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Edited Transcript of VCEL earnings conference call or presentation 7-May-19 12:00pm GMT

Q1 2019 Vericel Corp Earnings Call

Ann Arbor Jul 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Vericel Corp earnings conference call or presentation Tuesday, May 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Orlando

Vericel Corporation - Former COO

* Dominick C. Colangelo

Vericel Corporation - CEO, President & Director

* Gerard J. Michel

Vericel Corporation - CFO & VP of Corporate Development

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Conference Call Participants

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* Chad Jason Messer

Needham & Company, LLC, Research Division - Senior Analyst

* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Kevin Michael DeGeeter

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

* Jeremy Goverman, MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to your Vericel Corporation First Quarter 2019 Earnings Call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the call over to Gerard Michel, CFO. Sir, you may begin.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [2]

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Thank you, operator, and good morning, everyone, welcome to Vericel's First Quarter 2019 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 fully -- 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; Dan Orlando, our Chief Operating Officer; John Hopper, Chief Medical Officer; and Mike Halpin, Senior Vice President of Quality and Regulatory Affairs. In light of the NexoBrid transaction announced this morning, joining us on today's call is Dr. Jeremy Goverman, Assistant Professor of Surgery at Harvard Medical School and a burn surgeon at the Sumner Redstone Burn Center at Massachusetts General Hospital, who is one of the lead investigators and top enrollers in the pivotal U.S. Phase III clinical trial of NexoBrid. One logistical item to note before we begin, in addition to our quarterly results and NexoBrid transaction press release, we also have presentations available on the webcast and our website with highlights from this morning's earnings call and the NexoBrid transaction. I will now turn the call over to Nick.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [3]

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Thank you, Gerard, and good morning, everyone. I'll begin with a few comments on our first quarter results and the NexoBrid transaction before turning the call over to Dan and Gerard to discuss our first quarter performance in more detail. We reported solid first-quarter financial results in what is our seasonally lowest revenue quarter for the year. We had record total revenues for the first quarter led by continued strong growth for MACI. The strong MACI growth was offset in part by a lower quarter for Epicel, which was within the range of variability that we've seen in prior quarters.

Gross margins continue to expand. Adjusted EBITDA improved significantly compared to the first quarter of 2018, and we reported positive cash flow for the quarter. Most importantly, based on the strong underlying growth indicators that we're seeing for MACI, we've raised our full year 2019 MACI and Epicel revenue guidance, $110 million to $114 million, up from our original guidance of $108 million to $112 million, with MACI revenues of at least $90 million.

Turning to the license transaction with MediWound announced this morning, we're delighted to expand our burn care franchise with the addition of NexoBrid, a highly innovative biological orphan product for debridement of thermal burns, which we believe represents a paradigm shift in the standard of care for hospitalized burn patients.

As a high value product in an area of significant unmet need with focused call points and a consultative sales model, NexoBrid is an excellent strategic fit with our advanced therapy portfolio. Its's also a derisked asset with compelling clinical and pharmacoeconomic data. NexoBrid is approved in the EU and other international markets and generated positive top line results in the pivotal U.S. Phase III detect study.

Moreover, published European pharmacoeconomic studies suggest that the use of NexoBrid can lead to significant potential cost savings.

NexoBrid also is highly synergistic with our existing commercial franchise and will significantly expand Vericel's presence in the burn care market. Adding NexoBrid to our portfolio will support a broader commercial footprint that we believe will not only drive next NexoBrid uptake but also will have a pull through effect to further increase Epicel penetration as we build a larger share of voice in the burn care market. Importantly, NexoBrid significantly expands our burn care target addressable market, or TAM, given that we'll be targeting a significantly larger segment of hospitalized burn patients than with Epicel alone. Of the approximately 40,000 burn patients that are hospitalized in the US each year, our current TAM for Epicel consists of approximately 600 patients that have greater than 40% total body surface area, or TBSA burns, which is less than 2% of hospitalized burn patients.

In contrast, based on the anticipated label, the annual U.S. TAM for NexoBrid consist of more than 30,000 hospitalized burn patients. We believe that this represents a $200 million-plus addressable market, roughly tripling the size of our current burn care TAM.

Finally, in addition to the clear strategic fit, we believe this transaction is very attractive from a financial perspective. The performance-based deal structure, together with BARDA funding support for the development expenses to obtain U.S. marketing approval and for medical countermeasure procurement, results in an attractive financial profile for NexoBrid in the near term as well as the longer term as we expect NexoBrid to generate margins consistent with expected margins for our current portfolio. We believe that this transaction will enable us to build a second significant commercial franchise with Epicel with our cartilage repair franchise, thereby significantly enhancing the long term growth profile with the company.

I'll now turn the call over to Dan and Gerard to review our first quarter 2019 results.

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Daniel R. Orlando, Vericel Corporation - Former COO [4]

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Thank you, Nick. MACI first quarter revenue increased 38% compared to first quarter 2018. Not only are we pleased with our first quarter revenue performance but strong biopsy and implant trends into the second quarter indicate that we are on track for full year growth above our initial guidance. One key driver fueling MACI's continued growth is our sales force expansion. As of April 1, the MACI sales force has increased from 40 to 48 territories, which is more than double the size of the sales force prior to the launch of MACI. Note that, even with the expansions, we're on track to see revenue per rep increase for 2019 for the second year in a row. This increase in productivity reflects the growing preference for MACI among physicians and patients, the quality of our sales representatives and the efficiency of our payer and pharmacy approach.

With respect to Epicel, revenue decreased 12%. And as we've expressed many times on these calls, the episodic nature of severe burn injuries causes large quarterly fluctuations in Epicel performance. Although, on an annual basis, over the past several years, Epicel has delivered year-over-year growth in the high single to low double-digits.

The results for Epicel this quarter are within the range of variability that we've seen in prior quarters. And at this point in the second quarter, the underlying metrics for Epicel are on par with where we were at this point just last year.

In addition, Epicel's clinical utility in the sever burn market was reinforced in the first quarter with the publication of the 25-year experience with Epicel on large burn wounds in the Journal of Burn Care & Research in February.

The data from 127 U.S. hospitals included 954 patients treated with Epicel compared to more than 177,000 patients in the national burn registry over the same period. This data demonstrated that the average Epicel-treated patient had a 67% TBSA burn, and Epicel showed a marked improvement in survival rates versus the comparator population. This publication is now in our representatives hand and, based on recent [CareWell] feedback, provides a compelling rationale for continued use of Epicel.

Now later, if you listen to Dr. Goverman's perspective on the utility of NexoBrid, the excellent strategic fit for Vericel will become very apparent. NexoBrid has the potential to be used in the vast majority of admitted thermal burn patients in virtually every burn center in the country, creating an opportunity to leverage and build upon our existing commercial infrastructure to drive NexoBrid uptake as well as to expand the use of Epicel in centers that are not using the product today.

To meet the combined opportunity for Epicel and NexoBrid, we are adding 2 new burn therapy specialists this year and intend to at least double to a fully integrated Epicel and NexoBrid burn care sales force as we prepare for the NexoBrid launch.

I'll now turn the call over to Gerard to review our first quarter financial 2019 result.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [5]

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Thanks Dan. We reported total net product revenues of $21.8 million for the first quarter of 2019, an increase of 21% over the first quarter of 2018. MACI revenue grew 38% to $16.6 million, up from $12.1 million in 2018. Epicel revenue decreased 12% to $5.2 million from $6 million in 2018.

Gross margins for the first quarter of 2019 improved 300 basis points to 60% versus 2018.

Approximately 75% of the revenue growth of the first quarter of 2018 dropped to the gross profit line. It is worth noting that, excluding a $200,000 noncash charge in the quarter from the acceleration of lease expenses under the new lease accounting standard and a $100,000 increase in another noncash charge, stock compensation in our cost of goods line, the marginal contribution to gross margin would have been approximately 82% of incremental revenue for the quarter. These onetime changes to our fixed expenses will have less of an impact as we move into higher revenue quarters through the remainder of the year. And we continue to expect that approximately 80% of incremental revenue for the full year will contribute to gross profit. Due primarily to our increased share price over the past year, our stock based compensation expense increased significantly compared to last year. In the first quarter, we incurred $2.6 million in stock based compensation expense, and we expect approximately $14 million in stock based compensation expense for the full year, up from $7.2 million in 2018.

Non-GAAP adjusted EBITDA loss was $400,000 for the first quarter compared to $2.6 million in 2018.

That means we were able to convert approximately 60% of marginal revenue over 2018 to adjusted EBITDA, which is a bit above the approximately 50% expected contribution. Adjusted EBITDA will continue to be an important metric to measure the underlying growth in profitability from operations, especially considering the deal announced this morning. For details reconciling non-GAAP measures, please see the table in this morning's press release.

Vericel's net loss for the quarter was $2.8 million or $0.07 per share, based on an average of 43.7 million shares outstanding in the quarter, compared to a loss of $7.7 million or $0.21 per share for the first quarter of 2018. To assist with modeling EPS going forward, I would note that our current share count is 43.8 million shares, and we have 50 million shares on a fully diluted basis.

We reported positive cash flow for the quarter. And as of March 31, 2019, the Company had $84.1 million in cash and short-term investments compared to $82 million -- $82.9 million at December 31, 2018. Turning to our full year revenue guidance. Based on the strength that we are seeing and MACI growth, we are raising our guidance to $110 million to $114 million from our previous guidance of $108 million to $112 million, with Macy revenue of at least $90 million.

We continue to expect seasonality in revenues similar to 2018, especially for MACI, where there is a stronger seasonality pattern. Last year, the quarterly share of MACI revenue was heavier in the second half of the year, with the first through fourth quarters accounting for 18%, 21%, 24% and 37%, respectively, of full year net product revenue. That completes my financial review. Now I'll turn the call over to Nick.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [6]

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Thanks, Gerard. Turning to NexoBrid, as we've mentioned, approximately 40,000 patients are hospitalized in the US each year, most of whom require the debridement of burn eschar to facilitate healing and reduce the risk of infection. Surgical excision of eschar is currently the standard of care and is performed through repeated use of a large surgical blade to remove necrotic tissue until bleeding healthy tissues has reached.

NexoBrid is a topically-administered biological product that enzymatically removes eschar in patients with deep partial and full thickness burns within 4 hours of application without harming viable tissue. In January, MediWound announced positive top line results from the pivotal Phase III DETECT study of NexoBrid in adult patients with deep, partial and full thickness thermal burns, up to 30% of total body surface area. The study met its primary endpoint of complete eschar removal as well as all secondary endpoints, including shorter time to eschar removal, a lower incidence of surgical eschar removal, and lower blood loss compared to standard of care. A key safety endpoint, noninferiority and time to complete wound closure compared to standard of care, was also achieved.

I'm pleased to have Dr. Goverman with us this morning to discuss his experience with NexoBrid bridge and how NexoBrid can help burn patients -- or burn specialists provide improved outcomes for patients.

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Jeremy Goverman, MD, [7]

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Thank you, Nick. I was really thrilled to learn that MediWound had partnered with Vericel to bring NexoBrid to the U.S. market. After having a team that supports it, it has had a long and well respected role in the burn community. And I'm confident that with your team, you'll be able to support NexoBrid to the same excellent standard. I've been familiar with NexoBrid for many years. Initially, I heard about the product from my burn colleagues in Israel and other regions around the globe and then reading the increasing number of NexoBrid publications. And now, after having my own experience with the product as a PI in the pivotal Phase III DETECT trial, I have no doubt that this product works as it is reported to have

worked -- to work. The positive results from the Phase III DETECT trial announced last January were likely not surprising to any investigator -- any investigator involved in the trial, because NexoBrid's efficacy is so clear. Hard, leathery, dead tissue is liquified in 4 hours, and it can easily be wiped away with a tongue depressor.

Intact skin remains completely unharmed and intact. It is important to note that the trial was rigorously controlled and managed. And I expect that this trial, when it's published, to become a landmark paper in my field. I'm confident then, when approved, the real world clinical results will be consistent with both the DETECT trial results and my own clinical experience.

The ability to consistently and selectively debride burn eschar in one 4-hour application is a dramatic improvement over our current standard of care. For the first time, we have the ability to completely remove all the eschar early after injury without the risk of collateral damage or injury to nearby viable tissues, blood vessels or nerves, and all in 4 hours.

There's no other enzymatic debridement product on the market that debrides as quickly or as selectively in NexoBrid, and it really puts it in a class of its own. There's no question that it'll change the standard of care for burn injured patients in the US. In fact, every physician I know that has used it in Europe, where it's already approved, believes it should be the standard of care for excision of burn eschar. The European consensus guidelines on bromelin-based early eschar removal has already been published. NexoBrid would definitely change my treatment algorithms as it is such an obvious and dramatic improvement on the antiquated techniques that we use today. Early eschar removal is a critical component to the initial care of the burn patient and it is standard of care in developed countries.

Burn eschar is essentially dead or necrotic tissue, such as skin, fat and muscle. And eschar can serve as a source for bacteria and other microorganisms that can cause life-threatening infections.

And they also release a number of circulating inflammatory mediators that have a number of well-known negative systemic effects. And #1 cause of death after burn injury is infection. And the first and primary goal of treating infection, even before antibiotics, is that of source control. In a burn patient, complete source control can only be achieved or obtained with removal of all necrotic nonviable tissue or eschar. NexoBrid allows me to achieve super-fast, less invasive source control. And again, complete source control is always the first and most important step in treating an infection or preventing infections. Furthermore, there are a number of non-patient noninjury-related systems-based barriers to our current standard of surgical excision, which the use of NexoBrid -- NexoBrid will largely eliminate.

For example, surgical excision requires an operating room and an operating room staff, a surgical team, a scrub tech, and anesthesiologist, a transporter, a recovery room and all the associated staff with that recovery room. And to pay all of these components and even finding available operating room time is not a trivial or inexpensive matter.

While a massive burn is immediately life threatening, and therefore every effort is made to provide rapid OR access. For a smaller burn, depending on many non-patient-related factors, it can take up to 48 to 72 hours, which -- to get to the operating room, which prolongs the period of time that eschar is on the patient and that increases the amount of time the patient is at increased risk for infection.

NexoBrid will dramatically facilitate my ability to initiate this critical first step in burn treatment, early eschar removal. It removes for the need for an operating room, and all of its required components.

Just as importantly, NexoBrid will enable to the vast majority of patients to avoid the trauma associated with traditional surgical excision. Currently the instruments used for surgical excision of burn are antiquated and inadequate, nothing more than an adjustable guard on a long razor blade with a handle. Skin is excised layer by layer, tangentially, until the surgeon feels that the majority of this 2 dimensional plane of tissue is viable. Very often, we exercise all the dermis and a portion of this subcutaneous tissue or fat to achieve this result.

And given our current tools, this is the best that we can do. There's no doubt that we excise some amount of healthy tissue in order to ensure that we have complete eschar removal and thus complete source control. And sometimes, when a burn is not completely full thickness, we do save a bit of the lower part of the skin, the deep dermis, and it's well known in the burn community that, when we save the dermis, the skin graft overlying that will look and behave much more like uninjured skin. The more dermis we can preserve, the better the outcome. And this is where we got the saying, epidermis is life but dermis is quality of life.

Unlike my knife, NexoBrid debrides selectively in 3 dimensions and thereby spares healthy dermis as well as more hair follicles, sweat grands and have [nicer] structures in general.

Dermal preservation improves the body's innate healing abilities likely through the preservation of a number of resident stem cell populations, for examples, the bulge cells in the hair follicles.

The NexoBrid debrided wound area is extremely unique, in that much of that foundation of the dermis is still intact and alive, much more than I initially thought was possible. I remember the first time I took down the dressing after debriding with NexoBrid and I saw the wound bed, I was stunned. I saw far more healthy dermis than I would have expected and far more than if I had excised the wound with a knife. The ability of NexoBrid to preserve more viable dermis should lead to improved -- improvements in long term cosmetics and functional outcomes, in fact, lately, there have been more and more reports of good long term outcomes presented by our peers in Europe that have already been using NexoBrid for a few years. So in short, I'm expecting to put my knife down, at least when it comes to burn eschar removal. The knife is nonspecific and traumatic. It requires an OR and a staff. I will gladly replaced the knife with NexoBrid and a tongue depressor to wipe away the eschar once liquefied. Eschar removal, the first major step in the treatment of burns, can now be performed with much less risk, much less time, much less facility needs, blood loss and the actual excision bed is far superior in its preservation of viable tissue.

I would be more effective and efficient. In anticipating better outcomes, NexoBrid should lead to operational and economic improvements as well, such as increased patient throughput, decreased surgical costs, reduce costs from transfusions and reduced length of stay.

After using NexoBrid on many patients I expect it to play an important role in our ability to manage mass casualty events. In fact, in the fall of 2015, when more than 150 people suffered severe burns from a fire at a night club in Bucharest, Romania, [Aidrio] sent 2 burn surgeons and a supply a of NexoBrid to aid local doctors. NexoBrid was used to treat approximately 50 burn victims in 3 days. Without a product like NexoBrid, our ability to care for a large number of burn injured patients is seriously limited as the burn eschar excision will the first major bottleneck in patient treatment. BARDA appropriately recognized this problem and thus has been hugely instrumental in funding the research for this product. A surgical excision of a 40% total body surface area burn probably takes about 4 hours of my time. And even in a 20 hour day and more than one OR, I could only excise 4 of such patients.

NexoBrid removes all the eschar in 4 hours, but it can also be performed on multiple patients in parallel. So I can treat 4 or even 10 patients in about 6 hours, assuming I have a staggered start. And all of these excisions will be done with more precision and with more staying of the viable tissue.

This is a dramatic increase in the number of patients who can be treated versus standard of care, which would be one at a time for me.

In conclusion, if I had a burn or my family member had a burn, I would absolutely want NexoBrid as an option. And if excision was needed, I would want NexoBrid to be to be used instead of a knife, even a my knife with my hand behind it.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [8]

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Well, thank you, Dr. Goverman. We truly appreciate you joining us today to share your perspective on the clinical utility of NexoBrid.

Throughout our diligence on this deal, we reached out to many burn surgeons both in the U.S. and Europe. Dr. Goverman's comments regarding both the need for a better debridement option and, for those with experience with NexoBrid, the utility of the product is consistent with what we heard in those conversations. I'll now turn the call over to Gerard to review the financial aspects of the deal.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [9]

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Thank you, Nick. Under the terms of the license agreement, Vericel will make an upfront payment to MediWound of $17.5 million with an additional $7.5 million payment contingent upon U.S. approval, and up to $125 million contingent upon meeting certain sales milestones. The first sales milestone of $7.5 million would be triggered when NexoBrid annual net sales in North America exceed $75 million. Vericel also will pay MediWound tiered royalties on commercial net sales ranging from single-digits to low double-digit percentages.

We anticipate the first NexoBrid sales in the U.S. to come from purchases under an existing BARDA contract, which includes a $16.5 million commitment for procurement of NexoBrid, contingent upon FDA eligibility for use in an emergency or FDA marketing approval.

Since MediWound holds the BARDA contracts, they will supply the product to BARDA, and we will participate via a profit-sharing formula, which yields to Vericel approximately $6 million in revenue with no associated cost of goods. BARDA has not yet placed an order. And therefore, we are not including any procurement revenue in our 2019 revenue guidance. Once an order is placed, we would expect it to be fulfilled over the course of 4 to 6 quarters. We will update our 2019 revenue guidance as appropriate when we gain clarity on the timing of BARDA procurement orders. Longer term, BARDA has the option to make up to $50 million of additional NexoBrid purchases, which could yield up to $25 billion in profit sharing for Vericel over approximately 10 years. These amounts are not yet funded, and there is no guarantee that they will occur.

The current plan is to submit the BLA based on the acute DETECT study results in the fourth quarter of 2019, which would result in a PDUFA date sometime in the fourth quarter of 2020, assuming a standard review.

If the FDA requires the BLA submission to include the 12-month safety follow up data, we will be looking at more of a Q2 2020 BLA submission and a Q2 2021 approval, assuming a standard review. The pre-BLA meeting is planned for later this quarter, at which time, we will have additional clarity on the BLA submission timelines. In order to properly support MediWound in obtaining the U.S. approval and in preparation for U.S. launch, we will see a modest increase to our expenses. However, the expected revenue from the committed BARDA purchases of NexoBrid should cover those expenses, making it a relatively neutral impact to our profitability over the next 2 years ahead of launch.

And we expect that our current formula of 80% of marginal revenue going to gross profit and 50% to adjusted EBITDA to be maintained. The upfront $17.5 million will flow through the P&L as an R&D expense in the second quarter. That concludes our prepared remarks. Now I'd like the operator to open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ryan Zimmerman with BTI (sic) [BTIG].

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [2]

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Congrats on the agreement this morning. So I want to begin with Epicel results in the quarter, if we could. Can you just talk about what you saw in burn? And was this a reflection of seasonality or the lack of patients to treat? Or do you think there's -- it's becoming a more competitive environment that saw physicians maybe trialing new products and entrants in the market? And I have a follow up.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [3]

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Thanks, Ryan, this is Nick. Yes, so as Dan mentioned during his prepared comments, to date, at this point in the year, we've seen sort of the same underlying drivers for Epicel as we have in the past. So in terms of biopsies coming in and so on, so the top of the funnel looks about the same. And obviously, with these critically ill patients, whether those biopsies turn into treatments, it's always variable. And this quarter's performance is well within the variability that we've seen in previous quarters.

And to the competitive nature, Ryan, so yes, there's, as you're aware, RECELL has launched into the marketplace. We met with KOL group at the recent burn association meeting. And there is some use of RECELL, but it's very investigational on their part at this point. And for the most part, they've had their success with the product in on-label RECELL patients, meaning lower TBSA. We are aware of a few patients that have been treated with Epicel and RECELL together, but that's been kind of far and few between.

And in our perspective the -- from what we see, and the TBSA market for Vericel, as you know, the average is about 60-some percent, we continue to get consistent both biopsies and patient treatment for that population.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [4]

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That's helpful. And then my second question is around NexoBrid's applicability, which does sound like it covers a much larger proportion of burn. And given Epicel's label, which calls for 30% TBSA, or higher, I'm just wondering how you think about driving those synergies, potentially, in Epicel with the addition of NexoBrid.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [5]

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Sure. So Ryan, our initial assessment of it is that not every burn center is really established to treat the severely burned patient. As we looked at the Epicel data, approximately 80 centers utilized Epicel over the last few years. However, there's a number of burn centers, obviously, there's about 127, 130 burn centers that have potential to use Epicel. So because, as described by Dr. Goverman, the utilization of NexoBrid is virtually any thermal burn patient in virtually every burn center in the country by having our representatives represent these 2 products as a burn care specialist, they'll be able to extend their reach into hospitals and identify patients with severe burns, whether it be down to, say, 30%, 50% or up to 60% in centers that aren't currently using Epicel. So we think the initial gains for Epicel will really be a matter of reach as they're able to call on these additional burn centers with both products.

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Operator [6]

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And our following question comes from the line of Danielle Antalffy with SVB Leerink.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [7]

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If I could just follow up here on -- actually, focusing on MACI. I mean, clearly, it seems like the guidance raise is almost entirely driven by MACI. Could you confirm that, first of all? And second of all, how much of the MACI guidance raise has to do with the incremental sales reps coming on? I believe they came on in April. And can talk about what you're seeing? I know it's very early days, only a month in. But clearly, they're giving you some confidence in their ability to ramp. Maybe a little bit of color there.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [8]

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Danielle, so the guidance raise is, yes, entirely due to MACI. And we see strong growth going forward based on biopsies coming in the door. In terms of what's driving. And I think it's always difficult to disentangle the factors. Clearly, increased physician demand based on the product attributes. But yes, rep productivity is clearly increasing, which is not what you always see when you're expanding a sales force. I think it's a little soon to stay the new reps are, looking at Dan right here, I'd be hitting the ground right away, a little soon to say that they are contributing meaningfully at this point. But I do think we will continue to see rep productivity increase.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [9]

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Yes. Danielle, the confidence we have is based on the last 2 expansions of new sales representatives for MACI, and seeing how their contributions have added and the strength of the new physicians who've come into the fold and are now not just biopsy-ing but doing implants. And we had a strong performance of new physicians in the first quarter. Although, in general, we still say that our growth is coming from about 50% from the historic user as well as 50% from new users. But given the strength in both new physicians implanting as well as the volume of biopsies, which, as you know, convert over several months, 6-month period, that gives us some insight to the strength of the second half of this year and the confidence to increase the guidance.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [10]

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That's very helpful. And then just one follow-up on the guidance and one more MACI-related question. Is the guide reflecting any lower Epicel sales. I mean we were clearly mismodeling it. But just curious on how you were thinking about Q1 and what's reflected in the guide for Epicel. And then the follow up on MACI, I'll just ask it, now, I know it's early days, but you guys have initiated this direct-to-patient initiative around getting consent from the patient, in an attempt to reach out to them and move the conversion rate higher, what -- are you seeing continued progress there?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [11]

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Danielle, I wouldn't say you mismodeled Epicel because it's so difficult to model. As we've talked about before, it's very small. And unfortunately, that in itself, in terms of the front of the funnel is variable. And then unfortunately, many of these patients pass away, which is tragic. And it's a minor issue that we can't model it, but that does lead in -- relative to that fact, but that does lead to some difficulty. We're very confident in our guidance on MACI. So I can say, that we're firm about. The balance who -- it's difficult to say how much -- how Epicel will perform for the year. I would note that in many years, we've had it a down quarter, and then we end up being up for the entire year. But we can't guarantee that. So I'll just have to stick with the $90 million for MACI and say, we're very confident with that. In terms of the conversion rate and the consents, I'll turn it to Dan.

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Daniel R. Orlando, Vericel Corporation - Former COO [12]

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Yes. So as we shared recently, Danielle, we -- for the first time, we were able to demonstrate that we can improve the conversion ratio. So last year, we saw some slight improvement in that. So that gave us confidence to continue to invest there. Specifically, we are revamping all of the patient materials to better speak to them, specifically around rehab. We've just interviewed this week a -- and are launching, a patient ambassador program, so that patients can speak to other patients who have successfully rehabbed from MACI and basically have a coach, if you will. It's not uncommon now to be able to communicate online with others like that. So we are launching a program here in the coming quarters. And those folks will be sitting down to an interview with our spokesman, Dara Torres, so we'll have more and more online access to inform patients as to what they're facing to sign up for MACI and get successful rehab. And we believe that's a key trigger in converting a patient, from a patient perspective. On the payer perspective that's an important one for physicians, and we continue to make progress there. And we'll highlight some of that maybe on a future call.

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Operator [13]

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Our following question comes from the line of Kevin DeGeeter with Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [14]

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Congratulations on all the progress and the interesting transaction today. I think maybe 2 questions for me, both are going to be on NexoBrid. First, with regard to the clinical profile, I guess, NexoBrid is described as being appropriate or indicated, at least in Europe, for deep partial thickness and full thickness. And I guess the question is, what's sort of the profile of the partial thickness burn that it really wouldn't be appropriate here? Or should we think about all partial thickness burns as potentially being candidates for NexoBrid. And then I guess, as sort of a follow-on clinical profile question. Is there any other data or any other data fields that you think would be important to capture in a post approval study in the US that might help drive commercialization, that were not incorporated in the DETECT study? And then I have a follow-up question.

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Jeremy Goverman, MD, [15]

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Yes, this is Dr. Goverman here. I think I can answer that question. With respect to the partial thickness burns, within that realm of partial thickness, partial thickness is basically second degree. You have different varying depths of second degree depending on how much of the dermis is destroyed or necrotic. In a superficial second degree, you have very little dermis that's destroyed. You may just have and exposed dermis, in which case, NexoBrid wouldn't be indicated.

So essentially, anything with eschar or any burn of a very thin layer or any type of dead tissue over the top of it would be a candidate. Any type of burn that does not have any overlying eschar or overlying necrotic or dead tissue would not be a candidate for the NexoBrid. So burns like -- burn that are going to heal on their own for sure that don't need that thin layer of tissue removed. Like if you have a sunburn with a blister and that opens up, that's a very superficial second degree burn. It's pink and that burn just needs a dressing and it'll heal. The problem comes when some of that overlying tissue becomes an eschar. It's dead and it stays on top of the wound. That could result in progression of the wound depth. So if you have a second degree burn and you don't remove the eschar, it could help to propagate that burn depth to a third degree burn. It can also be a -- a candidate for infection, which would also propagate the burn depth beeper. So removal of any type of thin dead tissue over the top. If it's a second degree, deep second, and you remove that thin tissue and you see dermis under there, then it has a chance of healing. So any second degree, that's not very superficial.

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Daniel R. Orlando, Vericel Corporation - Former COO [16]

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And I'll pick up the second question there in terms of, is -- are there any endpoints, let's say, that weren't studied in the DETECT study that maybe we want to do in a future trial. I think, it's important to first note that this trial, and we were really impressed during our diligence, was really well designed. And our hats off to both MediWound and the investigators, including Dr. Goverman, in terms of the design and the execution of the trial. But it's included in a number of things. A lot of pharmacoeconomic data is being collected, length of stay, blood loss, percentage of patients that need to go on to have a meta autograft that's required because this is autograft sparing. So I think, really everything we need to effectively commercialize this product was in that study. And of course, there will be additional trials. I'm sure, Dr. Goverman has a bunch of things he'd like to look at as well in terms of a -- yes, and there's also 2-year data coming out as well, follow-up data that's important, so cosmesis as an example. I have no doubt that there are burn surgeons that will want to study alternative ways of using -- treating the burn after NexoBrid, because NexoBrid does leave a very -- a much more healthy, I'll use that word in quotes, wound bed to work with. But again, the DETECT trial is outstanding. I don't see a large financial requirement in terms of funding large trials post approval, but I do see small trials with investigators.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [17]

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And then just one more sort of, I guess, general economic question. If I do my very back-of-the-envelope math, $200 million market, 30,000 patients, that would suggest somewhere in the ballpark of $6,500 in sort of addressable revenue per patient, if I have that right. In terms of general metrics, should we think about pricing for the U.S. market, commercial market on a per patient basis, being variable depending on coverage area kind of akin to Epicel? Or should we think about the pricing for patient as being a fixed metric.

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Daniel R. Orlando, Vericel Corporation - Former COO [18]

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For modeling purposes, it will be variable based on percentage TBSA burned because we'll be pricing this thing on a unit basis. For modeling purposes, what we assume is something between the average patient having anywhere between 7% to 10% TBSA, now that's -- usually, it's tons of patients lower than that amount and then there's a small number of patients much larger than that. And if you kind of do the mean, you come to something between 7% to 10%. And that's what we do we when we built our model. Your math is correct in terms of kind of what the pricing average comes out to when you do that math, but I'd stress that our pricing analysis is just starting at this point. I would stress that the pharmacoeconomic data that we've seen to date, published in Europe, is compelling. I think the average patient who gets multiple treatments with Santyl, which doesn't -- which is not terribly effective, I think it's fair to say. That comes probably out to about $5,000 per patient. And a premium over that would probably make some sense.

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Jeremy Goverman, MD, [19]

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I just wanted to say that (inaudible) he brought up Santyl. And just from a clinical standpoint, as a clinician, you don't even use the two in the same sentence. You cannot use Santyl for excision of eschar. You could use -- you can't use Santyl for excision, this is like a knife, NexoBrid.

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Operator [20]

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And our following question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [21]

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I wondered if you could provide a little bit more information on how you foresee the commercial force in the burn mark kind of playing out over the next couple years. You talked about adding a couple folks, domestically, in the shorter term. What should we expect as far as the size that force and as far as total commercial for U.S.?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [22]

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This is Nick. So yes, we did mention that we would expect to add a couple more burn therapy specialists this year and sort of ramp up as we get closer to be the NexoBrid launch, at least, doubling our current sales force of about 6 burn therapy specialists. And that will be dictated as you've seen with -- as is the case with MACI, depending on the uptake of the product and making sure we're able to service our customers properly. That will dictate, ultimately, sort of the size of the sales force. So I think that gives you a relative context for the near term.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [23]

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Okay. Got it. And then one follow up on some previous questions. So you talked about number of biopsies up on MACI. So biopsies up, could you talk a little bit about the pull-through and the volumes and the throughput is the -- are conversions also up as well on a percentage basis? Are you seeing kind of more coming in the door on the biopsy side that's wider and larger, yet conversions are approximately the same on a percentage base? Or are you seeing an increase on that side as well?

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Daniel R. Orlando, Vericel Corporation - Former COO [24]

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Yes. Jeff, this is Dan. We -- as I -- we shared last year, conversions were up slightly over historic Carticel as well as early MACI as we continue to invest there, we hope to see that continue that trend, the confidence that we have and the reason that we are increasing guidance for MACI for this year is based on the real true driving factors, are increase in biopsies as well as the mix of physicians, meaning the contribution from new physicians as they have converted historic biopsies. So if those 2 are the main drivers, I would not say that the conversion ratio is a true main driver for increasing our guidance. However, it is something, as we shared, we're investing in heavily. And we can -- hope to see continued incremental improvement.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [25]

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Okay, perfect. And one more if I may, to Dr. Jeremy, could you talk a little bit about current treatment paradigms for NexoBrid as far as cases you're doing? Are you seeing cases that you think may benefit from Epicel in certain regions and NexoBrid in other regions? And is there any correlation between the 2 products? And also what might you be using after NexoBrid? Or if you're finding that results need further dressing or further work after NexoBrid, meaning burns are somewhere in the middle, let' say.

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Jeremy Goverman, MD, [26]

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Sure. Well, I think, first, it's important to get a good understanding of the differences between these 2. They're very much unrelated, Epicel and the NexoBrid. With burns, we kind of think of 2 main areas, there's the excision of the burn wound and then there's coverage of that burn wound. And excision of the burn wound can be enzymatically done, it can be surgically done. There are some other ways. And so within that excision becomes NexoBrid, the enzymatic debrider. And then as far as coverage goes, there are a lots of coverage options. The standard of care would just be a split thickness skin graft. And then beyond that, we have things like Epicel or now RECELL, but they're used for coverage and so -- really unrelated to whether you're going to use one versus the other. I would say that -- what was that other part of the question? I think that really that's the most important thing is that they're really -- it's one versus the other. So because I'm using NexoBrid, that doesn't really change my usage of Epicel or influence my...

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [27]

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Let's ask first, in a patient who has excessive burns, say, 65% TBSA, that's kind of the average for an Epicel patient, would you use NexoBrid in that kind of patient? Or would you typically use neither?

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Jeremy Goverman, MD, [28]

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Currently, there are limitations for that -- currently, I can't use NexoBrid because it's not FDA approved here. That's the first and foremost. And I think -- I've only used it within the trial, and I know that we are moving forward in trying to get some continued access usage until that time in which it is FDA approved. So we will be able to use it, hopefully, before that time. But there are still indications for us, or limitations on size, I think, with respect to being used on label, which we do not have on label yet. But I can tell you anecdotally this -- the product has been used for larger burns typically only up to 30% at a time. So if you have a 60% burn, you'd probably do a 30% application, 30% TBSA at one point and 30% TBSA of another point. I've seen actually 80% burns excised, still with very little blood loss in the ICU bed.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [29]

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Just talking about the rationale for the bill here. The rationale is that we have a highly trained sales force, well respected in burn centers, but the use of the Epicel is episodic. One of our cell therapy specialists will not know if they're getting on a plane to California, Oregon, Texas or whatever. And -- it's very episodic. And although they have access, there's a lot of down time for them, a lot of [bolus] time. With NexoBrid, we're going to have access to all the burn centers because all the burn centers need to be trained. So we can leverage our existing force build. And these cell therapy specialists know how to change standard of care because that was required for -- it is required for Epicel to train them. So it's a perfect fit for our skill sets and our existing infrastructure and it will benefit Epicel in that we'll have more coverage, be more regularly in those -- all burn centers.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [30]

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Yep. I got it. It sounds like what you were saying that it would be currently somewhat unrelated but it's possible down the road with the product here in the U.S. that there may be some opportunity for both products to be used in similar cases.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [31]

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On occasion, yes.

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Jeremy Goverman, MD, [32]

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With respect to the -- the reps that you have, these are reps for a product that's used in special circumstances. And it's not like you're coming in to sell us a product, they're coming in to help us save a life. And the reps -- I mean, your reps, I've come to know very close with the reps that you have. So we like them, we're happy they're going to be getting us another good quality product. And we like them, they're good people, so that's nice.

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Operator [33]

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And our next question comes from Chad Messer with Needham & Company.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [34]

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So just on NexoBrid, which is a product I actually know and done some work on. And I do think it's a very exciting and innovative product. But it was launched in Europe in 2012, and I think sales figures last year something just north of $3 million. And even given the modest price you pay for it, I have to assume you guys assume you're going to do substantially better across your first several years after launch. Other than price, which I would grant is likely you're going to do a lot better than. What other factors about the difference in market dynamic and/or just your own capabilities would you point to, to give us optimism that you can far exceed the product success here in the US verses what it achieved in Europe in its initial years?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [35]

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Chad, that was a key question, obviously, we, doing our diligence, had to answer to ourselves and to the board. The -- Europe is a very, very different animal. I don't need to go through the long list of products that have been successful in the U.S. and not so successful in Europe, but we all know that's a common dynamic. The specifics in this case are varied. One has to do with the fact that there are only about, right now, 10 people at most that they've had detailing this product across all of Europe. And in Europe it is a very different situation than the U.S. In Europe, only about 1/3 of burn patients are actually treated in specialized burn centers. So it's a very diffuse market with most patients being treated in regular hospitals. Whereas, in the U.S., 100 and some-odd -- well 120 some-odd centers account for the vast majority of burn patients. Now, when you're changing standard of care, it's important that you can get in front of all the treating surgeons and train them. And it's easier when there's kind of a homogeneous audience. You don't have a homogeneous audience in Europe, and you have a lot more call points to have to cover. Another issue is that the label for the product itself in Europe says it needs to be used in specialized burn centers. That, of course, dramatically limits the market immediately. The third thing is, in Europe, as is often the case, access is very difficult. For example, in France, they don't even have pricing approval. And in other markets, it varies -- it's all heterogeneous, there's not one Europe as you well know. But you can generally say, across the European markets, access has been difficult as they, in certain markets, decide how much money will they spend on a certain product. In this case, Italy recently put a -- budgeted a reasonable amount of money just last year on

(technical difficulty)

product, and so we expect volumes to increase there. But again, it's a light touch in terms of getting in front of what's a very diffuse audience, a heterogeneous audience in terms of changing standard of care, difficulty with access. All roll into making it a very different commercial situation that we have here in the U.S.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [36]

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And then maybe just a quick follow-up on sort of the map of the synergies with Epicel. You say you've got 80 centers using it now. 127, I believe, have that potential. Just wondering what's going on in those 40-something centers that aren't using it. Are these ones you're not detailing at all or ones that you've kind of tried and not had luck? What's the dynamic there at the current time?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [37]

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So for the centers that haven't used Epicel in the last 3 years that I said were that 40 centers or so, it's not that they haven't used Epicel ever, it's just that they either -- if they get a large severe burn, they don't treat them. So some of them just send them to centers of excellence, like Dr. Goverman. And that's not uncommon especially in the larger metro areas. The second piece of that is that they just don't have frequency, so that if they're not seeing large severe burns in any common persistence, then they're not going to use it. But they do come and go, I'll say that, so from time to time, we'll get a call to even treat patients in those centers. But by being there, by being present on the front end of admission, when patients are coming in to be debrided, our reps will be there to hopefully identify potential Epicel patients early in their treatment paradigm, which is actually consistent with the best outcomes Epicel provides.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [38]

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Okay, so your hope for these centers, by being present would be to get doctors who currently would refer away the patients to keep them.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [39]

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No, if they refer the patient, they would refer it. But there's certainly some patient that we wouldn't even be aware of that they are potentially trying to treat with successive autograft treatments and things like that, that might be a 50% TBSA that we think we could better treat with Epicel, and were not even aware of that patient today. Where, in being there with -- at the front end of admission with NexoBrid, we would be certainly aware that, that patient was being admitted.

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Operator [40]

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And I'm showing no further questions at this time. I would now like to turn the call back to Nick Colangelo, CEO, for closing remarks.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [41]

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Well, thank you all for your questions and continued interest in Vericel. As we talked about today, we've had a solid first quarter. And based on the underlying trends for MACI, we're excited about the trajectory of the business for the remainder of the year as reflected in our updated full year 2019 revenue guidance. Likewise, we're very pleased to have the opportunity to bring an important new product like NexoBrid to the U.S. market and to build the second significant commercial franchise, which can further enhance the company's growth file -- profile. So we look forward to reporting on our progress on our next call, and have a great day.

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Operator [42]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.