, kind of telegraphing the expectation for and our total growth of both MACI and Epicel. So in the in terms of long term, what sort of growth are we are thinking about for both products. And also, you as you said the salesforce expansion obviously, has allowed you to penetrate better into the into the surgeon groups. Is there -- what sort of expectations do you have on your salesforce in terms of how much, even though it was been a tough two years. Do you think the salesforce is working at the optimal level at this point? Or do you still need to add more salesforce, as you said, by the end of this year?

Thanks, RK. I’ll start and Joe you can add additional comments. So first of all, with respect to the new facility, as we mentioned, that is intended to support the long term growth for both MACI and Epicel. We haven't really gone beyond sort of mid-decade. But, as we talked about, in our earlier pre announcement this year, we certainly expect to be in the 20 plus percent compounded annual growth rate as a product portfolio through mid-decade. And then, given the fact that these are large under penetrated markets, we think there's growth ahead for multiple years, especially when you sort of layer on, hopefully an increased commercial presence on the burn side with the NexoBrid launch and then lifecycle management for MACI. So we're really confident and bullish on the prospects through the end of the decade and beyond. When you think about the salesforce, as we were mentioning earlier, for the reasons we mentioned and just to repeat myself, we have obviously procedural data for the market that makes up our addressable market. And, while that declined overall by double digits since 2019, MACI revenues are up 20% versus 2019. So we are clearly, we were outgrowing the market by a wide margin before COVID. We've outgrown it through COVID. And we certainly expect to outgrow it when we're through COVID. So we feel really good about that. That's driven in part, obviously by the salesforce. They continue to execute well, and we don't expect that to change. And just on the productivity question that Sam mentioned and Joe touched upon. I mean, we kind of before the expansion, we're up to about 2 million per rep. That took a step back through COVID and through the expansion, but we certainly expect to be back to those ranges and beyond as we continue to grow the brand.

Thank you. In terms of the pipeline growth, especially with their arthroscopic delivery of MACI and also the ankle. You said you are expecting to initiate some conversations with the FDA. Could you give us a little bit more color on those on those timelines, so that we understand how to think through some of the R&D expenses going forward?

Yes, well I'll start with kind of timeline thoughts. And then, Joe you can kind of layer in the expenses, but not to pre-empt them. But, we've said pretty routinely that for these lifecycle management initiatives for salesforce expansions. I mean, that's just, those are expenditures that we can sort of absorb in our, in our operating margins and so on that that we've shared with analysts and investors previously. So -- but for timelines around arthroscopic MACI what we said is we're we plan to meet with the FDA later this year. We got a lot on our plate right now, right, getting the NexoBrid submission in by mid-year. But also we want to be with the FDA, shortly thereafter, so that work is on-going to discuss what the development plan would look like going forward. And, it's a little hard to, to give a lot of detail around, sort of precise expenditures, until you sort of understand and agree with the FDA on what the program is going to look like in the same, of course, is for MACI. But we have placeholders in sort of long, our long range plans, that, that cover that. So it, as we said earlier, we expect that in arthroscopic delivery for MACI is more of a 2025 plus kind of endeavor, and the ankle indication would be more of a towards the end of the decade, just because it would involve a more robust clinical study to be able to get that indication, under our current thinking. So, Joe if you have anything?

Yes, not a whole lot more to add. And I'd say, these are certainly kind of areas we think it makes sense from an investment perspective and a business case perspective, over kind of the mid to long term and as you think about lifecycle management. In terms of kind of the P&L and the operating expense impacts, I mean, there certainly will be an impact over that timeframe. But, as Nick said, it's kind of built into the numbers. We think, we can kind of manage that within our kind of operating cash flow and existing P&L structure, it will add some costs, but it's not hugely meaningful over the next few years and not so much on an annual basis.

Thank you very much. Thank you, both. Talk to you soon.

Okay, thanks RK. Thank you.

Presenters, I'm showing no further questions at this time. I would like to turn the conference back to Nick Colangelo closing remarks.

Okay, well, great. And thank you all for your questions and your continued interest in Vericel. Overall, the Company continued to execute very well across all areas of the business in 2021. We expect another year of significant top line revenue growth, margin expansion and operating cash flow driven by both our franchises in 2022. And given the significant market opportunities for our products, our strong financial profile, we believe the company is well positioned for sustained long term growth in the years ahead. So we're excited about the business as we move forward. And again, want to thank you for your questions and interest in the company. Have a great day.

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