Vericel Corp (VCEL) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vericel Corporation Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I will now like to introduce your host for this conference call, Mr. Gerard Michel, you may begin.

Thank you, operator, and good morning, everyone. Welcome to Vericel's Third Quarter 2017 Conference Call to discuss our third quarter 2017 financial results. Before we begin, let me remind you that on today's call, we will be making forward-looking statements under the Private Security 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 are Nick Colangelo, Vericel's President and Chief Operating -- Chief Executive Officer; and Dan Orlando, our Chief Operating Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good morning, everyone. Before I turn the call over to Dan and Gerard to review our third quarter commercial and financial performance, I'd like to comment on several business highlights for the quarter.

First, we reported record third quarter revenues, in our second straight quarter of 30% or greater revenue growth versus the same quarter in the prior year. This strong revenue growth was driven by the momentum of MACI's uptake in the second full quarter following launch as well as significant growth for Epicel in the quarter. Total net revenues for the third quarter were $14.3 million, an increase of 30% compared to the third quarter of 2016. Total revenues for MACI were $9.9 million, an increase of 19% over Carticel revenues in the same period in 2016, and total revenues for Epicel were $4.4 million, an increase of 67% compared to the third quarter of 2016. We also reported a significant improvement in gross margins, which increased to 50% of net revenues compared to 37% of net revenues in the third quarter of 2016. The improved gross margins demonstrate the leverage of unit volume increases in our business model. I'm pleased to report that all of our MACI key launch performance indicators, including the numbers of surgeons trained, the increase in biopsies, uptake by surgeons that were former or non-Carticel users, and total orders for the quarter point to a continued acceleration in MACI uptake.

Third quarter growth in MACI biopsies and implants was driven by both previous and new user segments. We expect this momentum to continue, particularly in light of the fact that we currently have less than 10% penetration into the patient population that we believe could benefit from MACI annually. Dan will provide further details on both our promotional activities and key launch performance indicators. While we believe MACI uptake is driven, primarily, by its favorable product profile, it was also supported by our transition to a new case management model. In this new model, we've directly contracted with a case management service provider to manage reimbursement and patient support services for MACI. By directly managing the customer-facing portion of our medical authorization and benefit review, we can ensure a high-quality experience for both surgeon offices and patients. Equally importantly, our payor access strategy has been executed in accordance with our planned time lines. Our goal was to ensure that the majority of payor medical benefit policies were updated and that access for MACI was available for our top plans within 9 months following the launch. As we recently announced, with UnitedHealthcare and multiple other commercial plans updating their policies, after less than 3 quarters on the market, the number of covered lives for commercial plans providing access to MACI is approximately equivalent to the number of covered lives for commercial plans that previously covered Carticel. This is a significant achievement and reflects the tremendous work of our market access team over the past year. Based on this expanded medical policy coverage, which has opened up important markets that were not available for Carticel as well as the continued momentum of MACI in the third quarter, we've decided to expand the MACI salesforce again. Our sales team is one of the most accomplished salesforces in the industry. However, there are many more cartilage repair surgeons than can be reached at our current size, and the level of surgeon interest continues to grow. This decision, therefore, reflects our confidence in MACI's future prospects and the value of -- our sales representatives can create, as they work to deliver therapies to improve the lives of patients.

I'll now ask Dan to provide further detail on our commercial results.

Thank you, Nick. The third quarter represents the second full quarter following the launch of MACI with our expanded salesforce of 28 representatives and the first quarter with Carticel not on the market. As mentioned earlier in the call, MACI revenue for the third quarter increased 19% over Carticel revenue in the third quarter of 2016, representing the second consecutive quarter of strong MACI growth following launch. Biopsies are by far the most important leading indicator for near-term MACI growth, and biopsies increased 44% in the third quarter and 27% year-to-date in 2017 respectively, compared to the same periods in 2016.

Overall, surgeon interest and demand for MACI continues to expand, particularly in the segment of surgeons who had never used Carticel and the former Carticel user segment of surgeons who had not used Carticel in the last 2 years. In our first 2 full quarters since launch, we have seen a higher growth rate in both MACI biopsies and MACI implants from this newly engaged surgeon segments. The significant increase in MACI biopsies and rapid expansion of our MACI surgeon customer base is very encouraging for MACI's long-term growth prospects, especially since the rate at which biopsies convert to implants has been very consistent over the last 5 years, and we have not seen a material change from previous conversion rate since the launch of MACI. While we cannot be certain that conversion rates will remain constant in the future, given this growth in biopsies, we're confident that implant volume growth will continue to accelerate into 2018. To help drive this growth and ensure appropriate utilization, we have been very active with both marketing activities and medical education. Today, we've trained over 440 surgeons on the MACI surgical procedure, with approximately 50% of the trained surgeons coming from the former Carticel user and non-Carticel user segments. Peer-to-peer education programs continue to be a priority. We have conducted over 20 national, regional and local programs since launching MACI. And in the fourth quarter, we will be conducting 2 additional national training programs both live and web-based. And we have also had strong presence at industry meetings since launching MACI. We'll be attending 3 additional national meetings that will include MACI surgical demonstrations, MACI's symposia or MACI case study presentations, here in Q4.

Turning to patient access. Our aggressive MACI payor access continues to play out on schedule. Our strategy was designed to have the majority of payor medical policies updated within 9 months following the launch, and I'm very pleased to report that 28 of the top 30 plans now have medical policies, which allow access to MACI. We estimate that this represents over 85% of commercial lives and is equivalent to the coverage we had with Carticel. There will always be a small plan here and there, which do not have specific MACI policies, but for these, we generally are able to gain approvals on a case-by-case basis. We are well positioned to meet the increased MACI demand with our current manufacturing facility without significant capital investment, and we are on track to convert a portion of the Carticel clean room to expand MACI capacity to handle anticipated volume growth for the foreseeable future. Given the MACI launch momentum, particularly the expanded patient access and expanded surgeon interest, we are pleased to announce the salesforce expansion from 28 representatives in 4 regions to 40 representatives in 5 regions. In some geographies, the expansion is a direct result of improved payor access versus previous Carticel medical policy and in other areas, it's a direct response to the need to increase support for the newly engaged surgeon segments. We expect our new sales representatives to be trained and in place by the start of Q2, 2018.

In summary, the MACI launch is progressing according to plan, and momentum continues to build for this exciting new product.

I'll now turn to Epicel. Revenue in the third quarter was $4.4 million, up 67% over the third quarter of 2016, as we saw significant increase in the number of orders and institutions ordering Epicel compared to the same period in 2016. While Epicel volumes are inherently volatile, the number of burn centers taking biopsies and treating patients is steadily increasing. And on average, we expect that Epicel volume should continue to grow. As we have previously discussed, the first phase in Epicel growth was re-engaging surgeons who had previously used Epicel and were trained on the optimal use of the product. We believe that the recent growth is the result of our investments in related Epicel's peer-to-peer training, intended to establish a standard of care and to help surgeon identify Epicel patients. We are focusing our messaging on graft take rates and patient survival to reinforce the powerful potential lifesaving benefits of Epicel. Along with our increased promotional efforts, we have improved our presence at burn association meetings, including speaker programs, targeted at -- to major regional and national burn conferences, and we will have presented -- held educational symposia and exhibited at more than half a dozen important conferences and programs over just the second half of this year alone.

Finally, we've also created a reimbursement hotline, staffed with billing experts to aid hospitals with coding and reimbursement for Epicel. Epicel can be an important lifesaving therapy for severe burn patients. We are pleased our investments to-date have expanded its utilization, and we're confident that through our continued support, we will reach more patients in need. I'll now turn the call back to Nick.

Thanks, Dan. The commercial team has done an outstanding job in driving MACI uptake, expanding access to MACI and optimizing the patient and physician experience with our new case management services. I'm optimistic that these efforts will continue to drive growth for MACI and that our commercial and medical initiatives for Epicel will continue to increase its penetration in the severe burn market.

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

Thanks, Nick. Total net revenues for the quarter ended September 30, 2017, were $14.3 million, which included $9.9 million of MACI net revenues and $4.4 million of Epicel net revenues, compared to $8.3 million of Carticel net revenues and $2.6 million of Epicel net revenues, respectively in the third quarter of 2016. Total net revenues increased 30% compared to the third quarter of 2016 with MACI revenues increasing 19% over Carticel revenues and Epicel revenues increasing 67% compared to the same period in 2016. Gross profit for the quarter ended September 30, 2017, was $7.1 million or 50% of net revenues compared to $4.1 million or 37% of net product revenues for third quarter of 2016. The significant increase in gross profit margin is due to the fact that the marginal cost to produce MACI and Epicel are approximately 15% to 20%, so that every $1 million in incremental revenue increases gross profit by about $800,000 to $850,000.

Research and development expense for the quarter ended September 30, 2017, were $2.9 million compared to $3.4 million in the third quarter of 2016. The reduction of third quarter R&D expenses is primarily due to a reduction in ixCELL-DCM clinical trial expenses.

Selling, general, administrative expenses for the quarter were $8.2 million compared to $7 million for the same period in 2016. The increase in selling, general, administration expenses is primarily due to an increase in expenses for marketing initiatives related to the launch of MACI and an increase in per sale cost, primarily related to an increase in the MACI salesforce. Loss from operations for the quarter were $4 million, compared to $6.4 million for the third quarter of 2016.

Material noncash items impacting the operating loss for the quarter included $800,000 of stock-based compensation expense and an approximately $400,000 in depreciation expense. Other expense for the quarter was $1.4 million, compared to approximately $300,000 for the same period in 2016. The change in other expense for the third quarter is primarily due to the change in the fair value of warrants in the third quarter, compared to the same period in 2016 and interest expense on our outstanding revolving credit agreement and term loans.

Vericel's net loss for the quarter was $5.4 million or $0.16 per share, compared to a net loss of $6.7 million or $0.38 per share for the same period in 2016.

As of September 30, 2017, the company had $15.5 million in cash, compared to $23 million in cash at December 31, 2016. We have had a higher-than-expected accounts receivable balance over the past 4 quarters due to the change in our pharmacy model in 2016 and '17 and the previously disclosed contractual dispute involved -- involving a pharmacy provider and a third-party payor.

At the end of the third quarter, we had approximately $7 million of accounts receivable that we would not, otherwise have carried. Since the close of the third quarter, we have collected approximately $4 million of that $7 million and anticipate collecting the balance over the next 3 quarters. Augmenting this additional cash flow will be the expected $5.5 million payment related to the licensing agreement with ICT. The funding transfer is subject to approval by the state administration of foreign exchange of the People's Republic of China, and we hope to include -- conclude this in the fourth quarter of 2017.

Finally, we have used only $2.5 million of our $10 million revolver with Silicon Valley Bank, and we have an ATM in place. As a result, we believe that we have adequate access to capital to fund the company's operations to profitability.

Regarding future MACI performance, almost all of the implants occurring in any quarter are the results of biopsies taken 1 to 4 quarters earlier. Although there is no guarantee that conversion rates will hold constant, we believe that biopsy growth represents a strong leading indicator for MACI implants. Over the last four quarters, we've seen high teens biopsy growth versus the prior four quarters. Based on this, we expect MACI revenue in the upcoming -- in the coming quarters to grow at least to that rate.

Epicel is more difficult to project, given the relatively small number of patients. But when measured over the prior four quarters, we do expect meaningful revenue growth, going forward. Gross margin should continue to increase, consistent with 15% to 20% marginal cost for MACI and Epicel.

Finally, our operating expenses will increase given the MACI salesforce expansion, the increased investment in case management services based on higher MACI volumes and the start of a postapproval commitment clinical trial, studying MACI and pediatric patients. This increase in operating costs, which will be at a lower rate than revenue gross -- growth will rise over the next few quarters and reach approximately $2 million per quarter more than the third quarter 2017 operating expense.

That completes my financial review. Now I'll turn the call over to Nick.

Thanks, Gerard. We had a very strong third quarter, driven by the accelerating uptake of MACI as well as significant growth for Epicel. Our robust revenue growth and margin expansion reflect the success of our commercial team's sales and marketing initiatives, coupled with strong physician enthusiasm for MACI and Epicel. We believe that these results position the company for strong short-term and long-term growth, moving forward.

That concludes our prepared remarks. Now I'd like the operator to open the call to your questions.

(Operator Instructions) Our first question comes from Chad Messer with Needham.

Great. Appreciate the added color that you gave on expenses, both margins and where SG&A and R&D can go. Is it possible, maybe, to expand on that a little bit more? Is there's some rule of thumb for a salesforce expansion? I know you expanded it in the past, is that a good -- is that a good, sort of, rule of thumb to look at how cost went up before, as you expanded the salesforce when -- as you're doing it again?

Hey, Chad, it's Gerard. I think, for the salesforce itself yes, that's a good rule of thumb. However, we are putting additional investment in hub services to really smooth the process of a patient from the doctors deciding that they want some MACI implant to getting insurance approval. So it'll be a bit higher than you saw in the past. And that's why we gave a fairly specific number saying, hey, take what we did this quarter and over a couple of quarters, ramp it up to -- we get to about $2 million higher a quarter. That would pay for far more than a salesforce, and the bulk of that is from the hub services.

Okay. And then, you had -- basically, no net cash use or at least the cash balance didn't go down during the quarter, even though you've got this climbing accounts receivable. Was there a debt drawdown or share issuances? What accounts for -- you guys keeping...

So, we did have a judicious use of the ATM, we issued approximately 1.9 million shares for approximately $6.9 million net cash, and we think, we're in pretty good shape with the current tools in hand to get to profitability, and that's part of the reason, we went through all of that detail about the AR, DSO and ICT, et cetera.

All right, great. Just watching your cashes. I am sure, you guys are too.

Sure.

Our next question comes from Kevin DeGeeter with Ladenburg.

With regard to trend you're seeing in the market for MACI, you know, 1 of your peers did complete enrollment in the clinical trial back over the summer. Have you seen any impact in certain centers with regard to patients who might have otherwise gone on clinical trial being now candidates for commercial sale of MACI?

Well, Kevin, I don't think we've seen a meaningful increase due to that, if you think about it. Our competitors may could be enrolling single-digit numbers of patients a month, so it really doesn't have a huge impact for us. We are just pleased, obviously generally, that we're seeing increased utilization across the board, whether they were investigators in other studies or not.

And with regard to your comments in the prepared portion of the call with regards to gross margin, can you just help us think how mix may impact expansion of gross margin, going forward specifically the, kind of, call it $0.80, $0.85 per $100 of, kind of, falling through to gross profit. How does that, sort of, fall depending on whether that's it's Epicel versus MACI revenue follow through?

Yes, That's a great question. I think, the percentages I gave really are based on our anticipated mix. I think, on the margin, if Epicel is growing by leaps and bounds and continue to grow by leaps and bounds and superseded -- took over MACI, I think, maybe -- it might be tat bit lower, but I think, it's within the margin of error. The material cost for these per patient are roughly similar.

Okay. And then lastly, for me. Then I'll get back in the queue. With regards to salesforce expansion, is 40, sort of, the right number now that you have, essentially full access and payor coverage? And how should we think about the trend in potential salesforce growth going forward to the extent that demand continues to pull through?

Yes, Kevin. It's Nick. For the time being, we do think it's the right numbers. Dan mentioned, there were a couple drivers. One is that with increased expanded medical policies, it opened up some geographies, where we didn't have good Carticel coverage in the past. So that was, sort of, an easy one. And then as you think about a salesforce expansion, obviously there is a larger universe of orthopedic surgeons that we would like to reach, with the appropriate frequency and making sure, we can do that in light of increasing workloads being driven by increased biopsies, implants, et cetera. So it's combination of all of the -- those factors, increase medical policy, better reach and frequency on our target universe and making sure that we take into account the work activity for our sales reps.

Maybe just 1 more quick follow-up question with regard to your comments on expanded coverage for orthopedic surgeons. When you think about -- some of the more -- kind of, call them mid-tier orthopedic surgeons by volume, sort of what's the lower bound or how many cases given orthopedic surgeon needs to be seeing a month for it to make sense to allocate a MACI rep to be calling on them?

Yes, I don't know that we can answer the exact number of, like, cartilage repair that they do on a monthly basis. It's more about seeing the right mix of patients, our typical patient is 35 years old, our typical physician is more sports-injury associated. And so I would say that, the typical threshold for a physician, if somebody is going to treat at least 2 of these patients annually. And from that they'll get biopsies, say, from 2 -- twice that number, 2x to 3x of that number of potential patients. So that is like -- it's the continuous pool of patients that, that physician creates, thinking of the appropriate patient and applying MACI where they think it's right. And typically, that would be the lower threshold.

Yes, Kevin as -- I think, as we've talked about before, the data that's available in this marketplace is not like we're used to. From large pharma days where you have IMF data and deciles for each of the physicians, and you make decisions on how deep you want to go into those deciles. So a lot of it is, we've been in this market for 2 decades, we know the high-potential physicians, until we have a certain target universe and a certain, sort of, hierarchy of surgeons, we want to get to.

And I'll just chime in from a economics perspective, if it took 4 or 5 calls to convert the dock. I mean, 1 implant every other year would yield the positive impact probably. I mean, I expect to probably get more than that if we converted somebody, but it doesn't take much business from a dock. I don't think -- after probably 3 or 4 calls, a cell therapy specialist will know whether or not it's worth continuing the call, start to convert the dock. So I think, on the margin, after a call or 2, they'll know whether to move on or whether to convert the dock. And there (inaudible)

The next question comes from Ted Tenthoff with Piper Jaffray.

The MACI launch seems to be doing particularly well. Just looking, kind of, down the road may be a couple years. Ultimately, how big do you think this product can get? And if there's something where you would have to expand manufacturing at some point?

Yes, Ted, so I'll start. As we talk about, often, in our corporate presentation, and as I mentioned on my prepared remarks, we think we are probably penetrating maybe 10% of the patients that we believe could benefit from MACI annually. So we think there's just a, kind of, upside for this product, as we continue to build the brand over the foreseeable future. In terms of manufacturing capacity, as Dan alluded to, we had a much larger footprint from a clean room perspective for Carticel, and we had a separate MACI suite and once we removed Carticel from the market in the middle of this year, Dan and his team have embarked on converting part of the Carticel clean room over to MACI. So we don't have any real estate constraints, if we need to expand beyond that again, we're certainly able to do that. So for us it's more about getting the certain volume levels. We may have to add some headcount at some point, down the line. But there's no real estate constraints for us in terms of projected volumes into the future.

And I'm not showing any for the question at this time. I'd like to turn the call back over to our host.

Okay. Well, thank you very much for your questions and continued interest in Vericel. We're excited about the opportunities ahead and look forward to reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.