Vericel Corp (VCEL) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vericel Corporation Second Quarter 2018 Earnings Call. (Operator Instructions) And as a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to your host, Gerard Michel, Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Vericel's second quarter 2018 conference call to discuss our financial results.

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 judgment as of today. These statements may involve risks and uncertainties that could cause actual results to differ from expectations and 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 Executive Officer; and Dan Orlando, our Chief Operating Officer.

I will now turn the call over to Nick.

Thank you, Gerard, and good afternoon, everyone. I'm very pleased to report that we continued our strong start to 2018 with another solid quarter for the company. We reported record second quarter revenues of $19 million, marking the fifth consecutive quarter following the launch of MACI with record quarterly revenues for the reported quarter.

Total revenues were $37 million for the first half of 2018, a 41% increase on a GAAP basis compared to the first half of 2017 and a 34% increase on a non-GAAP basis, excluding the net impact of the reserve for Carticel and MACI recorded in the first half of 2017.

As a result of our performance this year-to-date, as well as our forecast for MACI growth in the second half of the year, we've raised our full year revenue guidance for 2018 to $80 million to $83 million from the previous guidance of $73 million to $78 million.

Our increased forecast for MACI growth in the second half of the year follows on the heels of expanding our MACI sales force and case management team, implementing an expanded pharmacy distribution network and increasing MACI manufacturing capacity to support the expected growth in demand. Gerard and Dan will provide more details about our performance in the second quarter as well as the forecast drivers for the remainder of the year.

We also significantly strengthened the company's financial position as a result of the $74.8 million public offering that we completed in June. Our performance in the first half of the year and updated revenue guidance certainly reinforce our previously stated position, that we had sufficient cash on hand to fund operations to reach profitability.

However, it was also important to bolster our balance sheet in order to position the company to be able to execute strategic transactions over time that can further enhance our growth profile and maximize the long-term value of the company.

Our current portfolio is made up of highly innovative premium-priced products with significant clinical benefit, and we're focused on opportunities that have a similar profile within our sports medicine and severe burn care franchises or that leverage our advanced cell therapy development and manufacturing platform.

We obviously can't comment on specific opportunities or time lines, but business development remains an important component of our overall corporate strategy. In the meantime, our immediate priority is on continuing to execute our MACI and Epicel growth plans. And for that, I'll turn the call over to Dan to discuss our commercial performance.

Thank you, Nick. Starting with MACI, new physician interest remains strong, as reflected by the fact that we now have trained approximately 700 physicians on the MACI procedure since launch. And we are well on track to meet our goal of training a total of approximately 900 surgeons by the end of 2018, which is up from 500 trained surgeons at the end of 2017.

The expanding surgeon customer base and demand for MACI is driven by the simplicity of the MACI surgical procedure and the fact that a year out from launch, surgeons are witnessing the improved speed of recovery and improved patient outcomes with MACI compared to Carticel. To meet the needs of this growing base of implanting surgeons and their patients, we have now fully deployed both the expanded MACI sales force and corresponding case management team.

Growing MACI demand is also being driven by improved patient access and simplifying and accelerating the payer approval process from a customer perspective. As we have noted previously, MACI has achieved significant payer access with all of the top 30 commercial plans providing access to MACI. This access has been enhanced in the first half of 2018 with medical policy updates to better reflect the expanded MACI label compared to Carticel, specifically including patella.

This has the direct effect of streamlining the approval process. Likewise, the efforts of our expanded sales force and case manager team have resulted in patients moving through the payer approval process faster than ever before, reducing barriers to usage and reinforcing the positive perception of MACI among our surgeons.

We also are enhancing MACI access by moving from an exclusive pharmacy distribution model to an expanded pharmacy network model. While all 30 of the top plans provide access to MACI, no single pharmacy provider has a contract with all payers. This means that for some patients, in some cases, a time-consuming single patient agreement needs to be put in place in order to ensure reimbursement. By adding additional pharmacies, we can reduce the number of these more burdensome single patient agreements that can delay or restrict usage.

On the manufacturing front, we are preparing for continued quarterly volume growth, and I'm happy to report that we have recently completed our MACI clean room expansion. We now have sufficient capacity in Cambridge to support MACI production for the next several years without significant additional investment.

Turning to Epicel. We had another solid quarter of growth and continue to make strategic investments in this franchise. Of note, in the second quarter, we've partnered with our largest Epicel customer to facilitate a training session with all the burn centers in their network, many of which had not previously used Epicel.

Since the training biopsies from the affiliate have increased, in addition, the burn centers in this network will be supported by a clinical burn specialist who will focus specifically on training and case support activities, which will free up time of our burn therapy specialists to expand into new burn centers.

As a commercial organization, we are very pleased with the first half results, and we continue to execute against our strategic imperatives.

I'll now turn the call over to Gerard to review our second quarter 2018 financial results and the exciting update to our financial guidance.

Thanks, Dan. As Nick mentioned earlier, we reported total revenues of $19 million in the second quarter. Before comparing to 2017 results, it is important to remind you that second quarter 2017 revenue included a favorable $1.4 million reversal of the $2.8 million revenue reserve within the first quarter of 2017 related to a settled dispute between one of the company's pharmacy providers and a third-party payer. In other words, second quarter 2017 is inflated by $1.4 million and is, thus, an artificially high comparable.

While on a non-GAAP basis second quarter 2018 total revenue growth over -- 2018 total revenue growth over 2017 was 12%, the underlying growth rate on a non-GAAP basis, excluding the impact of the reversal of the revenue reserve, is 23%.

On a year-to-date basis, comparing the first half of 2018 with the first half of 2017, our revenue growth on a GAAP basis is 41% and 34%, excluding the net impact of the reserve in 2017. Given the dynamics in the first half of 2017, we view 34% as a more accurate measure of a year-over-year growth and, thus, appropriate post-MACI launch growth measure for the overall business.

MACI revenue for the second quarter was $14.1 million and year-to-date is $26.2 million. Year-over-year, for the quarter, MACI grew 9% on a GAAP basis and 23%, excluding the impact of the reversal. Year-to-date, MACI revenue growth is 46% on a GAAP basis and 36%, excluding the net impact of the 2017 revenue reserve.

Epicel revenue for the second quarter was $4.9 million, increasing 21% compared to the second quarter of 2017. Epicel revenue for the first half of 2018 was $10.9 million, which represents 29% growth over the first half of last year.

In terms of second quarter results down the P&L, gross profit for the quarter was $11.3 million or 59% of net revenues compared to $9.3 million or 55% of net revenues on a GAAP basis and 51% on a non-GAAP basis, excluding the impact of the revenue reserve -- reversal for the second quarter of 2017.

Even more impressively, though, the first half of 2018 gross profit was 58% of net revenues, which is significantly higher than the first half of 2017 where gross profit was 47% of net reserves, excluding the impact of the reserve reversal.

Total operating expenses for the second quarter were $15.5 million compared to $11.8 million for the second quarter of 2017. The increase in operating expenses over last year was driven primarily by a $1.7 million increase in noncash stock-based compensation expense due to the increase in our stock price and a $1.6 million increase in MACI-related sales and marketing activities.

Loss from operations for the quarter was $4.2 million compared to a loss of $2.5 million on a GAAP basis and $3.9 million on a non-GAAP basis, excluding the impact of the revenue reserve reversal in the second quarter of 2017.

Material noncash items impacting the operating loss for the quarter included $2.5 million of stock-based compensation expense and approximately $400,000 in depreciation expense compared to approximately $800,000 of stock-based compensation expense and approximately $400,000 of depreciation expense in the second quarter of 2017.

Other expense for the quarter was approximately $400,000 compared to other income of approximately $100,000 for the second quarter of 2017.

Non-GAAP adjusted EBITDA loss was $1.4 million for the second quarter compared to a loss of $2.7 million in the second quarter of 2017. We view adjusted EBITDA as a proxy for future cash flows as it eliminates the noncash and onetime items and is more aligned to performance in a given quarter, specifically looking at operating cash flows due to the fluctuations in accounts receivable seen in a seasonal business.

On a year-to-date basis, adjusted EBITDA loss of $3.9 million compared to a loss of $8.7 million last year. This is consistent with our expectation that approximately 50% of our sales growth will fall to income. You can see the tables reconciling non-GAAP measures in our press release for more detail.

Vericel's net loss for the quarter was $4.7 million or $0.12 per share compared to a net loss of $2.4 million or $0.07 per share on a GAAP basis and $3.8 million or $0.11 per share on a non-GAAP basis, excluding the impact of the revenue reserve reversal.

As of June 30, 2018, the company had $95 million in cash compared to $26.9 million in cash at December 31, 2017.

As Nick mentioned in his opening, we have raised our revenue guidance from $73 million to $78 million to $80 million to $83 million. The increased revenue guidance is due to an increased forecast for MACI. We now expect revenue growth for MACI to be at least 30% for the second half of the year.

It's important to point out that approximately $1 million of the increase is attributable to a shift between revenue discounts and selling costs and will come along with an increased SG&A of a similar amount. This is a result of a contract change in July with one of our pharmacies, which, from a GAAP accounting perspective, changed its role from a customer to a service provider. What was previously accounted for as a reduction to revenue will in the third quarter be accounted for as a cost of selling and be reported in SG&A.

Epicel continues to progress, and we are forecasting full year growth in the low to mid-teens. We expect gross margins to increase -- to continue to increase consistent with 15% to 20% marginal cost of goods for MACI and Epicel.

With the change in the accounting for the distribution agreement, plus additional investments to support MACI reimbursement programs, we now expect SG&A in the second half of 2018 to be just slightly lower than the first half. R&D is also expected to be relatively consistent between the first half and second half of the year.

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

Thanks, Gerard. In summary, the first half of 2018 was, in many ways, a continuation of our performance from the second half of 2017: strong revenue growth for both products and expanding margins. Leading performance indicators point to that growth continuing as the core business moves towards sustained profitability. And the company is now in a very strong financial position to execute both on our operating and strategic business plans.

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

(Operator Instructions) And our first question comes from the line of Danielle Antalffy of Leerink Partners.

Congratulations on a really good quarter. Just a quick question. I know you guys talked about this in the prepared remarks, but curious on what gets materially better in the back half as it relates to MACI versus what you had previously been thinking.

I know you don't necessarily provide quarterly guidance, but if we do look at what you've said about seasonality, based on what you printed in the first half of the year, that would get you to something just over $80 million. So it sounds like you're expecting to do even a little bit better than that.

And I just want to make sure we have a good sense about what is driving that as it relates to, is it physicians ramping faster in volumes? It sounds like you expect to be at 900 trained by the end of the year, but I don't think that's really materially different than what you've said in the past. So I just want to get a sense of what's going to get better.

Yes, Daniel, we continue to see strong growth in biopsies coming in, and that's one of the important leading indicators to help us to forecast for, let's say, Q4 and a bit of a balance of this quarter.

And then also visibility right now as to the orders coming in for the quarter, the quarter we're in right now. So that gives a pretty good handle on where we're going to end up. In terms of the actual commercial drivers that are causing the enthusiasm, Dan can speak to that.

Yes, sure. So, Danielle, we've -- we noted, I believe, in a bit more detail the impact of what happens when we get a biopsy and how we intend to help move that biopsy to an implant. So we've implemented all of those strategies now. So they're in the works. And we're starting to see that start to pay off as well.

So it's a fairly complicated model that we don't provide the specifics on for guidance, but these inputs of biopsy, biopsy conversion ratios, number of physicians that are both implanting and providing biopsies, all these factors play into our confidence here in the second half.

Great. That makes a lot of sense. And then if I could just follow up with you, Gerard, on the COGS. You had a very strong gross margin [beat] versus our expectations. It looks like the marginal cost that you've talked about in the past, I think you said 15% to 20%, it looks like it's actually much lower than that. And I'm just -- I just want to make sure we're thinking about it correctly on a go-forward basis.

Is that 15% to 20% still right? Was there something in the quarter that was sort of onetime in nature that isn't going to repeat? Because it seems like you're getting an incremental benefit and you've only just started [excusing] manufacturing. So I just want to make sure I understand what's going on on the COGS line.

Yes, that's a good question. I think we're definitely on the lower end of the 15% to 20%. I think 15% is probably a better number. It does swing a bit from quarter-to-quarter. So I'd like to give myself a bit of a window. But definitely, it's coming in at the low end of that, and maybe we'll revise that marginal cost downward after another quarter or 2.

But a lot of moving parts as we're still a year in -- a little more than a year, but in a launch where there's some spikes in costs that we don't anticipate -- we don't -- can't anticipate at times. So let's stick with the lower end of 15% at the moment.

Our next question comes from Ryan Zimmerman of BTIG.

So I think last we spoke, your new reps in the MACI department were just getting started in the second quarter. And I wanted to follow up and see, one, how those reps have been progressing. Are they ramping faster than your original expectation just given your raised guidance? Any color there, I think, would be very helpful.

Yes, I'll start, Ryan, and then turn it over to Dan. Obviously, we had talked previously, and we've been through this drill now -- this is the second time, right, where we bring reps on in the first quarter, train them up, let them shadow their legacy reps, put them in the field, starting in the beginning of the second quarter.

And as we saw last year, we principally expect to see the impact from the new representatives in the back half of the year and, obviously, that fed into our increasing revenue guidance pretty substantially. So there's a number of factors, and Dan and his team have done a great job.

And I think it's just a culmination of, obviously, the procedure itself being much simpler for surgeons. I think Dan's team has done a great job of reimbursement and access that makes it simpler for surgeons to get the product reimbursed with confidence that they can move forward. And then, of course, layering on some great new sales reps, just kind of creates what we hope to be a virtuous cycle going forward.

Yes. So I'll give some credit here to Roland DeAngelis, who's the VP of our Commercial group. And he's done a really nice job of identifying what needs to be taught and how to best teach it from the folks that we hire on.

Fortunately, MACI has gotten really good in the orthopedic market. So we've attracted a lot of good talent that already has experience in the OR. And also -- and though -- and most -- the vast majority are in orthopedics already as well.

So the part that they're not as astute with is the payer piece, because a lot of them were working with devices. So Roland has instituted the training for payer and how to navigate patients through MyCartilageCare. And not only that, the case management team that we have has come on really strong as well.

So if the representatives can really focus on becoming astute at training surgical technique and helping physicians identify the patients. And where our reps -- initially, when we came to this company, the rep really was responsible for almost all of the reimbursement and getting the appropriate prior authorizations and things like that. Now we have a strong case management team that can support these new representatives, bring this business up to speed quicker.

Very helpful. And then I recognize you can't comment on any business development that's going on, but you do have a stronger balance sheet today than you did a quarter ago. Just your general thoughts around kind of what you're thinking about for the use of cash, when investors may get some sense of where that could play out.

Yes, thanks, Ryan. So as we've talked about, we obviously have a portfolio of highly innovative, premium-priced products, only approved products in their class. And it's those types of products that we look for in order to build out our commercial franchise in sports medicine and severe burn care or other opportunities that would allow us to build a new vertical as we had with sort of an anchor product.

We obviously understand sort of what's created value for the company, high revenue growth, good margins, on a path to profitability. So we take those kinds of things into account as well. But as we said during our raise, we think we have a number of good opportunities that are out there.

The one thing we won't abandon is sort of the financial discipline that has served us so well, not only in acquiring this business but in running this business. So we're not going to do a deal just to do a deal, even if -- even though we have the balance sheet to do so.

And as I mentioned in my comments, we think, over time, this gives us the flexibility to do strategic transactions. And when the right ones are here, that's when we'll let investors know about it.

(Operator Instructions) Our next question comes from Kevin DeGeeter of Ladenburg.

Congratulations on the quarter. Dan, could you talk a little bit more about what your surgeons are seeing in terms of the rehab time for patients? And are you seeing any more use or exploration with the U.S. surgeons on shorter rehab schedules post-MACI procedure?

Sure. So I'll caveat everything I'm about to share with every patient's rehab is their own, given the nature, age and the number of defects they have or concomitant surgeries like ACLs, things like that.

So -- but in general, our physicians are finding that the MACI rehab procedure is 3 months quicker than Carticel. So where patients used to get to, say, running at 9 months, they're now running at 6 months. They're getting back to sports, pivot sport. Usually, with Carticel, that was 9 months plus. For MACI, that's more like 6 months plus, definitely by 9 months.

We've got certainly a lot of anecdotal evidence. So they'll talk about specific patients who have recovered quicker than even those time lines. But in general, I think the best way to describe it is it's 3 months quicker than Carticel.

Great. Now that's helpful. Then just maybe one for Gerard on guidance. Can -- Gerard, can you just clarify for me? When you talked about, I think, low to mid-teens growth for Epicel, was that for the year? Or is that for the second half?

Well, that was for Epicel, and that was for the year.

Okay. So that would suggest something sort of in the single digits, I think, if my math is correct, for the second half of the year. Is there anything you want to call out there? Or is that just a level of conservatism given the lumpiness of the business?

Yes. So Epicel in the second half of last year had -- they were record-breaking quarters, volume. We had also taken some pretty significant price increases, too, that were staging in that had just finished by the middle of the year.

So it is a pretty -- it was a pretty hefty comparator for the back half of this year versus back half of last year. Plus, as we've said consistently, Epicel is so tough to predict. So with both of those things in mind, we think it's always prudent to, kind of on a rolling basis, never get over, as we've said before, high single digits, low double digits. At this point, we're saying low teens for the full year.

Great. And then just maybe one last one for me, and it goes along the same line of guidance. So does guidance include any expectation for price increases for either Epicel or for MACI?

No, not in this fiscal year, no.

Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Mr. Colangelo for any closing remarks.

Well, I just want to say thanks to everybody for your questions and your continued interest in Vericel. We're obviously excited about the opportunities ahead and look forward to reporting on our progress on our next call. So have a great day, and thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may now disconnect. Have a great day.