Ladies and gentlemen, thank you for standing by. Welcome to the Vericel's Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instruction] I will now turn the conference call over to Eric Burns, Vericel's Head of Financial Planning and Analysis and Investor Relations.

Thank you, operator, and good morning everyone. Welcome to Vericel's fourth quarter 2022 conference call to discuss our financial results and business highlights. Before we begin, I'm going to 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, 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 financial results press release is available on 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 access on our website. I’m 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 by discussing financial and business highlights for the fourth quarter and full year 2022, current trends for MACI, which have been very positive to start the year. Our NexoBrid commercial launch activities and our overall outlook for 2023, a year in which we expect total revenue growth to accelerate in continued strong profitability for the company. Joe will then provide a more detailed update on our financial performance in 2022 and financial guidance for 2023 before opening the call to Q&A. The company delivered strong financial and business results to close the year as we generated record quarterly revenue, delivered our 10th straight quarter of profitability and positive operating cash flow and achieved significant development milestones including an accelerated regulatory pathway for the arthroscopic MACI program, an FDA approval of NexoBrid, which we believe will enable the company to build a second high growth commercial franchise. For the full year, total revenue was more than $164 million, with MACI revenue growing 18% to $132 million, we continued to deliver strong profitability and cash flow as we generated nearly $25 million of adjusted EBITDA and $18 million of operating cash flow ending the year with $140 million in cash in investments and no debt. We also generated record total revenue of nearly $53 million in the fourth quarter, as well as gross margin of 73% and adjusted EBITDA margin of nearly 30%, both of which increased versus the prior year and approximately $6 million in net income for the quarter, which increased more than 30% compared to 2021. Our strong fourth quarter results were driven by record quarterly MACI revenue of over $46 million, which came in at the high end of our guidance range, represented 24% growth over the…

Thanks, Nick, and good morning, everyone. Starting with the income statement. Total net revenue for the full year was $164.4 million, driven by strong MACI results in the fourth quarter. Total company revenue in the fourth quarter was $52.7 million. MACI revenue of $132 million for the full year was at the high end of our guidance range growing 18% versus the prior year. For Q4, MACI revenue was $46.3 million and grew 24% versus the prior year and approximately 50% versus the third quarter. As we continued our momentum in the MACI business with two very strong quarters to close out the year. MACI growth in 2022 was driven by continued strong surgeon and biopsy growth as well as a higher price, and importantly, the conversion rate where MACI stabilized in the second half of the year. Total burn care revenue for the year was $32.4 million, consisting of $31.7 million of Epicel revenue and $0.7 million of revenue related to the procurement of NexoBrid by BARDA for emergency response preparedness. Epicel revenue in the fourth quarter was $6.3 million. Gross profit for the quarter was $38.2 million or 73% of net revenue, an increase compared to 72% for the fourth quarter 2021. For the full year gross profit was approximately $110 million or 67% of gross revenue, which was in line with the prior year gross margin and higher than our full year guidance in the mid 60% range. Total operating expenses for the quarter were $32.2 million compared to $29.9 million for the same period in 2021. And for the full year our operating expenses were $126.8 million compared to $113.9 million last year. The increase in operating expenses in 2022 was primarily due to an increase in headcount and higher sales and marketing expenses. Net income…

Thank you. [Operator Instructions] Our first call comes from Ryan Zimmerman [BTIG]. Ryan, your line is open.

Thanks for taking the questions. Good morning guys, and congrats on all the progress this year. I want to start with Epicel a little bit just because the guidance is a little lower than I think we were expecting. And I understand, it’s volatile, NexoBrid going to help offset that. But when you think about that run rate, that $24 million run rate, do you feel like you’ve sufficiently set a floor here to account for the variability given how unpredictable it is? And just help us understand kind of how you came to that $40 million on NexoBrid. Why is that right? Why is it not less? Why is it not more? Just would appreciate understanding your thought process on coming to that number.

Yes. Good morning, Ryan. Thanks for the question. This is Joe. I’ll start with that one. So, I think on Epicel, so at first it’s important to realize with Epicel from a run rate perspective to your question, we’re very mindful of kind of where the business is. So, the Q4 revenue was roughly $6 million. When we talked about in the prepared remarks as we move into Q1, as we would expect a similar revenue number around $6 million, although to your point, it’s always difficult to predict exactly what that looks like based on the small patient numbers, et cetera. So it obviously could be a bit different quarter-to-quarter. But we do feel like that run rate, we saw that coming exiting last year, that’s where we started this year. As we think about the framework for guidance, maybe turning to that for a moment. So, the way we’re thinking about it is, that $24 million is really the appropriate starting point for Epicel. So basically that $6 million run rate per quarter and certainly we will look to grow from there. If you look in prior years kind of pre-2021, we said more significant growth. You typically saw growth in the kind of mid-single-digit or low-double-digit range. So, if you do the math there, you could get up to, call it $25 million, $26 million perhaps a bit more. Again, right now your question we’re on that $24 million run rate. So as we then think about the total guidance, that’s where NexoBrid is important as well. So, we feel like the combination of the two products can get us into that $28 million to $32 million range for the full year. And again, we want to be mindful of kind of where Epicel trends are right now as part of that. But what that points to your NexoBrid question is, as we talked about in the prepared remarks, we’ve certainly seen some strong indicators so far. We still expect commercial availability in the second quarter. And again, from a cadence perspective, there’ll be no revenue in the first quarter, some modest stocking in the second quarter, and then really an increase as we get into Q3 and Q4. So, if you kind of think about the guidance framework, and again, we’re not giving specific numbers by product, which is why we’re talking about the franchise, but that does put you in kind of that mid-single-digit range, which based on kind of what we’ve seen to date, I think kind of makes sense for NexoBrid. And again, we think we can take a pretty meaningful share over the long-term. So, again, we’re thinking about it from a franchise perspective, but when we think about where Epicel is and potential of NexoBrid, I think it’s the appropriate range this year.

Okay. Let me turn to MACI for a moment. And just one housekeeping question, Joe, did you say 20% growth off of first quarter 2021? I thought I heard you say that not first quarter of 2022, or was that just a mistake?

Yes, sorry. First quarter of 2022, 20% year-over-year growth in Q1.

Okay. Okay. All right. Okay, just want to check. And then, as I think about the MACI business, I think your guidance is very clear about what’s included in that business, what could be upside? Do you – and your comments about productivity are also helpful, Nick. But when you think about the arthroscopic delivery edition, do you feel like you need to upsize the sales force to capture that opportunity? Or is the sales force appropriately sized at, I think it was 76 last we checked. And just given a broader customer base, why not upsize it if productivity is going to keep growing implied by kind of your comments.

Yes. Ryan, thanks. This is Nick. So number one, you’re right. We did increase our sales force from by about 50% from 49 to 76 territories back in 2020. And at that point leading into that, our rep productivity was – had gotten up to a couple million dollars a year. As you remember, it kind of grew even as we were expanding from a sales force size in the 20s, up through 50. And we’re kind of now back at that range given the current MACI guidance. I think what we’ll end up doing, as we’ve mentioned before around arthroscopic MACI is going back and refreshing sort of the targeting work that we did back in 2019. The Health Advances project, as we talked about at that time, we know there’s a meaningful segment of those 10,000 plus surgeons that we had both arthroscopic and open procedure data on that either exclusively or predominantly do arthroscopic procedure. So that may mean we add some number of new surgeons, and if that’s large enough that it would justify increasing the sales force, that’s certainly something we think about. So we’ll be doing that work during this year ahead of the potential launch next year.

All right. Thank you. I’ll hop back in queue.

Thank you.

Thank you very much. [Operator Instructions] Our next call comes from Sam Brodovsky of Truist Securities. Sam, your line is open.

Hi. Thanks for taking the question and congrats on the good quarter. I’ll just start with one on MACI in terms of – and appreciate you providing the components of the guidance. But in terms of things looking better to start the year, what would you need to see to start to incorporate either increasing conversion rates or an improving sort of patient census into the MACI guide?

Yes. This is Joe, I’ll take that one to start. So, I think from a MACI’s perspective, again, just to clarify Ryan’s earlier comment, what we talked about was we’ve had a strong couple quarters to close out last year, kind of both above 20%, which certainly is a good sign. And I think as we look into the first quarter, I think what we’ve really seen is strength in both biopsies, which really started in Q4 and then continued into Q1 as well as implants. So that’s certainly an encouraging sign. And so, our expectation in the first quarter is to be approximately 20%, so I think gets you to around $31 million for the quarter. As we think about the full year, a couple things to keep in mind there. We do think about kind of that seasonality and mix by quarter so that kind of number in Q1 actually lines up again to roughly 20% of our full year – if you look at the midpoint, for example, it’s basically 20% of that full year number. So that’s certainly something we’re mindful of. I’d also say, we’ve probably seen some early signals that perhaps conversion rate is ticking up. But we generally measure that over longer periods of time. And I think what I would say is, from our perspective, we want to see that over a longer period of time. We think the foundation is there and the operating environment is improving, but we would want to see some of those additional growth drivers, which we think can still be growth drivers for the brand, but in terms of 2023, we'd want to see that over a longer period of time before we know whether that's the case for multiple quarters.

Thanks. That's helpful. And then just a quick one on NexoBrid and thanks for providing the guide points there, does guidance for this year contemplate any accounts outside of the existing Epicel base, or does it just assume revenue coming from those accounts? Thanks.

Yes. Hey Sam, this is Nick. No, we obviously have tiered the targets and the sales force is focused on, as we talked about, first thing you do, aside from sort of surgeon training and hiring the sales force training and deploying them, really it's about the P&T committee approval process. And so that is well underway and that includes accounts that are Epicel users. But also, if you'll recall, obviously there was the DETECT pivotal study at sites here in the U.S., the pediatric study, the ongoing NexoBrid or the next expanded access protocol. So three different clinical studies where sites may have experience with NexoBrid often those are also Epicel centers, but sometimes they're not. So I would just say that all 140 target burn centers are in play for the year, and we would expect utilization to come from both current Epicel burn centers, but then NexoBrid burn centers as well.

Okay. Thanks for any the questions.

Thanks.

Thanks.

Thank you very much. [Operator Instruction] Our next call comes from Jeffrey Cohen of Ladenburg. Jeffrey, your line is open.

Hi, Nick and Joe, how are you?

Good, Jeff.

Doing well. Good morning.

Just a couple questions from our end. If you could talk a little more about some of the human factors work you're doing in the arthroscopic setting as far as the device and its design. Is it locked down at this point?

Yes, Jeff, I think and one thing you can do is go to our website where we have a video of the MACI arthroscopic procedure, which I really think helps give people an understanding of exactly what the instrument set looks like and how MACI will be administered arthroscopically. And the context for the human factors study is that when we met with the FDA in December, we proposed that because we were not changing either the drug substance or the drug product, just the way it was administered. And because there's a fair amount of published data about, the outcomes, good outcomes when MACI has delivered arthroscopically principally outside the U.S. when the product was available outside the U.S., the FDA agreed that a human factor study would be inappropriate path going forward. So really that means you bring in a number of orthopedic surgeons, you give them instructions on how to administer the product arthroscopically, they do it in a cadaver lab just to make sure that the interface, the surgeon interface faced with the instruments is appropriate. And there's no issues there. And so it's a pretty streamlined path for us comparing and obviously an accelerated regulatory pathway versus having had to do an actual clinical study. So that study is planned for this year and we would plan to submit the label expansion to the FDA by the end of the year and would allow us to launch in 2024.

Okay, that's helpful. And then Nick, could you talk about the consumable or reposable instrument kit and what portions may or may not be and how that might look from the payer standpoint as far as the actual procedures being done arthroscopically in the Monday flow there?

Yes, so as you'll recall for MACI, it's typically reimbursed under a J code. So it's a separate code that, the payers – under which the payers reimburse the product. There's obviously a procedure code, a CPT code in terms of how the surgeons get paid and then a facility fee. So that's kind of the current economics. This is the kit you can see in the video is basically a set of disposable instruments, different size cutters, curettes, things like that. And so exactly how we'll price those is to be determined but it won't impact sort of the current reimbursement for the MACI product itself.

Got it. Okay. Perfect. That does it for us. Thanks for taking the questions.

Thanks Jeff.

Thank you.

Thank you very much. Please stand by for our next question. Our next question comes from Sean Lee of HC Wainwright. Sean, your line is open.

All right, good morning guys, and congratulations on finishing a great year. I just have two quick questions. One for next outbreak, can we expect any more orders from BARDA this year?

Yes, no orders from BARDA during this year, just commercial.

Okay. Great. And in terms of the launch strategy for NexoBrid, would you be targeting all the burn centers at the same time similar to what Epicel is doing, or would you start in certain geographies first before rolling out nationwide?

Well, as we've talked about previously of the 140 accredited burn centers in the U.S. each year, episodes typically used in probably half of them. So obviously we have relationships in those accounts. We are adding sales reps that will focus on the other accounts with NexoBrid only to start. And so, we've tiered them out by patient volumes, claims data, et cetera. And obviously you focus on high volume centers first, so it will be, as I mentioned earlier on the call or in the Q&A session that, we'll be targeting both current Epicel using centers as well as, high volume centers that have been involved in the various studies for NexoBrid here in the U.S.

Thanks. That's helpful. And my final question is just on the new manufacturing facility. Is everything still on track there, still ready to be – sorry, still expected to be completed in 2024?

Yes, so everything remains on track. The tenantive improvement part of the project is scheduled to be completed by the end of 2024. Of course, we've mentioned that we would expect commercial production in early 2026. So really that 2025 time period is FDA inspection and validation of the new facility.

Great. Thanks. That's all the questions I have.

Thank you.

Thank you very much. I would not like to turn the call back to Nick Colangelo for closing remarks.

Okay. Well, thank you very much and thanks to everyone for your questions and your continued interest in the company. Overall, we delivered strong financial and business results to close the year in 2022, and we expected another year of significant top line revenue growth and strong profitability and operating cash flow driven by both our commercial franchises in 2023. Given our significant market opportunities for the products and our strong financial profile, we really believe that the company's well positioned for sustained long-term growth in the years ahead. So thanks again and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.