Ladies and gentlemen, thank you for standing by. Welcome to Vericel’s Fourth Quarter 2023 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. I will now turn the conference call over to Julie Downs, Vericel’s Head of Corporate Communications.

Thank you, Operator, and good morning, everyone. Welcome to Vericel’s fourth quarter 2023 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that on today’s call, we will be making forward-looking statements covered under the Private Security 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, Julie, and good morning, everyone. I’ll begin today’s call by discussing financial and business highlights for the fourth quarter and full year, as well as our expectations for 2024. Joe will then provide a more detailed update on our 2023 financial results and financial guidance for this year before opening the call to Q&A. The company executed exceptionally well in 2023 and delivered outstanding financial and business results in the fourth quarter, generating top-tier revenue growth and even higher profitability growth. Total revenue for the full year increased 20% to over $197 million, which was at the top end of our guidance range, with MACI revenue growing 25% to nearly $165 million and burn care revenue of nearly $33 million. The company also reached an inflection point with respect to our profitability profile, with bottomline profitability growing at twice the rate of our topline revenue growth as adjusted EBITDA increased 40% to $34 million and we generated over $35 million of operating cash flow, ending the year with approximately $153 million in cash and investments and no debt. The company also had a very strong close to the year, as we generated record total revenue of $65 million in the fourth quarter, an increase of 23% over the prior year. Our strong fourth quarter performance was driven by record quarterly MACI revenue of nearly $7 million -- $57 million, which was above the high end of our guidance range and represented more than 50% sequential growth over the third quarter and 22% growth over the fourth quarter of 2022, marking the sixth straight quarter of 20%-plus growth for MACI. This outstanding MACI revenue performance was driven by strong underlying business fundamentals, as we had the highest number of MACI implants -- implanting surgeons, surgeons taking biopsies and biopsies…

Thanks, Nick, and good morning, everyone. Starting with our 2023 financial results, total net revenue for the full year was $197.5 million, representing growth of 20%. Total net revenue in the fourth quarter was $65 million, with growth of 23%, driven by strong results from both of our franchises. MACI revenue of $164.8 million for the full year was above our guidance range, growing 25% versus the prior year. For Q4, MACI revenue was $56.7 million and grew 51% over the third quarter and 22% versus the prior year, as we continued our momentum in the MACI business with our sixth consecutive quarter, with growth over 20%. Total burn care revenue for the full year was $32.7 million, consisting of $31.6 million of Epicel revenue and $1.1 million of NexoBrid revenue. In the fourth quarter, our total burn care revenue increased by 31%, with Epicel growth of 22% and the addition of NexoBrid revenue in the quarter, leading to a very strong fourth quarter burn care result. Growth profits for the year was $135.6 million or 69% of net revenue, an increase of approximately 200 basis points compared to 2022. For the quarter, growth profit was $48.5 million or 75% of net revenue, which also increased by 200 basis points versus last year and represents the highest gross margin for the company in any quarter to-date. In addition, our pull-through of incremental revenue to gross profit has now returned to levels similar to 2019, with the pull-through to gross margin of 83% for the fourth quarter and nearly 80% for the full year. Total operating expenses for the year were $142 million, compared to $126.8 million in 2022. For the quarter, operating expenses were $35.8 million, compared to $32.2 million for the same period in 2022. The increase in operating…

Thank you. [Operator Instructions] Our first question comes from Ryan Zimmerman with BTIG. Please go ahead.

Good morning. Can you hear me okay?

We can. Good morning, Ryan.

Good morning and congrats on a really strong 2023. I appreciate all the commentary on guidance this morning, Joe. I’m wondering if you could talk a little bit about seasonality on the topline, though. I mean, it is kind of a normal year relative to year’s prior with the launch of NexoBrid, potentially some benefit late in the fourth -- in the third quarter and fourth quarter for arthroscopic MACI. I’m just curious if you could kind of expand a little bit on that in terms of how to think about maybe seasonality and pacing this year, given it is a little abnormal?

Yeah. So thanks for the question, Ryan, and good morning. I can hit on that and maybe I’ll just start at a high level with guidance just to make sure people understand the framework and then I can touch on the seasonality as part of that. So first off, from a total company perspective, as we talked about in that 20% plus range, very consistent with our messaging to close out last year and early this year at JPM, where we updated our corporate presentation and thinking for this year in 2025. Importantly, as part of that question, we’re using the same framework we used last year. Obviously, a higher starting point for the company and both franchises, so it is a bit higher, but same framework, which is important. So on MACI and I’ll touch on the seasonality. So on MACI, from a framework perspective, again, it’s very similar to 2023, which is starting the year, assuming our key growth drivers are surgeon -- continued surgeon in growth, which has been strong. That leads to additional buyout season volumes, an increase in price. So that gets you into the, call it, high-teens on a full year basis. And so as part of your question, I would say, we factored in some impact from the arthroscopic launch. It’s really more, I would say, from a Q4 perspective, but I wouldn’t say that meaningfully changes kind of how we’re thinking about seasonality from a MACI perspective. So it certainly could have some impact because we do think ours will have an impact in Q4, but to start, I wouldn’t think from a quarterly perspective, it’ll be significant relative to last year, kind of what an average year looks like. So if you think about MACI and we talked about in the…

Thank you for all that color. That’s very, very appreciative. Maybe just to ask on NexoBrid, I think people were hoping it would kind of get rolling pretty quickly here. You’re guiding to kind of a similar level from the fourth quarter. Talk to us about kind of how the process is going. I mean, clearly, there’s interest, you wouldn’t have that many sites ordering this early if there wasn’t. But how do you think about kind of the early adoption of NexoBrid from what you’re seeing so far a couple weeks in the launch? Thanks for taking questions.

Yeah. Hey, Ryan. This is Nick, I’ll start and then, Joe, can kind of talk about sort of the dynamics of the distribution system. But from our perspective, as you referenced, whether it’s our market research or independent work that others have done, I mean, there is this high level of interest from surgeons in NexoBrid. There’s no doubt about that. Obviously, we -- the team’s done a great job on in terms of the onboarding of burn centers and we’ll continue to keep adding those burn centers. With the delay last year, there was an interruption to sort of the onboarding process for many centers when the product did become available. Obviously, those that were farther along were able to kind of finish out that process and start making some initial orders. And with respect to other centers where they had really kind of put things on hold, it was a re-engagement process. And all of that’s going really well, obviously. Importantly, we think about this, obviously, as we’ve always said, over the long-term, when you’re changing the standard-of-care for what burn surgeons have done for the last several decades in terms of their eschar removal protocols, et cetera, those things take time. But making great progress, and importantly, we take great care to make sure we support the initial patient applications and treatments. The outcomes have been great. The surgeons’ feedback has been great. So, we think we’re kind of where we thought we’d and sort of making the progress that we would expect.

Yeah. And just to add a little bit as well on the NexoBrid side. So, first, as Nick said, obviously, the metrics have been very strong to start. The clinical feedback has been very positive. So, those are great signals. I think it is important to understand, we’re early in the launch, and a couple of things just to point out, which is, again, the distribution on NexoBrid is very different than MACI and Epicel. And just as a reminder, we have a 3PL that kind of manages our inventory and then the distribution network that’s in place consists of multiple specialty distributors. Some have multiple locations and we recognize revenue when those specialty distributors order from our 3PL. The second kind of part of the channel, if you will, is then the burn centers and hospitals order from those FTs. It might be the one that they typically work with, most likely or some different products at their centers. So when they order, that drives additional orders from our FTs each quarter and then leads to our quarterly revenue. And then lastly, it’s important to remember that both the FTs and the hospitals will keep some level of inventory, which can vary and impact ordering patterns. So just briefly, as you kind of think about the first couple quarters of launch, again, Q3, that was, if you remember in Q3, we got commercial availability very late in the quarter. So that was essentially the FTs kind of ordering from a channel perspective in Q3 and we didn’t really get into the market and start treating patients until Q4. That’s the quarter where hospitals start ordering from FTs and kind of it’s in the market, et cetera. And generally, I think what we’ve seen is a lot of the burn…

All fair. Thanks guys for the very comprehensive answers. Appreciate it.

Thanks, Ryan.

Thanks, Ryan.

Thank you. One moment for our next question. Our next question comes from Mike Kratky with Leerink Partners. Please go ahead.

Hi, everyone. Thanks for taking our questions. Can you speak to how you’re thinking about how quickly you can get traction in the new target surgeon population once you get arthroscopic approval? I mean, do you get the sense there’s pent-up demand from surgeons that are not currently using MACI presently, but will start doing implants once you have arthroscopic approval?

Yeah. Hey, Mike. This is Nick. Obviously, as we said, we’re really excited about MACI Arthro for the reasons we’ve described. It targets the largest segment of our addressable market. It will be the only arthroscopic restorative cartilage repair procedure for these femoral condyle defects of a certain size. So we think this is going to be very meaningful for us as we move forward. Obviously, we can’t at this point, since it’s not an approved method of administration, be out there talking generally to surgeons. But we are working with a couple dozen surgeons through the human factors study, voices at customer labs, additional trainings, et cetera. And I’ll just say the enthusiasm from the surgeons who have been exposed to the new instruments has been significant and great. So they’re really excited about it and I would expect that that will translate to those who aren’t as familiar with it right now. And I would just, last point would be that, for these surgeons, if you look at our addressable market, right now, the vast majority of cartilage repair procedures are done arthroscopically, whether it’s chondroplasties, microfracture. Those are the things that make up the majority of the cartilage repair market. So this kind of is right in the wheelhouse for those surgeons in terms of how they currently do their cartilage repair procedures. And there’s nothing out there that has the clinical outcomes that MACI has. So, we think that combination is going to be very powerful for us as we move forward.

Got it. Yeah. I really appreciate the color there. And then maybe just as a follow-up. Is it reasonable to think that as you get arthroscopic approval, that could ultimately lead to an improvement in the conversion rate just as more implants end up getting done over time? Is that available?

Yeah. Well, we certainly believe and our surgeons believe that, number one, with a less invasive procedure that obviously there’s better aesthetic outcomes, there’s less post-operative pain and we would expect there to be faster post-surgical recoveries, and that is something from a medical affairs perspective that we’ll be focused on as soon as we launch the product and generating data that actually supports what I think everybody expects to be the case. So, yeah, I think that is very much in line with sort of what we’re thinking.

Got it. Thanks very much.

Okay. Thanks, Mike.

Thank you. One moment for our next question. Our next question comes from Richard Newitter with Truist Securities. Please go ahead.

Hey. Sorry. It’s actually Sam on. Thanks for taking the questions. Just first one, on MACI, can you just sort of walk us through the price dynamic in 2023 and then any changes there for 2024 and how should we be thinking about that impacting revenue and any price impact from arthroscopic as well?

Yeah. Hey, Sam. This is Nick. So, yeah, so we’ve spoken before about sort of we routinely take annual price increases for MACI. We, of course, expect to do that this year as well. We’ve typically taken a mid-year price increase. The -- with respect to arthroscopic MACI, MACI’s reim -- -- the product itself obviously is reimbursed under a J code. That pricing will not change whether a surgeon delivers MACI in a mini arthrotomy or an arthroscopic procedure. So that won’t impact it. The CPT codes is the same. So the reimbursement for the surgeon will be the same for the procedure. We do anticipate charging. This will be a disposable set of instruments and we do expect to charge for those instruments. So much like our MACI biopsy kits where there’s a line item in our financial filings that you can see. We expect that these instruments will generate some revenue for the company and offset some other costs potentially over time. But really the main revenue driver is the reimbursement for the implant itself.

Great. Thanks for that. And then thanks for all the really detailed great color earlier. That was really helpful. I did just want to touch a little more on Epicel given the quarterly volatility this product can have. Can you just give us a little more insight into the visibility you have into that sort of run rate through the year and why you’re so confident again? Thanks.

Yeah. I’ll start and Joe can kind of chime in. I think Joe referenced it in the prepared remarks that historically and pre-COVID, I mean, things got a little more variable during COVID, obviously. And we would always say probably a safe place to start the year, assuming high single-digit to low double-digit growth for Epicel. We kind of routinely outperformed that. But again, given sort of less visibility than we have, for instance, with MACI, we kind of always just assume that kind of communicated, I should say, that that was a good place to start. I would say that over the past essentially three quarters now Epicel with a larger share of voice has been sort of returning. It’s not even back to its highest levels ever and but we’ve seen it kind of get back routinely into more of like an $8 plus million run rate. And the market’s kind of normalized. The -- we had some dynamics with respect to our largest customer that have now been resolved at their facility, not Epicel related, but other issues. And so all of that is kind of normalized and so we’re kind of back into sort of that place we were in from prior years. And so, again, obviously, we have -- when we have a biopsy quarter, like we did in the fourth quarter, we know that’s going to create strength into the year, as we discussed earlier. So, yeah, we’re feeling pretty good about it. And again, we said all along that we expected pull through for Epicel from having a larger share of voice. We’re in more hospitals than we were previously and all that. It had an impact starting kind of the middle of last year, as we talked about on earlier calls and it continues to have an impact.

Yeah. Just to add -- just to kind of reiterate or add a little bit, Sam, kind of the earlier question around seasonality ties into it and guidance, et cetera. But I think it is important to recognize Epicel meaningfully grew versus where it exited 2022. Sometimes it’s a little bit tough to look at calendar years, but we know it was running in the $6 million to $7 million range. Again, if you just use the last couple of quarters of 2022, it was kind of high 6s. Now we’re above $8 million. I mean, that’s more than 20% growth, which also lines up historically to kind of where we were. And again, as we think about kind of growth on a full year basis, just to reiterate, there’s multiple components there. So we think the volume can be a bit better and we’re starting to see some signs of that with a larger footprint and the share of voice. But also, as I said earlier, there’s a price component to there as well. So as you think about call low double-digit growth on Epicel, and again, that’s one scenario within our guidance and burn care there can be shifts along the franchise products, but the one I referenced, I mean, that’s below where we were last year. So I certainly think that’s a reasonable expectation. Again, it could vary quarter-to-quarter in terms of how we get there, but we think that’s certainly a reasonable expectation going into the year.

That’s great. Thanks for taking the questions.

Thanks, Sam.

Thank you. One moment for our next question. Our next question comes from George Sellers with Stephens. Please go ahead.

Hey. Good morning and thanks for taking the question. Maybe to shift gears a little bit to the margin guidance, I’m just curious, what does that assume in terms of the improvement driven by price versus NexoBrid and Epicel ramping up? And then what’s also sort of assumed related to investment for commercializing arthroscopic delivery?

Yeah. So good morning, George, and thanks for the question. So I’ll kind of hit that and just make sure we talk a little bit about some of the guidance beyond the revenue So as we talked about we’re expecting improvement in gross margin from high 60s last year to 70. On adjusted EBITDA, we ended last year on a full year basis at 17. We think we could be around that 20% number this year. First off, to just kind of point out, I did comment in my prepared remarks, but as you think about that guidance, I would say, it’s also important to think about the quarterly progression and the trends there. So the way kind of our business works with just some of the seasonality and whatnot is we typically see improving kind of margins throughout the year, particularly Q1 often ends up being kind of on the low end and then Q4 obviously ends up being on the higher end. So there’s going to be a progression, I would say, and you can really reference last year’s trajectory and assume probably some something similar on a year-over-year basis with some improvement and there could obviously be some puts and takes within quarters. In terms of kind of what’s driving kind of the margin improvement, I would say, and I guess, on the last piece on the OpEx side just before I go there, we did talk about call it mid-160s, I think, I mentioned $165 million from an OpEx perspective, and from an investment perspective, it’s the things we’ve been talking about. So certainly we’ll want to make sure Arthro is set up for success. There’s some spend there to kind of get ready from a commercial perspective, to make sure the instruments are ready. So…

Okay. That’s really helpful color. I appreciate all that detail. You touched on MACI ankle. Just curious with that clinical study initiating in 2025 and then you’ve also talked about getting close to 30% adjusted EBITDA margins in 2025 and beyond, how do we sort of reconcile those two items and what should we think about in terms of the investments for launching that clinical trial?

Yeah. Hey, George. Nick. As we’ve talked about this study has always been sort of planned and is included in sort of the longer term projections that we’ve given. This is not a large study by pharma or biotech standards. It’ll be very much like the summit study that was the pivotal study for MACI in the knee somewhere call it up around 200 patients. It’ll take a couple of years to enroll. So it’s kind of single-digit-million dollars kinds of study and so it’s, again, not compared to our overall sort of OpEx and investment. It’s really not that significant.

Okay. Great. Thank you all again for the time.

All right. Thank you.

Thanks, George.

Thank you. One moment for our next question. Our next question comes from Jeffrey Cohen with Ladenburg. Please go ahead.

Hi, Nick and Joe. How are you?

Great. Well.

Good, Jeff.

A couple of quick ones from our end. So, when you talk about MACI Arthro and the surgeon population expanding out from 5,000 to 7,000, how do we equate that or think about the overall TAM as there’s certainly some other levers out there? Is that a 40% greater TAM or what might we think?

Yeah. So as we talked about previously when you look at our 60,000 patient TAM clearly MACI’s a go-to product in patella and larger defects on the femoral condyle or other areas of the knee. We do get business on these 2 to 4 square centimeter defects in the femoral condyle, but just our penetration rate there is lower and we think MACI arthroscopic will allow us to have deeper penetration there. So, for MACI Arthro, it’s really about sort of deeper penetration into the existing addressable market of $3 billion plus. The TAM expansion for MACI occurs when you move to other joints and that’s where MACI ankle comes into play. And as I mentioned in my prepared remarks, that’s about a$1 billion addressable market opportunity for us with around 20,000 eligible patients per year.

Okay. Got it. And then, lastly, first, could you talk about cash a little bit? You had a strong Q4 with $10 million of free cash flow. Any thoughts on cash? I know that some portion of that would be for the facility, but any thoughts there?

Yeah. So I think we talked about a pretty strong year from kind of a cash flow perspective. I think it was great to end the year at a higher place than we started, even as we started funding the building. I think as I talked about the prepared remarks, I mean, this is more the year where you’re going to see some more substantial kind of capital or cash kind of allocated to our new building, but we also expect to continue to generate kind of new cash -- additional cash and sort of self-fund that. So that’s probably the key dynamic, I would say, as you think about the cash flow in 2024.

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

Thank you.

Thanks, Jeff.

Thank you. One moment for our next question. Our next question comes from Swayampakula Ramakanth with HCW. Please go ahead.

Thank you. Good morning, Nick and Joe. Most of my questions have been answered, but I just have a quick question regarding how to think through NexoBrid, not just over 2024, but even beyond. Just like what we had seen with Epicel, I remember even about a year, year and a half ago, you folks were not quite sure how to talk through the dynamics of Epicel, but now you’re able to give guidance for the year. And also I listened to what Joe had talked about special centers and specialty centers and how the product moves through it. So should we expect similar dynamics or since you have had some learnings with how to commercialize Epicel, NexoBrid probably will get to a decent dynamics earlier than what you had experienced with Epicel?

Yeah. Hey, RK. I’ll try to parse that out and just the variability that we had seen -- have seen historically with Epicel is really just a matter of a smaller patient population that you’re typically treating, right? So, if you have a few more or less treatments per year when the average treatment is pretty significant in terms of revenue it can bounce around a little bit and that’s why we kind of historically said before, again, COVID sort of disruptions that starting out high single-digit or low-double digits for Epicel is usually safe ground and we typically outperformed that. So, it’s really kind of reverting back to kind of what we did previously. With NexoBrid, of course, you’re really sort of playing more at the top of the addressable market funnel where there’s multiple times more patients, 30,000 we believe out of 40,000 hospitalized patients each year are eligible for NexoBrid treatment. And so, yeah, once you get through, as Joe was talking, sort of the initial dynamics around specialty distributor stocking, hospital stocking, you have kind of a more mature customer base that has more kind of normalized or routine treatment protocols, then you kind of -- we would expect, as we’ve said for a long time, that it will help dampen any variability that you would see with Epicel as NexoBrid kind of revenues grow over time. So, nothing has changed in terms of our belief on how that will play out and sort of our excitement around NexoBrid.

Thank you. One quick question. So, do you think you have better leading indicators with NexoBrid than obviously it’s difficult to do that with Epicel, but is NexoBrid in a better place in that sense?

Yeah. Well, again, yes. The answer is definitely yes. Because, again, as we kind of get into sort of, you can kind of think about we have a certain number of centers, right, 140 burn centers. We’ve got certain tiered targeting of those. As you onboard those, they get P&T committee approvals and then they start to make their initial order and you see penetration into the patients that they see. You’ll see sort of routine or more routine reordering patterns. And we’re just so early in this right now that those patterns haven’t emerged yet, but once they do, we certainly will have sort of more visibility in terms of forecasting as we go out.

Perfect. Thank you very much. Thanks for taking my question.

All right. Thank you.

Thank you. I’m showing no further questions at this time. I’d now like to turn it back to Nick Colangelo for closing remarks.

Okay. Well, thank you everyone for your questions and continued interest in Vericel. Obviously, we had outstanding financial and business results in 2023 and we expect that the momentum in our core portfolio and new product launches will drive continued strong revenue and profit growth in 2024 and the years ahead, so we look forward to talking to you again at our next call and thanks and have a great day.

Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.