Vericel Corporation (VCEL) CEO Nick Colangelo on Q2 2018 Results - Earnings Call Transcript
Vericel Corporation (NASDAQ:VCEL) Q2 2018 Earnings Conference Call August 6, 2018 4:30 PM ET
Gerard Michel - CFO
Nick Colangelo - President and CEO
Dan Orlando - COO
Danielle Antalffy - Leerink Partners
Ryan Zimmerman - BTIG
Kevin DeGeeter - Ladenburg
Good day, ladies and gentlemen, and welcome to the Vericel Corporation Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] And As a reminder, today's conference is being recorded for replay purposes.
It is now my pleasure to turn the conference over to your host, Gerard Michel, Chief Financial Officer. Please go ahead.
Thank you, operator, and good afternoon, everyone. Welcome to Vericel's second quarter 2018 conference call to discuss our financial results.
Before we begin, let me remind you that on today's call we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995, and all of our projections and forward-looking statements represent our judgments as of today. These statements may involve risks and uncertainties that could cause actual results to differ from expectations and that are described more fully in our filings with the SEC which are also available on our website. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.
With us on today's call are Nick Colangelo, Vericel's President and Chief Executive Officer; and Dan Orlando, our Chief Operating Officer.
I will now turn the call over to Nick.
Thank you, Gerard, and good afternoon, everyone. I'm very pleased to report that we continued our strong start to 2018 with another solid quarter for the company. We reported record second quarter revenues of $19 million, marking the 5th consecutive quarter following the launch at MACI, with record quarterly revenues for the reported quarter.
Total revenues were $37 million for the first half of 2018, a 41% increase on a GAAP basis compared to the first half of 2017. And a 34% increase on a non-GAAP basis excluding the net impact of the reserve for Carticel and MACI recorded in the first half of 2017.
As a result of our performance this year to-date, as well as our forecasts for MACI growth in the second half of the year, we’ve raised our full year revenue guidance for 2018 to $80 million to $83 million from the previous guidance of $73 million to $78 million.
Our increased forecast for MACI growth in the second half of the year follows on the heels of expanding our MACI sales force and case management team, implementing and expanded pharmacy distribution network and increasing MACI manufacturing capacity to support the expected growth demand. Gerard and Dan will provide more details about our performance in the second quarter, as well as the forecast drivers for the remainder of the year.
We also significantly strengthen the company’s financial position as a result of the $74.8 million public offering that we completed in June. Our performance in the first half of the year and updated revenue guidance certainly reinforce our previously stated position that we had sufficient cash on hand to fund operations to reach profitability. However, it was also important to bolster our balance sheet in order to position the company to be able to execute strategic transactions overtime that can further enhance our growth profile and maximize the long-term value of the company.
Our current portfolio is made up of highly innovative premium price products with significant clinical benefit. We’re focused on opportunities that have a similar profile within our sports medicine and severe burn care franchises or that leverage our advanced cell therapy development and manufacturing platform. We obviously can’t comment on specific opportunities or timeline, but business development remains an important component of our overall corporate strategy. In the meantime, our immediate priority is on continuing to execute our MACI and Epicel growth plan.
And with that, I’ll turn the call over to Dan to discuss our commercial performance.
Thank you, Nick. Starting with MACI, new physician interest remain strong as reflected by the fact that we now have trained approximately 700 physicians on the MACI procedures since launch. And we are well on track to meet our goal of training, a total of approximately 900 surgeons by the end of 2018, which is up from 500 trained surgeons at the end of 2017.
The expanding surgeon customer base and demand for MACI is driven by the simplicity of the MACI surgical procedure and the fact that a year out from lunch surgeons are witnessing the improved speed of recovery and improved patient outcomes with MACI compared to Carticel. To meet the needs of this growing base of implanting surgeons and their patients, we have now fully deployed both the expanded MACI sales force and corresponding case management team.
Growing MACI demand, is also being driven by improved patient access, and simplifying and accelerating the payer approval process from a customer perspective. As we have noted previously, MACI has achieved significant payer access, with all of the top 30 commercial plans providing access to MACI. This access has been enhanced in the first half of 2018, with medical policy updates to reflect the expanded MACI label compared to Carticel, specifically including patella.
This has the direct effect of streamlining the approval process. Likewise, the efforts of our expanded sales force and case manage our team, had resulted in patient moving through the payer approval process faster than ever before, reducing barriers to usage and reinforcing the positive perception of MACI among our surgeons.
We also are enhancing MACI access by moving from an exclusive pharmacy distribution model to an expanded pharmacy network model. For all 30 of the top plants provide access to MACI, no single pharmacy provider has a contract with all payers. This means that for some patients in some cases, a time consuming single patient agreement needs to be put in place, in order to ensure reimbursement. By adding additional pharmacies, we can reduce the number of these more burdensome single patient agreements that can delay or restrict usage.
On the manufacturing front, we are preparing for continued quarterly volume growth and I am happy to report that we have recently completed our MACI clean room expansion. We now have sufficient capacity in Cambridge to support MACI production for the next several years without significant additional investment.
Turning to Epicel, we have another solid quarter of growth, and continue to make strategic investments in this franchise. Of note in the second quarter, we partnered with our largest Epicel customer to facilitate a training session with all the burn centers in their network, many of which had not previously used Epicel. Since the training biopsies from the affiliates that increased in addition the burn centers in this network will be supported by a clinical burn specialist, who will focus specifically on training and case support activities, which will free up time of our burn therapy specialist to expand into new burn centers.
As a commercial organization, we are very pleased with first half results, and we continue to execute against our strategic imperative.
I’ll now turn the call over to Gerard to review our second quarter 2018 financial results and the exiting update to our financial guidance.
Thanks, Dan. As Nick mentioned earlier, we reported total revenues of $19 million in the second quarter. Before comparing to 2017 results, it is important to remind you that second quarter 2017 revenue included a favorable $1.4 million reversal of the $2.8 million revenue reserve booked in the first quarter of 2017, related to a settled dispute between one of the company’s pharmacy providers and the third-party payer.
In others words, second quarter 2017 is inflated by $1.4 million and is thus an artificially high comparable. While on a GAAP basis, second quarter 2018 total revenue growth over 2017 was 12%, the underlying growth rate on a non-GAAP basis excluding the impact of the reversal of the revenue reserve is 23%.
On a year-to-date basis, comparing the first half of 2018 to the first half of 2017, our revenue growth on a GAAP basis is 41% and 34% excluding the net impact of reserve in 2017. Given the dynamics in the first half of 2017, we view 34% as a more accurate measure of a year-over-year growth and thus appropriate post MACI launch growth measure for the overall business.
MACI revenue for the second quarter was $14.1 million and year-to-date is $26.2 million. Year-over-year, for the quarter MACI grew 9% on a GAAP basis and 23% excluding the impact of the reversal. Year-to-date MACI revenue growth is 46% on a GAAP basis and 36% excluding the net impact of the 2017 revenue reserve.
Epicel revenue for the second quarter was $4.9 million, increasing 21% compared to the second quarter of 2017. Epicel revenue for the first half of 2018 was $10.9 million, which represents 29% growth over the first half of last year.
In terms of second quarter results down the P&L, gross profit for the quarter was $11.3 million or 59% of net revenues compared to $9.3 million or 55% of net revenues on a GAAP basis and 51% on a non-GAAP basis excluding the impact of the revenue reversal for the second quarter of 2017. Even more impressively though, the first half of 2018 gross profit was 58% of net revenues, which is significantly higher than the first half of 2017 where gross profit was 47% of net reserves excluding the impact of the reserve reversal.
Total operating expenses for the second quarter were $15.5 million compared to $11.8 million for the second quarter of 2017. The increase in operating expenses over last year was driven primarily by a $1.7 million increase in non-cash stock-based compensation expense due to the increase in our stock price and a $1.6 million increase in MACI-related sales and marketing activities.
Loss from operations for the quarter was $4.2 million compared to a loss of $2.5 million on a GAAP basis, and $3.9 million on a non-GAAP basis, excluding the impact of the revenue reserve reversal in the second quarter of 2017.
Material non-cash items impacting the operating loss for the quarter included $2.5 million of stock-based compensation expense and approximately $400,000 in depreciation expense compared to approximately $800,000 of stock-based compensation expense and approximately $400,000 of depreciation expense in the second quarter of 2017. Other expense for the quarter was approximately $400,000 compared to other income of approximately $100,000 for the second quarter of 2017.
Non-GAAP adjusted EBITDA loss was $1.4 million for the second quarter compared to a loss of $2.7 million in the second quarter of 2017. We view adjusted EBITDA as a proxy for future cash flows as it eliminates the non-cash and onetime items, and is more aligned to performance in a given quarter consistently looking at operating cash flows due to the fluctuations in accounts receivable seen in a seasonal business.
On a year-to-date basis, adjusted EBITDA loss of $3.9 million compared to a loss of $8.7 million last year. This is consistent with our expectation that approximately 50% of our sales growth will fall the income. You can see the tables reconciling non-GAAP measures in our press release for more detail.
Vericel's net loss for the quarter was $4.7 million or $0.12 per share compared to a net loss of $2.4 million or $0.07 per share on a GAAP basis and $3.8 million or $0.11 per share on a non-GAAP basis, excluding the impact of the revenue reserve reversal. As of June 30, 2018, the company had $95 million in cash compared to $26.9 million in cash at December 31, 2017.
As Nick mentioned in his opening, we have raised our revenue guidance from $73 million to $78 million to $80 million to $83 million. The increased revenue guidance is due to an increased forecast for MACI. We now expect revenue growth for MACI to be at least 30% for the second half of the year. It is important to point out that approximately $1 million of the increase is attributable to a shift between revenue discounts and selling costs and will come along with an increased SG&A at the similar amount.
This is result of a contract change in July with one of our pharmacies, which on a GAAP accounting perspective change its role from a customer to a service provider. What was previously account for as a reduction to revenue will in the third quarter be accounted for as a cost of selling and is quarterly SG&A.
Epicel continues to progress and we are forecasting full year growth in the low to mid-teens. We expect gross margins continue to increase consistent with 15% to 20% marginal cost of goods for MACI and Epicel. With the change in the accounting for the distribution agreement plus additional investments to support MACI reimbursement programs, we now expect SG&A in the second half of 2018 to be just slightly lower than the first half. R&D is also expected to be relatively consistent between the first half and second half of the year.
That concludes my financial review. Now I'll turn the call over to Nick.
Thanks, Gerard. In summary, the first half of 2018 was in many ways a continuation of our performance from the second half of 2017, strong revenue growth for both products and expanding margins. Leading performance indicators point to that growth continuing as the core business moves towards sustained profitability. And the company is now in a very strong financial position to execute both on our operating and strategic business plans.
That concludes our prepared remarks. Now, I'd like the operator to open the call to your questions.
Thank you. [Operator Instructions] And our first question comes from the line of Danielle Antalffy of Leerink Partners. Your line is open.
Hey, good afternoon guys. Thanks so much for taking the question and congratulations on a really good quarter. Just a quick question, I know you guys talked about this in the prepared remarks, but curious on what gets materially better in the back half as it relates to MACI versus what you had previously been thinking? I know you don't necessarily provide quarterly guidance, but if we do look at what you've said about seasonality based on what you've printed in the first half of the year, that would get you to something just over $80 million. So it sounds like you're expecting to do even a little bit better than that. And I just want to make sure we have a good sense about what is driving that as it relates to is it physicians ramping faster in volumes, it sounds like you expect to be at 900 trained by the end of the year. But I don't think that's really materially different than what you said the past. So just want to get a sense of what's going to get better.
Yes, I’d -- Danielle, we continue to see strong growth in biopsies coming in. And that's one of the important leading indicators that help us to forecast for Q4 and a bit of the balance of this quarter. And then also, visibility right now as to the orders coming in for the quarter, the quarter that we are in right now. So that gives us a pretty good handle on where we’re going to end up. In terms of the actual commercial drivers that are causing the enthusiasm, Dan can speak to that.
Sure. So, Danielle, we’ve noted I believe in a bit more detail the impact of what happens when we get a biopsy and how we intend to help move that biopsy to implant. So we’ve implemented all of those strategies now, so they’re in the works. And we’re starting to see that start to pay off as well. So it’s a fairly complicated model that we don’t provide the specifics on for guidance. But these inputs of biopsy, biopsy conversion ratios, number of physicians that are both implanting and providing biopsies, all these factors play into our confidence here in the second half.
Great, that makes a lot of sense. And then if I could just follow-up with you, Gerard on the cost. You had a very strong gross margin versus our expectations. It looks like the marginal costs that you’ve talked about in the past I think you’ve said 15% to 20%, it looks like it’s actually much lower than that. And I’m just -- I just want to make sure, we’re thinking about it correctly as, on a go forward basis. Is it is that 15% to 20% still right.
Was there something in the quarter that was sort of one-time in nature, that isn’t going to repeat. Because it seems like you’re getting an incremental benefit, and you’ve only just started expensing manufacturing. So I just want to make sure I understand what’s going on, on the cost lines? Thanks so much.
Yes, that’s a good question. I think we’re definitely on the lower end of the 15% to 20%, I think 15% is probably a better number. It does swing a bit from quarter-to-quarter. So I’d like give myself a bit of a window. But definitely it’s coming up at the low end of that and maybe we’ll revise that marginal cost downward after another quarter or two.
But a lot of moving parts as we’re still a year in for -- well we are more than a year. But in the launch where there’s some spikes in costs that we don’t anticipated, we don’t -- can’t anticipate at times. So let’s stick with the lower end of 15% at the moment.
Okay, that’s fair. Thanks so much.
Thank you. Our next question comes from Ryan Zimmerman of BTIG. Your line is open.
Great, thanks for taking the question. So I think last we spoke your new reps in the MACI department were just getting started in the second quarter. And I wanted to follow-up and see; one, how those reps have been progressing, are they ramping faster than your original expectations, just given you raised guidance. Any color there I think would be very helpful.
Yes, I’ll start Ryan and then turn it over to Dan. Obviously we had talked previously, and we have been through this drill now this is the second time right, where we bring reps on in the first quarter, train them up, let them shadow to the legacy reps, put them in the field, starting in the beginning of the second quarter. And as we saw last year, we principally expect to see the impact from the new representatives, in the back half of the year and obviously that fit into our increasing revenue guidance pretty substantially.
So, there is a number of factors and Dan and his team have done a great job and I think it’s just a combination of obviously the procedure itself being much import for surgeons. I think Dan and his team has done a great job with reimbursement and access that makes it simpler for surgeons to get the product reimbursed with confidence that they can move forward. And then of course layering on some great new sales reps just kind of creates what we hope to be a virtues cycle going forward.
So I’ll give some credit here to Roland DeAngelis of VP of our Commercial Group and he has done a really nice job of identifying what needs to be tough and how to best teach it from the folks that we hire on. Fortunately MACI has gotten really good orthopedic market, so we have attracted a lot of good talent that already has experience in the OR and also -- and most the vast majority are in orthopedics already as well.
So the part that they are not as astute with is the payer piece, because a lot of them were working with devices. So Roland has instituted the training for payer and how to navigate patients through like cartilage care and not only that the case management team that we have has come on really strong as well. So, the representatives can really focus on the becoming astute at training surgical technique and helping physicians identify the patients and where our reps initially when we came to this company, the reps really was responsible for almost all of the reimbursement and getting the appropriate prior authorizations and things like that.
Now we have a strong case management team that can support these new representatives bringing this business up to speed quicker.
Very helpful. And then I recognized you can’t comment on any business development that’s going on, but you do have a stronger balance sheet today, than you did a quarter ago. Just your general thoughts around kind of what you are thinking about for the use of cash, when investors may get some sense of where that could play out? Thank you.
Yes, thanks Ryan. So, as we have talked about, we obviously have a portfolio of highly innovative premium price products, only approved products in their class and it’s those types of products that we look for in order to build out our commercial franchise in sports medicine, and sever burn care or other opportunities that would allow us to build the new vertical as we had with sort of an anchor product.
We obviously understand sort of what’s created value for the company, high revenue growth, good margins, on a path to profitability, so we take those kinds of things into account as well. But as we said during our raise, we think we had a number of good opportunities that are out there. The one thing we won’t abundant is sort of a financial disciplined that has served us so well, not only in acquiring this business, but in running this business. So we’re not going to do a deal just to do a deal, even though we have the balance sheet to do so.
And as I mentioned in my comments, we think overtime this gives us the flexibility to do strategic transactions and when the right ones are here, that’s when we’ll let investors know about it.
Appreciate it very much. Congrats on the quarter.
Thank you. [Operator Instructions] Our next question comes from Kevin DeGeeter of Ladenburg. Your line is open.
Hey guys, thanks for taking my questions and congratulations on the quarter. Dan, could you talk a little bit more about what your surgeons are seeing in terms of their rehab time for patients. And are you seeing any more use or exploration with the U.S. surgeons on shorter rehab schedules post-MACI procedure?
Sure I'll caveat everything I am about to share with every patient's rehab is their own given the nature, age and number of defects they have or cut or concomitant surgeries like ACL and things like that. So -- but in general, our physicians are finding that the MACI rehab procedure is three months quicker than the Carticel. So where patients used to get to say running at nine months they're now running at six months. They're getting to back to sport usually with Carticel that was nine months plus. For MACI now that's more like six months plus definitely by nine months.
We've got certainly a lot of anecdotal evidence. So they all talk about specific patients who’ve recovered quicker than even those timelines. But in general I think the best way to describe it is it's nine months quicker than Carticel.
Great, that's helpful. And then just maybe one for Gerard on guidance. Gerard, can you just clarify for me when you talk about I think low to mid-teens growth for Epicel. Was that for the year or is that for the second half?
That was for Epicel and that was for the year.
Okay. So that would suggest something sort of in the single-digits I think if my math is correct for the second half of the year. Is there anything you want to call out there? Is that just a level of conservatism given the lumpiness of the business?
Yes, so Epicel in the second half of last year had -- they were record breaking quarters. Volume we had also taken some pretty significant price increases through that were staging in that I just finished by the middle of the year. So it is pretty -- it was a pretty healthy competitor for the back half of this year versus back half of last year. Plus as we said consistently Epicel is still tough to predict.
So both of those things in mind, we think it's always prudent to kind of on a rolling basis never get over as we said before high-single-digits, low-double-digits. At this point we're saying low-teens for the full year.
Great. And then just maybe one last one for me and it goes along the same line of guidance. Does guidance include any expectation for price increases for either Epicel or for MACI?
No, not in this fiscal year. No.
Great, thanks for taking my questions.
Thank you. Ladies and gentlemen this concludes today's question-and-answer session. I would like to turn the call back to Mr. Colangelo for any closing remarks.
Well, I just want to say thanks to everybody for your questions and your continued interest in Vericel. We're obviously excited about the opportunities ahead and look forward to reporting on our progress on our next call. So have a great day and thanks again.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Have a great day.
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