Q4 2022 Vericel Corp Earnings Call
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2022.
At this time.
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Right right smells heads of financial planning.
Thank you up later and good morning, everyone.
Welcome to the fourth quarter.
A conference call to discuss our plan to result in business highlights.
Before we begin.
Remind me on today's call.
The statement cause I ended up <unk> Crazy litigation reformat to 1995.
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We have a short presentation with Houseroom today's call that can be a good draft fee on the webcast or access on our website.
I'm joining a call by various was president and Chief Executive Officer, Nick Calendula at.
Chief Science Officer, Joe Marra.
Oh, now kind of call over the neck.
Thank you, Eric and good morning, everyone.
In today's call by discussing financial business highlights for the fourth quarter and full year 2022.
Current trends for Macy's, which was very positive to start the year.
<unk> commercial launch activities and our overall outlook for 2023, a year in which we expect total revenue growth to accelerate and continued strong profitability for the company.
Joe will then provide more detailed update on our financial performance in 2022.
Financial guidance for 2023 before opening the call to Q&A.
The company delivered strong financial and business results to close the year as we generated record quarterly revenue delivered our 10th street quarter of profitability in possibly operating cash flow.
Significant development milestones, including an accelerated regulatory pathway for the arthroscopic Macy program and F. D. A approval <unk>, which we believe will enable the company to build a second high growth commercial franchise.
For the full year total revenue with more than $164 million with Macy revenue growing 18% to $132 million. We continued to deliver strong profitability in cash flow as we generated nearly $25 million of adjusted EBITDA and $18 million of operating cash.
Flow ending the year with $140 million in cash and investments and no debt.
We also generated record total revenue of nearly $53 million in the fourth quarter as well as gross margin of 73 per cent and adjusted EBITDA margin of nearly 30 per cent, both of which increased versus the prior year.
And approximately $6 million in net income for the quarter, which increase more than 30 per cent compared to 2021.
Are strong fourth quarter results were driven by record quarterly Macy revenue of over $46 million, which came in at the high end of our guidance range represented 24 per cent growth over the fourth quarter of 2021, and approximately 50% sequential growth over the third quarter of 2022.
Strong revenue growth was driven by strengthening key growth drivers for Macy's.
Surgery and adoption continue to grow as he finished the year with approximately 2000 surgeons, taking biopsies in 2022, an increase of approximately 10% from 2021.
We also had continued growth in D C biopsies in the fourth quarter and stabilization in the biopsy conversion rate to close out the year.
I'll discuss in a moment positive trends that we saw in the fourth quarter of continued into the first quarter is the operating environment continues to improve.
With respect to episodes fourth quarter and full year revenue was lower than anticipated as the incidents of large birds greater than 30 per cent of total body surface area declined to pre 2021 levels.
Notwithstanding this dynamic we continued to see broad Burns center engagement as we had a record number of bird centers, taking biopsies in the fourth quarter and the full year and a similar number of burn centers grafting patients during the year.
While the breath of customer we're engagement January solid episode biopsy activity the proportion of biopsy patients going onto surgery was lower in 2022, and particularly in the fourth quarter due mainly to patient health related issues.
He also had fewer episodes grasp probation in 2022, which had grown significantly in 2021 and there were some organizational changes at our largest customer which impacted patient referral patterns. It had a significant impact on patient volume at the center.
Despite these dynamics, which led to the variability we often see with episodes. We believe that are strong engagement with leading burn centers and our expanded customer base position does very well to drive <unk> uptake upon lunch.
In addition to generating strong financial results in the fourth quarter. We also made significant progress advancing our pipeline as we announced last month following our type C meeting with the F. D. A in December we're planning to initiate a human factors validation study this year to support expanding the Basie label to include arthroscopic.
Delivery of Macy's for the treatment of cartilage defects in the knee.
We know anticipate a potential launch of arthroscopic Macy in 2024, which is several years earlier than it is an additional clinical study was required.
We believe that the arthroscopic delivery Macy will be a very attractive option for patients insurgents and could provide a substantial upside growth opportunity for me C.
Based on our initial market research approximately 90 per cent of respondents expressed interest in an arthroscopic delivery option for me see which provides an opportunity for additional surgeon adoption given that a portion of the more than 10000 surgeons that performed cartilage repair procedures in the U S to each year either primarily.
Or exclusively performed arthroscopic procedure procedures and could now consider macy as an option for their patients.
Arthroscopic Macy also offers the potential for increased utilization. Among currently so users is approximately 90 per cent of current users indicated that they would expect to increase Macy procedure volume if an arthroscopic option was available.
To that end the arthroscopic knee C instrument kit is designed to treat the most common defects in the basie patient addressable market, which are two to four square centimeter defects on the femoral condyles and makes you would be the only arthroscopic Lee administered restorative cartilage repair product to treat these defects, which we believe.
Would allow us to achieve a greater share of those procedures.
We're also in discussions with the F D. A regarding our planned Macy's clinical development program for the treatment of cartilage injuries in the ankle which is the next largest market opportunity for me see we believe that a potential ankle indications with an estimated 1 billion dollar addressable market could be a significant growth driver for me C.
Over the long term.
Turning to our burn care franchise. The F D. A approval of an extra burden with a significant milestone for the company and our commercial launch activities are progressing well, we've seen widespread interest and enthusiasm for burn surgeons and other health care providers for next spring and we're on track to meet or exceed our internal goals regarding Burns center in <unk>.
Judgment ahead of commercial product availability, which is expected in the second quarter of this year.
The hiring of our next bird sales team is nearly complete and training for burn Surgeons began last month following approval.
There are a number of high profile burned conferences in the first part of the year, including the American Burn Association annual meeting, where we will have a significant presence to support the launch an expert and where nexobrid training <unk>.
Conducted by leaving Bird Surgeons will be included in pre conference peer to peer educational sessions regarding the science of wound preparation and the science of Blue enclosure.
Given that <unk> will be dispensed through hospital pharmacies gaming P. A T committee approval for the use of <unk> and our largest or in our target burnt centers as a high priority activity during the early launch fees.
Based on the widespread interest in <unk>, we have surgeon champions at dozens of our target burn centers, who will lead the process to gain Panty committee approval at their respective institutions.
This process can take up to a few months, which should sync up well with the timing for <unk> commercial product availability in the second quarter.
Looking at the overall burn care franchise, the approval of an expert in the U S significantly increases the addressable market for a bird care franchise to over half a billion dollars.
While we expect it episodes will return to growth over the coming years, we believe that next to Bruce will provide a more consistent and predictable revenue stream and help offset much of this episode revenue volatility.
In addition, the incremental investment required for next to British relatively limited give her an hour existing burn care commercial infrastructure and the overlap with episodes, which should also benefit from a larger commercial footprint in higher share a voice in the market.
Finally, turning the guidance for 2023, we expect total revenue for the year to increase to approximately $100 million to $188 million and degenerate continued strong profitability in operating cash flow.
Joe will provide further details in a moment, but I wanted to touch on some of the key elements of our guidance as well as the current operating environment for Macy's start the year.
As we announced this morning, we expect Macy revenue to be in the range of $152 million to $156 million for the year the.
The underlying framework for our initial basically guidance is that full year revenue growth will be driven by continued growth and biopsy surgeons and higher net price per implant it.
At this point our guidance for the year does not assume any sustained increase in other Macy's huge growth drivers of biopsies per surgeon or the biopsy conversion rate compared to 2022 levels, which would represent upside growth potential as we start the year.
That being said, we're very encouraged not only by the strong fourth quarter for Macy, but also by a strong started the year with positive trends that we saw in the fourth quarter continuing into the first quarter and the overall operating environment continuing to improve.
At this point, we expect Macy growth for the first quarter to be approximately 20% versus last year, which would represent the third straight quarter of 20 plus percent year over year growth as Macy resumes its high growth profile.
More broadly we believe that may seem very welcome position for another strong year of growth in 2023 and.
And we expect that the launch of arthroscopic Macy in 2024 will drive even broader surgery adoptions and further growth acceleration next year.
Portly based on our 2023 for your guidance.
Our sales rep productivity will meet or surpass our historical high of $2 million per rep achieved prior to our last sales force expansion in 2020, and we would expect to begin to significantly exceed that level in 2024 and beyond.
With respect to the burn care franchise, we expect total bird care revenue of $28 million to $32 million with growth versus our fourth quarter annualized run rate for episode $24 million driven primarily by the launch of Mexicali.
We believe that the launch an exit bridge, which has the potential to become the standard of care and eschar removal and take it very meaningful share of its $300 million addressable market in the U S will enable the company to build a second high growth franchise in the burn care market.
I will now turn the call over to Joe to discuss our fourth quarter and full year financial results as well as our financial guidance for 2023.
Thanks neck and good morning, everyone.
Starting with the income statement tone that revenue for the full year was $164 4 million driven by strong making results in the fourth corner.
Total company revenue in the fourth quarter, it was $52.7 million.
Making revenue of $132 million for the full year is at the high end of her guidance range growing 18% versus the prior year.
Q for making revenue was 46.3 million and grew 24% versus the prior year and approximately 50% versus the third quarter as we continue to our momentum and and Macy business with two very strong quarters to close out the year.
<unk> growth in 2022 was driven by continued strong surgeon and biopsy growth.
As well as a higher price and importantly, the conversion rate for maintenance stabilized and the second half of the year.
Total burn care revenue for the year was 32.4 million cause they think I'm $31.7 million, a epistyle revenue and 0.7 $9 of revenue related to the procurement of <unk> by <unk> for emergency response preparedness.
<unk> revenue in the fourth quarter was $6.3 million.
Gross profit for the quarter was 38.2 million or 73% of net revenue and increase compared to 72% for the fourth quarter 2021.
For the full year gross profit was approximately $110 million or 67 per cent of gross revenue, which is in line with the prior year gross margin and higher than our for your guidance and the Netflix two per cent range.
Total operating expenses for the quarter or 32.2 million compared to 29.9 million for the same period in 2021.
And for the full year operating expenses were $126 eight $9 million compared to 113.9 million last year.
The increase in operating expenses in 2022 was primarily due to an increase in headcount and higher sales and marketing expenses.
Net income for the quarter was 5.9, $9 or 12 cents per share compared to net income of 4.598 or nine cents per share for the fourth quarter of 2021.
The increase an increase of more than 30% versus the prior year.
non-GAAP adjusted EBITDA for the quarter was $14.9 million or 28% of net revenue increase versus the 27 per cent in 2021 and importantly, this represents our 10th consecutive quarter and we've generated positive adjusted EBITDA.
But a full year adjusted EBITDA with $24.2 million similar to the 29.5 million regenerated in 2021, despite lower epistyle revenue.
Companies now generating over $50 million of adjusted EBITDA over the last few years and over $99 over the last four years as we continue to grow our top line revenue expand our pipeline and physician to accompany from multiple product launches, while maintaining a very strong financial profile.
Finally, the generated $79 of operating cash flow and a quarter and 17.7 million for the full year.
We ended the year with approximately $149 in cash and investments.
No that.
Transitioning to our financial guidance for 2023, we expect total revenue of $180 million to $188 million for the full year.
We expect macy revenue to be in the range of $152 million to $156 million with growth in the mid to high teens percentage range for the full year.
As Nick reference first quarter and transform Macy have been encouraging driven by strengthening both biopsies and in plan and we anticipate another strong quarter with growth of approximately 20% versus the first quarter of 2021.
In terms of Macy's seasonality or Nixon business by quarter, we would generally expect a similar percentage of full year revenue by quarter as we saw in 2022.
Moving to the burn care franchise, we expect full year burnt care revenue, which includes both <unk> next big revenue to be approximately $28 million to $32 million.
This full year revenue arrange implies growth for the burn care franchise versus our commercial revenue run right from Q4 of approximately $24 million.
In terms of <unk> revenue uptake during the year, assuming commercial product availability in the second quarter, we would anticipate some modest stocking revenue in queue too with the vast majority of <unk> revenue occurring in the second half of the year.
As Nick mentioned, we expect an active ready to take a significant share of the market over time.
In the near term, we would also expect <unk> to be an important driver of our burn care growth. This year with meaningful revenue during the second half of the year. Although it is difficult to predict the exact I've taken quarterly cadence of revenue during its launch here.
For Epistyle quarterly revenues remains very difficult to predict do the nature of the product and the volatility across quarters, although for the first quarter based on trends today, we would anticipate revenue to be roughly in line with the fourth quarter run rate of approximately $6 million.
Moving down the P&L, we expect an improvement in gross margin compared to 2022 with gross margin expected to be in a high 60 per cent range adjusted EBITDA in the mid tier percentage range and for your operating expenses to be approximately $149.
Finally, we would also anticipate an increase in capital investment because I failed out of our new state of the art cell therapy manufacturing facility in corporate headquarters as the project continues to move forward with our share of construction costs and a $30 million to $40 million range for 2023.
In total this guidance points to accelerating company revenue growth in 2023 and continued strong profitability for the full year.
In addition, we would also anticipate further acceleration of our total company revenue growth in 2024 with a full year of an expert on the market and the anticipated launch of arthroscopic Macy.
This concludes our prepared remarks will now open the call to your question.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you would need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please stay on by while we can file the Q&A roster.
Our first call comes from Ryan Zimmerman Ryan Your line is open.
Thanks for taking my questions can morning, guys and congrats on on the progress of this year.
I Wanna start with Epistyle, a little bit just because you know the guidance just a little lower than I think we are expecting.
And and and I understand you know it's it's.
Volatile next I'm Gonna, it's gonna help offset that.
But when you're thinking about that run right that $24 million run right now do you feel like you're sufficiently set a floor.
To account for the variability.
Given how unpredictable it is and.
Just help us understand kind of how you came to.
For a million on next over it.
Why is that right.
Is it not.
Wow.
Just hold on it.
I understand your thought process I'm coming to that number.
Yeah. Good morning, right. Thanks for the question of the gel.
Started at one so I think on <unk>. So it's perfect important to realize would.
<unk> from our run rate perspective to your question you know, we're very mindful of kind of where the business days. So yeah. The queue for revenue is roughly 6 million and what are we talking about in the prepared remarks, as we move into Q wide as we would expect similar similar revenue number around $6 million to your point.
Yeah, it's always difficult to predict exactly what that looks like based on a small patient numbers et cetera, et cetera, obviously, obviously it would be a <unk>.
Bit different quarter to quarter, but we do feel like that run right. We saw that coming coming exiting last year, that's where we started this year as we think about the framework for guidance may turn into that for a moment doesn't go the way we were thinking about it is that $24 million is a very appropriate starting point for <unk>. So.
Basically that that 6 million run rate per quarter, and certainly we will look to grow from there. If you look in prior years kind of pre 2021.
More significant growth you typically thought growth and that kind of mid single digits or low double digit range. So you have to do the math there you could get up at all.
25, 26 million and perhaps a bit more again right now to your question where on that 24 million run right. So we didn't think about the total guidance, that's where they are and activate as important as well. So we feel like the combination of the two products can get us into that 28 to 32 million dollar range for the full year and again, we want to be mindful of kind of where.
<unk> right now as part of that but you know what that points to your next every question is as we talked about in the prepared remarks.
Certainly seen some strong indicators so far we still expect commercial availability in the second quarter and again from a cadence perspective.
There would be no revenue in the first quarter some modest stocking in the second quarter, an increase that we get an a Q3 Q for so yeah I've been kind of think about the guidance framework and again, we're not getting specific numbers by product, which is why we're talking about the franchise, but that does put your own kind of that mid single digit range, which you know based on what.
What we think of date, you know I think kind of makes sense.
For <unk> and again, they can take a pretty meaningful share over the long term so.
Thinking about it from a franchise perspective, but when we think about where epistyle is and the ketchup and extra bright I think if the appropriate range for this year.
Okay.
Trying to make me for a moment and just one housekeeping questions did you say 20 per cent grown off of first quarter 21, I thought I heard you say that not.
First quarter.
Or was that just a mistake.
Yes, my first quarter of 2022, 20% year over year granted you want Okay, alright, Okay, I just want to check and then.
As I think about the Macy business I I think your guidance is very clear about what's included in that business. Once that's you know what can be outside.
Do you.
And your comments are about productivity are also help on that but when you think about the arthroscopic delivery edition.
Do you feel like you need to upsize the sales force to capture that opportunity or as a salesforce appropriately sized and I think it was 76 last week checked and and just given a broader customer base you know.
Why not upsize it if productivity is gonna keep growing.
Implied by you know kind of your comments.
Yes, Brian .
This is Nick so number one you're right. We did increase our sales force from by about 50% from 49% to 76 territories.
Back in 2020, and you know at that point, leading into that Ah Rep productivity was I had gotten up to a couple of million dollars a year as you remember a kind of groomed even as we are expanding from.
A sales force size in the twenties.
Up 350, and we're kind of now back at that range given the current Macy guidance.
I think what we'll end up doing is we've mentioned before around arthroscopic Macy is going back and refreshing sorted the targeting work that we did back in 2019. The health advanced This project as we talked about at that time. We know there is a meaningful segment of those 10000, plus surgeons that we add both arthroscopic.
And open procedure data on that either exclusively or predominantly do arthroscopic procedure. So that may mean, we add.
Some number.
Of new surgeons, and if that's large enough that it would justify incur.
Increasingly salesforce, that's certainly something we think about so we'll be doing that work. During this year ahead of the potential launch next year.
Alright, thank you.
I guess.
<unk> as a reminder, please press star one to ask a question and you will be brought into the queue.
Our next call comes from Sam Brodowski of Truth Securities Samuel line is open.
Hi, Thanks for taking the questioning congrats on like a quarter.
Start with one on on Macy in time and I appreciate you, providing the component guidance, but.
In terms of things looking better to start the here what would you need to see to start to incorporate either increasing conversion rate or an improving patient sanchez into.
The nation God.
Yeah sure I'll take that one.
To start so I think from.
Maintain perspective again, just to clarify Ryan's earlier comment you know what we talked about was we've had a strong couple of quarters to close out last year kind of both by about 20%, which certainly that is a good sign and I think as we look into the first quarter.
What we've really seen a strength and both biopsy, which really started in Q4 and then continue continued into Q1 as well as implant. So that's certainly you know an encouraging sign and so our expectation in the first quarter has to be approximately 20%. So I think I should go around 31 million for the quarter.
As we think about the full year you know a couple of things to keep in mind. There. We do think about kind of AD seasonality and mixed by quarter. So that yeah that kind of number in Q1 actually lines up again, roughly 20% of our four year, you'll get a bad points for example.
May 20 per cent of that for your number. So that's certainly something remindful of but also say and we've probably seen some early taking all of that perhaps conversion rate is taking up but we generally measure that over longer periods of time and I think what I would say is from our perspective, we want to see we might see that over a longer period of time.
And we think the foundation is there any operating environment is improving but we want to see some of those additional growth drivers, which we can still be growth drivers that brand, but in terms of 2023, we would want to see it over a longer period of time before we know whether that's the case for a multiple quarters.
Thanks, That's that's helpful. And then just a quick one on on the next overhead.
And thanks for providing that that.
Guide points there because.
Guidance for this year contemplate any account outside of any existing epistyle base or does it just assume revenue coming from those accounts.
Yeah, I hate to say this is Nick no. We obviously have.
Tiered the targets and the sales force is focused on you know the as we talked about the first thing you do aside from sort of surging training and hiring the salesforce training and deploying them really it's about the <unk> committee approval process and so that is well underway and that include.
<unk> accounts that are episode users, but also if you'll recall obviously the words the detect a pivotal study at sites here in the U S. The pediatrics study ongoing.
Next a bridge.
Alright, the next <unk>.
Expanded access protocol, so three different clinical studies, where sites may have experience with <unk> with next of Britain, often those are also episodes centers, but sometimes they're not so I would just say that all hundred 40 target burn centers are in play for the year and we would expect utilization to come from both current episode.
Burnt centers, but then next spring.
Burnt centers as well.
Okay. Thanks for your questions.
Alright. Thank.
Thank you very much.
Please remember to ask a question just press star one on your phone and you'll be brought into the queue.
Our next call comes from Jeffrey Cohen of Lindenberg jeopardy loans over.
Alright, and they're controlling how are ya.
Good yet.
Just a couple of questions from our end as you can talk a little more about some of the human factors work, you're doing an arthroscopic shedding as far as the <unk>.
<unk>, which designer should lock down at this point.
Yeah do you have I think one thing you can do is go to our website, where we have a video of the Macy arthroscopic procedure, which I really think helps give people an understanding of exactly what the instruments that looks like and how may see will be administered arthroscopic Lee.
And the context for the human factor study is that when we met with the FDA in December we proposed that because we were not changing either the the drug substance or the drug product just the way it was administered and because.
There's a fair amount of published data about the outcomes good outcomes when Macy's.
Delivered arthroscopic lead principally outside the U S. When when the product was available outside the U S.
You know the FDA agreed that the human factor study would be inappropriate path going forward. So really that leads you bring in you know.
A number of orthopedic surgeons give them instructions on how to administer the product arthroscopic Lee they do it in a cadaver lab just to make sure that the the interface the surgeon interface faced with the instruments.
Is appropriate and there's there's no issues there and so it's a pretty streamlined path for us compare and obviously an accelerated regulatory pathway versus.
Having had to do an actual clinical study. So that study is planned for this year.
And we would plan to submit the label expansion to the FDA.
By the end of the year and would allow us to launch in 2024.
Okay. That's helpful and then.
Could you talk about the consumable or reposal instrument, and what portions may or may not be and how that might look from the players standpoint as far as the actual procedure speak to an arthroscopic random on disclosure.
Yeah. So as you will recall forward may see it's typically reimbursed under a J code. So it's a separate code that you know.
The payors under which the payers reimburse the product.
Obviously, a procedure code to CPT code in terms of how the surgeons get paid and then a facility fee. So that's kind of the current.
Economics. These the kit you can see in the video is basically a set of disposable instruments.
Different sized cutters.
<unk> things like that.
And so exactly how will price those.
To be determined.
But it won't impact sort of the the current reimbursement for the basic product itself.
Okay perfect that does it for us thanks for taking my questions.
Thanks, Jeff Thank you.
Thank you very much please stand by for our next question.
Our next question comes from Sean Lee of Hte wait right Shawn Your line is open.
Good morning, Guice and congratulations on finishing a quick here.
I just have two quick questions. One <unk> can we expect any more.
Orders from <unk>.
Yeah, So that was no.
<unk> are starting to share.
Just commercial.
Okay, great and in terms of the lunch strategy for next so great would you be targeting all the burns center's at the same time similar to what episodes Dewey or would you starting in certain <unk> first before rolling out a nationwide.
Well you know as we.
Talked about previously up to 140 accredited burn centers in the U S. Each year episodes typically used probably half of them. So obviously, we have relationships in in those accounts.
We are adding sales reps that will focus on the other accounts with <unk> only to start and so we have teared them out by patient volumes claims data et cetera, and obviously you focus on high volume centers first so it will be as I mentioned earlier on the call or in the Q&A session.
Will be targeting both current episode using centers as well as high volume centers that.
I've been involved in the various studies for next spring here in the U S.
I see that's helpful.
My final question and check on the pneumonia.
<unk> Everything's too on trust, there is still ready to be.
So expect it to be completed in 2024.
Yeah, So everything remains on track.
Tenant improvement.
Part of the project is scheduled to be completed by the end of 2024 of course, we mentioned that we would expect commercial production in early 2026. So really that 2025 time period is FDA inspection and validation of the new facility.
Great. Thanks, that's all the questions I have.
Thank you.
Thank you very much like to turn the call back to Nick Cohen Jello for closing remarks.
Okay, well, thank you very much and thanks to everyone for your questions and your continued interest in the company.
Overall, we delivered strong financial and business results to close the year in 2022, and we expect another year of significant top line revenue growth and strong profitability in operating cash flow driven by both our commercial franchises into 2023.
Given our significant market opportunities for the products and our strong financial profile really believed that the companies well positioned for sustained long term growth in the years ahead. So thanks again and have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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