Q3 2020 Vericel Corp Earnings Call

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Ladies and gentlemen.

Today's conference is scheduled to begin momentarily.

Until that time your lines will again be placed on music hold thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the various L Corporation third quarter Twenty-twenty earnings call at.

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

After the speaker's presentation, there will be a question and answer session too.

Asked a question during the session you will need to press star one on your telephone.

I would now like to have the conference over to your speaker today, Nick Calendula, Paracelsus, President and C. E O. Thank you. Please go ahead.

Thank you operator, and good morning, everyone.

Welcome to bear selves third quarter of 2020 conference call to discuss our financial results in business highlights before.

Before we begin let me remind you that on today's call will be making forward looking statements covered under the private Securities Litigation Reform Act of 1995. These.

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 web site.

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 third quarter financial results press releases available in the Investor Relations section of our web site.

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.

This morning, we reported record third quarter total net revenues of $32 $3 million are strong revenue performance, which exceeded our expectations.

Was driven by Macy v-shaped recovery that started in June continued in the third quarter.

<unk> revenue grew 18% over the third quarter of 2019.

We also reported the second highest quarterly episode net revenue in history and reported our first nexobrid revenue related to the bar to procurement for emergency response preparedness.

Are strong revenue performance generated significant profitability and cash flow as we reported a gross margin of 70%.

Record third quarter net income of three $6 million and positive operating cash flow of four $6 million for the quarter.

With these results we've generated growth in total revenues year to date compared to the same period in 2019 and.

And the company's cash flow positive for the year through the third quarter, a great achievement given the significant challenges during this period.

From an operational standpoint in addition to announcing the first delivery of next a bird to Barbara and related revenue.

We also announced that the FDA is accepted the next a bird BLA for review and assigned to produce with gold date of June 29th 222021.

As those of you who were able to join US on a recent analyst an investor day heard not only is there a great deal of enthusiasm for next to breathe among burnt surgery thought leaders in the United States, but we also have extensive pre commercialization marketing and medical initiatives underway to support the plan an expert launch in the second half of.

2021 upon approval.

As we.

Broach the end of this challenging year or third quarter results demonstrate significant progress. We've made in 2020 on several key metrics that gives us confidence regarding the resiliency of our long term growth profile and point to a strong fourth quarter and the potential for significant growth acceleration as we move into 2021.

Before covering additional details of our commercial performance and expectations looking forward I will briefly cover our financial highlights for the third quarter.

As mentioned earlier total net revenues increased to $32 $3 million compared to $35 million in the third quarter of 2019 and included 24 $4 million and Macy revenue and six $7 million of episodes revenue compared to $26 million and $99 million of meeting an episode.

Revenue, respectively in the third quarter of 2019.

Total revenues for the quarter also included $1.2 million of Nexobrid revenue related to the bar to procurement for emergency response preparedness.

Gross profit for the quarter was $22.5 million or 70% of net revenues compared to $21.2 million or 69% of net revenues for the third quarter of 2019.

Total operating expenses for the quarter were $19 million compared to $18 $1 million for the same period in 2019.

The increase was primarily driven by incremental employee expenses related to the <unk> Salesforce expansion earlier this year.

Net income for the quarter was three $6 million or eight per share compared to $3.5 million or seven per share for the third quarter of 2019.

Non-GAAP adjusted EBITDA was seven $6 million for the quarter compared to six eight.

In the third quarter of 2019.

Finally, we generated four $6 million of operating cash flow and as of the end of the quarter.

Had $85 $5 million in cash and investments compared to $79 million as of December 31st 2019 and know that.

Which represented 25% growth over 2018.

Despite the significant challenges, resulting from the pandemic over the course of this year, we still expect the number of surgeons, taking biopsies to grow to around 1500 surgeons in 2020.

Of particular note the 27 expansion towards territory's added this year had by far the highest growth rate in the third quarter in terms of adding new surgeons that had never previously taken a macy biopsy.

This supports our salesforce expansion strategy to increase the reach and frequency on our high volume cartilage repair target surgeons and gives us confidence that will return to a similar rate of growth insurgents taking biopsies in 2021 as we saw in 2019.

In terms of the average number of biopsies taken per surgeon third quarter rates were already back to 2019 levels.

Looking forward into 2021, we'd expect biopsies per surgeon to increase from current levels, which when combined with our expectation for an acceleration in the growth insurgents taking biopsies.

Such Macy up for a very strong 2021.

Your voice and expand our presence in the burn care market.

So we're very excited to have an opportunity to bring <unk> upon approval to the market in the United States in 2021, but we believe it will be a meaningful contributor to our growth in 2022 and beyond.

To wrap up I'll spend a few minutes discussing the current operating environment and our expectations for the fourth quarter.

While we're not in a position to forecast exactly how the recent rapid increase in COVID-19 cases could impact may see in the second half of the fourth quarter. We can say that to this point, we have not seen any change in the trends and Macy's biopsies, new case, activations or scheduled surgeries as a result of the effects of the pain.

<unk> bye.

Barring widespread reinstatement of restrictions on elective surgeries as we've previously discussed we believe that Macy's well positioned to return to its prior growth trajectory even in the challenging COVID-19 environment, given the profile of potential macy patients the outpatient nature of the surgery and it's favorable reimbursed.

<unk> status.

As support for this view, although there was a spike in COVID-19 cases in states, including Florida, Texas, and California in the third quarter Macy's growth rates in those states actually outperformed the national average in the quarter.

That experience together with our market research with surgeons around the country regarding expected practice dynamics during times of increased Covid hospitalizations has helped calibrate how we're thinking about <unk> performance in the fourth quarter.

COVID-19 remain were highly confident in the underlying fundamentals of our business. We remain on track to deliver strong revenue and profit growth in the years ahead.

This concludes our prepared remarks as a reminder, the presentation is available on our web available on our web site provides additional highlights of today's call now I'd like the operator to open the call to your questions.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press, the pound or have key please stand by while we compiled the Q&A roster.

Yeah. Our first question comes from the line of Ryan Zimmerman with B T I G.

Hey, Thanks for taking my questions. Congrats next year like a like a one man band today.

I was hopping between calls so I apologize if I missed this but I guess I want to put a finer point are on kind of a strong growth for macy in the fourth quarter I think the straightest modeling about mid single digit growth right now, but certainly based on your commentary.

And the commentary for double digit product growth and when suggest something a little bit higher assuming epistyle kind of hold that its current levels. So one is my thinking around that correct and then to any commentary to put a finer point on kind of your expectations are amazing.

Well, yes, I do I think you're thinking around that is correct obviously.

You can kind of look at the product revenues from last year.

In.

Macy biopsy before and again that supports the rationale for why we expanded the sales force to make sure we had appropriate reach and frequency.

On the surgeons one thing we did talk about on our last call was sort of the.

Fact that we expected the majority of our volume in the third quarter to be essentially new patient flow. So we said may be 20% would be sort of quote unquote catch up and for that for us Thats a little really has two components number one.

There were cases at.

In late March and April that were canceled and there were no.

Some cases, probably less than 5% of third quarter volume related to cases that were previously scheduled being canceled and rescheduled.

Alright, and shake out.

Well yeah. Thanks, Daniel further question and I I would say that.

I appreciate your acknowledgement that we're not going to give 2021 guidance right now what we're trying to do is say that.

Obviously, we are expecting.

The reference back to sort of the growth rate in new biopsy surgeons that we saw in 2019 over 2018.

We had talked about that being epson pre covid disruptions sort of a good baseline growth for the company.

Going forward and that was sort of the mid 20% range in our commentary now is that we expect to get back towards those levels.

Head of the Nexobrid launches, we do for Macy's or have done for me see previously.

And that is you know we'll bring in.

The manager level folks at the beginning of the year, we plan to add.

Seven new clinical support specialists and sales reps sort of.

Ahead of the launch a quarter or so and so yes, we expect certainly we focus now on call it.

70, or 80 of the top.

And centers and there is a 140 or so in the country with Nexobrid will be broadened that reach and we certainly do expect that it will.

Help to increase utilization and.

Penetration for Epicel.

Opportunities. So we will continue to look, but we have a pretty high hurdle in.

Those will happen when it makes sense for us.

In terms of internal investment obviously, we have.

Lifecycle management initiatives that are underway.

We're always sort of upgrading facilities and looking at capacity expansion plans over a five year plus five to 10 year period. So.

So there may be capital requirements, there over time as we continue with these very high growth rates.

I would say, we certainly have not ventured into the share buyback territory yet.

But obviously, we will think about all those parameters as we move forward.

And maybe just following up on that topic with regard to manufacturing structure can can you remind us as to how you would think about.

What type of run rates, particularly with regards.

To Macy.

Makes a discussion about.

Upgrade its expansion or perhaps geographic.

Diversification of the manufacturing infrastructure.

Timely discussion, it's kind of when does that.

Sir threshold run right on Macy kind of kind of make that informative.

Yeah, we've talked in years past and it's probably been a couple of years now about sort of the capacity here and again.

Essentially doubled over volumes or more since.

Over the past couple of years since we've launched <unk> and so we certainly you have to look out.

Three to five years, and say, where do you think you'll be in and when do you need to start make.

Making those.

Making those strategic moves and so we're at a point, where we're looking out three to five years and saying.

Where are the pinch points in terms of capacity. Obviously are December volumes are so high typically double any other month and the year and that creates certain capacity constraints that we need to navigate around and so so I would just say that we're while we had adequate capacity for the next three to five years or so.

Three years to call it you.

You need to get ahead of it so we're looking at that now.

Can burn Association meeting.

This past year virtual meeting and that will continue ahead of launch we have.

Lastly brand development that is ongoing right now.

And then of course market access.

Initiatives as well so all three of those buckets were sort of laid out by Roland on our analyst and Investor day call. It's kind of the typical sequence of events. You do ahead of launch and so there is a lot of those activities.

Once you know the BLE has been filed for review were accepted for review by the FDA to that you kick those initiatives off. So we're we're deeply engaged in all of those activities.

In terms of the sales force expansion, we currently have.

One national sales director and 11.

Sales reps and clinical support specialists so.

As you think about getting towards 20.

Sales personnel, that's a little difficult for one person to have that many direct reports. So we'll have a structure that again as much like our Macy's structure in terms of we'll have two regions with two regional managers.

And then.

Essentially 11.

The territories.

Then that are supported by both reps and clinical support specialists. So we think thats about the right number.

To call on that number.

Current centers, which.

Which is the next part of your question, which is sort of right now as I mentioned, we probably focused on the top 80 burnt.

Burn centers out of the 140 in the country because those are the centers that typically see sort of the the catastrophic burn patients like.

Is that.

Surgeons are using and we've had a tremendous response a tremendous success using those.

During the second and third quarters. So, we'll certainly plan to continue to do that.

And what it does is allow us.

Two two.

To maintain a bit of a lower cost structure is we've had this year. So.

We'll see how travel resumes, we're sort of planning that it might get back to normal by the middle of next year and in the meantime, we'll continue to engage those highly effective virtual tools.

Great, Okay and then.

I think I would say that to prevent an ability that test failure.

Any disruption as.

Last year was our third year in a row of double digit growth for product that's been on the market for 20 years.

Thank you.

Thank you. Our next question comes from RK with HC Wainwright.

Thank you.

Good morning, Nick Congratulations on a great quarter.

Most of my questions have been answered, but I just had a couple of them.

I know you gave a lot of metrics.

Around.

Quick question on the financial.

In terms of gross margin by and by the end of 2019, you know you. There was actually at 300 basis point expansion on your gross margin last year. Obviously this year because of what we have facing you know there is there's been actually a decline in there.

But do you expect the fourth quarter to help you with that.

And at least get it as good it's flat 2019 or even better maybe.

Yeah, well certainly in the fourth quarter as you know, it's our highest volume quarter by far.

So the margins tend to be pretty high in that time, and so yeah, I think it will be roughly.

Roughly in line.

With the with last year.

So that we're very pleased with that obviously given sort of the second quarter results, but.

Mhm.

Thank you thanks for taking my questions and I'll talk to you soon.

Great. Thank you.

Yeah.

There are no questions at this time Mister Calendula do you have any closing remarks.

No I would just like to say thank you very much for.

Participating in our call today, we appreciate the interest and look forward to keeping you updated on our continued progress so have a great day. Thanks.

This concludes today's conference call you may now disconnect.

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