Vericel Corp (VCEL) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's fourth-quarter 2014 conference call.

At this time all participants are in a listen only mode. I would also like to remind you that this call is being recorded for replay.

I will now turn the conference call over to Vericel's chief financial officer, Gerard Michel.

Thank you, operator, and good afternoon, everyone. Welcome to Vericel's fourth-quarter 2014 conference call to discuss our fourth-quarter and year-end 2014 financial results as well as the progress of our commercial business and development programs.

Before we begin let me remind you that on today's call we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995 and all of our projections and forward-looking statements represent our judgments as of today. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC, which are also available on our website. In addition, any 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.

With us on today's call our Nick Colangelo, Vericel's President and Chief Executive Officer; Dan Orlando, Vericel's Chief Operating Officer; Dr. David Recker, our Chief Medical Officer; and Dr. Ross Tubo, Vericel's Chief Scientific Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good afternoon, everyone. Before we discuss our fourth-quarter and year-end financial results I would like to take a few minutes to review the business highlights for Vericel during the past year.

2014 was a highly transformative year for our Company. Following the restructuring of our business in 2013 to focus on our orphan disease program for the treatment of advanced heart failure, we entered 2014 focused on strategic growth initiatives for the Company.

As part of that strategy we acquired Sanofi's cell therapy and regenerative medicine business in May of last year and established Vericel as a commercial stage cell therapy company. Through this acquisition we acquired worldwide commercial rights to three approved autologous cell therapy products, a US sales and marketing organization and a commercial stage GMP cell manufacturing facility in Cambridge, Massachusetts.

We now have a robust product portfolio with two marketed products in the US generating substantial revenues and a high potential late stage pipeline. In addition to substantially expanding our business last year, we enhanced our senior management team by adding accomplished senior executives with strong track records of developing and commercializing products in the United States and deep experience in restructuring and integrating acquired businesses.

We also substantially strengthened our financial position. Our successful $40 million equity raise in September has put us on a very solid financial foundation for the business that we are now building. Our new business attracted a strong institutional shareholder base of leading fundamental healthcare investors and we view their participation in the financing as a strong vote of confidence in our current business strategy.

Finally in the fourth quarter, we changed our corporate name to Vericel to reflect our expanded business and relocated our corporate headquarters to Cambridge, Massachusetts. In January we announced the expansion of our Board of Directors with the appointments of Dr. Steve Gilman, former chief scientific officer of Cubist; Kevin McLaughlin, chief financial officer at Acceleron Pharma; and Dr. Paul Wotton, chief executive officer at Ocata Therapeutics. These distinguished pharmaceutical executives bring significant expertise in pharmaceutical research, drug development, corporate finance and business development which will be extremely valuable as we continue to implement our strategic plan to build the Company and we're very pleased to welcome them to our Board.

Having built a solid foundation for the Company over the past year, our strong fourth-quarter results reflect both the successful ongoing integration of the acquired commercial business and the implementation of new strategic initiatives to support the acquired products. As we have discussed, the key priority in acquiring the Sanofi business was to drive the business to profitability as rapidly as possible and we are encouraged by the revenue and gross margin improvements that we achieved in the fourth quarter.

Total Carticel and Epicel net revenues for the fourth quarter were $14.7 million, which represents a 13% increase over the fourth quarter of 2013. Total Carticel and Epicel net revenues for the year, which includes seven months of sales, were approximately $28.3 million, which represents a 9% increase compared to the same period in 2013.

Importantly, given our near-term goal to improve gross margins and the profitability of the acquired business, gross margins increased to 54% for the fourth quarter and 40% for the June to December timeframe. We also reduced our quarterly operating loss to $2.3 million despite a significant increase in clinical trial expenses associated with a high rate of recruitment in our Phase 2b ixCELL-DCM clinical trial.

Our fourth-quarter performance represents an important step towards our goal of achieving profitability with the capital we raised in our recent financing. Our goal remains to aggressively drive the business to profitability as quickly as possible and grow the business over the long term. While our fourth-quarter performance was strong it is important to keep in mind that this is a lower volume specialty biologics business and revenue trends can be inconsistent quarter to quarter for a variety of reasons, particularly when, as Dan will discuss, we are in the process of rebuilding the foundation of the commercial organization.

That being said, we are confident with our new talented sales professionals and the implementation of new marketing programs and cost savings initiatives, we cannot only drive the Company to profitability but continue to increase utilization of our products and grow revenues in the quarter and years ahead. Dan and Gerard will provide more details about our commercial and financial performance in a moment and Gerard will provide some historical data about the acquired products to help put their performance going forward in better perspective for you.

I'm also encouraged by our clinical and regulatory progress. In January we completed patient enrollment in our Phase 2b ixCELL-DCM clinical trial that is evaluating the efficacy and safety of ixmyelocel-T in patients with advanced heart failure due to ischemic dilated cardiomyopathy. The primary endpoint of this study is major adverse cardiovascular events defined as the number of all caused deaths, cardiac hospitalizations and unplanned emergency department visits for treatment of acute worsening heart failure over 12 months.

This important milestone was made possible by the strong performance of our clinical development team and the tremendous support of our clinical investigators and advisers, study participants and DSMB committee members and we thank them for their commitment to the trial. By completing involvement on schedule we are now on track to report top-line results from this study in early 2016.

From a regulatory perspective our key priorities remain to bring MACI to the market in the US as rapidly as possible and to pursue a pediatric label change for Epicel. Our clinical and regulatory teams have spent a considerable amount of time analyzing the existing data and putting together briefing packages for discussions with the FDA on both of these topics.

Regarding MACI, our Phase 3 product candidate for the treatment of cartilage defects in the knee, which has been approved in Europe and used in approximately 10,000 patients globally, will be meeting with the FDA later in the second quarter to review the existing preclinical and clinical package and to discuss US registration requirements. We believe that this meeting will enable us to determine the next steps required to submit a BLA for MACI in the United States.

With respect to Epicel, as we have discussed in the past, Epicel is approved in the US as a humanitarian use device under a humanitarian device exemption. As such, Epicel is subject to certain restrictions that limit pricing to an amount that does not exceed the cost of the research and development, fabrication and distribution. However, under the Food and Drug Administration's Safety and Innovation Act, or FDASIA, a humanitarian use device may be eligible to be sold for profit after receiving HDE approval if the device is intended for the treatment of pediatric patients and such device is labeled for use in pediatric patients.

Epicel currently is indicated for use in patients who have deep dermal or full thickness burns greater than or equal to 30% of total body surface area. We have submitted a pre-submission meeting request package to the FDA to discuss the submission of an HDE supplement to revise the labeled indications for use for Epicel to specify use in adult and pediatric patients, and pediatric labeling and requests an exemption from the profit prohibition for Epicel.

Our request is based on the fact that Epicel is routinely used to treat both adult and pediatric patients and the original HDE application included a significant amount of clinical data from pediatric patients. Our goal is to be able to increase resources devoted to Epicel to expand utilization of this life-saving product and we look forward to meeting with the FDA in the coming months to obtain feedback on our proposed regulatory approach to filing an HDE supplement for Epicel.

Now I'd like to turn the call over to Dan for an update on our commercial activities.

Thanks, Nic. I am pleased to report that we had strong fourth-quarter sales performance for our two marketed products.

We'll start with Carticel. Net sales for Carticel implants and surgical kits was approximately $11.4 million for the fourth quarter and approximately $22.3 million for the seven months in 2014 that we owned the acquired business.

As Gerard will review in a moment, Carticel revenues are subject to seasonal fluctuations with sales traditionally being strongest in the fourth quarter. We believe, however, that our fourth-quarter results also reflect the positive impact of several ongoing initiatives designed to improve Carticel gross margin and ultimately provide long-term top-line growth.

To date, we have realigned our sales territories, created a new incentive compensation program and hired new sales leadership. We are now in the midst of building a high performance team of sales professionals to serve our customers and expand Carticel utilization.

At this time 9 of the 21 sales representatives or more than 40% of these Carticel salesforce are new talented sales professionals with orthopedic and operating room experience who are being trained by our very best performers. It will take some time to see the impact of these new representatives in terms of consistent Carticel growth.

Our Carticel sales representatives work closely with our orthopedic surgeon customers to assist in identifying appropriate candidates for Carticel implants and in providing additional patient and customer support. These relationships take some time to build. Our goal is to minimize the disruption from turnover in the salesforce as we build a high-performance sales team that can deliver consistent future growth.

Carticel enjoys a very loyal following among orthopedic surgeons many of whom have used the product for over 20 years. However, expanding the Carticel prescriber base and utilization is a critical component of growing the business over the long term.

To this end one of our top 2015 commercial priorities is to expand the Carticel prescriber base and reestablishing a robust peer-to-peer educational program. Our sales and marketing team are implementing programs designed to reach over 1,000 orthopedic surgeons and clinical care support staff through a variety of these programs.

We are also making special efforts to expand Carticel's prescriber base and increase Carticel utilization in military facilities given that younger patients seeking to return to full activity represents ideal candidates for Carticel therapy. Likewise, we have initiated training programs for new residents and fellows to train the next generation of Carticel users. All of these programs are starting in earnest next month and while we expect it may take several quarters for these initiatives to expand the prescriber base, we are encouraged by the level of interest and participation in these programs.

Finally, in addition to building a foundation of consistent top-line growth, we remain focused on improving gross margins for Carticel. As we have discussed in the past, a key efficacy metric is improving the ratio of cartilage biopsy that results in revenue-generating Carticel implants.

The implant-to-biopsy ratio, which has been flat at 34% for the last three years, improved to 38% in 2014 and we expect further improvement as our representatives continue to deliver a strong intent to treat message to surgeons. In addition, we expect that our ongoing process development research projects, some of which have already been implemented, will further decrease the labor and manufacturing costs associated with Carticel production.

Now turning to Epicel, our life-saving product for treating severe burns. Epicel net sales were approximately $3.3 million for the fourth quarter and approximately $6 million for the seven months of 2014 that we owned the acquired business.

Epicel revenues also were subject to seasonal fluctuation with sales traditionally being strongest in the winter months. We believe, however, that our fourth-quarter results also reflect a positive impact of initiatives designed to increase Epicel utilization and its contribution to the overall business. One of our top commercial priorities is to increase Epicel utilization by targeting institutions that previously used Epicel prior to the reduction of Epicel's salesforce.

Last fall we increased the salesforce from one to three representatives as we work towards restoring previous levels of promotional effort. Based on the early success of that initiative, we've continued to expand the Epicel salesforce and have just added a fourth sales representative, a burn nurse who previously sold Epicel and who bring significant physician relationships to our team.

In addition, we are working closely with some of the premier burn surgeons and institutions in the country as part of a peer-to-peer program designed to educate other surgeons and institutions about the life-saving potential and administration of this underutilized product. We believe that these and other initiatives will drive top-line revenue for Epicel.

In summary, we are making good progress and strengthening the Carticel and Epicel franchises and ensuring that the business is positioned for profitability and growth over the long term. Now I'll turn it back to Nick.

Thank you, Dan. I am very encouraged by the performance of our commercial and operations groups and congratulate you and your entire team on the progress that you have made during the past six months. You've accomplished a lot in a short period of time and the actions taken by your team have significantly improved the opportunities and prospects for our business moving forward.

I'll now turn the call over to Gerard to review our fourth-quarter financial results.

Thanks, Nick. Vericel reported a net loss for the quarter and year ended December 31, 2014, of $2.4 million, or $0.17 per share and $19.9 million, or $2.23 per share respectively compared to a net loss of $2.9 million, or $0.97 per share and $15.6 million, or $6.95 per share for the same periods in 2013.

Net product revenues for the quarter were approximately $14.7 million and included approximately $11.4 million of net sales of Carticel implants and surgical kits and approximately $3.3 million of net sales of Epicel. Total Carticel and Epicel net revenue for the fourth quarter increased by approximately $1.5 million compared to the fourth quarter of 2013. Net product revenues for the year, which included seven months of sales of the acquired products, were $28.8 million and included $22.3 million of Carticel net sales and $6 million of Epicel net sales.

Total Carticel and Epicel net revenues for the June through December period increased approximately $2.5 million compared to the same periods in 2013. Gross profit for the quarter ended December 31, 2014, was $8 million, or 54% of net product sales. Gross profit for the year ended December 31, 2014, was $11.5 million, or 40% of net product sales.

Cost of product sales for the for the full year includes $2.5 million in restructuring costs. The improved margins in the fourth quarter resulted from improved implant-to-biopsy ratios and higher fourth-quarter volumes.

Research and development expenses for the quarter and year ended December 31, 2014, were $5.8 million and $21.3 million respectively versus $3.3 million and $15.1 million for the same periods a year ago. The increase in research and development expenses in the fourth quarter was due to a net increase of $1.6 million and clinical expense due to an increase in the number of patients treated and followed in the Phase 2b ixCELL-DCM clinical trial offset by a decrease in other clinical trial expenses in the prior period and approximately $900,000 of personnel and other expenses associated with Epicel, Carticel and MACI.

The increase in full-year R&D expenses is primarily due to a $3.2 million charge associated with the settlement agreement that eliminates all future milestone payments related to the development and commercialization of MACI in the United States, an $800,000 net increase in clinical trial expenses resulting from an increased enrollment in the Phase 2 ixCELL-DCM clinical trial offset by a decrease in other clinical trial expenses in the prior period, and the addition of $2.2 million of personnel and other expenses associated with Epicel, Carticel and MACI.

Selling, general and administered expenses for the quarter and year ended December 31, 2014, were $4.5 million and $13.8 million respectively compared to $1.6 million and $5.9 million for the same periods a year ago. The increase in SG&A expenses in the fourth quarter is primarily due to approximately $2.8 million in sales and marketing expenses associated with the recently acquired commercial business, approximately $900,000 in increased IT, legal consulting and personnel costs related to integrating and managing the acquired business in the US offset by approximately $600,000 in reductions and previously accrued estimated obligations associated with closing the Danish subsidiary.

The increase in SG&A expenses for the year ended December 31, 2014, over the prior year is due to approximately $5.4 million in sales and marketing expenses related to the commercial business, approximately $1.9 million in increased IT, legal, consulting and personnel costs related to integrating and managing the acquired business in the US, an increase of approximately $0.5 million in restructuring charges and $300,000 in general and administrative costs from the Danish subsidiary, which has ceased manufacturing operations. Loss from operations for the quarter and year ended December 31, 2014, was $2.3 million and $23.5 million respectively compared to $4.9 million and $21 million for the same periods a year ago. Material non-cash items impacting the operating loss for the quarter and year included approximately $200,000 and $800,000 respectively of stock-based compensation expense and $300,000 and $800,000 respectively in depreciation expense offset by a decrease in our asset retirement obligations in Denmark of approximately $1 million.

Other income for the quarter and year ended December 31, 2014, was $24,000 and $3.6 million respectively compared to $2 million and $5.3 million for the same periods a year ago. The decrease in other income for the full year is due primarily to a decrease in fair value of warrants in 2013 compared to 2014 offset by the $3.5 million bargain purchase gain in 2014.

The change in other income for the quarter is also primarily due to an increase in other income attributable to a decrease in the fair value of warrants in the fourth quarter of 2013 compared to the same period in 2014. As of December 31, 2014, the Company had $30.3 million in cash and cash equivalents compared to $8.1 million in cash and cash equivalents at December 31, 2013.

The increase in cash was due primarily to proceeds from the Company's successful equity offering in September. Based on our progress to date and in the absence of additional strategic transactions or other strategic events driving the need to raise additional capital, we believe that our cash position is sufficient to fund our business operations until we achieve profitability.

Of the $2.4 million net loss in the fourth quarter the legacy R&D-focused business attributed $4 million of loss, while the acquired commercial business generated $1.6 million of net profit. While we will no longer break out results in this way going forward it is important to note that we anticipate losses from the legacy businesses will decline as the ongoing ixCELL-DCM clinical trial completes and we expect the commercial business to increase its profit contribution as both revenues and gross margins increase.

We recognize that there is little historical information available for both Carticel and Epicel sales. In today's call we have provided total product net revenue comparisons versus the same period in the prior year and we will continue doing so.

Although we are not providing revenue guidance at this time, we would like to provide some additional background information regarding seasonality and overall trends to assist analysts and investors in constructing their own models. This information will also be included in our 10-K, which we anticipate filing tomorrow.

Carticel revenue is subject to seasonal fluctuations with stronger sales occurring in the second and fourth quarters. During 2014 the percentage of annual sales by quarter was as follows: 21.6% in the first quarter, 23.7% in the second quarter, 21.8% in the third quarter and 33% in the fourth quarter.

Epicel revenue is also subject to seasonal fluctuations with stronger sales in the winter months although the trend in any single year can be absent due to the extreme variability inherent with Epicel's low patient volume. Over the last four years the percentage of annual sales by quarter has been as follows: first quarter 20%, second quarter 24%, third quarter 20%, and fourth quarter 28%. The variability between the same quarter in consecutive years has been as high as 10% of the annual volume and therefore can be difficult to ascertain sales trends or forecast annual revenue from any single quarter.

Large swings in revenue in some quarters should be expected especially when factors such as severe winter weather affect the number of patients and procedures. However, we do expect overall growth as we increase the number of burn centers prescribing Epicel, we believe this volatility will diminish.

This completes my financial review. Now I will turn the call over to Nick.

Thanks, Gerard. We are making great progress in transforming our business into a dynamic new organization and achieving our goal of commercial and scientific leadership in this field. In the year ahead we look forward to increasing product revenues by expanding the number of prescribing physicians for Carticel and the number of treating burn centers for Epicel, increasing margins by improving the Carticel implant-to-biopsy ratio and introducing manufacturing process improvements, initiating the required next steps to submit a BLA for MACI in the United States and obtaining a pediatric label change for Epicel.