Vericel Corporation (NASDAQ:VCEL) Q4 2023 Earnings Call Transcript
Vericel Corporation (NASDAQ:VCEL) Q4 2023 Earnings Call Transcript February 29, 2024
Vericel Corporation beats earnings expectations. Reported EPS is $0.26, expectations were $0.18. VCEL isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Vericel’s Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now turn the conference call over to Julie Downs, Vericel’s Head of Corporate Communications.
Julie Downs: Thank you, Operator, and good morning, everyone. Welcome to Vericel’s fourth quarter 2023 conference call to discuss our financial results and business highlights. Before we begin, let me remind you that on today’s call, we will be making forward-looking statements covered under the Private Security Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC, which are available on our website. In addition, all 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. Please note that a copy of our fourth quarter financial results press release is available in the Investor 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 am joined on this call by Vericel’s President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara. I will now turn the call over to Nick.
Nick Colangelo: Thank you, Julie, and good morning, everyone. I’ll begin today’s call by discussing financial and business highlights for the fourth quarter and full year, as well as our expectations for 2024. Joe will then provide a more detailed update on our 2023 financial results and financial guidance for this year before opening the call to Q&A. The company executed exceptionally well in 2023 and delivered outstanding financial and business results in the fourth quarter, generating top-tier revenue growth and even higher profitability growth. Total revenue for the full year increased 20% to over $197 million, which was at the top end of our guidance range, with MACI revenue growing 25% to nearly $165 million and burn care revenue of nearly $33 million.
The company also reached an inflection point with respect to our profitability profile, with bottomline profitability growing at twice the rate of our topline revenue growth as adjusted EBITDA increased 40% to $34 million and we generated over $35 million of operating cash flow, ending the year with approximately $153 million in cash and investments and no debt. The company also had a very strong close to the year, as we generated record total revenue of $65 million in the fourth quarter, an increase of 23% over the prior year. Our strong fourth quarter performance was driven by record quarterly MACI revenue of nearly $7 million -- $57 million, which was above the high end of our guidance range and represented more than 50% sequential growth over the third quarter and 22% growth over the fourth quarter of 2022, marking the sixth straight quarter of 20%-plus growth for MACI.
This outstanding MACI revenue performance was driven by strong underlying business fundamentals, as we had the highest number of MACI implants -- implanting surgeons, surgeons taking biopsies and biopsies in any quarter since launch. We also generated very strong growth in the burn care franchise, as fourth quarter revenue grew 31% over the prior year. Our topline revenue performance drove significant margin expansion and profit growth in the fourth quarter, as we generated gross margin of 75% and adjusted EBITDA margin of 34%, with adjusted EBITDA growing 50% to over $22 million and net income for the quarter more than doubling to $13 million. As we look forward to 2024 and beyond, we expect that continued high revenue growth will drive further expansion of our margins and enhancement of our profitability metrics.
From a commercial perspective, MACI sustained growth has been driven by continued expansion of our surgeon customer base, as we had another year of double-digit growth in surgeons taking biopsies in 2023. We’re now approaching 50% penetration of our current 5,000 target surgeons. The expansion of our surgeon base and the corresponding growth in biopsies has fueled MACI ‘s success and helped drive sales rep productivity to its highest level ever at $2.2 million per rep in 2023. Our commercial team continues to execute high-quality peer-to-peer programs to help drive surgeon uptake and we had our highest number of programs to-date in the fourth quarter, demonstrating that interest in MACI continues to grow. In addition, MACI’s positive long-term clinical outcomes were highlighted in a prospective study published in the American Journal of Sports Medicine last week.
The study showed improved clinical scores, high levels of patient satisfaction, and clinical and MRI-based outcomes that were maintained out to 10 years for patients treated with MACI. The study also showed excellent long-term outcomes for MACI patients treated for both patellofemoral and femoral condyle defects, which is the focus of our MACI Arthro program. Based on the strength of MACI’s clinical outcomes, topline revenue performance and its underlying growth drivers, our core MACI business remains very well-positioned for continued strong growth in 2024 and the years ahead. Looking beyond this core MACI growth to our lifecycle management and indication expansion initiatives, we announced last month that our MACI arthroscopic delivery submission was accepted for review by the FDA and that we expect to launch MACI Arthro in the third quarter of this year.
As we previously discussed, the MACI Arthro kit targets 2 to 4 square centimeter femoral condyle defects, which comprise the largest segment of our addressable market, representing approximately 20,000 patients per year or roughly one-third of the $3 billion addressable market for MACI. In January, the USPTO issued a patent covering the complete set of MACI Arthro instruments into 2043, underscoring our market research indicating that orthopedic surgeons view MACI Arthro as a meaningful innovation in the cartilage repair market, and that regardless of their current MACI usage, surgeons expect to shift a meaningful share of their procedures to the MACI Arthro procedure. Our pre-launch commercial activities are well underway. In addition, in connection with the MACI Arthro launch, we’ll be expanding our surgeon target base from 5,000 to approximately 7,000 surgeons, to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures.
Based on our experience to-date, we’d expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for MACI in the years ahead. We’re very excited about the anticipated launch of MACI Arthro later this year, as we believe it represents another significant growth opportunity for MACI and a key value driver for our business moving forward. We’re also advancing our MACI development program for the treatment of cartilage injuries in the ankle and expect to initiate the MACI ankle clinical study in 2025. Cartilage defects in the ankle represent the second largest market opportunity for MACI, and we believe that a potential ankle indication, with an estimated $1 billion addressable market, could be another significant growth driver for MACI in the next decade and beyond.
Turning to our burn care franchise, we also saw strength in the underlying business fundamentals for Epicel in the fourth quarter, as we had the highest number of Epicel biopsies in the quarter since 2021 and that momentum has carried into 2024 with a strong start to the year. We continue to see positive pull-through for Epicel from our expanded burn care sales team, which further supports our belief that Epicel will benefit from a larger commercial footprint and higher share of voice in the burn care market. With respect to NexoBrid, our burn care team is executing on the initial phases of our launch plan, following commercial availability of the product in the U.S., beginning in the fourth quarter of last year. Our commercial and medical teams remain focused on building a strong foundation for NexoBrid by supporting P&T committee approvals to enable burn care center access to NexoBrid, training burn surgeons and their staffs, and supporting initial cases at burn centers to ensure successful patient outcomes.
We’re pleased with the progress that we made in the fourth quarter in terms of the early launch phase key performance indicators for onboarding burn centers. As of the end of 2023, more than 50 burn centers had submitted packages to their P&T committees, more than 25 centers had gained P&T committee approval and nearly 20 centers placed in initial product order. While our performance on these metrics was strong, as we mentioned on our call, the manufacturing-related delay in 2023 and the resulting uncertainty around the ultimate timing of product availability did cause a number of burn centers to defer or delay NexoBrid training and P&T committee approval processes, which in addition to the typical administrative hurdles at hospitals, impacts ordering patterns and the timing of use and uptake at many of these centers.
Most importantly, however, the clinical outcomes for the initial patients treated with NexoBrid and the feedback from burn surgeons treating those patients has been very positive, which serves as a great signal for the long-term potential of NexoBrid as we look to change the standard of care for eschar removal for patients with severe burns. In addition to the progress with initial burn center onboarding, we also completed a number of initiatives designed to build a strong foundation for NexoBrid commercial success over time. In the fourth quarter, we submitted a supplemental BLA for a pediatric indication for NexoBrid that was accepted for review by the FDA. In terms of commercial access, CMS granted NexoBrid a permanent J code and transitional pass-through payment status, which became effective in January, and provides a reimbursement pathway for the outpatient treatment of appropriate NexoBrid patients in our target burn centers, as well as additional hospitals over time.
So, overall, we’re very pleased with the strong surgeon interest in NexoBrid, our progress in market access activities and onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients, and the clear impact that our broader burn care portfolio and expanded sales team is having on Epicel. We believe that all of these factors will enable the company to build a strong foundation for NexoBrid in 2024, meaningfully contribute to our burn care franchise revenue this year, enables the company to have a second high-growth franchise in burn care moving forward. Finally, turning to guidance for 2024, we expect continued strong revenue growth of 20%-plus, with full year revenue of $237 million to $241 million, driven by the continued strength in our core portfolio, our first full year of NexoBrid revenue, which will contribute to growth this year, and even more meaningfully so next year, and the anticipated launch of MACI Arthro in the third quarter, which is expected to generate some revenue towards the end of the year and support a sustained high level of growth for MACI and the company in 2025 and beyond.
We also expect that our sustained high revenue growth will drive further expansion of our margins and growth in our profitability metrics. I’ll now turn the call over to Joe.
Joe Mara: Thanks, Nick, and good morning, everyone. Starting with our 2023 financial results, total net revenue for the full year was $197.5 million, representing growth of 20%. Total net revenue in the fourth quarter was $65 million, with growth of 23%, driven by strong results from both of our franchises. MACI revenue of $164.8 million for the full year was above our guidance range, growing 25% versus the prior year. For Q4, MACI revenue was $56.7 million and grew 51% over the third quarter and 22% versus the prior year, as we continued our momentum in the MACI business with our sixth consecutive quarter, with growth over 20%. Total burn care revenue for the full year was $32.7 million, consisting of $31.6 million of Epicel revenue and $1.1 million of NexoBrid revenue.
In the fourth quarter, our total burn care revenue increased by 31%, with Epicel growth of 22% and the addition of NexoBrid revenue in the quarter, leading to a very strong fourth quarter burn care result. Growth profits for the year was $135.6 million or 69% of net revenue, an increase of approximately 200 basis points compared to 2022. For the quarter, growth profit was $48.5 million or 75% of net revenue, which also increased by 200 basis points versus last year and represents the highest gross margin for the company in any quarter to-date. In addition, our pull-through of incremental revenue to gross profit has now returned to levels similar to 2019, with the pull-through to gross margin of 83% for the fourth quarter and nearly 80% for the full year.
Total operating expenses for the year were $142 million, compared to $126.8 million in 2022. For the quarter, operating expenses were $35.8 million, compared to $32.2 million for the same period in 2022. The increase in operating expenses in 2023 was primarily due to increased headcounts and related employee expenses, lease expense associated with the company’s new facility that is under construction, variable sales and marketing expenses, as well as other external expenses. Net income for the fourth quarter more than doubled to $13 million or $0.26 per share, compared to net income of $5.9 million or $0.12 per share for the fourth quarter of 2022. For the full year, our net loss was $3.2 million or $0.07 per share, compared to a loss of $16.7 million or $0.35 per share in 2022, representing an improvement of nearly $14 million on a year-over-year basis.
Non-GAAP-adjusted EBITDA for the year grew 40% to $33.9 million or 17% of net revenue, compared to $24.2 million or 15% of net revenue in 2022. For the quarter, adjusted EBITDA grew 50% to $22.3 million or 34% of net revenue, an increase of approximately 600 basis points versus 28% in the fourth quarter last year. Importantly, our adjusted EBITDA growth of 40% for the full year is double our topline revenue growth of 20% and our adjusted EBITDA growth of 50% in the fourth quarter is more than double our revenue growth of 23%, as our results continue to demonstrate very strong P&L leverage and a top-tier profitability profile. In addition, the company has now consistently generated positive adjusted EBITDA each quarter for more than three years and continues to convert adjusted EBITDA into strong cash flow.
We generated operating cash flow of $35.3 million in 2023 and ended the year with $152.6 million in cash, restricted cash, and investments and no debt, up from approximately $140 million to start the year, as our cash balance increased in 2023, despite CapEx investments for our new facility. Turning to our financial guidance for 2024, we’re using a similar guidance framework to start the year that we used in 2023 for both MACI and our burn care franchise. For the full year, we expect total company revenue of $237 million to $241 million, representing growth of approximately 20% to 22%, driven by continued strong growth in both of our franchises. With MACI on track for another strong year, Epicel benefiting from a high share -- higher share of voice and NexoBrid early in its launch phase, we have multiple paths to our 20%-plus total revenue guidance for the year.
We expect another year of growth for MACI -- another year of strong growth for MACI, and as a starting point, we expect full year revenue growth in the high-teens percentage range, with biopsy surgeon growth, biopsy growth and an increase in price continuing to serve as the key MACI growth drivers. For the burn care franchise, we expect growth of over 30% the full year, based on significantly improved Epicel trends over the past several quarters, plus the initial revenue contribution from NexoBrid. For the first quarter, we expect a strong start to the year, with total company revenue of approximately $48 million to $50 million, representing approximately 20% revenue growth at the midpoint. We expect Q1 MACI revenue of $38.5 million to $39.5 million and for burn care, we expect total revenue in the first quarter to be $9.5 million to $10.5 million, with the vast majority of revenue coming from Epicel, which is trending above our recent run rate, based on the strength of biopsies to close out 2023 and NexoBrid revenue to be in a similar range as Q4.
Moving down to P&L, for the full year, we expect gross margin of approximately 70% and adjusted EBITDA margin of approximately 20%, which would imply another year of very strong adjusted EBITDA growth of around 40%. We would expect similar quarterly trends in terms of seasonality and progression for both our gross margin and adjusted EBITDA margin percentages throughout the year and we would expect operating expenses to be approximately $165 million for the full year. Finally, we anticipate an increase in capital investment for the buildout of our new manufacturing and headquarters facility, with our share of construction costs expected to be in the $50 million range for 2024. In total, this guidance points to continued high revenue growth in 2024 with further enhancement of our top-tier profitability profile.
In addition, we would also anticipate continued strong revenue growth in 2025 with a full year of arthroscopic masonry and further acceleration of NexoBrid usage, as well as continued expansion in our key profitability metrics. This now concludes our prepared remarks. We will open the call to your questions.
See also 10 Countries with No Income Taxes in the World and 18 Most Tax-Friendly States to Retire in 2024.
To continue reading the Q&A session, please click here.
