Q4 2019 Earnings Call

Ladies and gentlemen, please stand by your Vericels <unk>.

Fourth quarter 20 lighting earnings conference call will begin momentarily again, please standby a conference will begin in two minutes. Thank you.

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Hello, ladies and gentlemen, and welcome to the virus fill fourth quarter 2019 earnings conference call.

At this time, all participants are in listen only mode.

Later, we'll conduct a question and answer session and instructions will follow at the time.

If anyone should require assistance during the conference. Please press star the zero on your Touchtone telephone.

A reminder, this conference call is being recorded.

I would now wasn't turn the conference over to your whole Smith, Gerard Michel Chief Financial Officer. Please go ahead.

Thank you operator, and good morning, everyone welcome to Vericels fourth quarter 2019 conference call to discuss our financial results.

Before we begin let me remind you that on todays call, we will be making forward looking statements covered under the private Securities Litigation Reform Act 1995, and all of our projections and forward looking statements represent our judgment as of today.

Statements may involve risks and uncertainties that could cause actual results differ from expectations.

Our described more fully in our filings with the U.S.C.C., which are also available on our website.

In addition, all forward looking statements represent our views only as of today it 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 was available in the Investor Relations section of our website. You also have a short presentation with highlights from today's call that can be viewed directly on the web cast or accessed on our website.

I will now turn the call over to Vericels, President and Chief Executive Officer, Nick Colangelo. Thank you Gerard and good morning, everyone.

Our fourth quarter results reflect reflecting strong finish to another great year for the company during which we continued to deliver significant revenue and profit growth and added an exciting new product to our portfolio.

We achieved record revenues of $39.4 million for the fourth quarter.

And $117.9 million for the full year in 2019.

Total revenues increased 30% for the full year driven largely by continued strong uptake VC, which had revenue growth of 34% for the quarter and 35% for the full year.

Epicel also had a solid year with revenues up 13% compared to 2018, marking the third consecutive year of double digit growth for Epicel.

This strong revenue growth drove record quarterly profits as we generated net income of 9.5 million in the fourth quarter importantly, excluding these $17.5 million Nexobrid upfront license payment 2019 marks the first full year of profitability for the company as we generated adjusted net income of 7.8.

Million dollars for the year.

Moreover, excluding the onetime license paid our cash and investments download increased $13.6 million in 2019.

As these results demonstrate 2019 was a landmark year for barrier, so in which we advanced beyond being solely a high growth revenue story.

With expected sustained strong double digit revenue growth ahead for me see together with continued growth for Epicel in the anticipated launch of Nexobrid. In 2021, we believe that we are entering 2020 is one of the few high revenue growth companies, but it's also position deliver substantial profit and cash flow growth in the.

Years ahead.

As we announced earlier today, we expect total revenues for 2020 to be in the range of $141 million to $146 million, including full year revenue of approximately $3 million, resulting from BARDA emergency stockpile purchases of Nexobrid.

Gerard will provide further details regarding our financial guidance for 2020 in a moment.

This is growth in 2019 was due in large part to an increasingly broad group of surgeons adopting macy as a preferred treatment for large symptomatic focal cartilage defects.

This broad adoption is reflected by the fact that we received biopsies from nearly 1400 surgeons in 2019, an increase of 25% over 2018.

This represents roughly one quarter of our expanded 5000 target surgeon audience, providing a significant opportunity to maintain strong double digit growth in the years ahead by continuing to expand our customer base with new Surgeons, who include may see as part of their cartilage repair treatment algorithm.

To capitalize on this opportunity in the fourth quarter, we initiated the Mitsui Salesforce expansion from 49 to 76 territories as we expected were tracking a sizable pool of high quality candidates and our recruiting and Onboarding efforts remain on track to have the new representatives hired and deployed in the field at the start of the second call.

Order.

While much of our 2020 revenue growth will result from the account development efforts of our current representatives. We do expect at the new Representatives will yield incremental business in the second half of the year will be key to delivering strong growth in the years ahead as we continue to drive uptake in the large and Underpenetrated addressable market for me see.

Turning to our burn care franchise Epicel had another solid year growth driven by increasing the number of center sending in biopsies in placing orders the numbers of orders placed in the number of patients treated all compared to 2018.

Upon approval Nexobrid will significantly expand the addressable market for our burn care franchise, and we'll continue to add scale to burn care team to drive uptake for both products in the large and underpenetrated severe burn care market.

Under new sales leadership, we've expanded the Epicel team for this year from six to 10 sales representatives and burned clinical specialists, which we believe will be a key driver, but so growth in 2020.

In the fourth quarter, we announced the initiation of the Nexobrid expanded access treatment protocol or next to treat patients is up to 30 sites in the United States during the preparation and review of the Nexobrid BLE, which we plan to submit to the FDA mid 2020.

Next we'll expand the number of Nexobrid trained physicians and healthcare providers in the us and generate additional awareness advocacy and experience at us centers of excellence prior to commercialization of Nexobrid, which we believe should enhance the overall uptake of nexobrid grid upon approval.

We also announced that BARDA has initiated the procurement of Nexobrid for emergency stockpile to increase national preparedness for public health emergencies involving burn patients.

Ill now turn the call over to Gerard to provide more details on the fourth quarter financial result in additional details on our 2020 financial guidance.

Nick We reported total revenues of $39.4 million in the fourth quarter and $117.9 million for the full year, representing growth of 26% for the quarter and 30% for the year compared to 2018.

Our gross margin was 73% for the quarter and 68% for full year 300 basis point improvement for the full year versus 2018, our operating income was $9.2 million in the fourth quarter or 23%.

We delivered $9.5 million of net income or 20 cents per share in the quarter compared to net income of $5.2 million or 11 cents per share.

Our 2018.

Moving to 17.5 million dollar upfront payment for the Nexobrid license. Our adjusted net income for 2019 was $7.8 million or 18 cents per share compared to a loss of $8.1 million for 20 cents per share in 2018.

Adjusted EBITDA for the year, which excludes noncash stock compensation interest in depreciation was $21.2 million. This is a strong leading indicator of future cash flow.

You exclude our nexobrid payment, our cash and investments grew by over $13 million. In 2019, you could find a reconciliation of non-GAAP measures to GAAP in our press release and slide supporting today's call.

Turning to financial guidance for 2020, we expect total net revenues for the year to be in the range of 141 million to $146 million.

Including revenue of approximately $3 million from BARDA as emergency stockpile purchase of next of Nexobrid.

We expect revenue growth for Macy of approximately 26% for both the full year and each quarter versus the same quarter in 2019.

Epicel revenue growth from the first quarter of 2020 is expected to begin the high single to low double digit range compared to revenue of $5.2 million in the first quarter of 2019.

Finally, we received an updated timeline for medical and regarding BARDA stockpile purchases and we now expect $3 million of Nexobrid procurement revenue in 2019, which will start in the second quarter and occur fleet across each of the remaining three quarters of 2020, the balance of the 5.8 million dollar revenue from our share of the.

Sure Matt will occur in 2021.

Since the launch of May see approximately 80% of marginal revenue has contributed to gross profit and approximately 50% of marginal revenue has contributed to adjusted EBITDA, given our low manufacturing costs premium priced products and focus call points.

We expect to maintain the marginal revenue contribution to gross profit in 2020 and beyond with 80% of each marginal revenue dollar over the prior year quarter translating into increased gross profit. Accordingly, we expect gross margin to approach were reach 70% for the full year in 2020 with gross margin for any.

Given quarter being higher or lower due to revenue seasonality.

Excluding the 17.5 million our payment to medical and in 2019 full year 2020 operating expenses are.

Our expected to be the increased approximately $24 million.

To $98 billion.

This increase as a result of expenses related to the expansion of the Macy and Epicel sales forces and prelaunch activities for Nexobrid and includes approximately $4 million increased share based compensation compensation, largely driven by our increased share price and a $1 million increasing depreciation.

In 2021 and beyond we expect to return to a similar rate of marginal revenue contribution to adjusted EBITDA as seen since the launch of Macy with 50% or more of each marginal revenue dollar over the prior year quarter translating into increased adjusted EBITDA.

That concludes our prepared remarks as a reminder that presentation available on our website provides highlights of today's call, including fourth quarter results in our 2020 financial guidance.

Now I'd like the operator to open the call to your questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on this has told telephone.

If your question has been answered are you wish for Movistar from the Q. Please press the pound Keane.

And your first question comes from the line of Ryan Zimmerman with BT I'd.

Good morning, Thanks for taking the questions.

So wanted to start with the guidance for 2020, if we could just maybe.

Dr. Gerard you could talk about kind of the puts and takes the implied may see guidance.

What the underlying assumptions are from.

Do physician adoption.

Does the guidance assume a price increase on may see and maybe the contribution from new reps that are coming on board it through the balance of the air.

I have a follow up thank you.

Okay. Ryan. Thank you sure. So in terms of assumptions as you know well know Ryan.

For the near near part of the year, we rely heavily on.

The biopsies, we've seen come in to dates.

And then for the mid to back ended the year, we make certain assumptions about increasing the number of Biopsying docs minimal biopsy as Bill said and and then as well as the behavior existing docs.

We have been giving the leading metric of the number of new Biopsying docs and that's 25% right now is what Nick Nick had mentioned so thats a core assumption.

For the for the forecasts.

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We assume conversion rates stay about where they are which is the other important factor and we assume that they average number biopsies per Doc maintains about the same of course, we have a variety of Monte Carlo type analyses are we tweak that one way or another but you can assume maybe just roughly about the same.

In terms of the contribution from the sales the new reps, we expect them to take several quarters to really get up and running I make a significant difference I think by the end of this year.

They will be making a difference, but I think the bulk of the growth. This year is primarily going to come from business development that the existing reps have already have the efforts they've already put in and I will put him in the near term.

Okay. Thank you and then.

Right. If you could just just.

Clarify.

But the timing.

I heard you on the stockpile in front of the for the BARDA.

The $3 billion, but.

I apologize if I Miss is that there's a $5.8 million number in there and just the cadence that we should expect is that I'm sure a million dollars in the second quarter third fourth just maybe clarify yes, it's roughly it's going to be roughly a million dollars a quarter for six quarters. Its little under that that's why I say 5.8.

The timeline has gotten pushed back by one quarter.

I'll give a little bit of color on that better wound and BARDA are really.

Are the ones that parties to be dream. It we get a piece the economics as I understand its.

There is an awful lot of logistical details that need to be sort of that whenever you put together a stockpile of products for emergency use.

There isn't a commercial label available on it needs to be imported into the country.

It need they need to have stitch.

Vessel processes set up to rapidly within a day or some get it to the places side of the emergency and all that needed to be ironed out prior to the procurement starting and Thats. The result of this slight delay in the start of the stockpile, but the overall amount that's going to be purchased it hasn't changed it's just gotten pushed out one quarter.

Thank you.

Your next question comes from Danielle Antalffy with SVP Leerink.

Hey, good morning, guys. Thanks, much for taking my question. Congrats on a solid year just wanted to follow up on the guidance for a second here you talked about seeing biopsies.

It's funny 19 I think.

So why.

Assuming a step downs from that.

In 2020 for me see if the conversion rate isn't changing just a little bit more clarity there would be helpful.

Yes, so we certainly saw 25% increase and the number of Biopsying docs. So that's the leading indicator we gave somewhere it we're guiding to about 26% growth for may see.

So that's in line, it's always good to give a little bit of maybe a question here and there is one doesn't know where things are going to turn out for the year, we don't have a perfect crystal ball.

But again, we're using the biopsies we've seen come in to date and we haven't given a number on that but we're using the biopsies we've seen to coming to date to kind of help heavily model. The front ended the year on the back ended the year, we have to look at the number of new Biopsying docs have come onboard and make certain assumptions about the rate of biopsying rate of conversion, which again roughly would help those constant in our model.

Okay got it.

Conversion rate you know you guys.

About this patient initiative.

I think we're now what 12 to 18 months into that if I'm remembering correctly.

I thought you had been seeing a little bit of a tick up in the conversion rate are you seeing continued success.

I'm, just trying to get a sense of where you see on without how thats progressing.

As it relates to that conversion rate.

Yes. It Daniel this is Nick Thanks for the question then we are.

Still implementing that program, we're probably as you mentioned.

Probably about four quarters into it now and we're very pleased with sort of the capture rate of consents, we're seeing from patients and now in the process of sort of optimizing and doing market research around how we can be most effective in terms of communicating patients to drive growth over the long term.

We've talked about a lot when you had a significant number of new surgeons who are.

Entering the folded in adopting may see.

Obviously, when they take their first biopsies the conversion rates zero until they do a first implants. So we we have a bunch of moving parts here you know, we certainly believe overtime that will be able to increase the conversion rates at the current time, it's kind of bounced around the historical norms.

But we do expect that to increase overtime.

Okay. That's helpful. Thanks, much guys.

Your next question comes from Kevin Degeeter with Oppenheimer.

Hey, congratulations staying a bit on theme of guidance here, maybe I'll turn to Epicel here.

As we think about I guess your guide.

Kind of.

Give or take 10% growth for next year, how much of that with regard to after Sal is.

You know incremental.

Burn centers, our expansion versus kind of deeper into existing accounts and can you just comment generally about competitive landscape and ended burn market. What are you seeing is there any change.

Kevin Thanks for the question and I'm glad you actually asked this question about about a 10% because we slipped something in the in the transcript here that we haven't done before we actually gave a little bit of guidance for the first quarter for Epicel, because we recognize how difficult that is.

For analysts and investors and frankly also times.

To model. It so we have some visibility of how the first quarters churning out. So we said mid high to low low double digits for growth in the first quarter, we didnt say anything for full year.

Growth for Epicel on the quarter on the call.

Granted since we have two products that are moving you can make a variety of different assumptions, but.

We're probably you know, we're probably erring on the side of conservatism for Epicel in our guidance and if you do the back calculation you probably would get a mid to mid high single digits for epicel baked into the guidance.

Great and then maybe in terms of limited.

John.

Little bit color on where the business will come from I think it'll.

We continue to come from more institutions using using the product it's been a very steady.

Slow, but steady increase in the number institutions with the expanded salesforce in the new model, where we have a subset of the field personnel focused on just supporting cases and other subset out there selling I think we will see an expansion in the number of sites using the product.

But again, we'd like to err on the conservative side for this product given it's so difficult quarter to quarter see we're a saturday, but we are confident that overtime. We will continue to increase because then it is a life saving product for a very small percent small number of these terribly burn patients.

And then just on the competitive landscape.

Sure on the competitive landscape.

We don't we really don't see any real strong pressure from.

From a beat as resell product to referring to in all likelihood.

So it's not a good product for lower TBS, a burns, which is a good mark for them.

In the worst of the worst patients we treat I think that maybe it is 10 or 15% overlap but.

I think we're treating their very different patients would just break the dock that book tools out there, but I don't see much competitive pressure.

Got it and then maybe just a separate fall off and it's actually became the 10 Axa Brad.

Can you remind us with regard to the next protocol essentially the training surgeons.

How much feed back to you got there's various how gas in terms of the surgeon experience under the next protocol and you know how how should we think about your ability sort of incorporate.

Some of that learning into pre commercialization and somewhat this year, but probably more 2021.

Yeah, that's a great question, Kevin This is Nick.

We certainly do we have actually hired and this is part of.

The sub sub contract through BARDA.

One of the clinical recruiting managers for the next protocol. So we clearly get direct feedback on surgeon.

Experience with the product it's still early in ramping up for the next protocol, we probably have.

10, or a dozen sites up and running now 20 by the ended the quarter and will be fully up to the 30 sites.

Shortly and so we'll be very much involved in getting the sites up and running getting feedback on experience with the product and obviously when you have an opportunity to be up and running it 30 sites treating the number of patients will be able to see pre or treat pre commercialization. We believe that we'll have a very.

Sorry meaningful impact on the uptake upon approval.

Great. Thanks for taking my questions.

And your next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Hi, how are you guys.

Doing well thank you.

Good morning, just two questions.

Firstly towards a little bit of a jump in Ah receivables for 2019, how does a little now and maybe just kind of affordable component.

In terms of receivables was given that.

Fourth quarter is our highest by quarter kind of a natural cadence so you'll see a similar path.

Every every fourth quarter for the last several years.

Okay, and then secondly could you talk about may see as far as these sales organization.

And you reach into the utilization trends for dog Super centers, and how you're thinking on that show source of the covering.

20 facilities 40 facilities and how is that kind of rolling out most went to 20 to 26.

Yes, so in terms of our coverage of our two sales forces with May see with the expansion and the sales force to 76, we're going to cover.

5000 of the highest.

Docs in terms of cartilage procedures in terms of up to fill our other salesforce.

With that and field based personnel, we have now subset again doing supporting Burns care in the subset actually out there selling hard.

We can probably probably cover the 400 I think we're a target probably 60 to 70 that have a higher higher volume ones, but we can cover pretty much every burn center in the country would expand sales force.

Okay, and any insight into utilization trends from the May show it.

Oh, yes, it varies dramatically by physician, we have some physicians, who do dozens and dozens a year in some who do it a few by year I'm. You know, we do try try to attract penetration by patient pipe evocation defects and such.

I'd say at a high level, we spent a biopsy basis.

We have you know.

Under 10%, probably roughly 10% penetration on I implant basis still under 5% if I do my math correctly into the overall Tam. So there's a long long way to go in terms of penetration, which is a surrogate for utilization.

Ill just add some.

Yes, Weve, obviously defined our.

Target addressable market is 60000 patients a year and that's with Gerard was referring to in terms of penetration of biopsies and implants. If you look at what was our 3000 surge in target audience. Prior to this expansion we mentioned that we had.

Received biopsies from about 1400 surgeons, so thats a pretty good penetration number in relatively short period of time.

On the flip side as we expand to 5000 target surgeons. It gives us a whole lot of headroom moving forward.

Got it that's very helpful. Then lastly, any commentary on a.

M&A and any folks is out there any activities out or spaces that you'd like to be.

Well as Weve talked about before you know there are three principal areas that we focus on that's adding products to our existing commercial franchises in the sports medicine in burn care.

Markets. So we continue to look at.

Highly innovative products in those areas and as a result, we've also talked about the hurdles are pretty high we want to maintain our position is having one of the most highly innovative portfolios in our spaces financial hurdles need to be met and then technically de risk asset. So we continue to look.

But we're also.

Fortunate to have a high growth portfolio already.

And will complement it if and when it makes sense to do so the third area. We'd look at obviously as we often say we're the only company with two approved advanced cell therapies in the country.

And we do look at other opportunities to establish new verticals.

With with cell therapy products, but again.

We want to make sure that those meet our our high standards and again, we will look at deals if and when that.

It makes sense for us.

Great. Okay Super helpful. Thanks for taking my questions.

Your next question comes from the line of Sean Lee with H.C. Wainwright.

Good morning, the conduit and congratulations on the end of a great deal.

I just most of my question is hoping and so they just says the two quick ones. So for the Nexobrid BLE, which we can expect to the next couple of months what are the steps that you still need to complete before that.

Well, it's a pretty straightforward process.

Theres offering each of the BLE sections and modules and then an extensive amount of Q scene of of those modules and so thats essentially what's left to do as we mentioned earlier, we didnt need to wait for the 12 month of safety follow up data.

And.

That obviously is incorporated into clinical study report, which is also then included into the BLM. So it's really a relatively straight forward.

Set of tasks. It is just.

Anyone who's been through this knows it's a pretty complex process and and at the end of the day you want to make sure that you are focused on a high quality submission with the highest probability for approval and that's the approach, we're taking with our partner Maryland.

Great and my second question is I think in the prepared remarks, you mentioned that.

So far approximately 25% of your target audiences, sending biopsies. So do you have any specific programs in place help reach out to the rest of a market.

Yes, so that's part of our target expansion. So as we have talked about three through 2019 in into the fall we've expanded our target surgeon population from 3000 to 5000 surgeons. So 1400 out of 5000 is about 25% sole purpose for.

Increasing our sales force from 49 reps to to 76 reps is to make sure that we have appropriate reach and frequency on each of the target surgeons. So thats the the plan for.

For deeper penetration into that target surgeon audience.

I see.

And my final question is could you provide a little bit color and expectations on cost trend lines for this year.

Sure in terms of cost trend lines on the manufacturing cost basis as I've said before I think we've just just keep assuming that.

The cost on the margin revenue dollars, 20% or to another words, 80% of every marginal revenue dollar should fall to should fall through the the gross profit.

In terms of up operating margin, what I would point you to is excluding the 17 and a half million dollars payment the medical in 2019.

Our full year 2020 operating expenses are expected to increase by approximately 24 24 million over 2019 to 98 million. This increased as I mentioned before as a result of expenses related to the expense, but it may seem epicel sales forces.

And prelaunch activities for Nexobrid and include some important noncash items that patent to know about $4 million an increased share based comp its largely driven by our increased their share price at a 1 million dollar increase in a in depreciation.

So that cost that you operating expenses obviously are.

Growing kind of in a step fashion next year in 2021, we do expect to return to a similar rate of marginal revenue contribution to adjusted EBITDA US we've seen since the launch of May see that's about 50% level or more of each marginal revenue dollar.

Hitting the EBITDA line and that that will return to that in 2021 and beyond.

Thank you that's only half.

And again, ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your Touchtone telephone.

If your question has been answered you wish the movie assessment Q. Please press the pound Kim.

And you have a follow up question from Ryan Zimmerman with the T.I. team.

Thank you sorry for the fastest a few more for me.

You've commented on the May see guidance being 26%.

You didn't talk about seasonality it's been.

The topic for both May see an epicel before and for the overall business and so I just wanted to understand or we are we to assume that the seasonality.

Is essentially in line with what you saw it 19 as result of that May see guidance.

Couple other yet.

Yeah, Ryan so for for we expect to see the scene for May see we expect to see the same seasonality we saw in 2019.

Said another way I think right now we're guiding that.

Each quarter this year should increase approximately 26% over the same quarter in the prior year.

Okay.

And then.

Nick you touched on the 1400, it's been asked Theres potentially 5000 surgeons out there.

Trading.

You guys are trading with a lot of surgeons. So just wondering if you could comment on kind of the underlying training trends of the overall population that you're targeting in may see from a physician standpoint.

Yes, So Ryan I think we've mentioned a number of times you know that training really given the ease of the procedure is kind of a more of a lagging indicator.

Essentially surgeons can be trained online on and I pad right ahead of a surgery. So it's really.

I view and we view engagement with the brand at the point, where surgeons have decided to take biopsies from patients and make it easy part of their treatment algorithm. So we really focus on the number of Biopsying surgeons and a lot less on the number of training surgeons for for those reasons I Wouldnt say, if you look of.

Frame metrics that kinda more or less.

Track, the new docs to come on board.

Okay.

We should the color there guys. Thanks for taking my question.

I'm showing no further questions at this time I would like to turn the conference, but some Michelangelo.

Okay, well I just wanted to say thanks for your questions and your continued interest in Versaille. We're obviously very pleased with another strong year in 2019 and excited about revenue profit and cash flow growth opportunities for our business in the years ahead have a great day. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may all disconnect.

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