Vericel Corp (VCEL) 2023 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Second Quarter 2023 Conference Call. (Operator Instructions) 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 Burns, Vericel's Vice President of Finance and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Vericel's second quarter 2023 conference call to 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 1995. These statements may involve risks and uncertainties that could cause results to differ materially from expectations and are described more fully in our filings 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 on as representing our views as of any subsequent date. Please note that a copy of our financial results, press release is available on the Investor Relations section of our website. We also have a short presentation archive on today's call that you can be addressed on webcast or accessed on our website. I am joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Finance Officer, Joe Mara. I'll now turn the call over to Nick.

Thank you, Eric. And good morning, everyone. I'll begin today's call by discussing our financial and business highlights for the second quarter as well as our expectations for the rest of the year. Joe will then provide a more detailed review of our second quarter financial performance and our updated financial guidance for 2023 before opening the call to Q&A. The company had an outstanding quarter as we delivered significant revenue growth and record second quarter revenue, continued profitability and the operating cash flow, and strong underlying business results for MACI and Epicel.

From a financial perspective, total revenue for the second quarter increased 24% to approximately $46 million with both MACI and Epicel exceeding our second quarter financial guidance. We also continued to generate strong profitability as we delivered our 12th straight quarter of positive adjusted EBITDA, which increased by 60% over last year and operating cash flow of over $10 million. Ending the second quarter with $147 million of cash [in] investments and no debt. Based on the strength of our performance in the first half of the year, which included combined total revenue growth from MACI and Epicel of 20%.

We're raising our full year revenue guidance to $190 million to $197 million. As we look beyond this year into 2024, we expect the momentum in our core business to continue with the anticipated commercial launch of arthroscopic MACI and a significant contribution from NexoBrid, we believe that we're well positioned to drive further revenue growth acceleration with total company revenue growth of over 20% in 2024. Our financial results for the second quarter were driven by continued strength and momentum for MACI as we generated record second quarter revenue of $36.3 million, representing 27% growth compared to last year.

Our sustained MACI revenue growth over the past few quarters has been driven primarily by the continued expansion of our surgeon base and the resulting strength in biopsies, both of which were ahead of our forecast for the first half of the year. In addition to generating record second quarter MACI revenue in implants, we also had the highest number of surgeons taking biopsies in any quarter since launch and the second highest number of biopsies in the quarter, which were only a handful short of the record number of biopsies taken in the fourth quarter last year.

This performance reflects the continued strong execution of our sales and marketing teams in engaging new surgeons and the continued improvement in the overall market dynamics as we've now delivered 3 consecutive quarters with a record number of biopsy surgeons and our 3 highest quarters of biopsies since we launched MACI. Based on these underlying business fundamentals, MACI has achieved a sustained high-growth trajectory with nearly 30% growth for the first half of the year and 4 straight quarters of mid-20% to low 30% growth.

Given these results and the continued momentum to start the third quarter, in which we expect another quarter of 20% growth, we are increasing our full year MACI revenue guidance to $159 million to $163 million. This updated guidance range represents more than 20% growth for the full year and acceleration in the MACI growth rate versus last year. With respect to our MACI's life cycle management initiatives, we continue to advance the MACI arthroscopic and MACI ankle development programs. Importantly, we plan to initiate the human factors validation study for arthroscopic MACI this quarter and to submit the study results as part of a prior approval supplement to expand the MACI label to include arthroscopic MACI by the end of this year.

We now anticipate commercial launch of arthroscopic MACI in the first half of 2024, which we believe will positively impact the growth trajectory for MACI in the years ahead and have a significant impact on our overall business. We recently completed an extensive quantitative market research project that included more than 100 orthopedic and sports medicine surgeons to evaluate the potential impact that arthroscopic delivery could have on MACI penetration of the addressable market.

This research confirmed our view that arthroscopic MACI will represent a meaningful innovation in the cartilage repair market. First, the research indicated that there was a high degree of interest in arthroscopic MACI across all surgeon groups, which included MACI users as well as nonusers. Surgeons pointed to several potential benefits and advantages of arthroscopic MACI delivery, including a less invasive procedure resulting in less postoperative pain, faster recovery and improved aesthetic outcomes for patients.

The MACI arthroscopic instrument kit is designed to treat smaller 2 to 4 square centimeter defects on the femoral condyles and the research indicated that regardless of their current MACI usage, surgeons expected to shift a meaningful share of their procedures in this segment from alternative products and procedures to the arthroscopic MACI procedure. Importantly, 2 to 4 square centimeter femoral condyle defects represent the largest market opportunity for MACI as this segment represents about 20,000 patients per year or approximately 1/3 of the $3 billion addressable market for MACI.

While MACI has significant volume in this segment, its penetration rate is lower compared to other areas of the knee. For example, in patella defects, which represent about 10,000 patients per year, MACI's penetration is greater than 10%, and we continue to see very strong growth in this segment. We're able to achieve similar penetration in the femoral condyle segment with arthroscopic MACI, we'd effectively double our current MACI business over the coming years. We believe that arthroscopic MACI delivery will be a valuable option in the cartilage repair market and will help drive an acceleration in the company's overall growth trajectory beginning next year.

Finally, as noted in our earnings release this morning, we recently engaged -- executed a long-term extension of our exclusive supply agreement with Matricel for the MACI Maix collagen membrane. This agreement not only provides for continued supply of this key component of the MACI final product. but also provides Vericel with exclusive rights to the membrane for the next decade and beyond, which is an important part of our long-term protection strategy for MACI. Turning to our burn care franchise. We reported second quarter Epicel revenue of $9.6 million, which was one of our higher quarters to date and significantly ahead of recent trends in our guidance for the second quarter with growth of 40% versus the first quarter and 17% versus the prior year.

This strong performance for Epicel was driven primarily by the fact that we continue to see a higher proportion of biopsy to patients moving on to treatment with Epicel and continued stabilization in the average number of grafts per patient. Epicel revenues of $16.4 million for the first half of the year is 20% higher than in the second half of 2022, as our burn care team has driven a significant improvement in our performance trends and increased utilization of this important product. We're also beginning to see examples of positive pull-through for Epicel from our NexoBrid sales reps based on the high level of engagement and interest in NexoBrid, helping to drive usage at dormant Epicel accounts. Although we expect that Epicel revenue will still be variable from quarter-to-quarter, we're very pleased to see the significant improvement in our recent results and a strong first half of the year for the product.

With respect to NexoBrid, our prelaunch activities have remained on track throughout the first half of the year and our burn care team has generated a tremendous amount of interest and enthusiasm for NexoBrid in the burn care community. In terms of NexoBrid product availability, we received our first lot of finished product from MediWound for the U.S. market at the end of June, which currently is, warehouse is our third-party logistics provider. While this NexoBrid lot met all release criteria for distribution in the U.S. market, we're not able to commercially distribute the product at this time due to a deviation associated with a third-party testing lab in Taiwan used in MediWound's manufacturing process.

As we have previously discussed, there were several manufacturing process updates that were required to be implemented by MediWound following approval of the NexoBrid BLA. And all of those updates related to the MediWound facility have been successfully completed. However, one of the process updates was a new upstream in process control test on an antioxidant solution or a preservative that sprayed on the peel pineapple stems in one of the first processing steps for the botanical raw material at CBC, which manufactures the intermediate drug substance for MediWound in Taiwan.

This routine in process control testing was outsourced to a lab in Taiwan that subsequently was not approved by the FDA, given rise to the deviation and issue, and in validating the test results for all of the current lots of intermediate drug substance currently available to produce NexoBrid finished product. This impact will not impact -- or this issue will not impact NexoBrid finished product manufactured for the U.S. market from new intermediate drug substance lots as the in-process control test will be done directly by MediWound, which is the testing site of record in the BLA.

However, [absent] FDA allowing commercial distribution of the finished product affected by this deviation, we would not be able to distribute this product and we expect to begin commercial sales of NexoBrid in the first quarter of next year, following the upcoming fall pineapple harvest season, which is our current operating assumption until we hear otherwise. To that end, we're currently engaged in discussions with the FDA following a formal request that the agency exercised its discretion to allow the distribution of NexoBrid lots impacted by this deviation.

Although there may be a delay in the commercial availability of NexoBrid, the FDA's determination will not affect BARDA's planned $3 million procurement of NexoBrid to replenish the national stockpile for emergency response preparedness which we now expect in the second half of 2023. In terms of our overall Burn Care revenue guidance, based on our improved Epicel trends and the anticipated BARDA procurement revenue we're increasing our guidance for the year from $28 million to $32 million to $31 million to $34 million, which Joe will discuss in more detail later in the call.

And finally, as we look beyond 2023, we continue to expect NexoBrid to make a significant contribution to our revenue growth in 2024 and that our burn care franchise will become a second high-growth franchise for the company in 2024 and beyond. In summary, we're pleased with our excellent start to the year, strong second quarter financial results and continued progress on MACI life cycle management activities. Importantly, we've raised our revenue expectations for this year and we expect company growth to accelerate to over 20% in 2024 with continued strong performance from our core products and significant contributions from the launch of new products. I'll now turn the call over to Joe to discuss our second quarter financial results and updated financial guidance.

Thanks, Nick. And good morning, everyone. Starting with the income statement. Total net revenue for the quarter was $45.9 million, an increase of 24% versus the prior year, driven by strong making revenue of $36.3 million and $9.6 million of Epicel revenue. For MACI, during the first half of the year, we generated revenue of $70.5 million, which represents 29% growth versus the first half of last year.

In addition, over the last 4 quarters, we've now consistently seen strong MACI growth each quarter with 30%, 24%, 32% and now 27% growth versus the prior year. In total, this represents a 28% growth on a trailing 4-quarter basis as MACI has resumed its high-growth profile. For Epicel, the $9.6 million of revenue in the second quarter was our highest quarterly revenue since Q1 of 2022 and Q2 revenue grew 40% compared to the first quarter and 17% versus the prior year. In addition, our first half Epicel revenue was more than $16 million, significantly ahead of our quarterly run rate of approximately $6 million per quarter entering the year.

Gross profit for the quarter was $29.9 million or 65% of net revenue, an increase compared to 62% in the second quarter of 2022. Total operating expenses for the quarter were $35.9 million compared to $31.9 million for the same period in 2022. The increase in operating expenses was primarily due to higher sales and marketing expenses and R&D program-related costs. Net loss for the quarter was $5 million or $0.11 per share compared to $9 million or $0.19 per share for the second quarter of 2022. Non-GAAP adjusted EBITDA for the quarter was $4.4 million, which grew 60% and versus the prior year.

And importantly, this now represents the 12th consecutive quarter that we have generated positive adjusted EBITDA. Finally, we generated approximately $10 million of operating cash flow in the quarter. We ended Q2 with approximately $147 million in cash, restricted cash [in] investments and no debt. Turning to our financial guidance. We are increasing our full year revenue guidance for 2023. We now expect total revenue of $190 million to $197 million, an increase compared to our prior revenue guidance of $184 million to $192 million, driven by both of our franchises.

We are maintaining our profitability guidance and expect gross margin to be in the high 60% range and adjusted EBITDA in the mid-teens percentage range. From MACI, we now expect full year revenue of $159 million to $163 million, an increase versus our prior guidance of $156 million to $160 million, with growth expected to be in the low 20% range for the full year. As Nick highlighted earlier, our MACI momentum has continued into the third quarter and we expect MACI growth in the quarter to be approximately 20% with revenue of $37 million.

For our Burn Care franchise, based on the strength of Epicel during the first half of the year, and with anticipated NexoBrid BARDA revenue in the fourth quarter, we now expect full year revenue of $31 million to $34 million, an increase compared to our previous guidance of $28 million to $32 million. For Epicel, based on our higher quarterly run rates over the last 3 quarters, we anticipate revenue of approximately $7.5 million in Q3. In total, our increased Burn Care revenue guidance does not assume any commercial revenue for NexoBrid during 2023 at this point. Although it does now include our share of BARDA procurement revenue of over $1 million, which we would expect to occur in the fourth quarter.

Overall, we are very pleased with our second quarter performance our strong start to the third quarter. And as we look towards 2024, we anticipate continued acceleration of our total company revenue growth rate to over 20% with continued strong execution on our core product as well as the anticipated contributions of arthoscopic MACI and NexoBrid. This now concludes our prepared remarks, and we will open the call to your questions.

(Operator Instructions) Our first question comes from the line of Ryan Zimmerman of BTIG.

Congrats on a nice quarter. I want to start off -- Joe, I appreciate all your comments on guidance and there's a lot of moving components here. I guess I'll start off with MACI. Given the first half '23 performance I guess I'd like you to speak maybe a little bit to end market dynamics, patient behavior and interest levels relative to last year. And then on that topic, again, your third quarter commentary suggests an acceleration from your prior expectations. But maybe help us understand just broadly why that couldn't continue to accelerate in the fourth quarter? And why not raise it by a bit more given the record biopsies we're seeing?

Yes. Good morning, Ryan and thanks for the question. So I'll probably take that in pieces and talk a little bit about where we were in the second quarter, kind of your point on the third quarter and then round that out as you think about the full year and, of course, touch on Q4. So first off, I would say, in the second quarter, as we talked about, just another really strong quarter for MACI 27% growth ahead of our guidance. I think the team is doing an excellent job from an execution perspective. And really just a continuation of the trends we've seen with a number of quarters now in the kind of mid-20s or 30% plus. And you're looking back, you basically had 29% relative to the first half of last year. So really strong growth. And I think to that point and to your question, really, the strength has been driven by the underlying metrics and really the top of the funnel.

So biopsies have been extremely strong. That continued in Q2, where we nearly matched our Q4 number. The growth in surgeons has continued very strong. We have 3 straight record quarters so those are really kind of the key drivers, I would say, of our results to date this year and as we look forward. So from a Q3 perspective, as we touched on in the prepared remarks, it's off to another strong start. And I think we expect another high-growth quarter of 20%, which is approximately $37 million for the quarter. And that does importantly imply a step-up from Q2 to Q3, which we don't always see. So I think that's certainly a sign of continued momentum.

And then the other piece I would say is -- and this will apply to Q4 as well. But we are running into some more difficult comps in the sense that Q3 and Q4 last year were also quite strong. They grew 30% and 24%, respectively. So that's certainly a consideration as we look forward. As we think about the full year guidance, I think it really starts with -- we started the year kind of in the mid- to high teens, we've continued to increase that and now we're in the low 20% range, which is above the last couple of years and above the guidance for the last couple of quarters.

So we have certainly increased that throughout the year. And the midpoint there at [161] is about 22% on a full year basis. And both Q2 being ahead and to your point, H2 is also ahead of kind of where we expect to come in the last quarter. And then I think just to kind of give context on Q4, at the midpoint, it would be kind of growth in the mid-teens. Certainly, I think we're set up potentially do better than that. But I think we just want to be balanced in the sense that if you look at Q4, it kind of lines up with what we typically see.

It's about 1/3 of the full year revenue. It's still a pretty significant step-up in the mid-40% range. And again, we are running into some more difficult comps. So broadly speaking, I would say, pleased with the performance in Q2 that continued into Q3. And on a full year basis, we're now in the low 20% range. So I just think at this point, we don't want to get too far ahead of ourselves in Q4, but this would essentially call for that strength in the business continuing throughout the second half. And again, we'll continue to drive the business.

Yes. No, that's great, Joe. And then, Nick, on the NexoBrid launch timing, I think the prudent thing was to pull it out of numbers for the back half of the year. But I just want to understand, and I think investors would want to understand. So is there a potential and kind of what is your view of potential of the FDA allowing these lots to potentially be on the market this year? And what would they need to see, I guess, to allow that maybe reestablish the NexoBrid launch in the second half of this year.

But this is -- this I think is the second delay we've had on NexoBrid since doing the deal with MediWound.

Yes, Ryan, you're right. It is the second delay we've had. Obviously, the product was not approved on the first grow round. We stepped in, got the product over the goal line. Obviously, we're frustrated and disappointed that we're 7 months beyond the approval, and we still don't have product from NexoBrid or MediWound that we can put into the commercial market.

So I think that's a fair comment. And again, we're trying to step in here now, again, engage with the FDA and be able to use these batches of intermediate drug substance to supply the U.S. market. So I can't go into all the details of our discussions with the FDA as we included in our 10-Q, we have done a detailed risk assessment, and we don't believe there's any incremental risk to product quality or patient safety. And obviously, those are the discussions we are having with the FDA. So this is there were a number of -- as we talked about before, a number of manufacturing updates that were required to be implemented following approval.

As we talked about previously, we were engaged with MediWound in the inspections last fall of their Israeli facility, the drug substance facility with CBC in Taiwan. Those inspections obviously went well and the product was approved, but we had some of these updates or MediWound had updates that needed to be completed. They completed the ones related to their own facility, and those were successfully completed. Again, this third-party testing lab, is basically testing. The microbial -- It's a microbial test of an antioxidant solution that's sprayed on the pineapple stems in one of the first processing steps there are a number of other microbial controls that have been added.

This one, the FDA did not approve this testing site. We were not involved with that. Obviously, MediWound is our contract manufacturer is responsible for that and they didn't execute. And so we're going in and working with the FDA to try to be able to use this material. At the end of the day, again, we don't think that there's any incremental risk to using this -- it's the same process that was used for all prior NexoBrid manufacturing.

So all material that was used in clinical trials, all material that was used to treat over 10,000 patients globally. The BARDA stockpile. All of that product was manufactured without this upstream in process control test. So we think there's a good case to be able to move forward with it. But I think, as you mentioned, it's prudent not to have that in our second half numbers until and unless we get the green light from the FDA.

Okay. And just to follow up and two finer points on that. One, the BARDA revenue that's being recognized in the back half of the year, are those the same lots that are being held off currently? And then conceivably, when would you get an update from FDA if you get one in the second half of the year, if you can share with us?

Yes. So they would be the same lots, right? Because all of the current intermediate drug substance lots were tested by this lab from both the 2021 and the 2022 harvest season. And then in terms of the timing of the FDA discussions, we'd expect it to be relatively soon.

Obviously, we need to -- we collectively need a determination on this in pretty short order. So I think we'll know. But again, the operating assumption is unless we hear otherwise, we're just going to assume that we have to wait for the next Pineapple harvest season, and that would result in new batches of both intermediate drug substance and NexoBrid finished product in the first quarter of 2024.

Okay. A lot of good pineapple going to waste like this.

Our next question comes from the line of Sam Brodovsky of Truist Securities.

First, a quick one and just started to touch on this a little bit before on the sequential for MACI. Should we expect a 2Q to 3Q increase is a sort of normal going forward? Or are there some market dynamics that are still a little unuseful behind your confidence in being able to grow sequentially this year?

Good morning, Samuel. You're trailing off a bit at the end, but I think you're asking about should we kind of expect this quarterly cadence going forward?

Yes, sorry. Is anything unusual behind the sequential increase from 2Q to 3Q? Or is that a more normal seasonality going forward?

Yes. I would say -- I think the way we're thinking about it is, obviously, we've kind of got off to a good start with strong results in both Q1 and Q2. And I think we're off to another good start in Q3. So if you look historically to kind of your point, it can certainly bounce around a little bit. We certainly have seen some years where there is Q3 kind of stepped down from Q2 but I think kind of where we are now is this certainly could change a little bit going forward. But I think what you're seeing come together this year are 3 pretty strong quarters sequentially, Q1, Q2 and Q3, which I think is kind of driven by momentum within the field and kind of driving biopsies and new surgeons, et cetera, which is great.

So I think it's I think it's just continued execution, and that's playing through in terms of the cadence of the numbers, and you see 3 pretty strong quarters. The step up in Q4 because of that may not be quite as high as it's been in the past. But that's kind of how this year is playing out. And I think that's probably how we would be thinking about it going forward, but I would say it could still vary a little bit within quarters. But we actually think it's certainly a good sign to see the continued momentum throughout the year.

Yes. That's great color. And then switching to arthroscopic and thanks for the market commentary, that was really great. How should we think about the scale of that launch progressing through '24. Should we think about second half being sort of in full market release? Or is that going to be phased through the year?

Yes, Sam, it's Nick. In terms of the launch itself, once the label is updated for arthroscopic MACI delivery, we'll be out there, obviously, in sort of full launch mode. I think the dynamic we'll wait to see exactly how it rolls out, I think, experienced MACI users who do a lot of MACI cases, having an opportunity to do it arthroscopically. They want to sort of be trained and it's not obviously very complicated, but they'll probably pick it up a little quicker the segment of surgeons that are non-MACI users, they may wait to sort of kind of attend peer-to-peer program.

So they may come sooner, they may come a little later. So I think it'll -- we'll wait to see sort of how it plays out exactly, and it will differ by obviously the differing surgeons. But in terms of our efforts in rolling it out and making it available when we launch, we launch.

Our next question comes from the line of Jeffrey Cohen of Ladenburg.

Nick and Joe. Just a quick one from my end. Firstly, Nick, it sounded like you commented about BARDA in the back half of the year being a few million dollars and -- so I was talking about just a Q4 impact of approximately $1 million. But for forecasting purposes, what should we think about on BARDA for the back half of this year?

Yes. So just to clarify that. So when -- we were talking about was that BARDA will be replenishing part of their stockpile, which in total is about a $3 million replenishment from a BARDA perspective. But then there's some economics that play into that, and we would share that with MediWound. So essentially, what I said, which is I think the right number to think about from our revenue, and we would expect something over $1 million, our portion of that $3 million, so over $1 million, probably between $1 million and $1.5 million. And that would be -- our expectation would be, that would be in the fourth quarter.

Okay. So for modeling purposes, don't think about anything for the third quarter.

Exactly.

Okay. I got it. And could you talk a little bit about the NexoBrid commercial expansion. It seems like most of your organization was in place that was expanded over the past few quarters. How does that look now? And how might that look going forward? Specific to NexoBrid.

Yes. So you're right, Jeff. We've kind of -- we mentioned that we were adding half a dozen reps for -- that would be NexoBrid only reps under our original and current plan. And you know that we've executed on that pretty successfully. The -- If we get the green light from the FDA shortly, then of course, we'll kind of deploy them as NexoBrid only account managers as originally intended and then sometime down the line, they'd be trained up on Epicel. And eventually, all reps would sell both products. If we have to wait till a Q1 launch, then we'll accelerate that Epicel training, get them up to speed there as well. And in the meantime, we have, as I mentioned, in the call, we started to see the impact of our NexoBrid reps in terms of -- as they call on the NexoBrid accounts that they're actually getting some episode pull-through now, and we've had cases from those dormant burn centers as well, which is exactly what we were hoping to see when we expanded the sales force.

Okay. Got it. That's helpful, Nick. And then lastly for us, any recent commentary to discuss about the ankle indication as far as progress or news or what we may expect in the back half of the year?

Yes. Obviously, our focus, as we talked about over the past year is that arthroscopic MACI was kind of the nearer term and larger opportunity. And that's been kind of a heavy focus for the team. For MACI ankle, that continues to progress. There's some upfront work that needs to be done on the preclinical nature, and that's progressing.

And once we kind of get to the point where we're ready to start talking about our clinical plan, we'll provide more guidance on that either later this year or into early next year.

Okay. Got it. Congrats on the strong quarter.

Our next question comes from the line of Swayampakula Ramakanth of HCW.

I'm trying to triangulate your comments on continued increase in biopsies and at the same time, trying to be careful regarding fourth quarter MACI numbers. So is -- how has the conversion rate been for the biopsies to use of MACI. And with adding additional surgeons, has that conversion rate stayed the same? Or is it tending to get into a higher number?

Yes. RK, it's Nick. So as Joe mentioned, really the outperformance for the year so far, has been driven principally by a significant increase in the number of biopsy surgeons. Obviously, 3 straight quarters of a record number of biopsy surgeons. They, of course, are driving an increase in biopsy, which is really kind of the top of the funnel, and that's principally driving again, the outperformance. We did mention in the first quarter that there was kind of an uptick in the conversion rate and that sort of maintained into Q2. But I'd say that's kind of secondary to the prior 2 drivers that I mentioned in terms of new surgeons and their increasing biopsies.

I'd say we're kind of in the situation that we've been in, in the past, even kind of pre-COVID where as you're adding a substantial number of new surgeons, your experienced surgeon -- surgeons, segments of those surgeons, their conversion rates are going up. New surgeons typically have a lower conversion rate as they come on board. And we're kind of seeing that same dynamic now. So I think that's the explanation overall in terms of the drivers for MACI.

And then on the MACI arthroscopic product, do you need to change anything in the manufacturing of the product itself? Or is it the same product but having a new indication?

Yes. No, it's the exact same product. There's no changes to the drug substance or drug product, and that's why we were able to move forward from a regulatory standpoint in an accelerated manner with a human factor study versus having to do any additional clinical work. So it's really the instrument kit that has been the development work and that will kind of form the basis around the human factor study.

Okay. And then with the new supplier of Matricel from Germany, is that going to be making any changes? Or is that just trying to make sure that you have additional supply because you're going to be adding additional indications through '24 and '25.

Yes. So Matricel is not a new supplier. They're actually our existing supplier for the membrane. So what we mentioned is that we executed a long-term extension that will take us well into 20, 30s -- into the 2030s in terms of our supply agreement. And that's important because it's an exclusive agreement so that they can't sell these membranes to anybody else who might be interested in sort of following down this path. So it's an important part of our sort of long-term market protection strategy for MACI.

Okay. One last question from me, Nick. So traditionally, you've been careful about talking through Epicel and giving guidance on Epicel sales. But I'm glad that you're doing that now. Does that mean you're becoming more and more confident about the dynamics of that Burn Care market? Or is it more because you have more feet on the ground for that product?

Well, no, I think it's kind of a stabilization of the market, right, over the past year and change. The incidence of large burns has come down, so you're kind of fighting that dynamic. And now that's stabilized more. And the team is just out there executing. And I think that's reflected in sort of kind of the stronger first half of this year that we've had compared to the second half of last year.

So I think it's just an execution story, a market stabilization story. I do think -- and again, we're not talking huge numbers of new reps on the ground, right? But having NexoBrid reps in dormant Epicel accounts and then realizing both biopsies and then orders from those accounts, that's a contributor, right? And that's important. And as I mentioned earlier, it's exactly what we -- that pull through is exactly what we were intending to happen as we expanded the sales force.

Perfect. Great quarter as always. And looking forward to talking to you soon.

Our last question comes from the line of George Sellers of Stephens Inc.

Congrats on the quarter. I guess my first 1 sticking with the arthroscopic delivery option in that dynamic. I'm just curious, how does that option change the sales strategy, if at all, in terms of would you be expanding that sales force given the increased target market or with the current sales force, maybe just shift their focus? Or how do you expect that launch to impact your sales operations?

Yes. So I think as we talked about in the past, when we did our sales force sizing exercise back in 2019 now, we had data on 12,000 orthopedic surgeons, and we could obviously draw an intersection of surgeons that did high volumes of cartilage repair and open procedures, and that sort of formed the basis for our initial 5,000 targets.

There was also a group of those surgeons that did high volumes of cartilage repair, but we did not have open procedure data on them. And so the presumption is that those are kind of arthroscopic-only surgeons or predominantly arthroscopic procedure surgeons. And so our intention is to kind of refresh that data. And to the extent there are additional targets that we'll focus on in that latter bucket, which I expect there will be that would drive whether we feel like we need to increase the sales force or not.

In terms of the sales process, the MACI clinical data speaks for itself, and it's obviously very strong. Basically now this just gives surgeons an option to, in appropriate cases deliver the product arthroscopically, which, again, we think and they think there's potential meaningful benefits and advantages to do that -- to doing that. And so it won't fundamentally change kind of how we sell. I expect we'll add some targets. And then again, if it requires us to expand the sales force, we'll do that. I would not envision any sort of wholesale restructuring of our sales force. If we add 1,000 or 2 targets, you'd add maybe a dozen reps, but we'll think about that as we get closer to launch.

Okay. That's really helpful. And then I believe you mentioned in your prepared remarks that arthroscopic delivery has the potential to double MACI in the coming years. And I'm just curious, what are some of the key assumptions that would go into that? Is it simply sort of what's going on now that more surgeons taking biopsies and more biopsies is going to drive that revenue growth? Or is there any change in your expectations for biopsy conversion rates associated with arthroscopic delivery?

Yes. Well, I'll just start and Joe can kind of go into the sort of the math of the -- that comment. But what we basically said was that over the coming years, we could essentially double our current business if we had the same share of those smaller femoral condyle defects as we do in the patella. So MACI is a go-to product in patella cases. There's about 10,000 patients in the addressable market with patella defects there's double that in this segment of femoral condyle defects that are 2 to 4 square centimeters in size. Triple that if you added all femoral condyl defects below 4 centimeters.

So it's a big market opportunity. And the point is if we get to the same share because now you have a delivery advantage in those smaller defects, you could basically double the size of our current business.

Yes. And just to add. Nick kind of hit it, this is Joe. But I would also point out we have a slide in our earnings deck. I think it's helpful where we kind of double-click a bit on the TAM that visually shows this. But again, I think what we're seeing there is, again, the patella is about a $500 million opportunity and we're kind of north of -- end of double digits on that. And again, from a -- if we're that competitive and it potentially could be so in the -- in this to the 4 square centimeter segment, that could be significant, which is where kind of potentially effectively doubling the business kind of plays in.

So I think the point we wanted to make, and again, I think the slide is helpful. This is a pretty big opportunity. we think arthroscopic MACI would potentially make us much more competitive in that space.

Okay. Okay. That makes a lot of sense. I'll leave it there.

Thank you. At this point, I would now like to turn the conference back to CEO, Nick Colangelo for closing remarks.

Okay. Thank you, operator, and thanks, everyone, for your questions and your continued interest in Vericel. Obviously, the company had a very strong financial and business results in the second quarter, and we expect that momentum to continue in the second half of the year and beyond. So we look forward to providing further updates on our next call. And with that, thanks again, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.