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Edited Transcript of VCEL earnings conference call or presentation 8-May-18 12:30pm GMT

Q1 2018 Vericel Corp Earnings Call

Ann Arbor May 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Vericel Corp earnings conference call or presentation Tuesday, May 8, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Orlando

Vericel Corporation - 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

Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices

* Edward Andrew Tenthoff

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Kevin M. DeGeeter

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

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Vericel Corporation First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Gerard Michel. 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 2018 Conference Call to discuss our first quarter of 2018 financial results.

Before we begin, let me remind you that on today's call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995, and all of our projections and forward-looking statements represent our judgment as of today. These statements may involve risks and uncertainties that could cause actual results to differ from expectations and that are described more fully in our filings with the SEC, which are also available on our website. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

With us on today's call are Nick Colangelo, Vericel's President and Chief Executive Officer; and Dan Orlando, our Chief Operating Officer. I will now turn the call over to Nick.

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

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

First, we reported record first quarter revenue and our fourth straight quarter of 30% or greater revenue growth versus the same quarter in the prior year. The strong revenue growth was driven by momentum of MACI's uptake in its first year following launch as well as significant growth for Epicel in the quarter. We also reported strong gross margin and operating margin improvements for the first quarter, which is one of our seasonally lighter revenue quarters. Gross profit was 57% of net revenues for the quarter, which is significantly higher than the first quarter of 2017 and higher than every quarter last year other than the fourth quarter. Likewise, we saw a significant reduction in adjusted EBITDA loss and net loss for the first quarter of 2018 compared to the same period in 2017, which together with our gross margin expansion continues to demonstrate the leverage of our revenue and volume increases in our business model, given our relatively fixed cost structure. Finally, we generated the company's first quarter of positive operating cash flow, as we continue to move our current business towards sustained profitability. Overall, we had very strong financial performance in the first quarter, which Gerard will cover in more detail in a few moments.

From a business perspective, we continue to build significant momentum for both MACI and Epicel as a result of strong commercial execution on our strategic imperatives for both products, which Dan will cover in detail. Epicel has delivered solid growth as we focused on survival benefit and expand the number of burn centers across the country that utilize this potentially lifesaving product. Likewise, MACI uptake remains strong as we continue to expand the number of sports medicine surgeons using the product. We believe that our efforts will be enhanced as surgeons gain additional experience with MACI and the body of compelling clinical data continues to grow.

To that end, in the first quarter, we announced the publication of results from the MACI Phase III SUMMIT Extension study in the American Journal of Sports Medicine, which demonstrated the sustained clinical benefit of MACI out to 5 years. MACI is the only FDA-approved cartilage repair product that has demonstrated significantly greater improvement versus microfracture in a Phase III controlled clinical trial. And it's important to both clinicians and patients that MACI in addition to demonstrating significant improvements compared to microfractures as early as 1 year maintains improvements over microfracture out to at least 5 years.

We have a number of important commercial initiatives underway for both MACI and Epicel to drive continued growth, and I'll now ask Dan to provide further detail on our commercial performance.

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

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Thank you, Nick.

The first quarter of 2018 caps an outstanding launch year for MACI. The appeal of MACI has solidified the market, as we are treating more patients through an expanding surgeon customer base with enhanced payer access compared to historic Carticel. Physicians are not only satisfied with the ease of the MACI procedure, but now a year out from launch, the growing firsthand experience of improved patient satisfaction and recovery time reinforce our belief in the future use of MACI by these surgeons.

We expect this momentum to continue as we execute on our 4 strategic imperatives for MACI in 2018. The first imperative is to establish MACI as the premium cartilage repair brand. To reinforce this position, we recently launched patient and surgeon testimonials to highlight successfully on maci.com. Additionally, our sales representatives will now be able to leverage the SUMMIT Extension study results, demonstrating the sustained clinical benefit of MACI out to 5 years. In every market, there are doctors that will wait until long-term data is available. Because of the prior European experience with MACI and the time line to its introduction in the United States, our representatives will have the unique advantage of promoting 5-year clinical outcomes for MACI just 1 year after launch. This certainly is an opportunity that our sales team will make the most of.

Our second strategic imperative is to increase the number of surgeons utilizing MACI. To aid in this effort, we have expanded the sales force from 28 representatives in 4 regions to 40 representatives in 5 regions. The new representatives have completed their training, and the new territory alignment was initiated on April 1. In line with our sales force expansion last year, we expect to see the first meaningful implant growth attributable to these new representatives by the fourth quarter this year. In addition to the expanded sales force, we will continue to invest in surgeon training programs throughout the year. We completed a national training program in the first quarter, and we've trained approximately 100 new surgeons so far this year. That brings our total to just over 600 physicians now trained on MACI. We have 3 upcoming regional training programs scheduled for the second quarter and additional education events scheduled at the American Orthopaedic Society for Sports Medicine meeting in July of this year. We also have speaker programs and KOL webinars scheduled for over the next 2 quarters, with more to come throughout the year.

Our third strategic imperative is to streamline and expand MACI payer access. We are very pleased to report that now all of the 30 largest commercial plans provide access to MACI. Our primary focus in 2018 is to ensure that all medical policies are updated to accurately reflect the expanded label for MACI versus Carticel on the plans that do not already do so.

Our fourth quarter strategic -- I'm sorry. Our fourth strategic imperative is to drive MACI patient awareness through education and brand preference. To support this effort, we launched the It's Your Move campaign with world champion swimmer, 5-time Olympian, best-selling author and MACI patient Dara Torres in March. This campaign highlights Dara's story of injury, chronic pain that limited her activity, why she chose MACI and her promising recovery since being treated with MACI. The goal of the campaign is to both increase initial patient interest in MACI and improve biopsy conversion rate.

In summary, MACI's strong performance continues. And with the sales force expansion complete, the launch of the It's Your Move campaign and continued execution on our strategic imperative, we fully expect the momentum to continue.

I'll now turn to Epicel, which also had another very strong quarter. While Epicel volumes are inherently variable based on the small patient population, we have significantly expanded the number of burn centers utilizing Epicel since we've began reinvesting in this franchise, and we expect that Epicel volume should continue to grow on an annual basis.

Similar to MACI, we have a set of strategic imperatives to help drive that growth. The first of which is to establish an Epicel treatment protocol in every target burn center that reflects the best practices of the leading burn care surgeons. To support this imperative, we have built new online tools such as a treatment pathway and videos which feature decision points and criteria to help surgeons identify patients earlier and expand the patient types that where Epicel can be used.

Our second imperative for Epicel is to increase utilization through peer-to-peer education both at major conferences and in one-on-one settings. In the first quarter, we piloted a new cadaver training program with a small number of surgeons at our headquarters and will roll this enhanced training program out at scheduled events in the second quarter. In addition, our Epicel team was so very busy at the 50th Annual Meeting of the American Heart Association last month. Two posters of patient cases were presented. We held a very well-attended educational program and an advisory board meeting with KOLs.

The third strategic imperative for Epicel is to strengthen reimbursement support for our customers. In conjunction with the new Epicel website, epicel.com, we have recently released a coding reimbursement kit that our burn therapy specialists can offer to current and prospective customers, along with a reimbursement hotline.

In summary, Epicel is an important lifesaving therapy for severe burn patients, and it's our mission to continue to expand utilization and reach more patients in critical need.

I'll now turn the call back to Nick.

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

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Thanks, Dan. The commercial team has done a great job in driving continued MACI uptake and expanded Epicel utilization.

I'll now turn the call over to Gerard to review our first quarter 2018 financial results.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [6]

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Thanks, Nick.

Excluding the Q1 2017 $2.8 million revenue reserve for Carticel and MACI, non-GAAP net revenues increased 49%, with MACI revenue increasing 55% and Epicel revenue increasing 37%, respectively, compared to the first quarter of 2017. As a brief reminder, the $2.8 million revenue reserve was related to a contractual dispute between one of the company's pharmacy providers and a third-party payer in the first quarter of 2017, $2.1 million of which was related to 2016 sales and $700,000 related to 2017 sales. This dispute was subsequently resolved, and the negotiated reimbursement resulted in the company's ability to recognize $1.4 million of additional MACI and Carticel revenue in the second quarter of 2017.

Gross profits increased 57% of net revenues in the first quarter of 2018 compared to 41% of net revenues, excluding the effect of the revenue reserve in the first quarter of 2017. Clearly, we are capturing the benefit of the leverage of revenue and volume increases in our business model, which we have discussed on past calls.

Total operating expenses for the quarter ended March 31, 2018, were $14.7 million compared to $11.9 million for the same period in 2017. The increase in first quarter operating expenses was primarily due to an increase in MACI sales force, growth in case management services to support MACI and higher noncash stock-based compensation expense.

Loss from operations in the quarter March 31, 2018, was $4.3 million compared to a loss of $9.6 million for the first quarter of 2017. Material noncash items impacting the operating loss for the quarter included $1.3 million of stock-based compensation expense and $400,000 in depreciation expense.

Other expense for the quarter ended March 31, 2018, was $3.3 million compared to $200,000 for the same period in 2017. This change in other expense for the quarter is primarily due to a $2.9 million change in the fair value of warrants as a result of the increased stock price during the quarter.

Vericel's net loss on a GAAP basis for the quarter was $7.7 million or $0.21 per share compared to a net loss of $9.8 million or $0.31 per share for the same period in 2017. Non-GAAP adjusted EBITDA loss was $2.5 million for the quarter ended March 31, 2018, compared to a loss of $5.9 million in the same period in 2017. Excluding the impact of the 2017 revenue reserve, over 55% of the $5.9 million of incremental revenue growth in the first quarter of 2018 over the first quarter of 2017 dropped to the adjusted EBITDA line, again consistent with our expectations regarding the overall leverage of our business.

We define adjusted EBITDA as net income plus income taxes, depreciation, amortization, noncash charges for stock-based compensation, warrant revaluation and significant onetime nonrecurring items. A full reconciliation can be found in both our press release and related 8-K earnings release filing.

As of March 31, 2018, the company had $29.8 million in cash compared to $26.9 million in cash at December 31, 2017. The increase in cash during the quarter was a result of our first quarter with positive operating cash flow, supplemented by a net cash inflow from warrant and stock option exercises. As we mentioned last quarter, and now further supported by the net increase in cash this quarter, we believe that we have adequate cash on hand to fund operations to reach sustained profitability without raising additional capital.

The first quarter results for MACI were within the range of our expectations, and we are maintaining our guidance of $73 million to $78 million in 2018 total net product revenue. As we have previously stated, our historical revenue seasonality has, on average, been 21%, 25%, 21% and 33% in the first through fourth quarters, respectively. However, we would consider results within 2 percentage points of the average for a quarter to be in line with historical trends. For 2018, we anticipate MACI's seasonality to be within this range of variability, perhaps at the higher end of our normal range in the fourth quarter, as we expect to see the impacts of the expanded sales force become a meaningful driver of growth by the fourth quarter. We expect gross margins to continue to increase, consistent with 15% to 20% marginal cost of goods for MACI and Epicel.

Turning to operating expenses. I want to add additional color on our first quarter 2018 spend. In the first quarter, we booked an incremental $800,000 in noncash stock-based compensation expense across R&D and SG&A above last year, primarily due to an increase in our stock price. Based on our current share price and volatility, we estimate the full year impact of stock-based compensation to be approximately $3 million more than the amount recorded in 2017. Additionally, the investments being made in the patient-focused education efforts for MACI are heavily weighted in the first half of 2018, and we project slightly lower spend in the third and fourth quarters overall as compared to the first half of the year. Excluding stock compensation and the $2.6 million intangible impairment for Carticel in 2016, we would reiterate that the increase in operating expenses over the full year is expected to be similar to the growth seen in 2017 compared to 2016.

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 [7]

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Thanks, Gerard.

We had a very strong first quarter and a great start to 2018. Our robust revenue growth and margin expansion reflect the success of our commercial teams' sales and marketing initiatives, together with strong physician enthusiasm for MACI and Epicel. We believe that these results position the company well for both near-term and long-term growth.

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) Our first question comes from Ted Tenthoff with Piper Jaffray.

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Edward Andrew Tenthoff, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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I guess, picking back up on the MACI performance, can you give us a sense for how training new physicians is helping drive biopsies and procedural growth? Is this really that the physicians are more comfortable with the procedure and are recommending it more? Is it more patient pull-through? What's really driving the success?

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Daniel R. Orlando, Vericel Corporation - COO [3]

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Sure. Ted, this is Dan. So the interest in training is basically that the Carticel procedure, because of the full arthrotomy and the surgical technique of suturing, was unappealing for many surgeons. And our reps are armed with both video as well as sales materials that can demonstrate to a physician who had never used Carticel in the past or potentially a new user to ACI in general and gain their interest by demonstrating the ease. So we're able to leverage that and take them either into cadaver training -- and really, the ideal training is whatever the physician chooses. If they'd like to go to a cadaver lab, we take them there. If they want to do a video online, we can do that as well. So we created a menu of options based on the physician's comfort, and that is really what's been most successful for us. I can't say it's been one type of training but having a menu and letting the physician choose and also the ability to demonstrate in the sales call how easy the technique is. And then of course, the physicians are experiencing that themselves.

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Edward Andrew Tenthoff, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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That's really helpful. And I found that the R&D data that you guys did the input from the doctor who was doing the patella surgeries was really interesting. Is there a typical progression like a doc who will do 1 and give it 6 months and see how it goes and then do 2? Can you give us a little sense about how the new doc or new surgeon adoption tends to play out?

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Daniel R. Orlando, Vericel Corporation - COO [5]

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Sure. So there really isn't a typical yet. We are interested in answering that very question, Ted, and we've been looking at newer doctors, older doctors. The physician that you experienced at our Investor Day is a physician who adopted very quickly, who was -- and did not use Carticel previously but was a cartilage specialist. And those physicians adopt at such a rate that -- as an example, she used 15 MACIs -- implanted 15 patients last year in her first year on market. Now we do have other physicians who aren't necessarily cartilage specialists who will treat a couple of patients and then wait until the patients have rehabbed. And during that time, we see that they continue to take biopsies. So that we -- they are predicting a good outcome, but they are waiting to see the patient recover before they jump in. So I -- we are also trying to project the adoption of new users. Unfortunately, we haven't landed on a standard yet. Some are quick to adopt. Others hit a few patients and then wait to see the recovery.

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Edward Andrew Tenthoff, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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And then last one, and then I'll hop back in line. But what about from a patient side, how do you start to pull from a patient side? I think Dara's experience is telling, but does this signal a more direct-to-patient advertising or outreach?

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Daniel R. Orlando, Vericel Corporation - COO [7]

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So it's 3-pronged. First, the -- Dara Torres is an outreach campaign. Now for a small company like us, you shouldn't expect TV or radio or things like that. It's targeted online. So for patients who are seeking care or seeking treatment for ongoing knee pain, those are the kind of push activities that we would do online for the It's Your Move campaign. In addition, we have established a very aggressive capture of patient consent both at biopsy and then throughout their treatment so that we can appropriately stay in communication with that patient as we take that biopsy, expand it, put it into cryopreservation so that we can communicate with that patient appropriately over time. So that's the second component of it. And then third, once they sign up, we send them a care kit from MyCartilageCare, and that also includes some of the patient advocacy and stories like Dara Torres. Understand she's not the only one. We have others that we are building a menu of so that patients can either find the motivational, aspirational context of a past Olympian, or they can find a patient that kind of looks like them on that menu as well. So we're -- we've taken, again, a multipronged approach to this, and we hope to see the benefits of that certainly in 2018.

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Operator [8]

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Our next question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [9]

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Great. Can you hear me okay?

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

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We can.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [11]

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Apologize if there's any background noise. I just want to follow up on Ted's question a little bit around biopsies. And I recognize that you're not providing the biopsy metrics that you did in '17 given the revenue guidance. But can you comment anecdotally on not just the biopsy dynamics but more so the subsequent conversions? And has that changed at all in the first quarter of '18? And is there any change -- or have patients, as you've expanded, chosen to get the procedure earlier? Or have they been waiting longer? I'm just curious around these dynamics.

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [12]

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Ryan, it's Gerard. Conversion rates are pretty much still within historical levels. I don't think we've seen a dramatic shift. I mean, that's one of the jobs that Dan has to do. I'm looking at Dan smiling. And that's part of what the outreach program is for with the patients to let them know that actually we have their biopsy. Because again, as Dan has mentioned in the past, many of them don't even know we have their biopsy. Hopefully, with the consents, we can start moving that needle, and I don't think we've seen much change in the timing either. And again, I think that's similar to -- if we see a change in conversion rates, I suspect we might see a change in timing as well.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [13]

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Understood, understood. And then on Epicel, continues to be very strong. Just curious around -- you've ramped up in the number of burn centers that you're in. Is the strategy for the year and should we be thinking about this that you're going deeper within existing burn centers? Or would we expect you to expand into further burn centers given that there's still a significant runway of additional burn centers that you could be in?

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Dominick C. Colangelo, Vericel Corporation - CEO, President & Director [14]

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Yes, Ryan, it's Nick, I'll start, and I think the answer is both, right? We're trying to increase utilizations in burn centers that are familiar with the product, and of course, you're never 100% penetrated into your target institutions. And so we certainly have a list of priority institutions that we would like to make entrance to, and that's part of our goal for the year. And we're doing that through a number of means that Dan mentioned, which include the strategic imperatives, medical education, peer-to-peer education, stronger presence at burn association meetings, et cetera, and we've seen that pay dividends previously, and we certainly expect that will be the case going forward as well.

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Operator [15]

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Our next question comes from Danielle Antalffy with Leerink.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [16]

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Gerard, just pushing a little bit on the guidance. I want to understand a little bit better just given the outperformance in the quarter. I mean, if I use the commentary that Q1 has historically been 21% of annual sales, that would imply actually 2018 sales in the $85 million range. So could you help us understand why you're reiterating guidance given that dynamic?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [17]

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Sure. So I think we do 2 things when we look at kind of our revenue. We're always comparing the same quarter -- this quarter to the same quarter in a prior year, and then we look at seasonality, and I think it's important to think through some onetime and unusual dynamics that are occurring. Thinking through just in terms of comparative quarters, of course, you need to keep in mind, and you did with mentioned the 55%, that we had a $2.8 million reserve in the first quarter last year, which would've skewed GAAP revenue. And I would just remind us to -- remind everyone to keep in mind that there'll be a $1.4 million reversal of that reserve in Q2 '17 that you need to keep in mind when you model. Putting that aside, because I think you've got your arms around that, the 55% growth we saw was against the Q1 where we suspect there was some business push from Q1 into Q2. The -- last year. The reason for that being MACI was launched mid-Q1. Training had to occur for the doctors to start using the products. And therefore, some docs who couldn't get trained in time we believe kind of pushed their business into Q2. Similarly, we didn't have all the payer policies changed. Really, the bulk of those started changing in Q2. So it was definitely, I believe, some business pushed into Q2. So I think we had a slightly weaker Q1 comparator, and we're facing a slightly stronger Q2 comparator, which really has nothing to do with how our business is performing right now but has to do with how you look at the growth versus last year. I think a better way to look at it might be to say, hey, H1 versus -- first half versus the second half is probably the important thing to measure in terms of how do we do in the first half of the year, how did we do in the second half of the year because I think will smooth out those effects. Secondly, in terms of seasonality, I think we'll actually see a bit of a skew. It'll be roughly in line with what we typically see, but I would expect we'd see about 2% increased -- something -- like a 2% skew towards the fourth quarter of this year as we move from transitioning the sales force to actually getting the impact of the new reps in the fourth quarter of this year. So I think we'll see a bit of a skew of the seasonality to the back half of the year.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [18]

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Okay. That's fair, and that's helpful. And then just a question on the performance in the quarter and the recent rep adds. 55% growth for MACI, that is acceleration versus the prior quarters, which is great to see. Is that -- how much of that can be attributed to the newer reps maybe ramping faster? Or is that not the case? Is this really just the 28 reps that you had in place already and more kind of, I guess, the right way to think about it would be same-store sales growth versus new reps and getting new accounts open?

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Daniel R. Orlando, Vericel Corporation - COO [19]

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Yes, Danielle, so we had just as -- we stepped back. A year ago Q2 we went from 21 reps to 28 reps. So I think what you're alluding to at our Q1 performance is the performance of those additional reps in Q4 and Q1. And you're right to say, yes, their -- those territories reflected their efforts and the acceleration of MACI through Q4 and Q1. So that's the same effect we hope to see with the expansion of -- from 28 reps to 40 reps, which just got launched on April 1. They just trained and in the new alignment, and we certainly are hoping to see a similar impact in Q4 and into 2019. Now granted the territories that -- in some of these territories, they did not have a strong base, and they'll be growing those over time, so it might take a little bit longer for these additional reps to contribute as well as expansion that's happened a year ago. But we are very confident that we'll see this continued momentum.

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Operator [20]

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Our next question comes from Chad Messer with Needham.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Great. We can just start maybe with Epicel. I know it's a lumpy product in terms of revenues, but 2 good quarters in the $6 million range after a few more sort of 4-handle quarters. Can you comment on how much of the strength this last couple of quarters has been actual unit or volume increases versus price increases?

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

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Yes, Ted -- or Chad, I'd say the majority -- we don't disclose volumes versus pricing. But the majority of the increase was volume driven, and that goes hand in hand with expanding, obviously, the centers using the product.

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Chad Jason Messer, Needham & Company, LLC, Research Division - Senior Analyst [23]

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All right. Great. That's good to hear. And then also on your positive cash flow during the quarter, that's always good to see operations adding cash to the balance sheet. It just seems looking through here, one of the drivers of that was a reduction in accounts receivable. I'm just wondering if there's anything you can comment on there. Are you getting people to pay you faster? Or are there -- is that more of a kind of onetime shift?

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Gerard J. Michel, Vericel Corporation - CFO & VP of Corporate Development [24]

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I think it's a function of 2 things. Cash receivable always piles up at the end of the fourth quarter. The fourth quarter is so strong. And then we're just slowly working through the tail end of those pharmacy disruptions. There were still some accounts receivable tied up in some of those hiccups that occurred last year. But the bulk of it really is the fourth quarter normal pileup of AR due to seasonality.

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Operator [25]

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Our next question comes from Kevin DeGeeter with Ladenburg Thalmann.

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Kevin M. DeGeeter, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [26]

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I guess, just building up on the prior question on Epicel. When you think about target penetration into addressable hospitals that you think could be -- and burn centers that you think could be attractive for Epicel, where do you think you are on a penetration basis in terms of if you look at it from the perspective of facilities that have ordered Epicel once either in the last 12, 18 months, pick your metric?

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Daniel R. Orlando, Vericel Corporation - COO [27]

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Yes, so I'll just size the entire market. There's approximately 124 self-identified burn centers. Now of that, there's approximately 80 that are American Burn Association certified, so it's a combination certification between the rep and surgeon society and burn society. So they've gone through the effort to be certified. Our use comes -- the majority of our use does come from those certified centers, but it also comes from the centers that haven't gone through that effort. As we shared initially when we took the business, there were 20 centers using Epicel. That was in 2014. Last year, we had 80 centers that utilized Epicel, so we're really encouraged by the investment we've made and the expansion of the number of burn centers that are utilizing Epicel. We believe we're about 50% there. So in context, we think that there's probably a total of about 80 that really could handle these critically injured patients and execute well with Epicel. That answer your question?

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Kevin M. DeGeeter, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [28]

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It does. No, that's helpful. And then just -- and kind of coming back around to questions of business development. Just generally your thought process to product profiles it would fit well into either this burn call point or orthopedics, of course.

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

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Yes, I'll start, Kevin. It's Nick. I think as we mentioned during our Investor Day, we really kind of take a 2-pronged approach to business development. First is adding products around our core sports medicine and severe burn care franchises. And so there's a set of products that we continually look at that our surgeon customer base could be interested in, and that applies to both sports medicine as well as the burn care market. I'd say there's probably more opportunities in the sports medicine franchise area than burn care, but we certainly have opportunities we're looking at in both of those. And then finally, we certainly -- we do have -- that leverages our commercial and other capabilities. We also have, as one of the leading advanced cell therapy providers in the country, other capabilities in development manufacturing, regulatory, et cetera, related to these advanced therapies that we think we can leverage and build new verticals. So we have another set of opportunities that we look at on that front.

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Operator [30]

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At this time, I'm showing no further questions. I'd like to turn the call back over for closing remarks.

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

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Well, I just wanted to thank you again for your questions and continued interest in Vericel. We obviously are excited about the opportunities ahead and look forward to reporting on our progress on our next call. Have a great day.

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Operator [32]

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