Q4 2021 Vericel Corp Earnings Call

February 24, 2022

Ladies and gentlemen, please standby ratios fourth quarter 2021 conference call will begin momentarily.

[music].

Ladies and gentlemen, thank you for standing by and welcome to <unk> fourth quarter 2021 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 Eric mines, Rachel's head of financial planning and analysis and Investor.

Relations. Please go ahead.

Thank you operator, and good morning, everyone welcome to <unk> fourth quarter 2021 conference call.

Discuss our financial results and business highlights.

Before we begin let me remind you on today's call we will be making forward looking statements covered under the private Securities Litigation Reform Act of 1095.

These statements may involve risks and uncertainties could cause actual results to differ materially from expectations and are described more fully in our <unk>.

Fillings 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.

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 web site.

Im joined on this call by vessels, President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer Officer, Joe Mara I will now turn the call over to Nick.

Thank you Eric and good morning, everyone I'll begin today's call by discussing financial and operational highlights for the fourth quarter and full year as well as current trends and our expectations for 2022, Joe will then provide a more detailed update on our financial performance and financial guidance before opening the call.

To Q&A.

The company delivered another year of strong revenue and profit growth in 2021. Despite the continued impacts of COVID-19 throughout the year.

Total revenue for the year increased 26% to approximately $156 million.

Our topline growth, which was at the higher end of the range that we pre announced last month was also in line with our compounded annual revenue growth rate since we launched <unk> in 2017.

We also generated nearly $30 million of adjusted EBITDA and operating cash flow in 2021, ending the year with $129 million in cash and investments and no debt as we once again demonstrated the strong P&L and cash flow leverage in our business as revenue continues to grow.

With respect to our fourth quarter results. Despite the unexpected emergence of the omicron variant in late November and the resulting impact on <unk> performance in December <unk>.

<unk> quarterly growth increase compared to the prior quarter in the same period in 2020, achieving record quarterly revenue in the fourth quarter.

We also finished the year with another strong quarter for episode as we generated revenue of over $9 5 million for the fifth consecutive quarter.

From a commercial perspective, we continued to see strength across the underlying growth drivers for Macy and a high level of brand engagement from surgeons and patients.

Importantly, we met our goal of increasing the number of surgeons, taking macy biopsies by 20% and generated biopsy growth of 30% for the year.

With a record quarterly high in the number of biopsies and the number of surgeons, taking biopsies in the fourth quarter.

The strong biopsy growth was also driven by an increase in the biopsies per surgeon of approximately 10%. Another key performance indicator for Macy as our penetration rate in individual practices is now higher than it was prior to the pandemic.

We also continued to see strength across the key growth drivers for episodes.

<unk> growth of over 50% for the year was driven in large part by a significant increase in the average number of episode grafts per patient, which we believe was due to the outstanding commercial execution by our burn care sales team.

This strong performance was also driven by over 30% growth in both the number of episodes biopsies and the number of burn centers treating patients with <unk> in 2021.

We believe that these key performance indicators will continue to help drive further penetration into episodes $200 million plus addressable market over the coming years.

As we announced this morning, we expect total revenue in 2022 to increase to approximately $178 million to $189 million with continued margin expansion and strong profit and cash flow growth.

Joe will provide further details regarding our financial guidance in a moment, but I wanted to take a minute to discuss the current operating environment and the framework underlying our guidance.

As we discussed throughout 2021 and in connection with our pre announcement in January we generated strong growth in both Macy biopsy surgeons and biopsies in 2021.

However, due to a variety of COVID-19 related factors throughout the year, we saw a much more pronounced impact on <unk> implant growth as historical biopsy to implant conversion patterns were disrupted.

This was the case again in December is the emergence of the omicron variant resulted in patients deferring cases, and scheduled cases being canceled because patients tested positive for COVID-19 during their pre up screening.

While these patient related dynamics created a biopsy backlog that we believe should contribute to <unk> growth. This year, the timing related to the recapture of this backlog and the normalization of conversion rate.

Rates remains uncertain at this point given the carryover of the omicron wave into the first quarter.

We've started to see general COVID-19 conditions begin to improve in February and moving forward, we expect continuous improvement throughout the year.

However, because of the timing and impact of COVID-19 dynamics. This year remain difficult to predict we've assumed a wider range of revenue scenarios in our initial financial guidance for the year.

The lower end of our revenue range assumes additional significant COVID-19 related headwinds and continued disruption within the health care environment.

Which would represent a more modest improvement over 2021.

The higher end of our range assumes some disruption beyond the first quarter, but gradual improvements in patient flow and conversion rates during the year.

Importantly, we expect the year over year quarterly growth rate for <unk> to increase each quarter throughout the year.

The midpoint of our revenue growth range for total B C. An episodic product revenue is in line with our 20% compounded annual growth rate that we expect to maintain over the next several years.

We also expect to generate additional margin expansion and increases in adjusted EBITDA and operating cash flow. This year as we further enhance our strong profitability profile.

Turning to our pipeline we remain on track for a mid year Resubmission of the Nexobrid, BLA, which would position nexobrid for a potential commercial launch in the U S. In the first half of 2023.

We also continued to advance important lifecycle management initiatives for Macy, we expect to meet with the FDA later this year to discuss the clinical development program for custom arthroscopic delivery system, which we believe offers the potential to make <unk>, an even simpler and less invasive procedure into.

Spanned the use of macy for the treatment of cartilage defects in the knee.

We also continue to advance our BC ankle program, which we believe could increase our overall addressable market to approximately $3 billion.

Finally, we're very pleased to have announced plans earlier this month for a new state of the art advanced cell therapy manufacturing and corporate headquarters facility in the Boston area.

The new facility, which is expected to begin commercial manufacturing in 2025 will significantly increase our manufacturing capacity and demonstrates our confidence in the continued growth trajectory for Macy and episodes in the years ahead.

I'll now turn the call over to Joe to discuss our fourth quarter and full year financial results as well as our financial guidance for 2022.

Thanks, Nick and good morning, everyone.

Starting with the income statement total net revenue for the full year grew 26% to $156 2 million driven by strong growth in both of our franchises.

<unk> revenue grew 18% to $111 6 million, while episodic revenue grew 51% to $41 5 million.

Total net revenue for the fourth quarter increased 5% to $47 6 million versus the fourth quarter of 2020.

While product revenues, excluding BARDA related next in Britain shipments grew 6%.

Macy's fourth quarter revenue was $37 3 million growing 8% versus the prior year. Despite.

Continued COVID-19 impact on volumes due primarily to the omicron variant Macy's fourth quarter revenue increased 56% sequentially versus the third quarter of 2021.

<unk> to a 42% sequential increase for the same period in 2020.

Epistyle fourth quarter revenue was $9 7 million similar to the strong results in Q4, 2020 of $9 6 million and the fifth straight quarter above $9 5 million for episodes.

In addition, total revenue in the fourth quarter also included approximately zero point $5 million of revenue related to the procurement of Nexobrid by BARDA for emergency response prepared.

Gross profit for the quarter was $34 million or 72% of net revenue compared to 74% of net revenue for the fourth quarter of 2020.

This decline in gross margin is mainly driven by the shortfall in revenue versus our initial expectations for the quarter due in large part to our scale up to meet expected demand.

Total operating expenses for the quarter were $29 9 million compared to $21 4 million for the same period in 2020.

The increase in operating expenses was primarily due to higher noncash stock compensation expense driven by share price appreciation.

Net income for the quarter was $4 5 million or <unk> <unk> per share compared to net income of $12 2 million or <unk> 25 per share for the fourth quarter of 2020.

non-GAAP adjusted EBITDA for the quarter was $12 8 million or 27% of net revenue and importantly, this is now the sixth consecutive quarter that we've generated positive adjusted EBITDA.

For the full year non-GAAP adjusted EBITDA was $29 5 million, an increase of approximately $11 million compared to $18 6 million in 2020.

Finally, we generated approximately $10 6 million of operating cash flow in the quarter and $29 million for the full year and as of the end of the year. The company had approximately $129 million in cash and investments compared to $100 million as of December 31, 2020, and no debt.

Before turning to 2020 to guidance I wanted to comment on capital expenditures, which increased in 2021 relative to historical trends.

This growth was related to the Buildout of our new office building in Cambridge that help to free up space for additional manufacturing capacity over the next few years.

We expect capital spend in 2022 to increase as we began as we begin to make preliminary investments for our new facility. Although the majority of capital expenditures for our new facility are expected in 2023 as well as 2024.

Transitioning to our financial guidance for 2022.

We expect total revenue of $178 million to $189 million may.

Macy's full year revenue is expected to be in the range of $132 million to $141 million.

As Nick mentioned, we are assuming a wider range of Macy revenue scenarios for 2022 at this point.

Given the variability of potential COVID-19 related impacts on the business.

Certainty around patient and payer dynamics and the timing of the normalization of patient flow and capacity within the overall healthcare system.

Importantly, we are expecting another year of double digit growth in surgeons, taking macy biopsies that conversion trends begin to normalize throughout the year.

And we start to recapture some of the Covid driven 2021 biopsy backlog, although we expect this to be gradual during the year.

While there are a number of moving parts to what we're seeing in the first quarter more broadly trends are beginning to improve of late and we project Macy volume in Q1 will still represent a typical percentage of our full year volume of approximately 18%.

We would also expect trends to continue to improve during subsequent quarters with year over year quarterly growth rates accelerating throughout the year.

For <unk>, we expect full year revenue in the range of 45, five to $47 5 million.

At the midpoint this would be approximately 11 5 million episode revenue per quarter on average.

However, we expect that it will take a quarter or two to get up to that higher run rate as the team continues to add new burn centers and we anticipate that episode revenues in the first quarter will be more in line with the recent run rate of approximately $9 5 million per quarter.

For <unk>, we anticipate we anticipate recognizing the remaining BARDA related revenue of approximately zero point $5 million in Q2 of this year and do not expect commercial revenue from <unk>. This year.

Moving down the P&L, we expect gross margin to be approximately 70% and full year operating expenses to be in the range of $134 million to $137 million.

non-GAAP adjusted EBITDA margin for the full year is expected to be approximately 21% an increase from 19% 2021.

For the full year adjusted EBITDA is expected to increase from approximately $30 million in 2021 to approximately $40 million in 2022, which also points to continued meaningful meaningful growth in our operating cash flow.

This concludes our prepared remarks, we will now open the call to your questions.

Thank you presenters, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question is from Ryan Zimmerman of <unk>.

Your line is open.

Hey, good morning, Thanks for taking the questions and.

Congrats on your progress this year I guess I wanted to start with with May see in the guidance. There I. Appreciate your comments on the first quarter, Nick and Joe.

Help us think of the backlog I think by our estimates from the last quarter, there was about $7 million backlog.

On Macy and so how much of that is assumed.

In that guidance this year it sounds like some of it.

Kind of what's the underlying growth rate on Macy's.

The backlog.

Thanks, Ryan This is Joe I'll start and take that question. So.

I think as we think about the backlog I think the way we're thinking about it is as we talked about in the prepared remarks, we certainly want to be mindful of the operating environment. We're in we have a wider range in terms of macy guidance for the year.

I think as we think about the backlog you're right. So in Q3, we talked about that number kind of being in the $7 million range.

As we came out of Q4, we actually saw an increase so I would say the number is closer to $10 million.

In terms of how that plays into the scenarios what I would say is certainly on the higher end of our guidance. We would we would assume or we are assuming a more substantial or substantive part of that backlog is kind of pulls through as part of that revenue number and at the low end.

It's certainly a much lower percentage so as we think about kind of may see growth for the year I mean, there's some competing dynamics certainly we think that backlog can help but as we talked about we don't think conversion rates and kind of patient flow will fully normalize or get closer to fully normalizing until the back half of the year.

And we also have some kind of COVID-19 impacts to start the year. So I think all of those are certainly part of the equation. When we think about the full year.

Okay.

And then.

Your cost as a follow up so just help me understand.

Your costs are largely labor related right and theres lower kind of material raw material costs for development of both episodes Macy's. We're hearing a ton of companies talk about rising wage pressures just given the inflationary environment and so I just wanted to get your thoughts about what to think about from that perspective both.

From an SG&A level in R&D level, and then I appreciate the guidance on adjusted EBITDA, but just help us think through kind of what kind of pressures you may be feeling on those lines.

Yes, no. Thanks, Ryan So certainly we're mindful of kind of the operating environment. We're in from a cost perspective, and we're considering that as we're thinking about guidance for the year as we talked about we do think we can improve on our gross margin on a year over year basis, and similarly on an adjusted EBITDA perspective.

As we think about some of those potential cost kind of impacts.

The good news is a lot of our raw material spend on some of our higher dollar items are tied up in kind of longer term contracts.

Do think the team got ahead in some areas to make sure we had enough stock and whatnot on our materials perspective.

But I think to your point I mean, we're certainly going to see some impact in terms of inflationary increases on some some of our vendors band some of other pieces.

On the labor piece I think it's important to recognize and remember we've been in the Cambridge area for quite some time there is a lot of competition for labor here. So that's something I think that's kind of been here for a while but certainly in the environment. We're in that's going to impact labor costs, a bit more on a year over year basis. So I think we're doing what we can certainly to manage on.

The cost side.

But there are some impacts kind of here and there I would say.

Thanks for taking the question.

Thank you.

Your next question is from Danielle <unk> of Seb Leerink. Your line is open.

Hey, good morning, guys. Thanks, so much for taking the question.

Just a question on the biopsy backlog and conversion rate I mean, they can go do you think that there's I guess, how are you thinking about that.

Potential to actually keep those patients in the funnel I guess, what I'm, saying is how much visibility or how many touch points you have with those patients in order to ensure that at some point those patients do get treated and then I have one follow up.

Yeah, Hey, Thanks, Daniel good to hear from you and Thats a great question and something we're really focused on here right. So.

I think Joe went through sort of the dynamics of how we're thinking about for the year that backlog may be worked down and I'll just add one comment there on the first quarter.

Obviously, the omicron, we've kind of carried into the first quarter. So I don't think we're under any illusions that backlog gets worked down in the first quarter given the dynamics, but that's more something that we've consistently been talking about.

Would expect to occur over the course of the year.

To your point of the sort of biopsies that were collected last year than under normal circumstances would have converted that is something we are hyper focused on here.

If you're running a commercial organization you certainly we are in a unique position in that we certainly understand obviously a biopsy comes with a transmittal form we know the surgeon that centered in the patient the nature of the defects et cetera, and so it's very easy for us from both a marketing and sales.

Team perspective to be able to create those biopsy lists focus our reps on having those discussions with the surgeons.

So that we're able to kind of make sure we don't lose those biopsies to the extent, we can control that.

And that they don't go scale. So that is something we are really focused on there are initiatives on the commercial team to be able to focus on for instance, Q2 and Q3 biopsies from last year.

So I think we're uniquely positioned to make sure we maintain those touch points and of course, we have.

A very strong case management team that is routinely in contact with surgeons offices and staff regarding patient.

Patients that are in the pipeline. So so we think we are.

That's a focus for us I'll just end there and we think we have certainly the ability to influence that to the extent possible.

Got it that's Super helpful. And then look it's been a few years since you guys expanded the fifth.

Unfortunately, I guess your last Salesforce expansion with literally right before COVID-19 .

During the early days of Covid, just curious about where you think the sales force today versus where it will go from here or do you think you have.

You have the sales force.

Thanks, so much.

Well, yes, certainly.

Very pleased with that expansion of the results we've seen even during these COVID-19 times and I think we've talked about that a lot in terms of.

The sales force expansion was necessary for a bunch of reasons, one we increased our target surgeon universe.

Two we wanted to get sales territories down to kind of more manageable geographic size and for those reasons. It was something we needed to do we've talked during the past couple of years about the performance of the the new territories and driving new surgeon acquisitions and so.

So we're very pleased.

And these were highly experienced sales reps that we added so from that perspective, we're very pleased we'll take another look as you'll recall when we expanded the sales force back in.

2020, it was intended to cover us through pretty much a two to three year period. So we will look again sort of at the end of this year about what our needs are going forward.

And I would just say that performance is kind of the bottom line here right I mean, we have <unk>.

Access to procedural data for the procedures that make up our market Microfracture Chondroblast DS osteo crowd layered allografts, etc.

That data tells us that since 2019 procedural volumes for the market as a whole are down double digits and over that time period basic revenues are up 20% plus so I think that speaks to the effectiveness of our sales force and we certainly don't ever question.

Expanding it was definitely something that we thought was the right thing to do would be certain.

We continue to think that.

Got it thank you.

Thanks Danielle.

Your next question is from Chris Cooley of Stephens. Your line is open.

Good morning, and thanks for taking the questions just two for me maybe first when we talk about expanding the number of surgeons, taking biopsies from IAC I think the target you gave during the prepared comments was approximately 10%.

Could you help us with maybe just how the sales forces incentivized in that regard is it going deeper within existing practices.

I would assume those surgeons would ramp faster if there appears we're already utilizing macy and they were familiar with it to some degree or are they more incentivized at this time to broaden the reach and then if I could just go ahead and ask my second question.

And then I'll be quiet and getting Q, but maybe just help us think Joe a little bit about this.

The sequential gating on the spend obviously youre driving much greater leverage there better cash flow really impressive, but just help us think about what the timing of the spend getting ready for the submission for <unk>.

<unk>.

The timing of the expansion just help us think a little bit there about how we should think about that.

That opex as it plays through the year, if theres anything different this year versus maybe the last to so called normal COVID-19 years. Thanks, so much.

Yes.

Thanks for your questions, Chris It's Nick I'll take the first one regarding kind of the sales force incentives and how you build a successful business and then and then turn it over to Joe So as I think we've talked about before at the end of the day.

Our sales reps are paid in.

In addition to sort of cash and salary in equity.

On a commission basis for the implants that are done right. That's when we recognize revenue and thats when they are how their incentive comp works, but just as we talk to investors and analysts about the growth drivers for the company at the high level, that's exactly what the reps are focused on.

At the territory level, and it's very clear throughout the organization to be successful as a sales rep you need to be doing everything we talk about which is expanding the number of surgeons, taking biopsies penetrating deeper into their practices, which is represented by the biopsies per surgeon.

And then getting those cases activate it isn't converted so that is a focus.

Throughout the organization and particularly with the regional directors and our sales reps.

Yes, Chris.

Good morning. Thanks on the second question I would say if you look back in the last couple of years kind of from an Opex perspective, if you look at 2021.

There was some ebbs and flows during the year, but I wouldn't expect anything.

Hugely variable from quarter to quarter perspective, there are certainly some things we're looking to get ahead of.

In terms of some of the investments.

Our lifecycle side that started there's certainly some spending there as we think about.

<unk> brand, which will kind of balance throughout the year and then obviously have some second half component. So I wouldn't think of it as kind of a hugely material differences from a quarter to quarter perspective, although it may ebb and flow. If you take that full year number and kind of work back to the quarters. Thank.

Thank you.

Your next question is from Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Hi, Nick Joe and Eric how are you.

Good Thanks, Jeff Good morning, just a couple of questions from Aaron So.

Looking at the.

So guidance for 'twenty two.

Can you walk us through some of the.

Trends you've seen thus far the first couple of months.

It seems a little cautious on the.

The aggregate numbers here, particularly given the fact that youre discussing.

Higher asps.

<unk> earned an average curious or anything to read in there or anything we should think about I know, it's been a strong five quarters in succession.

Yeah. Thanks, Jeff So when you look back at <unk>.

<unk> growth in 2021, it was obviously a phenomenal year, particularly for a product that as we often say it's been on the market for for close to 30 years now.

So 50% growth a big piece of that as I mentioned in my prepared remarks was that we have seen consistently now over the past five or six quarters.

Sort of an uptick or an increase in the average number of episode grafts used per patient and we've talked about this last last fall as well that.

As we adjusted our Tam upwards that the average grafts per patient had increased from about 90 to 120 graphs on average and so that if you look at that growth for last year, you can say.

Two thirds of it or.

Thereabouts was due to sort of that increase in.

In the graph per patient and.

What that did was sort of move the market.

Up to where the premier burn centers kind of the level of utilization per patient that they were using so we may get some small incremental.

And that over time, right, especially when you're treating these large total body surface area Burns, but really where the growth is going to come from is adding more burn centers that are treating patients with episodic and increasing the biopsies or the patients that are being treated and we saw.

Both of those sort of increased last year as I mentioned as well.

But I think it's a more realistic forward looking.

Perspective to say kind of baseline in that low double digit growth.

And then obviously.

Just on exceeding that.

Yes, maybe just to add is yes, just to add as well I think a couple of points. So again on those kind of average grafts per patient that patient utilization, obviously that was a huge growth driver last year. If you look back that actually has been pretty consistently high over several quarters. So.

Even as we compare to last year kind of the first quarter et cetera.

Really for the most part in run rate a.

A couple of other things just to highlight so if you look at the last several quarters that run rate has actually been right around $9 $5 million.

If you look across the last five quarters.

Take a bigger picture view, we think we can grow the overall kind of business and again, it's really thinking about adding burn centers and driving volume into that double digit range, but if you look at last year, there was kind of at one outlier.

$12 million plus so we think on a full year basis again, we can get into that double digit growth range and that's a realistic number for us, but what we're kind of seeing and where we are in Q1 right now.

We're kind of more in that run rate similar run rate at least at this point. So I still think given the nature of the product there is going to be ebbs and flows even as we try to drive growth. Although as you look back in the last few quarters, it's been more stable.

Still think it will ebb and flow, but overall, we're still looking for that double digit growth.

Perfect. Thanks for the commentary then.

Could you talk about you said year over year quarterly.

Sequential increase in reported terms just wanted to clarify that.

It won't be the cadence of Q1 to Q4 sequential pace.

The year over year.

Yes, so so I think when we talk we're talking about Macy's specifically there I mean, what we're saying is if you kind of think about.

The macy progression throughout the year, what we said in the first quarter is if you take our full year guidance from AC will be around that 18%, which is pretty typical percent of the business.

Or of the overall revenue for the year I, just think about the seasonality.

I think given kind of the trends, we're seeing will probably lean a little bit more kind of back loaded when you think about the percentage of business H two versus H, one or at least look more like some of the years that were more slanted towards <unk>. So if you play that out and assume similar seasonality.

What youll see there on a year over year basis. When you look at kind of Macy's quarterly is sequential sorry year over year each quarter, we will have.

Increasing year over year growth rate. So just to clarify are we making year over year relative to 'twenty one.

Got it and then lastly for US just to recap I know there's been a couple of questions on.

Some of the conversion ratio prior to so.

Seeing any read into.

Alright.

This quarter, thus far for 2022, those four as far as any biopsy trends, specifically I mean, excluding any.

Conversion rate commentary from insurance for this year versus.

20, or 19 as far as beginning of the year is it similar.

Yes.

We're kind of early in the year.

As we mentioned you have.

Micron carryover et cetera, I would just say that we certainly expect biopsies to grow for the year.

And that Hasnt changed and so again when you have this dynamic of increasing the biopsy surgeons at a double digit rate.

Which Joe mentioned, and then continued penetration into those practices, which means higher biopsies per surgeon sort of by definition youre going to have biopsy growth right. So that is certainly something that we expect for this year as well.

Perfect. Thanks for taking our questions.

Your next question is from Daniel without scale to list. Your line is open.

Hi, Thanks for taking the question I'll just start off with.

High level, just kind of how thats about the amount of upfront just to kind of high level thoughts on the Macy's going forward, starting with the sales force.

Expanded group matures.

Hopefully I'm moving into a more normalized market going forward.

Any kind of updated thoughts on how we think about peak or a target productivity for reps.

On an annual basis, and then sort of as we think about biopsy growth in 'twenty two.

You give us any any granularity into where we should be expecting biopsy growth to come from whether it be sort of the difference between that.

Pre COVID-19 dock roof.

Docks added last year, and then new docs.

Yes, well I'll start with sort of the.

The first question or the second question around biopsy growth.

We kind of believe given the size of the addressable market that biopsy growth is really coming from sort of all segments in terms of.

The initial.

The existing users new surgeons coming in I mean, we've commented previously.

About the the fact that we kind of see it across the board with new surgeons join that they end up.

Yeah.

The.

That they end up kind of moving up over the course of a year or two to sort of the average levels. So we see growth with existing users, we see new surgeons kind of getting to that level and so.

So we don't expect that there will be anything other than what we've seen in the past, which is sort of across the board growth among our surgeon customers.

Yeah, and just to add on.

On our productivity metrics. So certainly I think we've talked about in the past, we're certainly looking to get back up to <unk>.

All of that.

That two ish range.

For rapid $3 million range, if you look at last year.

'twenty one versus 'twenty two it is an improvement we're not quite there based on where our full year guidance is but we certainly think we are kind of trending back in that direction and we can kind of get back to that number that we've been talking about.

Yes.

Thank you Danielle. Your next question is from RP Slam Buccola of H C. Wainwright Your line is open.

Thank you good morning, Nick.

Joe.

Quite a bit of my questions have been answered.

But I'm just trying to.

Okay.

Yes.

Comments that you made.

Honestly by.

Hi, good announcements.

Our new manufacturing facility.

Graphing.

The expectation for.

Total growth.

But may see epic.

So.

In terms of long term.

What sort of.

Good.

We've been thinking about.

But for both product and also.

You just said.

The sales force expansion, obviously has allowed you to.

Penetrate better than today.

Groups.

Yes.

Is there.

Is that expect to what sort of expectations do you have on your sales force in terms of.

How much.

Even though it has been a tough two years.

Sure.

Do you think.

The sales force is working.

Optimal level at this point.

Or do you still need to add more sales force as you said by the end of this year.

Thanks, RK Els Dart and Joe you can add any additional comments. So first of all with respect to the new facility. As we mentioned that is intended to support the long term growth for both may see an episode.

We haven't really gone beyond sort of mid decade, but as we've talked about in our <unk>.

Earlier pre announcement this year, we certainly expect to be in the 20% compounded annual growth rate.

Product portfolio through mid decade, and then.

Given the fact that these are large underpenetrated markets. We think there's growth ahead for multiple years, especially when you sort of layer on them hopefully.

And increased <unk>.

Commercial presence on the burn side with them.

<unk> launch and then lifecycle management for Macy's, So, we're really confident and bullish on the prospects through the end of the decade and beyond.

When you think about the sales force as we were mentioning earlier.

For the reasons, we mentioned.

Just to repeat myself we are.

Obviously procedural data for the market that makes up our addressable market and while that declined overall by double digits. Since 2019 basis revenues are up 20% versus 2019. So we are clearly we were outgrowing the market by a wide margin.

And before Covid, we've outgrown it through Covid and we certainly expect to outgrow it when we're through Covid.

So we feel really good about that thats driven in part obviously by the Salesforce they continue to execute well.

And we don't expect that to change in just on the productivity.

<unk>.

Sam mentioned and Joe touched upon I mean, we kind of before the expansion were up too.

About $2 million per rep.

That took a step back through COVID-19 and through the expansion, but we certainly expect to be back to those ranges and beyond as we continue to grow the brand.

Thank you.

Terms of the.

The pipeline growth, especially with their co.

Delivery.

And also the ankle.

You said you are expecting to initiate some conversations with the FDA.

Could you give us a little bit more color on those.

On those timelines.

So that I.

10.

How to think through some of the R&D expenses.

Forward.

Yes, well I'll start with kind of timeline thoughts and then Joe you can kind of layer in.

<unk> expenses, but.

Not to preempt, but.

We've said pretty routinely that for these lifecycle management initiatives for sales force expansion I mean, that's just those are.

Spend ensures that.

We can sort of absorb in our in our operating margins and so on that we've shared.

With analysts and investors previously so.

But for timelines around arthroscopic may see what we said is we plan to meet with the FDA. Later this year, we got a lot on our plate right now right getting the <unk> submission in by mid year, but also we want to meet with the FDA. Shortly thereafter, so that work is on.

Going to discuss with the development plan would look like going forward and it's a little hard to give a lot of detail around.

Sort of precise expenditures until you sort of understand and agree with the FDA on what the program is going to look like in the same of courses for Macy, but we are placeholders in sort of our long range plan.

That.

Cover that.

So.

As we said earlier.

We expect that in arthroscopic delivery for Macy's is more of a 2025 plus kind of endeavor.

The ankle indication.

Would be more of the towards the end of the decade, just because it would involve.

A more robust clinical study to be able to get that indications.

Our current thinking so Joe.

Not a whole lot more to add than I'd say these are certainly kind of areas. We think it makes sense from an investment perspective, and a business case perspective.

Over kind of a mid to long term as you think about lifecycle management in terms of kind of the P&L on the operating expense impacts I mean, theres certainly will be an impact over that timeframe, but as Nick said, it's kind of built into the numbers.

We think we can kind of manage that within our kind of operating cash flow and existing P&L structure and will add some cost, but it's not hugely meaningful over the next few years and not so much on <unk>.

Basis.

Thank you very much thank you Bob.

Okay.

Okay. Thanks, Okay. Thank you.

Presenters I'm showing no further questions at this time I would like to turn the conference back to Nick Colangelo for closing remarks.

Okay, well, great and thank you all for your questions and your continued interest in <unk>. So overall the company continued to execute very well across all areas of the business in 2021, and we expect another year of significant topline revenue growth margin expansion and operating cash flow driven by both our franchises.

In 2022.

And given the significant market opportunities for our products our strong financial profile. We believe the company is well positioned for sustained long term growth in the years ahead. So we're excited about the business as we move forward and again want to thank you for your questions and interest in the company have a great day.

Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.

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Women.

Okay.

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Ladies and gentlemen, thank you for standing by and welcome to very shows fourth quarter 'twenty 'twenty. One 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 Eric brings very self head of financial planning and analysis.

Mr relation. Please go ahead.

Thank you operator, and good morning, everyone welcome to various health fourth quarter 2021 conference call to discuss our financial results and business highlights.

Before we begin I'll remind you on today's call, we'll be making forward looking statements covenant of the private Securities Litigation Reform Act of 1995.

These statements may involve risks and uncertainties could cause actual results to differ materially from expectations and are described more fully in the fall.

And 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.

Please note that a copy of our fourth quarter financial results press release is 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 webcast or accessed on our web site Islands.

Im joined on this call by <unk>, President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer Officer, Joe Mara I will now turn the call over to Nick.

<unk>.

The company delivered another year of strong revenue and profit growth in 2021. Despite the continued impacts of COVID-19 throughout the year.

Total revenue for the year increased 26% to approximately $156 million.

Our top line growth, which was at the higher end of the range that we pre announced last month was also in line with our compounded annual revenue growth rate since we launched Macy in 2017.

With respect to our fourth quarter results. Despite the unexpected emergence of the <unk> variant in late November and the resulting impact on Macy performance in December <unk>.

<unk> quarterly growth increased compared to the prior quarter in the same period in 2020, achieving record quarterly revenue in the fourth quarter.

We also finished the year with another strong quarter for episode as we generated revenue of over $9 5 million for the fifth consecutive quarter.

From a commercial perspective, we continued to see strength across the underlying growth drivers for Macy and a high level of brand engagement from surgeons and patients.

Accordingly, we met our goal of increasing the number of surgeons, taking macy biopsies by 20% and generated biopsy growth of 30% for the year.

With a record quarterly high in the number of biopsies and the number of surgeons, taking biopsies in the fourth quarter.

This strong biopsy growth was also driven by an increase in the biopsies per surgeon of approximately 10%. Another key performance indicator for Macy as our penetration rate in individual practices is now higher than it was prior to the pandemic.

We also continued to see strength across the key growth drivers for episodes.

Sales growth of over 50% for the year was driven in large part by a significant increase in the average number of episode grafts per patient, which we believe was due to the outstanding commercial execution by our burn care sales team.

This strong performance was also driven by over 30% growth in both the number of episodes biopsies and the number of burn centers treating patients with <unk> in 2021.

We believe that these key performance indicators will continue to help drive further penetration into episodes $200 million plus addressable market over the coming years.

As we announced this morning, we expect total revenue in 2022 to increase to approximately $178 million to $189 million with.

With continued margin expansion and strong profit and cash flow growth.

Joe will provide further details regarding our financial guidance in a moment, but I wanted to take a minute to discuss the current operating environment and the framework underlying our guidance.

As we discussed throughout 2021 and in connection with our pre announcement in January we generated strong growth in both Macy biopsy surgeons and biopsies in 2021.

However, due to a variety of COVID-19 related factors throughout the year, we saw a much more pronounced impact on Macy's implant growth as historical biopsy to implant conversion patterns were disrupted.

While these patient related dynamics created a biopsy backlog that we believe should contribute to <unk> growth this year.

Timing related to the recapture of this backlog and the normalization of conversion rates.

<unk> remains uncertain at this point given the carryover of the omicron wave into the first quarter.

We've started to see general COVID-19 conditions begin to improve in February and moving forward, we expect continuous improvement throughout the year. However.

However, because of the timing and impact of COVID-19 dynamics this year remain difficult to predict.

We've assumed a wider range of revenue scenarios in our initial financial guidance for the year.

The lower end of our revenue range assumes additional significant COVID-19 related headwinds and continued disruption within the health care environment, which would represent a more modest improvement over 2021.

The higher end of our range assumes some disruption beyond the first quarter, but gradual improvements in patient flow and conversion rates during the year.

Importantly, we expect the year over year quarterly growth rate from AC to increase each quarter throughout the year.

The midpoint of our revenue growth range for total <unk> and <unk> product revenue is in line with our 20% compounded annual growth rate that we expect to maintain over the next several years.

We also expect to generate additional margin expansion and increases in adjusted EBITDA and operating cash flow. This year as we further enhance our strong profitability profile.

Turning to our pipeline we remain on track for a mid year Resubmission of the Nexobrid, BLA, which would position nexobrid for a potential commercial launch in the U S. In the first half of 2023.

We also continued to advance important lifecycle management initiatives for Macy, we expect to meet with the FDA later this year to discuss the clinical development program for custom arthroscopic delivery system, which we believe offers the potential to make basi and even simpler and less invasive procedure into.

Expand the use of Macy's for the treatment of cartilage defects in the knee.

We also continue to advance our BC ankle program, which we believe could increase our overall addressable market to approximately $3 billion.

Finally, we're very pleased to have announced plans earlier this month for a new state of the art advanced cell therapy manufacturing and corporate headquarters facility in the Boston area.

I'll now turn the call over to Joe to discuss our fourth quarter and full year financial results as well as our financial guidance for 2022.

Thanks, Nick and good morning, everyone.

Starting with the income statement total net revenue for the full year grew 26% to $156 2 million driven by strong growth in both of our franchises Macy revenue grew 18% to $111 6 million, while episodic revenue grew 51% to $41 5 million.

Total net revenue for the fourth quarter increased 5% to $47 6 million versus the fourth quarter of 2020.

While product revenues, excluding BARDA related next in Britain shipments grew 6%.

Macy's fourth quarter revenue was $37 3 million growing 8% versus the prior year. Despite.

Despite continued COVID-19 impact on volumes due primarily to the omicron variant Macy's fourth quarter revenue increased 56% sequentially versus the third quarter of 2021.

<unk> to a 42% sequential increase for the same period in 2020.

<unk> fourth quarter revenue was $9 7 million similar to the strong results in Q4, 2020 of $9 6 million and the fifth straight quarter above $9 5 million for episodes.

In addition, total revenue in the fourth quarter also included approximately zero point $5 million of revenue related to the procurement of Nexobrid by BARDA for emergency response preparedness.

Gross profit for the quarter was $34 million or 72% of net revenue compared to 74% of net revenue for the fourth quarter of 2020.

This decline in gross margin is mainly driven by the shortfall in revenue versus our initial expectations for the quarter due in large part to our scale out to meet expected demand.

Total operating expenses for the quarter were $29 9 million compared to $21 4 million for the same period in 2020.

The increase in operating expenses was primarily due to higher noncash stock compensation expense driven by share price appreciation.

Net income for the quarter was $4 5 million or <unk> <unk> per share compared to net income of $12 2 million or <unk> 25 per share for the fourth quarter of 2020.

non-GAAP adjusted EBITDA for the quarter was $12 8 million or 27% of net revenue and importantly, this is now the sixth consecutive quarter that we've generated positive adjusted EBITDA.

For the full year non-GAAP adjusted EBITDA was $29 5 million, an increase of approximately $11 million compared to $18 6 million in 2020.

Okay.

Before turning to 2020 to guidance I wanted to comment on capital expenditures, which increased in 2021 relative to historical trends.

This growth was related to the Buildout of our new office building in Cambridge that helped to free up space for additional manufacturing capacity over the next few years.

Transitioning to our financial guidance for 2022.

We expect total revenue of $178 million to $189 million.

Macy's full year revenue is expected to be in the range of $132 million to $141 million.

As Nick mentioned, we are assuming a wider range of Macy revenue scenarios for 2022 at this point given the variability of potential COVID-19 related impacts on the business.

Certainty around patient behavior dynamics, and the timing of the normalization of patient flow and capacity within the overall healthcare system.

Importantly, we are expecting another year of double digit growth in surgeons, taking macy biopsies that conversion trends begin to normalize throughout the year and that we start to recapture some of the Covid driven 2021 biopsy backlog, although we expect this to be gradual during the year.

While there are a number of moving parts to what we're seeing in the first quarter more broadly trends are beginning to improve of late and we projected Macy volume in Q1 will still represent a typical percentage of our full year volume of approximately 18%.

We would also expect trends to continue to improve during subsequent quarters with year over year quarterly growth rates accelerating throughout the year.

For <unk>, we expect full year revenue in the range of 45, five to $47 5 million.

At the midpoint this would be approximately $11 5 million episode revenue per quarter on average.

We expect that it will take a quarter or two to get up to that higher run rate as the team continues to add new burn centers.

We anticipate that episode revenues in the first quarter will be more in line with our recent run rate of approximately $9 5 million per quarter.

Moving down the P&L, we expect gross margin to be approximately 70% and full year operating expenses to be in the range of $134 million to $137 million.

non-GAAP adjusted EBITDA margin for the full year is expected to be approximately 21% an increase from 19% 2021.

This concludes our prepared remarks, we will now open the call to your questions.

First question is from Ryan Zimmerman of <unk>. Your line is open.

Hey, good morning, Thanks for taking the questions.

Congrats on your progress this year I guess I wanted to start with what May see in the guidance. There I. Appreciate your comments on the first quarter, Nick and Joe.

Help us think through the backlog I think by our estimates from the last quarter. There was about $7 million backlog on Macy and so how much of that is assumed in that guidance. This year. It sounds like some of it and then kind of what's the underlying growth rate on AC ex the backlog.

Okay.

Thanks, Ryan This is Joe I'll start and take that question. So.

I think as we think about the backlog you're right. So in Q3, we talked about that number kind of being in the $7 million range as.

As we came out of Q4, we actually saw an increase so I would say the number is closer to $10 million.

It's certainly a much lower percentage so as we think about kind of may see growth for the year.

Some competing dynamics, certainly we think that backlog can help but.

But as we talked about we don't think conversion rates and kind of patient flow will fully normalize or get closer to fully normalizing until the back half of the year.

And we also have some kind of COVID-19 impacts to start the year. So I think all of those are certainly part of the equation. When you think about the full year.

Okay.

And then.

Your cost as a follow up.

So help me understand.

Your costs are largely labor related right and theres lower kind of material raw material costs for development of both episodes at Macy's, We're hearing a ton of companies talk about rising wage pressures just given the inflationary environment and so I just wanted to get your thoughts about what to think about from that perspective.

From an SG&A level in R&D level, and then I appreciate the guidance on adjusted EBITDA, but just help us think through kind of what kind of pressures you may be feeling on those lines.

Yeah, no. Thanks, Ryan so certainly.

We're mindful of kind of the operating environment. We're in from a cost perspective, and we're considering that as we're thinking about guidance for the year as we talked about we do think we can.

Prove on our gross margin on a year over year basis, and similarly on an adjusted EBITDA.

Respective.

As we think about some of those potential cost kind of impacts I think the good news is a lot of our raw material spend on some of our higher dollar items are tied up in kind of longer term contracts and I do think the team got ahead in some areas to make sure we had enough stock and whatnot on our materials perspective.

But I think to your point I mean, we're certainly going to see some impact in terms of inflationary increases on some some of our vendors band some of other pieces.

Cost side.

There are some impacts kind of here and there I would say.

Thanks for taking the question.

Thank you.

Your next question is from Daniele unhealthy of SBB Leerink. Your line is open.

Hey, good morning, guys. Thanks, so much for taking the question.

Question on the biopsy backlog and conversion rate I mean, you can tell do you think that there's I guess, how are you thinking about that.

Potential Q actually keep those patients in the funnel I guess, what I'm, saying is how much visibility or how many touch points you have with those patients in order to ensure that at some point those patients do get treated and then I have one follow up.

Yeah, Hey, Thanks, Daniel good to hear from you and Thats a great question and something we're really focused on here right. So.

I think Joe went through sort of the dynamics of how we're thinking about for the year that backlog may be worked down and I'll just add one comment there on the first quarter.

Would expect to occur over the course of the year.

To your point of the sort of biopsies that were collected last year that under normal circumstances would have converted that is something we are hyper focused on here.

Team perspective to be able to create those biopsy lists focus our reps on having those discussions with the surgeons.

So that we're able to kind of make sure we don't lose those biopsies to the extent, we can control that and.

And that they don't go scale. So that is something we are really focused on there are initiatives on the commercial team to be able to focus on for instance, Q2 and Q3 biopsies from last year.

So I think we're uniquely positioned to make sure we maintain those touch points and of course, we have.

A very strong case management team that is routinely in contact with surgeons offices and staff regarding patient.

Patients that are in the pipeline. So so we think.

That is a focus for us I'll just end there and we think we have certainly the ability to influence that to the extent possible.

Got it that's Super helpful. And then look it's been a few years since you guys expanded the scale of course, Unfortunately, I guess your last salesforce expansion with literally right before COVID-19 .

During the early days of Covid, just curious about where you think the sales force today versus where it will go from here do you think you have.

You have the sales force.

Thanks, so much.

Well, yes, we are certainly.

Very pleased with that expansion and the results we've seen even during these COVID-19 times and I think we've talked about that a lot in terms of the.

Sales force expansion was necessary for a bunch of reasons, one we increased our target surgeon universe.

Two we wanted to get sales territories down to kind of more manageable geographic size.

And for those reasons it was something we needed to do we've talked during the past couple of years about the performance of the the new territories and driving new surgeons acquisitions and so on so we're very pleased and these were highly experienced sales reps that we added so from that perspective.

<unk>, we're very pleased we'll take another look as Youll recall, when we expanded the sales force back in 2020. It was intended to cover us through pretty much a two to three year period. So we will look again sort of at the end of this year about what our needs are going forward.

And I would just say that performance is kind of the bottom line here right I mean, we have <unk>.

Accessed to procedural data for the procedures that make up our market Microfracture Chondroblast DS ostiole crowd hillaryland graphs et cetera.

That data tells us that since 2019 procedural volumes for the market as a whole are down double digits and over that time period may see revenues are up 20% plus so I think that speaks to the effectiveness of our sales force and we certainly don't ever question.

Expanding it was definitely something that we thought was the right thing to do and we certainly continue to think that.

Got it thank you.

Thanks Danielle.

Your next question is from Chris Cooley of Stephens. Your line is open.

Good morning, and thanks for taking the questions just two for me maybe first when we talk about expanding the number of surgeons, taking biopsies from IC I think the target you gave during the prepared comments was approximately 10%.

Could you help us with maybe just how the sales forces incentivized in that regard is it going deeper within existing practices.

I would assume those surgeons would ramp faster if there appears we're already utilizing macy and they were familiar with it to some degree or are they more incentivised at this time to broaden the reach and then if I could just go ahead and ask my second question.

And then I'll be quiet and getting too, but maybe just help us think Joe a little bit about.

<unk> gating on the spend obviously youre driving much greater leverage there better cash flow really impressive, but just help us think about what the timing of the spend getting ready for the submission for <unk>.

The timing of the expansion just help us think a little bit there about how we should think about.

That opex as it plays through the year, if theres anything different this year versus maybe the last to so called normal COVID-19 years. Thanks, so much.

Yes.

Sales reps are paid.

In addition to sort of cash and salary in equity.

And then getting those cases activate it and converted so that is a focus.

Throughout the organization and particularly with the regional directors and our sales reps.

Yes, Chris and thanks. Good morning. Thanks on the second question I would say if you look back in the last couple of years kind of from an Opex perspective. If you look at 2021 I mean, there was some ebbs and flows during the year, but I wouldn't expect anything hugely variable from quarter to quarter perspective, there are certainly some things were.

Looking to get ahead of it.

And to some of the investments on a lifecycle side that started there's certainly some spending there as we think about.

The <unk> brand, which will kind of balance of the year.

Obviously have some second half component so I wouldn't think of it as kind of a hugely material differences from a quarter to quarter perspective, although it may ebb and flow. If you take that full year number and kind of work back to the quarters.

Okay.

Your next question is from Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Hi, Nick Joe and Eric how are you.

Good Thanks, Jeff Good morning couple of questions from Aaron So.

Looking at.

The episode guidance for 'twenty two.

Could you walk us through some of the.

Trends you've seen thus far the first couple of months.

It seems a little cautious on the.

The aggregate numbers here, particularly given the fact that youre discussing.

Higher asps.

<unk> earned an average curious or anything to read in there or anything we should think about I know, it's been a strong five quarters in succession.

Yeah. Thanks, Jeff So when you look back at <unk>.

<unk> growth in 2021, it was obviously a phenomenal year particular leave for a product that as we often say has been on the market for for close to 30 years now.

So 50% growth that big piece of that as I mentioned in my prepared remarks was that we have seen consistently now over the past five or six quarters.

Sort of an uptick or an increase in the average number of episodes grafts used per patient and we talked about this last last fall as well that.

As we adjusted our Tam upwards that the average grafts per patient had increased from about 90 to 120 graphs on average and so that if you look at that growth for last year, you can say.

Two thirds of it or.

Thereabouts was due to sort of that increase in.

In the grass per patient.

What that did was sort of move the market.

Up to where the premier burn centers kind of the level of utilization per patient that they were using so we may get some small incremental growth in that over time right, especially when you're treating these sort of large total body surface area Burns, but really where the growth is going to come from is adding more burn centers.

That are treating patients with episode and increasing the biopsies or the patients that are being treated and we saw.

Both of those sort of increased last year as I mentioned as well.

But I think it's a more realistic forward looking.

Perspective to say.

Baseline in that low double digit growth.

And then obviously.

Focused on exceeding that.

Yes, maybe just to add is yes.

Just to add as well I think a couple of points. So again on those kind of average grafts per patient that patient utilization.

That is a huge growth driver last year. If you look back that actually has been pretty consistently high over several quarters. So even as we compare to last year.

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