Q2 2022 Vericel Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Verso second quarter 2022 conference call. At this time, all participants will be listen only mode. I would also like to remind you that this call is being recorded for replay I'll now turn the conference call over to Eric Byrnes Theirselves head of financial planning and.
The analysis and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone.
Welcome to marathon second quarter, 2022 conference call to discuss our financial results and business highlights.
Before we begin.
On today's call, we'll be making forward looking statements under the private Securities Litigation Reform Act of 1995.
These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations.
Guy more fully in our filings with the SEC.
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.
Note that a copy of our financial results press release, a short presentation with highlights from today's call are available on the Investor Relations section of our website.
I'm joined on this call by Verathon, President and Chief Executive Officer of Nickel, Angela and our Chief Financial Officer, John Martin I'll.
I'll now turn the call over to Nick.
Thank you Eric and good morning, everyone I'll begin today's call with a discussion of our second quarter financial and business highlights and our expectations for the remainder of the year.
I'll turn the call over to Joe for a more detailed review of our financial performance in 2022 financial guidance before opening the call to Q&A.
We generated total revenue of $37 million in the second quarter and approximately $3 million of adjusted EBITDA and operating cash flow, marking the eighth consecutive quarter of sustained profitability and positive cash flow for the company.
<unk> had a very strong quarter as we generated revenue of $28 $6 million, representing the highest quarterly revenue outside of the seasonally high fourth quarter since the launch of Macy's.
<unk> revenue grew 8% compared to the second quarter of 2021 and sequential revenue growth was more than 10% compared to the first quarter of 2022.
Importantly, <unk> continued to outperform the overall cartilage repair procedure market and we remain on track to generate our expected double digit growth in searches taken Macy biopsies. This year as our sales team continues to expand the macy customer base.
Macy's is also off to a strong start in the third quarter and as Joe will discuss in further detail. We expect to see an inflection in may see performance in the second half of the year with continued strong quarterly revenue progression and significantly higher quarterly growth rates compared to the same periods in 2021.
Based on our results to date and Macy's continued momentum, we expect macy growth to accelerate through the remainder of the year translating to growth in the mid to high 20% range in the third quarter and mid to high 30% range in the fourth quarter versus the same periods in 2021.
Accordingly, we're maintaining our full year revenue guidance for Macy as it resumes its high growth trajectory.
Basically adoption also continues to be supported through medical education and publications of data from our recently published Macy's study in the journal cartilage was featured in orthopedics today.
Showing the expansion of knee cartilage defects in the formation of new high grade lesions in patients as time between our Macy biopsy and implantation increases highlighting the importance of treating patients in a timely manner.
Finally, we remain on track for planned meetings with the FDA later this year to discuss our meets the arthroscopic amidst the ankle development programs initiatives that we believe will support sustained growth in the years ahead.
Turning to our burn care franchise, we reported episode revenue of $8 2 million for the second quarter, which was below our most recent quarterly run rate as.
As we've discussed previously even though quarterly baseline revenue for episode was significantly higher than pre 2021 periods.
Will continue to be inherent volatility in quarterly revenue given the small patient population and the concentrated number of burn centers treating these patients.
We have seen solid underlying fundamentals for episodes in the first half of the year as the number of burn centers, taking biopsies in treating patients with episode was consistent with the significantly higher burn center penetration scene in the same period last year, which included the highest episode volume and revenue quarter ever in Q2.
2021.
However, we did see fewer biopsies in patients treated with episodes in the second quarter and a lower average burnside's for treated patients compared to recent trends, there's clearly impacted our quarterly results, although again quarterly revenue of over $8 million significantly above pre 2021 quarterly run rates.
We also continue to support the expanded utilization of episode through medical Education and important publications, we recently announced the publication of results in the journal of burn care and research a leading peer reviewed journal from a retrospective study conducted by the burn and reconstructive centers of America, which showed.
The 90% survival rate for patients with large boat steer your burns treated with episodes. These.
These burnes presented a treatment challenge and that the posterior surface bears the major portion of body weight. In this first of its kind study highlights the potential for improved outcomes using episode for patients with significant posteriorly Burns.
Turning to Nexobrid, we're very pleased to announce this morning that the Nexobrid BLA Resubmission has been accepted for review by the FDA with a <unk> date of January one 2023.
Our cross functional teams in conjunction with their colleagues at Medimmune worked extremely diligently to address the fda's feedback with a high quality and timely resubmission, which met our target timeline. We're very pleased to have completed this important milestone and we continue to believe that Nexobrid. If approved has the potential to become a new.
Standard of care for eschar removal for patients with severe burns and a meaningful part of our overall business.
Finally, I'd like to highlight that we recently issued our inaugural ESG report, which reflects our commitment to incorporating these important principles across all of our business activities.
We'll continue to identify opportunities to broaden our positive impact and build upon our ESG performance in the years ahead as we remain focused on how we can better serve all of our stakeholders, including our patients customers employees investors and the communities in which we operate.
In summary, after a solid start to the year, we're maintaining our total revenue Macy revenue and adjusted EBITDA guidance for the full year as the entire of aerosol team is focused on delivering continued strong commercial and financial results in the second half of the year, while preparing for a potential Mexico <unk> launch in the first half of 2023.
I'll now turn the call over to Joe to provide additional details regarding our second quarter results and financial guidance.
Thanks, Nick and good morning, everyone.
Starting with our Q2 results total net revenue for the quarter was $37 million and was comprised of $28 6 million of maintenance revenue.
$8 2 million of episodic revenue and zero point $2 million of revenue related to the procurement of Nexobrid by BARDA for emergency response preparedness.
Macy's had a strong quarter with 8% revenue growth versus the prior year and also improved sequentially with 10% growth versus the first quarter.
For episodes. It is important to note that the prior year revenue of $12 2 million represented the highest quarterly revenue of any quarter to date.
I think in a difficult year over year comparison, and as Nick referenced with Epicentral. There is inherent volatility on quarterly volume due to the burn patient population and treatment dynamics.
Gross profit for the quarter was $22 9 million or 62% of net revenue compared to 68% in the second quarter of 2021.
Our gross margin was lower than prior year due to lower BARDA revenue, which is 100% gross margin piece.
P&L geography.
Cost movement as SG&A is no longer absorbing the costs from our current Cambridge manufacturing facility and these costs have moved to cost of goods sold as well as higher episodic related costs.
For episodes, we have expanded our manufacturing head count over the last year to support the significant product growth and we also had a higher mix of smaller burns, which translated into an overall higher cost per unit and both of these factors also contributed to the year over year change.
Importantly, we expect a typical gross margin increase in the second half of the year with our anticipated revenue growth in the third and the fourth quarters.
Total operating expenses for the quarter were $31 9 million compared to $30 6 million for the same period in 2021.
Net loss for the quarter was $9 million or <unk> 19 per share compared to a net loss of $3 8 million or <unk> <unk> per share for the second quarter of 2021.
non-GAAP adjusted EBITDA for the quarter was $2 8 million and we generated $3 1 million of operating cash flow, representing our eighth consecutive quarter with positive adjusted EBITDA and operating cash flow.
We ended Q2 with approximately $131 million in cash restricted cash and investments and no debt.
In addition, we recently entered into a $150 million revolving credit facility with a syndicate of banks led by Jpmorgan that significantly increases our strategic flexibility to pursue organic and inorganic growth opportunities using non dilutive capital.
Turning to our financial guidance.
After two strong quarters of performance to start the year and momentum accelerating into Q3, Macy's is well positioned to return to its high growth profile and we are maintaining our full year Macy revenue guidance of $132 million to $141 million.
In terms of Macy's quarterly revenue phasing.
As Nick mentioned, our orders for Q3 are in strong start the quarter and we anticipate a higher than typical stephane versus the second quarter with Q3 sequential Macy revenue growth expected to be in the mid to high single digits versus Q2.
This would imply a year over year growth in the mid to high 20% range for Q3, Macy revenue versus last year.
Moving to episodes after a lower than anticipated second quarter episodes now trending below our original expectations for the year.
We expect third quarter revenue to be at a similar run rate to what we saw in the first half of the year with a step up in the fourth quarter.
Overall, we are maintaining our total revenue guidance of $178 million to $189 million for the full year.
For the full year, we expect gross margin of approximately 69% a slight reduction from the prior full year guidance of approximately 70%.
However, we now also expect lower operating expenses for the full year of approximately $130 million to $132 million versus our original guidance of $134 million to $137 million, which will offset the slight reduction to gross margin.
Accordingly, we still anticipate a full year adjusted EBITDA margin of approximately 21%.
This concludes our prepared remarks, we will now open the call to your questions.
Thank you if you would like to ask a question you will need to press star one one on your telephone keypad. Our first question is from the line of Ryan Zimmerman of B P. I G. Please go ahead.
Thank you thanks for taking my questions and good morning.
Maybe just start with the guidance for a little bit neck, and Joe I appreciate the commentary on the color in terms of the pacing.
A few questions around that though I mean, if I think about kind of the pacing dynamics that we saw in the first half of this year, an episode implies obviously around $9 million for third quarter, but I guess how.
How are you thinking about and given your comfort level with the implied step up in the fourth quarter because.
Assuming the guidance is the same there's not much expected BARDA revenue.
You asked that.
Episodic guidance previously of 45 to 45, 5% to $47 five is unchanged for the year. So maybe to get your thoughts around why you can step up and hit that number in the fourth quarter and then I have a couple of follow ups. Thank you.
Yes.
Yeah. Good morning, Ryan This is Joe I'll start thanks for the question and maybe Nick will chime in as well so maybe just to talk kind of.
About the full year guidance and start broad and then kind of hit <unk>. So first off we are maintaining our full year guidance and total of $1 78 to 189 and as we talked about we're also maintaining our macy revenue range.
For years as well so as we kind of think about the product I would say to your point I mean Macy is on track from a full year perspective.
The midpoint is probably still a good kind of estimate in terms of where how we're thinking about may see for the full year I think on Epistyle to your point I think we're not I think what we're thinking now is kind of given the start of the year. It's more likely episode will be kind of flattish to last year or in the low $40 million.
Our original guidance.
So when you add kind of a midpoint of macy.
The lower estimate on <unk> as well as the BARDA revenue it really point you more to the lower end of the range.
So in terms of episodes phasing kind of hit that and then I'll kind of turn it over to Nick We do expect a similar quarter based on our run rates in Q3 called 9 million plus and a step up in the fourth quarter, but kind of more in that call it $12 million to $13 million range, which.
What you will get us into the low forties.
Yes, I think that captures it Joe so I appreciate that and Ryan maybe just a little bit.
On sort of the market dynamics as we've seen an episode performance. So as I mentioned during my remarks.
The underlying fundamentals in terms of burn center penetration is measured.
Episode biopsies that we receive.
From centers and then centers treating patients remained in the first half of the year pretty strong and comparable to what we saw last year, which was a big step up compared to prior years.
That being said based on sort of.
Diagnosis codes that we're able to access and so on it's clear that at least for the larger burns, 30% plus that.
There was there were lesser or a decline in those burns in the first quarter and then particularly in the second quarter. So you know.
Again, the one thing as we've always said is that even operating at a higher baseline level of revenue it does.
Theres, obviously inherent volatility given the small patient population and we just saw that in the first half of the year.
Okay. That's very helpful guys and then just two follow ups for me.
I wanted to take a swing at it 23, a little bit and just.
You may see growth do you have kind of in that low 20% range for this year.
Ill, let some others ask about the pacing, but are you comfortable with kind of that 20% longer term growth rate on macy.
Thinking about 'twenty, three and beyond and the durability of that and then.
The second question off of that is just I saw the 8-K last night I think all of US saw the 8-K you mentioned it today about the line of credit for $150 million.
Has your thinking around product lifecycle, our strategy changed at all given given this credit line and how you think about that in the context of both Macy as well as maybe inorganic M&A I. Appreciate your comments thanks for taking the questions.
Thanks, Ryan So maybe I'll start this one again, Nick can chime in as well. So on the first question, it's pretty early to be thinking and talking about 2023, specifically on Macy.
But I think kind of the broad question as we think about Macy and.
And just kind of the overall health care environment et cetera, continuing to hopefully improve and open up.
Do see Macy's still kind of in that long term growth profile kind of in that range. So I think that is how we're seeing it kind of over the long term and again, we haven't talked about 2023, specifically.
In terms of kind of the line of credit you know I'll I'll start I would say I think this is an important.
An important tool for the company.
Non dilutive capital and kind of lower and lower cost lower than the cost of equity et cetera. So we're certainly pleased to kind of have this as a as a tool for us.
I think strategically I think it just gives us kind of a nice degree of flexibility, particularly over the next few years.
As we're also investing in a new building, we want to be mindful of kind of maintaining the long term growth, whether that's potentially visit development or some additional lifecycle management or other organic opportunities. So that's kind of strategically how we're thinking about it.
Yes, and I guess I would just echo the comments, we certainly remain confident in Macy's performance in the years ahead.
I think Ryan we start from a strong position cash position of $130 million with no debt.
We'd like to have these tools available to us we have the ATM, although we haven't used it it's there if we find ourselves.
If that presents.
<unk> opportunity for us based on.
Business development deal to the line of credit falls into that same category.
So our perspective on that Hasnt changed I think.
We've always said that we certainly can fund our lifecycle management initiatives through our existing cash and operating cash flow given the profile and the strong profitability profile of the company, but as we think about potentially larger things to do down the line just great to have these tools in place.
Thanks for taking my question.
Okay. Thanks Ryan.
Thank you. Our next question is from the line of Sanford dusky of Truest. Your question. Please.
Hi, Thanks for taking my question.
First one on <unk> for me in terms of.
Looking at the sequential growth.
<unk> <unk> from Macy's.
Talk about we heard from other companies came in a little bit slower in July persisting and a little bit of a slower environment on electric procedures is that what you're seeing and then if you can kind of just.
Let us let us know what gives you confidence in that sequential growth into <unk>.
Yeah, well I'll start Sam and thanks for the question so.
Obviously in our remarks, and we referenced that our performance to date and continued momentum.
Gives us a lot of confidence about accelerating growth for <unk>, both in the third and fourth quarter. So.
I think that speaks for itself.
Yeah, and just to add.
Go ahead Sir.
Just maybe to put a finite life.
That's more of a confidence in terms of Youre, saying, one biopsies are we starting to see higher conversion of biopsies International procedures is that you are seeing it.
Well you know.
At the end of the day for US implants are the revenue generating metric that that we focus on right and so.
I'd say certainly in the first half of the year, we didn't see sort of a meaningful change or material change in conversion rates.
And our guidance for the range for the rest of the year and Joe can expand on this.
Does.
In corporate.
A little bit of an improvement there but.
And particularly at the high end of the range, but.
Basically what we're seeing around sort of implants and plant scheduling and so on that that gives us the confidence moving forward.
Yes, no I would just add I think I think Nick kind of hit the key points in terms of the drivers you know again I think what we talked about was kind of in that mid to high single digit quarter over quarter growth, which gets you into the mid to high Twenty's a year over year basis, it's kind of in that $30 million plus range for the quarter.
And I think Nick talked about the drivers so.
Ill leave it there thanks.
Yes.
That's helpful.
Okay, and extrapolate off of that so far can you just come back to hand, math looks like probably the assumption should be similar sequential growth from <unk> that we saw in.
In 2019 is that the right way to think about it.
Yeah.
<unk> speaking and I think we've been consistent with this.
Throughout the year.
As you think about kind of the mix of revenue where seasonality on Macy's.
We talked about kind of a strong Q2, where we think Q3 is trending toward and then as you think about kind of the second half of the year or do you think about <unk> et cetera.
We think we'll still see that kind of typically a typical 40 60 split from each one to age two and Thats actually been really consistent kind of in a pre COVID-19 years around 60% in the back half and even if you factor in the last couple of years, which are obviously very based on Covid, It's still point sugar at an average of roughly 60%. So I think.
In General Q4 is also pretty consistent on saying kind of that low $50 million range. If you kind of do the math on the midpoint.
Step up kind of similar kind of into <unk>. Some of the earlier years in 2019 is a good comp that we pointed to it. So that's I think that's a fair comment.
Okay. Thanks for taking the questions.
Thank you. Our next question is from the line of Jeffrey Cohen of Ladenburg Thalmann go ahead. Please.
Alright, Nick and Joe how are you.
Good morning.
Hey, Jeff.
Sure a couple of questions from Aaron just firstly could you talk a little bit about your gross margin commentary in Europe .
Modest opex reduction down to 131 32 of us as it relates to the back half.
To ensure that you have on the margin into things.
Yes so.
Thanks for the question. So I think starting with gross margin I think in general.
We try to think about this over the longer term there can certainly be some kind of variability.
This quarters et cetera, but on a full year basis, we still see this kind of trending.
<unk> <unk> is 69% for the full year as our guidance.
We can look at kind of run rate per quarter, and kind of see where they are year to date versus last year et cetera.
I think it's largely.
Tracking as anticipated and talked about a few of the drivers you would do a lower BARDA revenue and P&L geography, we talked about related to this kind of a manufacturing facility here episode costs were a bit higher because there are a lot of kind of the smaller burns.
And we are seeing some as anticipated material cost increases et cetera, but again those are largely as anticipated some of our outside vendor spend is a little bit higher I think an important point as well, though as you kind of think.
About the cadence of the year as we typically see more significant mix of our revenue and significant revenue growth from H, one to H two sides.
In 2021, if you look at those years, you'll see that across all those years and you also typically see a.
Kind of progression throughout the year on gross margin so.
That's why it kind of we're anticipating again this year and what we've seen historically so on a full year basis.
Pretty close to kind of where we anticipated to start the year.
But a bit lower than I think to your point, a little bit I think what's helping on a full year P&L perspective is on the Opex side I think we're managing our expenses well we have lowered the guidance by a few million. There I think we're just being more efficient in our overall spend having said that our key initiatives across the business are still on track. So we're mindful.
The total P&L and feel like between kind of the two line items. There is an offset there as we think about the total P&L for the year.
Okay got it and then secondly, first could you talk a little bit about next spring from a commercial standpoint from your entire perhaps making some preparations into a commercial launch early next year as far as your.
Sales in critical organization in the U S. Thank you.
Yes, Thanks, Jeff I'll take that one.
Obviously with an established <unk> date now.
We have resumed our commercial pre launch activities and that also includes medical affairs in terms of continue.
Continued education. The next protocol expanded access protocol and so on so all of those activities are ongoing.
And at this point based on the information we have we certainly expect a first half commercial launch assuming things stayed on track.
Again, we feel like we certainly submitted a high quality and timely resubmission that addressed the questions raised by the FDA I'd say one thing we will keep our eyes on our sort of inspection schedules.
As we mentioned previously we certainly expect.
That the FDA will want to inspect the sites in Taiwan, and Israel and that's the one piece of it that's sort of out of our control.
At this point again, where we're planning for a first half commercial launch and given sort of as we've talked about previously the PMT process and so on we would expect.
That schedule sort of commercial revenues to begin in sometime in the second quarter next year.
Perfect that does it for us thanks for taking the questions.
Okay. Thanks, Jeff.
Our next question is from the line of Arthur <unk> of H C. W. Your question. Please.
Yeah.
Hey, good morning, Joe the author aimed for RK.
Just had a quick question regarding Macy could you guys give us some color on the metrics on the biopsy growth at Macy's during the quarter.
Yes, we haven't talked specifically.
About kind of the biopsy growth.
Specifically I guess, what I would say is in general I would say where last year, we had significant kind of delta between kind of how biopsies youre growing and kind of the revenue range et cetera. So broadly speaking I would say as we think about this year I think that generally kind of a bit more in sync. So.
You kind of look at where the revenue growth that kind of gives you a good sense of.
Kind of in general where the biopsies are trending as well.
Got you thanks and.
Regarding the backlog of the Macy.
How is that looking like for the quarter and what's your expectation for the second half of the year.
Yes, so I would say.
When we think about kind of I would say the first half of the year and may see the results today and really even the back half I'd say, yes. This is certainly something we're still focused on in terms of that backlog from a commercial perspective et cetera, but we havent seen I wouldn't say, it's a significant contributor to the results the contributor to the results to date.
Or as you think about kind of the back half, we're not seeing that as a significant contributor in the back half either.
If if for example, our conversion rate and kind of meaningfully improves et cetera.
That could potentially be due to the backlog, but again at this point, we're not assuming that's a meaningful contributor.
Got you. Thanks Rod appreciate that thank you for taking my question.
Thank you and now I would like to turn the conference back to Nick Colangelo for closing remarks.
Okay well. Thank you everyone. We appreciate you joining us today and for your questions.
Think.
We certainly believe the company remains on track to deliver another year of strong financial and operating results and we look forward to updating you on our progress on our next call. So thanks, again and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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