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Edited Transcript of VCEL earnings conference call or presentation 6-Aug-19 12:00pm GMT

Q2 2019 Vericel Corp Earnings Call

Ann Arbor Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Vericel Corp earnings conference call or presentation Tuesday, August 6, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. And welcome to the Vericel Corporation's Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Gerard Michel, Chief Financial Officer

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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 Second 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 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 at any subsequent date. Please note that a copy of our second quarter financial results press release is available in the Investors Relations section of our website. We also have a short presentation with highlights from today's call that can be viewed directly on the webcast or accessed on our website. I will now turn the call over to Vericel's President and Chief Executive officer, Nick Colangelo.

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

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Thank you, Gerard. And Good morning everyone. We reported outstanding financial results for the second quarter, driven by significant revenue growth for MACI and Epicel. Total net product revenues increased 38% over the second quarter of 2018, marking the ninth consecutive quarter with record revenues for the reported quarter. And our trailing fourth quarter revenue rose to over $100 million for the first time. Based on the strong revenue growth and the momentum we're seeing in the third quarter we've raised our full year revenue guidance for 2019 to $112 million to $116 million, up from our previous guidance of $110 million to $114 million.

Importantly, our revenue growth continues to generate strong profit growth. Gross margins and adjusted EBITDA increased significantly compared to the second quarter of last year. And we generated positive adjusted EBITDA. And excluding the upfront license payment for NexoBrid, positive cash flow for the quarter.

MACI's strong growth is being driven by an increase in both new surgeons and the average number of implants per surgeon. We expect this momentum to continue as biopsy growth rates are best leading indicator of future demand and remained very strong through the first half of this year.

In terms of new surgeons, we've already added more new implanting surgeons in 2019 than in all of 2018. And new surgeons are contributing more to our growth than ever before. Nearly 2/3 of our rolling fourth quarter implant growth is coming from surgeons that never used CAR T-cell, with the balance of growth coming from historical CAR T-cell users increasing their implant volume.

On an absolute basis, approximately 1/3 of our first half MACI volume came from these new surgeons. The growing surgeon customer base and increasing MACI utilization is driven by the simplicity of the surgical procedure, compelling clinical outcomes and improved speed of patient rehab following surgery. We believe that MACI use is being further enhanced as surgeons have gained additional experience with the product and the body of clinical data continues to grow. To that end, in addition to the clinical study results published last year demonstrating the sustained clinical benefit of MACI out to 5 years, just last week positive 10-year clinical and radiological outcome data from a randomized control study of MACI was published in the Orthopedic Journal of Sports Medicine.

These study results from a 70-patient study comparing an accelerated versus conservative weight-bearing rehab protocol following MACI surgery demonstrated that MACI provided high levels of patient satisfaction and tissue durability beyond 10 years, providing further evidence of MACI's long-term clinical benefit.

Demand for MACI is also being driven by our best-in-class case management services for patients as well as enhanced patient access as we continue our efforts to ensure that medical policies are aligned with MACI's expanded label. To that end [Anthem] updated its MACI medical policy on June 30 to cartilage defects of the patella. Meaning that patella is now on policy for the top 10 plans for MACI which is significant given the limited alternatives available to treat patella defects.

From a promotional perspective, our current sales force of 48 representatives target approximately 3,000 sports medicine surgeons. Since launching MACI in early 2017, sales force productivity as measured by revenue per rep has increased each year even as we expanded the sales force 3x and more than doubled the overall size of the sales force. This is a reflection of the exceptional performance of our commercial team and the underlying patient and physician demand for MACI. Given the strong growth and market acceptance at MACI we are expanding the relevant target audience to include a broader set of orthopedic surgeons who perform a high volume of cartilage repair procedures.

During the second quarter we initiated a sales force sizing project ZS Associates, utilizing third party physician level procedure data to identify general orthopedic surgeons who perform cartilage repair procedures and are likely to treat MACI-appropriate patients. Based on this analysis we're expanding our target audience from 3,000 to approximately 5,000 surgeons who perform a high volume of cartilage repair procedures. Our sales force expansion for 2020 will be commensurate with the expanded target audience with the final number of subject to the completion of a detailed territory mapping exercise which we expect to finish around the end of the third quarter.

Turning to Epicel. Second quarter revenues increased 9% over the second quarter of 2018 and represented the highest Epicel revenue for a second quarter in history. It's noteworthy that Epicel's growth in the second quarter was largely driven by an increased user base relative to 2018. Not only was revenue up compared to last year but the number of biopsies, orders and burn centers sending in biopsies and placing orders all increased versus the second quarter of last year. And we see this momentum carrying into the third quarter. Despite the inherent variability in the severe burn care market, we're confident in Epicel's long-term growth prospects given its modest current penetration of the addressable market.

Last quarter we announced that we had entered into an exclusive license supply agreement MediWound to commercialize NexoBird in North America. We're excited to expand our severe burn care portfolio and we are uniquely positioned to commercialize this highly innovative orphan biologic product given our unparalleled access to burn centers and the technical expertise of our sales force. We're working closely with MediWound to prepare the BLA submission and actively participating in FDA discussions. And currently anticipates submitting the BLA for NexoBird to the FDA in the second quarter of 2020.

In May, we announced that BARDA had agreed to fund the NexoBird expanded access treatment or NEXT protocol. The NEXT protocol is an open-label single arm treatment protocol which allows for the treatment of up to 150 burn patients with deep, partial and full thickness thermal burns up to 30% of total body surface area. Up to 30 sites will participate in the NEXT protocol with the primary purpose to expand the number of NexoBird-trained physicians and healthcare providers in the United States and to generate additional awareness, advocacy and use at U.S. centers of excellence prior to commercialization of NexoBird.

The NEXT study also will enable Vericel employees supporting burn centers using Epicel to become familiar with the real world use of NexoBird. NexoBird will be used to treat patients in many of the same burn centers that are using Epicel and some Epicel patients may in fact be NexoBird patients as well. We believe this should greatly enhance our employees' knowledge and experience regarding the use of NexoBird and enhance overall uptake of NexoBird upon approval.

In preparation for the launch we are starting to ramp up the burn care sales force and intend to add 3 additional burn care sales and clinical support positions in the second half of 2019 with the goal of at least doubling the size of the team by the end of 2020. This will be the first significant growth in the burn care sales force since we purchased the business and we're confident that the expansion will drive increased use of Epicel. We also believe that upon approval NexoBird will strengthen our burn care franchise as well as create a third growth driver for the company in 2021 and beyond.

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

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [4]

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Thanks, Nick. We reported total revenues of $26.2 million in the second quarter and $48 million for the first half of 2019, representing growth of 38% for the quarter and 29% in the first half of 2019. We saw strong sales performance across both products in the quarter with MACI revenue growing 47% and Epicel revenue growing 9%. Our gross margin was 66% in the quarter, an increase of 700 basis points from the second quarter of 2018. On a GAAP basis, our second quarter operating expenses and more specifically our R&D expenses, included the $17.5 million payment to MediWound related to the NexoBrid license agreement. Excluding that payment, operating expenses in the quarter were up $4.3 million versus the prior year to $19.8 million.

As a percentage of revenue, operating expenses excluding the onetime payment dropped 600 basis points to 75% percent. And we expect that to continue to improve as topline revenue continues to grow.

The primary drivers for the increased operating expenses in the quarter were noncash stock based compensation, which was up $1.4 million in the quarter versus last year as a result of our stock price appreciation over the last 2 years. And the increased MACI salesforce and case management support costs which grew $1.6 million over 2018.

Our operating loss on a GAAP basis, including the $17.5 million NexoBrid license payment, was $20.2 million. Excluding the license expense, our loss was $2.7 million compared to a loss of $4.2 million in the second quarter of 2018.

The GAAP net loss for the quarter was $19.8 million or $0.45 per share. Adjusted net loss excluding the $17.5 million onetime expense was $2.3 million or $0.5 per share compared to a loss of $4.7 million or $0.12 per share last year. Adjusted EBITDA for the quarter was positive at $1.8 million compared to a loss of $1.4 million last year.

For details reconciling non-GAAP measures, please see the tables in this morning's press release.

As of June 30, 2019, the company had $66 million in cash in short-term investments compared to $82.9 million at December 31, 2018. Excluding the $17.5 million payment for NexoBrid, our net cash in short-term term investments were up about $0.5 million for the first half of 2019.

We are raising our total product revenue guidance to $112 million to $116 million, up from our previous guidance of $110 million to $114 million. We expect MACI revenue growth of more than 30% in the second half of 2019 with between 37% and 38% of our full year MACI revenue occurring in the fourth quarter, slightly higher than the percentage in 2018.

When considering growth for the balance of the year, it is important to keep in mind that beginning in the third quarter for comparison purposes, prior year results will now include the slight increase in pricing that we capture as a result of the change in our pharmacy distribution model in June of last year.

As we have often stated, forecasting Epicel is difficult. However, based on second quarter performance and the momentum we are seeing into the third quarter along with Epicel's clear leadership position in the severe patient segment of the market we serve, we remain highly confident in Epicel's strong prospects for long-term growth.

Based on revenues of $112 million to $116 million, we expect gross margins for the full year to be around 67%, up 300 basis points from last year and in line with our previous guidance of 20% marginal increase in cost of goods relative to our marginal increase in revenue.

Operating expenses for the full year including stock compensation and the $17.5 million payment for NexoBrid should be about $91 million to $93 million. Excluding the $17.5 million NexoBrid payment, the forecasted expense range is $73 million to $75.5 million.

The resulting adjusted EPS excluding the $17.5 million onetime payment is therefore expected to be positive for the first year, a significant milestone for the company.

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) Your first question comes from 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 [2]

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Congrats on a really solid quarter. Just curious how to think about the expanded target customer here as it relates to orthopedic surgeons that you're targeting from a training perspective. Does that change the ultimate TAM and how we think about that? Or is it really just the ramp into that TAM? And I guess really the question is, so what changes now from how we think about the go-forward outlook over the next few years as you penetrate that 60,000 patient population?

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

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Hey, Danielle, this is Nick. So I think the latter is the proper way to think about it, that this helps us penetrate into the TAM that we discussed last year. And so, as we think about it moving forward what we believe it will allow us to do is obviously have broader reach and frequency and help to maintain these higher growth rates as we go forward.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [4]

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And one other -- just a quick follow-up on that. One of the things that you have been doing is trying to drive the conversion rate higher for biopsies. And just curious to see direct-to-consumer efforts are starting to move the needle at all, where you stand on that.

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

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Yes, so as we've talked about, we believe that increase in conversion rates is a long-term project for us. We're sort of in early days, having launched this mid last year, and as you know, biopsies convert over anywhere from 3 to 6 to 12 to 18 months. And so I will say that early signs are that for cases that weren't otherwise immediately or there about activated, we are seeing a little higher percentage of cases being activated, which obviously leads to higher implants. So still early days, but we're confident in the program going forward and will remain a focus for us.

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Operator [6]

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Your next question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [7]

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Congrats on the quarter. Just want to ask, the BLA submission for NexoBrid is slated for second quarter '20. I know at the time of the call maybe there's some hope that it could come sooner. What do we have left to do on the BLA submission? And is there any chance that it could come a little sooner than anticipated? Or is second quarter '20 the key timeframe for BLA submission on NexoBrid?

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

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Yes, thanks, Ryan. So if you recall, when we announced the deal we had stated that if the FDA requested that the 12 months safety data be part of the initial submission package that we would be targeting a Q2 2020 submission date. And in fact BLA -- the pre-BLA meeting occurred at the end of July and in fact the FDA would like that data as part of the initial submission. So that sort of remains our current target date. Obviously, as we refine our timelines our goal would be to pull that in to the extent it's possible to do so. So it's very much consistent with what we said back in May when we announced the deal.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [9]

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Okay, understood. And then just broadly speaking, I mean, it sounds like there's numerous growth drivers for MACI, a lot of things going on to the sales force. Can you talk a little bit just about the durability of growth in MACI. I mean, not asking you to guide to 2020 or anything like that. But how do you think about the sustainability of that MACI growth just looking at kind of the penetration rates relative to what the opportunity is, and what you believe the right way investors should be thinking about the sustainability of MACI in outer years?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [10]

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Well, as you alluded to, Ryan, we believe there's a significant addressable market of up to 60,000 patients in the U.S. each year. Our current penetration rate from an implant perspective is less than 5%. So obviously we think there's a lot of room to grow over a longer period of time. And again, increasing the sales force, we've done this 3 times. To-date I think our team is excellent at implementing sales force expansions. And we think this will create broader reach and frequency for us as we go forward. On top of that, as you know, there's no near-term competition of a like product coming down the pike. So we think this growth is very sustainable.

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Operator [11]

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Your next question comes from Kevin DeGeeter with Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [12]

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I want to add my congratulation on a really nice quarter. Yes, Nick and Gerard, can you just comment a little bit with regard to the prescribing and usage profile of these sort of kind of incremental 2,000 high volume general orthopedic surgeons that you've identified? And perhaps as a related question, if 48 reps is kind of give or take the right number for 3,000 surgeons, is somewhere in the 80 range kind of at least over time kind of the right way to think about sizing for this 5,000 surgeon market that you are now identifying?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [13]

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Sure. Kevin, this is Gerard. I think the way we think about these orthopedic surgeons that we're going to add to the set of targets are these are docs that we know do cartilage repair procedures. And we also know are comfortable doing open knee procedures. They're not arthroscopic-only doctors. And there are a variety of sources of third-party data on the physician now that you can purchase to identify that. So they are docs who do the right type of procedures where they should be interested in MACI. And a point of fact, we've been getting business from docs that fit that, that aren't sports medicine docs but fit that description I just made without even us calling on them. So we're pretty confident there's a rich vein there to mine.

In terms of the actual number of reps, territory, if it was simply homogeneous country, travel didn't come into play, et cetera, efficiencies in travel, it would be easy just to kind of do a linear relationship like you said. In reality we have to deal do a territory mapping. And that can really drive the numbers one way or another. So I want to -- I hesitate to throw a number out there right now.

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

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Okay, great. And then maybe just one follow-up question, if I may, and that's on Epicel. It is an area where we get a firm number of questions from investors just trying to appreciate kind of where the core growth trend sort of sits for Epicel. So reasonably strong second quarter here. Can you just kind of comment what you're seeing in the market kind of as we move into August here to kind of give us some sense as to the general trajectory kind of going back to last question, MACI, but kind of applying it to Epicel, the sustainability of an Epicel trajectory.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [15]

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Yes, well, we've been saying for 5 years now that the growth for Epicel is variable. Obviously as we stated today, our penetration into what we believe is the addressable market is still relatively low. So we think there's a long period of sustainable growth. As we mentioned in our prepared remarks, the breadth of the business Q2 this year versus Q2 last year was apparent in terms of the number of centers sending in biopsies, taking orders, the number of biopsies and orders, et cetera. And as I mentioned, we see that continuing into the third quarter. So we're very confident in the long-term growth for Epicel. Again just with the caveat that it can be a little variable at times.

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Operator [16]

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Your next question comes from Chad Messer with Needham & Company.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [17]

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And congrats on a solid quarter. Gerard, I -- you rattled off some extra guidance on gross margins and OpEx and stuff at the end of your remarks, and I just want to make sure I got all that right, because I don't believe it anywhere in the printed remarks on the slides. $91 million and $93 million OpEx, excluding the $17.5 million, but does that include stock comp and all that?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [18]

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Yes, so the operating expenses including stock comp and the $17.5 million payment should be between $91 million to $93 million. Excluding the $17.5 million NexoBrid payment, we'll forecast the range to be between $73.5 million and $75.5 million. It's a lot to capture as I'm running through it.

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Operator [19]

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Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [20]

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I wanted to circle around on a couple of Kevin's questions on Epicel. If you could kind of call out any trends maybe that you're seeing as far as case volumes or [sheet] volumes or number of physician prescribers, et cetera, from the previous quarter? That'd be great.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [21]

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Sure, Jeff. I think probably the most important trend that we're seeing is expanded number of sites using the product. Again, with small numbers it's always hard to see a trend. But I think on trailing 4 quarter basis we see a consistent trend of more sites using the product. It's hard to look at specific patient volumes, because it is so variable.

But we want to see the broader usage basis for the product. It's not as we have before, product you just get and use, you need to be trained, get comfortable with it. So there is a long ramp to try to get a site up and running. So we are happy to see expanded usage. We see no encroachment. I think this is the underlying question that hasn't been asked yet, but we see no encroachment from competitors in this very severe segment that we treat.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [22]

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Okay, got it. And then my second question, could you talk a little bit about the throughput on your facility? It seem to me that the facility was being higher and higher as far as capacity utilization. Is there enough space to kind of continue to expand the market at the rates at which you are growing? I am assuming that upcoming NexoBird would be manufactured elsewhere.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [23]

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Yes, at our -- yes, NexoBird will be manufactured elsewhere. At our projected growth rates we think we have between 3 to 5 years before we would start sort of feeling any pinch points as opportunities to move office employees out of this current facility and leverage it for QC labs or that sort of thing. But at our current growth rate it's certainly prudent for us to be thinking through, do we need another facility, whether it's for capacity purposes or just redundancy purposes. And we are working through that exercise. But it's not a near-term initiative aside from thinking through it. But 3 to 5 years I think is a good estimate right now before we feel a pinch.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [24]

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Okay. Got it. And then lastly, do you expect to have any price increases on MACI for 2019?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [25]

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For -- in this - this particular -- no, I mean we'll do normal annual pharmaceutical level price increases as Nick usually puts it, but nothing extraordinary whether in terms of timing or level.

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Operator [26]

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(Operator Instructions) Your next question comes from Swayampakula Ramakanth with H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [27]

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This is RK from H.C. Wainwright. Most of my questions have been answered but I just want to ask a quick question on strategy. So as you prepare for MediWound's NexoBird to come to the market so probably in mid-2021, in the interim how do you -- or what is the strategy for Epicel such -- growth such that you get the market right for NexoBird since it has a bigger market since it can serve not only the severe burn but also any other type of burn because it's a debridement agent?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [28]

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Yes, so this is Nick, and so I'll start, and, Gerard, you can add any comments. So as you -- as we think about the addressable market, obviously NexoBird can have a larger target addressable market in terms of patients as we described in our corporate presentation. But it is focused like Epicel on hospitalized burn patients. So there is about 40,000 hospitalized burn patients each year. And we have defined the addressable market for Epicel in about the 600 patient range per year, whereas to your point virtually all of those 40,000 patients are eligible to be treated with NexoBird to the extent they require debridement. So we think there is a larger addressable market from a patient and quite frankly a revenue perspective as well.

In terms of how we're preparing to capture that, again there is about 120 to 130 burn centers in the U.S. As we mentioned in our prepared remarks, we plan to add 3 more. We currently have about 6 commercial and medical clinical support specialists supporting Epicel right now. We are going to add 3 more this year with the goal of doubling our current size at least by the time we head into a launch next -- well, in 2021 potential launch for NexoBird. So we think that will be adequate to cover the roughly 120 burn centers in the U.S. But if we need to add a little to that then we're certainly going to do that.

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Operator [29]

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(Operator Instructions) At this time, I'm showing no further questions. I would now like to turn the conference back for closing remarks.

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [30]

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Okay. Well, I'd like to thank everyone for your questions and your continued interest in Vericel. We had a great quarter. And that's reflected in our updated guidance. We're excited about the trajectory of our business for the remainder of the year. So thanks again and have a great day.

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Operator [31]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participating and have a wonderful day. You may all disconnect.