Ladies and gentlemen, thank you for standing by. Welcome to the Vericel's Second Quarter 2022 Conference Call. At this time, all participants are in listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now turn the conference call over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations. Please, go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's second quarter 2022 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. 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 financial results press release and a short presentation with highlights on today's call are available on the Investor Relations section of 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'll now turn the call over to Nick.

Thank you, Eric, and Good morning, everyone. I'll begin today's call with a discussion of our second quarter financial and business highlights and our expectations for the remainder of the year. And then turn the call over to Joe for a more detailed review of our financial performance in 2022 financial guidance, before opening the call to Q&A. We generated total revenue of $37 million in the second quarter and approximately $3 million of adjusted EBITDA and operating cash flow, marking the eighth consecutive quarter of sustained profitability and positive cash flow for the company. MACI had a very strong quarter, as we generated revenue of $28.6 million, representing the highest quarterly revenue outside of the seasonally high fourth quarter since the launch of MACI. MACI revenue grew 8% compared to the second quarter of 2021 and sequential revenue growth was more than 10% compared to the first quarter of 2022. Importantly, MACI continued to outperform the overall cartilage repair procedure market and we remain on track to generate our expected double-digit growth in surgeons taking MACI biopsies this year, as our sales team continues to expand the MACI customer base. Macy's also off to a strong start in the third quarter, and as Joe will discuss in further detail, we expect to see an inflection in MACI performance in the second half of the year with continued strong quarterly revenue progression and significantly higher quarterly growth rates compared to the same periods in 2021. Based on our results to date and Macy's continued momentum, we expect MACI growth to accelerate through the remainder of the year, translating to growth in the mid to high 20% range in the third quarter and mid to high 30% range in the fourth quarter versus the same period in 2021. Accordingly, we're maintaining…

Thanks, Nick, and good morning, everyone. Starting with our Q2 results. Total net revenue for the quarter was $37 million and was comprised of $28.6 million of MACI revenue, $8.2 million of Epicel revenue and $0.2 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. MACI had a strong quarter with 8% revenue growth versus the prior year and also improved sequentially with 10% growth versus the first quarter. For Epicel, it is important to note that the prior year revenue of $12.2 million, represented the highest quarterly revenue of any quarter-to-date, resulting in a difficult year-over-year comparison. And as Nick referenced with Epicel, there is inherent volatility on quarterly volumes due to the burn patient population and treatment dynamics. Gross profit for the quarter was $22.9 million or 62% of net revenue, compared to 68% in the second quarter of 2021. Our gross margin was lower than prior year due to lower BARDA revenue, which is 100% gross margin, P&L geography cost movement, as SG&A is no longer absorbing the cost from our current Cambridge manufacturing facility, and these costs have moved to cost of goods sold as well as higher Epicel related costs. For Epicel, we have expanded our manufacturing headcount over the last year that supports a significant product growth, and we also had a higher mix of smaller burns, which translate into an overall higher cost per unit and both of these factors also contributed to the year-over-year change. Importantly, we expect a typical gross margin increase in the second half of the year with our anticipated revenue growth in the third and the fourth quarters. Total operating expenses for the quarter were $31.9 million, compared to $30.6 million for the same period in 2021. Net loss for the quarter…

Thank you. [Operator Instructions] Our first question is from the line of Ryan Zimmerman of BTIG. Please go ahead.

Thank you. Thanks for taking our questions. Good morning. Maybe to start with the guidance for a little bit, Nick and Joe. Appreciate the commentary and the color in terms of the pacing. A few questions around that though, I mean, if I think about kind of the pacing dynamics that we saw in the first half of this year on Epicel, it implies, obviously, around $9 million for the third quarter. But I guess – how are you thinking about your comfort level with the implied step up in the fourth quarter? Because assuming MACI guidance is the same, there's not much expected BARDA revenue it would suggest that Epicel guidance previously of 45 to – 45.5% to 47.5% is unchanged for the year. So, maybe to get your thoughts around why you can step up and hit that number in the fourth quarter? And then I have a couple of follow-ups. Thank you.

Yeah. Good morning, Ryan. This is Joe. I'll start. Thanks for the question, and maybe Nick will chime in as well. So – maybe just to talk kind of about the full year guidance and start broad and then kind of hit Epicel. So first off, we are maintaining our full year guidance in total of $178 million to $189 million. As we talked about, we're also maintaining our MACI revenue range for the full year as well. So as we kind of think about the product, I would say, to your point, I mean, MACI is on track from a full year perspective. And I think the midpoint is probably still a good kind of estimate in terms of how we're thinking about MACI for the full year. I think on Epicel, to your point, I think we're not – I think what we're thinking now is kind of given the start of the year, it's more likely Epicel will be kind of flattish to last year or in the low $40 million versus our original guidance. So when you add kind of that midpoint of MACI, the lower estimate on Epicel as well as the BARDA revenue, it really points you more to the lower end of the range. So in terms of Epicel, changing kind of hit that, and then I'll kind of turn it over to Nick. We do expect a similar quarter based on our run rate in Q3 called $9 million plus, and a step up in the fourth quarter, but kind of more in that, call it, $12 million to $13 million range, which would get us into the low 40s.

Yeah, I think that captures it, Joe. So I appreciate that. And Ryan, maybe just a little bit on sort of the market dynamics as we've seen in Epicel performance. So as I mentioned during my remarks, the underlying fundamentals in terms of burn center penetration as measured in up-sell biopsies that we receive from centers, and then centers treating patients remained in the first half of the year pretty strong and comparable to what we saw last year, which was a big step-up compared to prior years. That being said based on sort of diagnosis codes that we're able to access and so on. It's clear that, at least for the larger burns, 30% plus that there was – there were lesser or a decline in those burns in the first quarter and then particularly in the second quarter. So again, the one thing, as we've always said is that, even operating at a higher baseline level of revenue, it does -- there's obviously inherent volatility given the small patient population and we just saw that in the first half of the year.

Okay. That's very helpful, guys. And then just two follow-ups for me. I want to take a swing at 23% a little bit. And just the MACI growth you have kind of in that low 20% range for this year. You'll let some others ask about the pacing. But are you comfortable with kind of that 20% longer-term growth rate on MACI, as we think about '23 and beyond and the durability of that? And then the second question off of that is just, I saw the 8-K last night I think almost saw the 8-K you mentioned today about the line of credit for $150 million. Has your thinking around product life cycle or strategy changed at all given this credit line and how you think about that in the context of both MACI, as well as maybe inorganic M&A? Appreciate your comments. Thanks for taking the question.

Thanks, Ryan. So maybe I'll start this one again, and Nick can chime in as well. So on the first question, it's pretty early to be thinking and talking about 2023, specifically on MACI. But I think kind of to the broad question, as we think about MACI and just kind of the overall healthcare environment is better, continuing to hopefully improve and open up. We do see MACI is still kind of in that long-term growth profile kind of in that range. So I think that is how we're seeing it kind of over the long term, again, we haven't talked about 2023 specifically. In terms of kind of the line of credit, I'll start. I would say I think this is an important tool for the company, nondilutive capital, kind of lower cost -- lower than the cost of equity, etcetera. So, we're certainly pleased to kind of have this as a tool for us. I think it's -- strategically, I think it just gives us kind of a nice degree of flexibility, particularly over the next few years, as we're also investing in a new building. We want to be mindful of kind of maintaining the long-term growth, whether that's potentially business development or some additional life cycle management and other organic opportunities, so that's kind of strategically how we're thinking about it.

Yes. And I guess I would just echo the comments. We certainly remain confident in MACI's performance in the years ahead. I think, Ryan, we start from a strong position -- cash position of $130-plus million with no debt. We'd like to have these tools available to us. We have the ATM, although we haven't used it. It's there if we find ourselves, if that presents an opportunity for us based on business development deals. The line of credit falls into that same category. And so, our perspective on that hasn't changed. I think we've always said that we certainly can fund our life cycle management initiatives through our existing cash and operating cash flow, given the profile and the strong profitability profile of the company. But as we think about potentially larger things to do down the line, just great to have these tools in place.

Thanks for taking my question.

Okay. Thanks, Ryan.

Our next question is from the line of Sam Bedovsky of Truist. Your question please.

Hi, thanks for taking my question. First one on me for me in terms of looking at the sequential growth in 3Q for MACI. If you could talk about -- we heard from other companies, June a little bit slower and July persisting in a little bit of a slower environment on elective procedures, is that what you're seeing? And then if you could kind of just let us know what gives you confidence in that sequential growth into 3Q?

Yes. I'll start, Sam, and thanks for the question. So, obviously, in our remarks and we referenced that our performance to-date and continued momentum gives us a lot of confidence about accelerating growth for MACI both in the third and fourth quarter. So, I think that speaks for itself.

Yes. Echo that -- go ahead.

Just maybe to put a final point. Is that more of a confidence in terms of you're seeing more biopsies, or are we starting to see higher conversion of biopsies and different actual procedures, is that how you're seeing it?

Well, at the end of the day, for us, implants are the revenue-generating metric that we focus on, right? And so I'd say, certainly, in the first half of the year, we didn't see sort of a meaningful change or a material change in conversion rates. In our guidance for the rest of the year, and Joe can expand on this, does incorporate a little bit of an improvement there, but -- and particularly at the high end of the range, but it's basically what we're seeing around sort of implants, implant scheduling, and so on that gives us the confidence moving forward.

Yes. No, I would just add, I think, Nick, kind of, hit the key points in terms of the drivers. Again, I think what we talked about was kind of in that mid to high single-digit quarter-over-quarter growth, which gets you into the mid to high 20s on a year-over-year basis. It's kind of in that $30 million plus range for the quarter. And I think Nick talked about the drivers so, leave it there. Thanks.

Yes, that's helpful. And just to kind of extrapolate off that to 4Q, just in back and that looks like probably the assumption should be similar sequential growth from 3Q to 4Q that we saw in 2019. Is that the right way to think about it?

Yes. I mean, broadly speaking, and I think we've been consistent with this really throughout the year in terms of -- as you think about kind of the mix of revenue or seasonality on MACI, we talked about kind of strong Q2 where we think Q3 is trending toward. And then as you think about kind of the second half of the year or you think about 4Q, et cetera, we think we'll still see that kind of typically -- a typical 40-60 split from H1 to H2. And that's actually been really consistent, kind of, in the pre-COVID years, around 60% in the back half. And even if you factor in the last couple of years, which have obviously varied based on COVID, it still points you at an average of roughly 60%. So, I think, in general, Q4 is also pretty consistent in staying, kind, of that low $50 million range. If you kind of do the math on the midpoint and step-up kind of similar kind of in the 60s to some of the earlier years in 2019 is a good comp that we point to do. So, that's -- I think that's a fair comp.

Okay. Thanks for taking the questions.

Thank you. Our next question is from the line Jeffrey Cohen of Ladenburg Thalmann. Go ahead please.

Hi Nick and Joe, how are you?

Good morning.

Hey Jeff.

So, a couple of questions from our end. I guess, firstly, could you talk a little bit about your gross margin commentary in your modest OpEx reduction down to $130 million, $132 million, at least as it relates to the back half and the confidence that you have on the margin and the things?

Yeah. So thanks for the question. So I think starting with gross margin. I think in general, we try to think about this over the longer term. There can certainly be some, kind of, variability across quarters, et cetera. But on a full year basis, we still see this trending in the high 60s, 69% for the full year is our guidance. We can look at run rate per quarter and see where they are year-to-date versus last year, et cetera. And I think it's largely tracking as anticipated. I talked about a few of the drivers. You do lower BARDA revenue, some P&L geography we talked about related to kind of the manufacturing facility here. FFO costs were a bit higher, because you have a lot of -- some of those smaller burns. We are seeing some, as anticipated material cost increases, et cetera, although again, those are largely as anticipated. Some of our outside vendor spend is a little bit higher. I think an important point as well though, as you kind of think about the cadence of the year is we typically see more significant mix of our revenue and significant revenue growth from H1 to H2. So, aside from 2021, if you look at those years, you see that across all those years. And you also typically see a progression throughout the year on gross margin. So that's what we're anticipating again this year and what we've seen historically. So on a full year basis, pretty close to where we anticipated to start the year, but a bit lower. And I think to your point, a little bit, I think what's helping on a full year P&L perspective is on the OpEx side, I think we're managing our expenses well. We have lowered the guidance by a few million there. I think we're just being more efficient in our overall spend. Having said that our key initiatives across the business are still on track, so we're mindful of the total P&L and feel like between two line items, there is an offset there as we think about the total P&L for the year.

Okay, got it. And then secondly, first, can you talk a little bit about NexoBrid from a commercial standpoint from year end, how you're perhaps making some preparations into a commercial launch early next year as far as your sales and clinical organization in the US? Thank you.

Yeah. Thanks, Jeff. I'll take that one. Obviously, with an established PDUFA date now, we have resumed our commercial pre-launch activities, and that also includes medical affairs in terms of continued education, the next protocol, expanded access protocol and so on. So all those activities are ongoing and at this point, based on the information we have, we certainly expect a first half commercial launch, assuming things stayed on track. Again, we feel like we certainly submitted a high-quality and timely resubmission that addressed the questions raise by the FDA. I'd say one thing, we'll keep our eyes on, our inspection schedules. As we mentioned previously, we certainly expect that the FDA will want to inspect the sites in Taiwan and Israel, and that's the one piece of it that's out of our control. But at this point, again, we're planning for a first half commercial launch. And given as we've talked about previously, the P&T process and so on, we'd expect that schedule commercial revenues to begin sometime in the second quarter next year.

Perfect. That's it for us. Thanks for taking the questions.

Okay. Thanks, Jeff.

Our next question is from the line of Arthur He with HCW. Your question, please.

Hi. Good morning, Nick and Joe. This is Arthur in for RK. I just had a quick question regarding MACI. Could you guys give us some color on the metrics on the biopsy growth for MACI during the quarter?

Yes. We haven't talked specifically about kind of the biopsy growth, specifically. I guess what I would say is, in general, I would say, last year, we had significant kind of delta between kind of how biopsies were growing and kind of the revenue range, et cetera. Broadly speaking, I would say, as we think about this year, I think they're generally kind of been more instinct. So if you kind of look at where the revenue grows at kind of gives you a good sense of kind of in general where the biopsies are trending as well.

Got you. Thanks. And regarding the backlog of the MACI, how is that looking like for the quarter? And what's your expectation for the second half of the year.

Yes. So I would say, when we think about kind of, I would say, the first half of the year on MACI, the results to date and really even in the back half, I'd say, this is certainly something we're still focused on in terms of that backlog from a kind of commercial perspective, et cetera. But we haven't seen -- I wouldn't say it's a significant contributor to the results – the contributor to the results to date. Or as you think about kind of the back half, we're not seeing that as a significant contributor in the back half either. If, for example, our conversion rate kind of meaningfully improves, et cetera, that could potentially be due to the backlog. But again, at this point, we're not assuming that's a meaningful contributor.

Got you. Thanks. Really appreciate that. Thank you for taking my question.

Thank you. And now I would like to turn the conference back to Nick Colangelo for closing remarks.

Okay. Well, thank you, everyone. We appreciate you joining us today and for your questions. I think -- we certainly believe the company remains on track to deliver another year of strong financial and operating results, and we look forward to updating you on our progress on our next call. So thanks again, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.