Vericel Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's First Quarter 2024 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 Eric Burns, Vericel's Vice President of Finance and Investor Relations.

Speaker 1

Thank you, operator,

Speaker 2

and good morning, everyone. Joining me on today's call are Verasol's President and Chief Executive Officer, Nick Colangelo and our Chief Financial Officer, Joe Mara. 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. 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. 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.

Speaker 2

Please note that a copy of our Q1 financial results press release and a short presentation with highlights from today's call are available in the Investor Relations section of our website. I will now turn the call over to Nick.

Speaker 3

Thank you, Eric, and good morning, everyone. I'll begin today's call by discussing our financial and business highlights for the Q1 as well as our expectations for the remainder of the year. Joe will then provide a more detailed review of our Q1 financial results and guidance for 2024 before opening the call to Q and A. We entered the year with a great deal of momentum after an out standing close in 2023 and that momentum continued through the Q1 as we delivered another quarter of top tier revenue growth, including record Q1 total revenue and significant growth in profitability. Total revenue for the quarter increased 25% to more than $51,000,000 which was above the top end of our guidance range with record 1st quarter MACI revenue and more than 60% growth in burn care revenue.

Speaker 3

This strong top line growth translated into significant margin expansion and profit growth as we generated record first quarter gross margin, which increased more than 400 basis points compared to last year and adjusted EBITDA growth of more than 300% as the company's profit growth continues to outpace our high revenue growth. Based on the strong start to the year, we're increasing our full year revenue guidance to $238,000,000 to $242,000,000 MACI had another excellent quarter with revenue growing 18% to more than $40,000,000 which was above the top end of our guidance range for the quarter. MACI's Q1 performance was driven by strong underlying business fundamentals as we continue to expand the MACI surgeon customer base and drive growth in biopsies. While the Q1 typically is the seasonally lowest quarter of the year, we had the 2nd highest number of MAC biopsies and surgeon taking biopsies in any quarter since launch, behind only the Q4 of last year, making the last two quarters the highest quarters ever on both of those metrics as our sales and marketing teams continue to execute at a very high level in building a strong foundation for continued MACI growth. To that end, surgeon interest and engagement with MACI remains high as the number of peer to peer programs and training labs for MACI more than doubled and overall program attendance more than tripled in the Q1 compared to last year.

Speaker 3

The high level of surgeon interest is driven by the strength of MACI's long term clinical outcomes, which were highlighted in a study published in the American Journal Sports Medicine in the Q1. This prospective study showed excellent long term results for MACI patients treated for both patellofemoral defects, where we currently have our highest penetration rates as well as femoral condyle defects, which is the focus of the MACI Arthur program. Pre launch commercial activities for MACIARTHR will continue to progress in advance of our anticipated launch in the Q3 of this year. In connection with the launch, we're expanding our target surgeon base from 5000 to 7000 surgeons to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures. Based on our experience to date, 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.

Speaker 3

In addition, MACI Arthro instruments target smaller cartilage defects that comprise the largest segment of our addressable market, representing approximately 20,000 patients per year or 1 third of the $3,000,000,000 addressable market for MACI. We believe that MACI ARTFL will take a greater share of these procedures and provide a significant upside growth opportunity for the company. We also continue to advance the MACI development program to treat cartilage defects in the ankle and remain on track to initiate the MACI ankle clinical study in 2025. Cartilage defects of the ankle represent the 2nd largest market opportunity for MACI. We believe that potential ankle indication with an estimated $1,000,000,000 addressable market could be another significant growth driver for MACI in the next decade and beyond.

Speaker 3

Turning to our burn care franchise, 1st quarter revenue increased more than 60% to over $11,000,000 as we delivered another quarter of high revenue growth with total burn care revenue above the high end of our guidance range. Epicel revenue grew 56 percent to over $10,500,000 in the first quarter, representing the 2nd highest quarterly revenue ever for Epicel. Epicel continues to benefit from our expanded sales force and a higher share of voice in the Bird Care market as there was a meaningful contribution to Epicel cell revenue in the quarter from new or dormant accounts. NexoBrid launch momentum continued during the quarter as we made significant progress with respect to burn center key performance indicators and growth in underlying NexoBrid demand metrics. Through the end of the Q1, more than 60 burn centers have completed P and T committee submissions, approximately 40 centers have gained P and T committee approval, and more than 30 centers have placed an initial product order.

Speaker 3

In addition, there was a significant increase in the number of patients treated with NexoBrid in the 1st quarter and significant growth in the number of burn center orders and NexoBrid units ordered by hospitals versus the prior quarter. We remain very pleased with the strong surge in interest in NexoBrid as was demonstrated by the high level of attendance and engagement at NexoBrid events at the recent American Burn Association annual meeting, the progress in 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 performance. We believe that these factors will enable the company to build a strong foundation for NexoBrid in 20 24 and that the company is now very well positioned to deliver sustained growth to the 2nd high growth franchise in place. Overall, the company delivered another strong quarter and based on the strength of our core portfolio and the expected contributions from our new product launches, we believe the company is very well positioned for continued high revenue and profit growth in 2024 and beyond. I'll now turn the call over to Joe.

Speaker 1

Thanks Nick and good morning everyone. Starting with our Q1 results. Total net revenue for the quarter was $51,300,000 representing 25% growth over the prior year, which was above the top end of our guidance range for the quarter. MACI revenue increased 18% to 40,200,000 and total burn care revenue increased 63 percent to $11,100,000 both of which exceeded our guidance for the quarter. Epicel revenue was $10,700,000 an increase of 56% versus the prior year, which represented the 2nd highest quarterly revenue for Epicel to date.

Speaker 1

NexoBrid revenue was $400,000 which as anticipated was similar to revenue in the Q4. While underlying hospital orders and units grew significantly versus the prior quarter, As previously noted, specialty distributor and hospital ordering patterns as well as inventory dynamics can impact quarterly revenue results. Gross profit for the quarter was $35,400,000 or 69 percent of net revenue, an increase of more than 400 basis points versus the prior year and the company's highest 1st quarter gross margin to date. Pull through of incremental revenue to gross profit also remained very strong in the Q1 at more than 85%. Total operating expenses for the quarter were $40,800,000 compared to $34,700,000 for the same period in 2023.

Speaker 1

The increase in operating expenses was primarily due to development activities for MACI arthroscopic instruments, increased headcount and related employee expenses and lease expense associated with the company's new facility that is under construction. Net loss for the quarter was $3,900,000 or $0.08 per share compared to $7,500,000 or $0.16 per share for the Q1 of 2023. Non GAAP adjusted EBITDA for the quarter increased 3.25 percent to $7,200,000 or 14 percent of net revenue compared to $1,700,000 or 4% of net revenue in 2023. As adjusted EBITDA growth continued to significantly outpace our high revenue growth. This increase in adjusted EBITDA margin of approximately 1,000 basis points and what typically is our seasonally lowest quarter of the year clearly demonstrates the strong P and L leverage and the top tier profitability profile for the company.

Speaker 1

Finally, the company generated $7,200,000 of operating cash flow in the quarter and ended the Q1 with 148,000,000 in cash, restricted cash, investments and no debt. Turning to our financial guidance. After a very strong start to the year, we are increasing our full year total revenue guidance to $238,000,000 to $242,000,000 or 20% to 23% total revenue growth. For the quarter, we expect MACI revenue to be approximately $42,500,000 For burn care, we expect total revenue in the 2nd quarter to be approximately $10,000,000 with another strong Epicel quarter above our 2023 quarterly run rate and sequentially higher NexoBrid revenue. Based on our 2nd quarter guidance, the trailing 12 month revenue growth rate will be above 20% for MACI, burn care and total company revenue as we continue to drive high top line growth across both of our franchises.

Speaker 1

For the full year, we continue to expect gross margin approximately 70%, adjusted EBITDA margin of approximately 20% and operating expenses to be approximately 165,000,000 dollars For the Q2, we expect gross and adjusted EBITDA margins to be in a similar range to 1st quarter margins. The company had a very strong start to the year with 25 percent top line growth in the Q1 and significant profitability growth and margin expansion. In addition, on a trailing 12 month basis, the company has delivered 23% total revenue growth and 74% adjusted EBITDA growth, demonstrating sustained high growth in the top line and the bottom line as we continue to significantly enhance the company's financial profile. Overall, we believe that the company is very well positioned for another strong year in 2024 and has a solid foundation in place for continued strong growth in the years ahead. This now concludes our prepared remarks and we

Speaker 4

will open the call to questions.

Operator

Thank you. At this time, we will conduct a question and answer session. First question comes from Ryan Zimmerman with BTIG. Go ahead, Ryan. Your line is open.

Speaker 5

Thank you and good morning and congrats on strong start here. I want to ask a couple of questions in a multi part manner. First on guidance, I want to understand 2 things. Do you still expect I think you had mentioned before that you could do NexoBrid sales in the range of and correct me if I'm wrong here, Joe, dollars 7,000,000 to $8,000,000 or $8,000,000 to $9,000,000 I can't remember exactly what it was, but do you still expect that level of NexoBrid sales this year? And the second component of the guidance question is you beat by about $2,000,000 dollars You kind of if you split that between the two franchises, guidance is moving up about $1,000,000 so just talk to us about kind of where you think you're holding back between MACI and Epicel for the guidance for the year?

Speaker 5

And then I have a second question.

Speaker 1

All right. Well, I'll start with those. Good morning, Ryan, and thanks for the question. So I may start on the total guidance and then talk a little bit how we're thinking about kind of the burn care on a full year basis. So in terms of the total guide, we had a very strong start to the year in Q1.

Speaker 1

We're raising our guidance to $238,000,000 to $242,000,000 So if you look at the midpoint there, which is where our focus, we're up $1,000,000 so $39,000,000 was our midpoint coming into the quarter. We've increased that to $240,000,000 In terms of kind of the mix on franchises to start, I would assume the $1,000,000 increase is on the Macy side and that kind of flows through to Macy. Given Macy was roughly $1,000,000 ahead in Q1 in terms of our expectations and guidance, our metrics are very strong into Q2. I think relative to the estimate we gave last quarter, which again, there's multiple scenarios, but the framework we gave, which the starting point for MACI was in the high teens and I had referenced 194,000,000 dollars I think you can assume that comes up in our base case, if you will, to $195,000,000 and the range ticks up as well, call it $193,000,000 to $197,000,000 if you think about a kind of high teens range. The remaining $45,000,000 would stay on Virtare and that gets you to the $240,000,000 total.

Speaker 1

A couple of things kind of around your question. So one, we don't typically adjust our burn care guidance particularly after the first quarter we don't adjust it rather after the Q1 of the year. We had a very similar situation last year where we had a run rate expectation going into the Q1. We were ahead of that. We did not adjust.

Speaker 1

And then if you just think about kind of our burn care portfolio where Epicel can still vary, although clearly it's doing quite well and benefiting from the higher share of voice, it's still can vary on a quarterly basis. And I would say it's still difficult to predict exactly what the shape of the NexoBrid launch uptake curve looks like. So it's still early in the year there. So kind of holding guidance there, it is important to recognize that in the burn care total, this is still kind of well above at $45,000,000 well above the company growth at nearly 40% on a full year basis. So we have a very still have high expectations on the Verint Care side for both franchises.

Speaker 1

And of course, we had a very strong start from a profitability perspective in the Q1 as well. In terms of your question on the mix, if you will, for the balance of the year, I would say, obviously, Episodic had a great start to the year with its 2nd highest quarter to date and nearly $11,000,000 kind of on its own. And so as we think about Virt Care, I think there's a number of scenarios. To your point, What I referenced last quarter were numbers kind of in the call $38,000,000 range $7,000,000 ish range that got you to 45,000,000 dollars in total in burn care. If, for example, we maintain the higher run rate in Epicel that we call for at the start of the year throughout the balance of the year.

Speaker 1

That probably gets us closer to $40,000,000 on Epicel and the balance would be call it $5,000,000 on NexoBrid. Again, I think it's still early in the year. I think both products could shift a little bit. But I think there's multiple scenarios to get it to 45. So I think at this point, it's still difficult to predict exactly what it looks like, but we expect both products to contribute.

Speaker 1

But NexoBrid is in a build year and clearly Epicel is operating at a higher run rate.

Speaker 5

Yes. No, that's very helpful, Joe. I appreciate all the color. The second question, I should say, and not again, not to take anything away from profitability, it was nice to see. On MACI, I want to ask about MACI and the launch of MACI Arthro a little bit.

Speaker 5

As you think about the broader segment of doctors that you can target, 1, are you thinking about expanding your sales force? I mean, should we think about that from an operating expense standpoint? And then 2, you talked about 50% penetration over time. By my estimates, I have you at maybe 2,400 docs today. So call it 7,000 docs, that's 1,000 more.

Speaker 5

Why 50%? Why not higher? Why not 75% or so? I'm just curious kind of what's driving that thinking?

Speaker 3

Yes. Hey, Ryan, this is Nick. So first of all, on sort of sales force expansion, I think we've discussed it before that this will not the launch of ECR through adding a couple of 1,000 targets over 76 territories, that's something that we think we can absorb without having to realign territories, which as you know can be disruptive. What we will do as volumes continue to increase is add some of the territory development managers that we had for instance last year as well in high volume territories. And then arthroscopic specialists who can really help surgeons who are new to MACI Arthro or MACI in general.

Speaker 3

And so all in, call it half a dozen to a dozen folks maybe. So kind of obviously not a very significant expansion, but one that we think will aid with the MACI, Arthro uptake. The 50% reference that we kind of talk about, as you know historically we launched MACI with 3,000 targets and we got up to sort of 50% penetration and it was increasing pretty dramatically at the time. From 2018 to 2019, the number of biopsy surgeons was up 25% to call it roughly 1400 for the year, but higher than that cumulatively. And then we increased the sales force.

Speaker 3

So we never got to sort of terminal sort of penetration rate with the initial size target universe. Obviously, we then increased 5,000. We continue to grow strongly, approaching 50% penetration and we'll expand again. So again, we'll not have gotten to an ultimate penetration rate. But the point is, it will drive, in our view, continued surgeon adoption and growth.

Speaker 3

And yes, ultimately, there's no reason it can't go above 50%. We just sort of never gotten to the point where, again, it's matured enough before we had other opportunities to expand the business.

Speaker 5

Thank you. Appreciate the color.

Operator

Thank you. Thank you. One moment for our next question. The next question comes from Sam Brudowsky with Truist Securities. Go ahead, Sam.

Operator

Your line is open.

Speaker 6

Hey, thank you for taking the questions and congrats on the solid start and great profit number. I did want to dig into that profit side of things

Speaker 7

a little bit. Joe, did I hear you right?

Speaker 6

You said 2Q margins, we should expect them to be similar to 1Q. And then just sort of taking that in mind, keeping the gross margin guide for the year at about 75% when presumably your lowest or excuse me 70% when presumably the lowest quarter of the year is going to be about 69 percent and hopefully can step off from that. Just how you're thinking about that and what can give you confidence to potentially think about moving that range up for gross margin or EBITDA that is?

Speaker 1

Yes. No, I certainly appreciate the question. I mean, obviously, kind of a great start from a profitability as we've been talking about quite a bit, in particular over the last few quarters, our focus is driving the top line growth, but also kind of margin expansion and our profitability metrics. So I think to your point in Q1, obviously really strong kind of both from an adjusted EBITDA margin perspective, be in the mid teens, gross margin in the high 60s. That was a bit ahead of kind of trends and expectations, if you will.

Speaker 1

I would say as we think about the balance of the year, I mean that can certainly still ebb and flow a little bit. And I think the right baseline is obviously Q1 is off to a very strong start. You can look at the prior year kind of in the kind of mid to high 60s and we would expect on a full year basis gross margin to expand from 6% to 8.5%, if you will, last year to that 70% range. So again, it can ebb and flow a little bit throughout the year. But I think to the kind of key part of your question, which is, I think, based on that strong start, we certainly have the potential and I think are in a good position to potentially be higher than our initial guidance.

Speaker 1

But given we're just kind of 1 quarter in and these are kind of approximate numbers, we haven't updated them yet, but they continue to improve continue to improve. And the other piece on the gross margin side that we look at is kind of the pull through, which was very strong in the quarter, kind of the incremental revenue pull through well above 80%, I think over 85%. So good start and expect strong quarters throughout the year and we'll kind of monitor that. But I think we're in a good kick on the gross margin side.

Speaker 6

Great. That's super helpful. And then shifting to NexoBrid, I wanted to ask a bit of a higher level question there. Obviously, without providing guidance, but just as we think about where the company is going to be positioned heading into 2025, you already have almost half of centers in the funnel to an certain extent. Should we think about most, if not a good portion of the target centers being fully onboarded and ready to go in 2024?

Speaker 6

And then then how do we think about the sales strategy changing in 2025? Can you fully shift to just driving surgeon utilization? Thanks.

Speaker 3

Yes. Hey, Sam, this is Nick. I'll take that one. So for NexoBrid, again, I think anyone who's done market checks or for instance, participated or attended the American Burn Association meeting, you get to see sort of this super high interest in the product from the burn care community. Obviously, as you alluded to sort of performing well on sort of the burn center KPIs in terms of P and T submissions, approvals, initial orders, and most importantly, excellent surgeon feedback on patient outcomes for those who have started using the product.

Speaker 3

So we think as we've been kind of beating the drum on, this is a build year as you get through these sort of processes. I think it's pretty well understood in the industry. We think we'll be in a good place by the end of the year where yes, we would expect the vast majority of PT submissions to have been completed and hopefully approved or in the process of being approved. And as we alluded to, once you get through the P and T committee process, there are still other procedures and processes that hospitals need to get through to be able to order the product and then start utilizing it. So we're hyper focused on that, as you might imagine.

Speaker 3

And at the level of sort of KPIs and getting centers up and running, I'm pretty pleased with that performance. Lastly, I would just say, as you know, changing the standard of care from a surgical excision procedure to a topically applied biologic, I mean, surgeons have been doing the same thing for decades. And so I think the adoption, again, moves at different paces in different hospitals, but we certainly have not changed our long term view for NexoBrid. It's just you go through the process.

Operator

Thank you. One moment for our next question. Your next question comes from George Sellers with Stephens Inc. Go ahead, George. Your line is open.

Speaker 7

Good morning. Thanks for taking the question and congrats on the quarter. Maybe on Epicel, I'm just curious if you could give some additional color on what drove the beat in the quarter, maybe how the underlying market performed, what corn sizes looks like, things like that. And also your perspective on the impact, some sort of halo effects potentially from NexoBrid, if that was a significant driver as well?

Speaker 3

Yes. Hey, George, it's Nick. So just starting with the burn care market, as we've talked about, we do have access to market data around large 30% plus body surface area of burns. And I would say the market was kind of normal, maybe down a little bit. So that certainly wasn't driving Epicel performance.

Speaker 3

It really was just as we talked about before. We do have a larger footprint now. We're in more burn centers than we used to be. As I alluded to in my comments, we certainly saw a significant contribution to Epicel revenue from what were formerly dormant or new accounts that we're calling on for NexoBrid. So that is a halo effect that we expected additional pull through on Epicel.

Speaker 3

And I think we're seeing that as we kind of move through the initial launch phase for NexoBrid.

Speaker 7

Okay. That's really helpful. And then maybe on NexoBrid, I'm just curious if you could give us some additional detail on some of the inventory and specialty distributor impacts. How we should really think about those 30 centers that are starting to see orders, how that will flow through the P and L and then maybe the cadence as we think about the rest of this year, where inventory levels are now and how that compares to what you're seeing in terms of actual utilization?

Speaker 1

Yes. So good morning, George. It's Joe. I'll take that one. So if you kind of think about NexoBrid revenue during the quarter and we talked about this on the last call, we expected kind of a similar revenue range.

Speaker 1

We ended up about $400,000 kind of similar to last quarter about 500 I think it's important as kind of Nick talked about in his prepared remarks, the strength in the center level KPIs continues to be very strong as part of your question there. I think importantly, we saw increases in the number of ordering centers, a significant increase from hospital orders to our specialty distributors and also significantly more patients treated in the quarter. So I think as kind of in addition to that, as we think about kind of our revenue trends, particularly early on, I think this is much kind of an early launch dynamic. If you think back, the Q1 in the market, Q3 of last year, we had kind of some SD stocking. The 2nd quarter in the market in Q4, I'd say there was a fair amount of hospital stocking, if you will, where they were starting to order products and kind of get it on their shelves, particularly the early adopters.

Speaker 1

And then just as a reminder, again, we recognize revenue when our specialty distributors order and this can vary each quarter depending on ordering patterns or inventory levels, etcetera. And really what happened again during the Q1 is the hospital orders to the FDs went up, but our orders from our specialty distributors to our 3PL, where we recognize our revenue came down. And essentially what that means is the specialty distributors managed to a lower inventory level. And you do often see as kind of launches progress, the distributors will kind of get to different inventory levels. So I think as anticipated, a little bit choppy out of the gates.

Speaker 1

But I think as we continue to progress throughout the launch, it's really going to be about continuing to add centers, treat additional patients, see those metrics come up and also really that additional utilization as centers become more comfortable. So there's certainly going to be an element of inventory dynamics as we go through this. But generally, I think as we move forward, particularly in the back half and into next year, it's really going to be driven by patient utilization and hospital ordering and this should be kind of a lower component, if you will, on the revenue side.

Speaker 7

Okay. That's really helpful. Thank you all for the time this morning.

Operator

Thanks, George. Thank you. One moment while we prepare our next question. The next question comes from Swayampakula with H. C.

Operator

Wainwright. Go ahead. Your line is open. Akyolawith H. C.

Operator

Wainwright. Go ahead. Your line is open.

Speaker 4

Thank you. This is RK from H. C. Wainwright. A couple of quick questions.

Speaker 4

Nick, as your team continues to increase the targeted surgeons, right, from 5000 to 7000 and also in anticipation of the MACIAR throw. I'm just trying to understand what sort of relative benefit could we start seeing from this increase in the cartilage repair business as some of the surgeons or most of the surgeons work on both sorts of injuries, the cartilage and the auto?

Speaker 3

Yes. So MACI arthro is going to address cartilage defects as MACI our current product does. As we've discussed, the instrument set is targeted to smaller defects on the femoral condyle, which makes up the largest part of the addressable market for 20,000 patients a year. So while MACI is certainly a go to in patellofemoral defects, larger condyle defects. This allows us to have a preferred way to administer the product on those smaller defects on the femoral condyle.

Speaker 3

So we think obviously that it will allow us as I mentioned on the call to have greater penetration into the largest part of the segment. So the impact is presumably increased basic procedures when you have an arthroscopic delivery option.

Speaker 4

Perfect. And then, just trying to understand the commercialization, I'm not sure it's the right word, commercialization process for NexoBrid. So once the centers get the P and T approval, what's the time lag between I know you're saying that there are some additional procedures that need to get done before they order product. So I know it's too early, but to call it a trend, but what are you seeing currently as the timeline between approval and initial order?

Speaker 3

Yes. So that certainly it differs by hospital. There could be some that are on the quicker side and there could be some that take weeks to months to be able to get what is called the Epic system, which is what they use in the pharmacy to order all their products essentially. And before a product gets into that system, in certain cases, it can take quite a bit of time. So we obviously are focused on helping centers kind of navigate that process if they happen to have an issue, but it really varies, like I said, from it can be days or weeks to it can be months in certain cases.

Speaker 3

So those are just some of the kind of call them processes and procedures that different hospitals have to go through before they're really able to start ordering product in treatment patients.

Speaker 4

So one last question for me. Just within this burns franchise, As we had historically noticed how Epicel we could I mean, at least I know in public comments you always said that I cannot predict how Epicel business will grow from quarter to quarter year to year for a bit of time. Are we going to see a similar trend with NexoBrid or do you think NexoBrid's growth will be quite a bit smoother than what we have seen with Epicel?

Speaker 3

Well, I would say that the way we've always positioned it, RK, is that with Epicel, if you think about the 40,000 hospitalized burn patients each year, there's really only, call it, 600 to 800 surviving patients each year. So very small numbers and that's what leads to the variability you see in Epicel. With NexoBrid, obviously, once you get through these initial quarters where you've got, again centers coming on board at different paces. You've got inventory and ordering pattern dynamics going on because in our view, 3 quarters or 30,000 patients a year are eligible for NexoBrid treatment that over time as it ramps up, it becomes a more kind of consistent basis. The overall franchise should have less variability.

Speaker 1

Yes. And I would just Joe, I would just add and just kind of as we're thinking about the year kind of more in the near term and just a couple of comments just to add to that. I think obviously Epicel can vary, but we have seen certainly some strength now over several quarters. We came into the year kind of expecting to grow over last year's run rate. We'd like to think of Epicel kind of the sort of a baseline from a quarterly run rate perspective.

Speaker 1

We came in with an exit rate in the low to mid-8s. Obviously, we were well ahead of that in the Q1. You can't really plan on that. I will say that I think we certainly have an expectation that it can stay at these higher rates. We came in the year and kind of said 9 plus or mid-nine.

Speaker 1

Percent. So when you're thinking about the Q2, we said around $10,000,000 I think we would certainly expect kind of Epicel to be in that $9,000,000 plus range within that $10,000,000 There certainly could be some variability there, but I think that's a reasonable expectation. And similarly, I think for the rest of the year, which is kind of how we're thinking about Epicel as well. So there could certainly be variability. And I would agree with Nick, kind of over time, we would expect NexoBrid to continue to build and sequentially grow.

Speaker 1

That's sort of the expectation as we close out the year and into next year.

Speaker 4

Thank you. Thank you very much, Kurt.

Speaker 2

I appreciate it.

Speaker 1

Thanks, Duncan.

Operator

Thank you. One moment while we bring up our next question. Our next question is from Mike Gratge with Leerink Partners. Go ahead, Mike. Your line is open.

Speaker 8

Hey, guys. This is Brett on for Mike. Thanks for taking the question and congrats on another great quarter. You guys saw a strong pull through in 1Q, 2020 through obviously. How should we think about the durability of this operating leverage into the second half of twenty twenty four and twenty twenty five while you drive penetration at both the existing market and the new arthroscopic market once approved?

Speaker 8

And then obviously you have the ankle improvements or investments in 2025. So how is that going to impact the durability of the operating leverage?

Speaker 1

Yes. And I think you're referring to 1Q 2024, I think, to 1Q 2023, but Correct. Yes, yes. So I think so as we talked about earlier, obviously, a great Q1 from a kind of P and L perspective across the board, margin expansion, the pull through is very high, etcetera. I do think on the gross margin side, our sort of our expectation for quite a while, our kind of call it midterm expectation was to get to that 70% plus on a gross margin level.

Speaker 1

And obviously, our guidance this year is at 70%. And I would say, certainly, as I talked about earlier, it could ebb and flow kind of within the year when you look at margins or pull through. But on a full year basis, that is kind of tracking in a very good place to kind of get to those targets. And I would say from a gross margin perspective as well, I mean there's definitely a lot of efforts right now kind of thinking about in the right ways, where can we find efficiencies within our processes, across our spend, vendors, etcetera. And that's going to be pretty important as we move into a new facility in the next couple of years as well.

Speaker 1

So I think a lot of work on the gross margin side and sort of a lot of focus to kind of make sure we're driving kind of the right savings there. On the kind of operating expense side, as part of your question, I mean, there are some investments that we will need to make. I mean, we referenced Arthur O'Macy, there's some development costs there, but obviously that's an important initiative. Similarly on ankle, over the next few years that will kind of make its way in the P and L, but that doesn't change from a bottom line perspective. Our expectation to be trending toward that 30% adjusted EBITDA target that we've talked about for quite a while as well.

Speaker 1

So I think it really starts with the top line growth, but there's a lot of focus on kind of making sure we're kind of managing the rest of the P and L, but it also just shows just the operating leverage kind of within the business, particularly as we start to scale. So I think Q1, obviously, was a great quarter, but I think a good start to the year. But as we think over 2024 and 2025 and beyond, I mean that's going to remain a focus and we think we'll continue to see that leverage across the P and L.

Speaker 8

Got it. That's helpful. And then one more, I guess, I want to go back to Arthro. You mentioned 6 to 12 new reps likely. How should we be thinking about that the difference in outreach for those reps versus existing MACI, when they target those new surgeons?

Speaker 8

And then obviously, the shape of that penetration curve may be different versus what we've seen with legacy MACI. How should we be thinking about the steepest of that curve and if there's any differences to call out for the next couple of years?

Speaker 3

Yes. So as I mentioned, we will be adding, I guess, a couple of different profiles. So number 1 is kind of territory development managers who can kind of be at biopsies, at surgeries, etcetera. And then there's arthroscopic specialists who are really kind of training and kind of spreading best practices for the arthro delivery of MACI. So there really is support functions.

Speaker 3

As I alluded to on the call, when you think about an extra couple of 1,000 targets over 76 territories, you're talking a dozen or 2 new targets per territory. Those could easily be targeted by existing sales reps. In terms of the so it doesn't again require a realignment or a wholesale increase in the sales force. When you talk about uptake, I think you can think about a couple of different surgeon segments. So there's current basic users who might do a lot of their procedures in certain parts of the knee, they can expand towards if they focus on the patellar lesion.

Speaker 3

Now they have an option, less invasive option for treating crema occondyle defects, that certainly can is an instance where you take an experienced basic user and they start using it more broadly. So that can have very quick uptake as you might imagine. You also have new surgeons who because you take a biopsy and then the median time from biopsy to implant is roughly 4 months. There's always a time lag there. So they'll be kind of having a prospective impact on the business there.

Speaker 3

So it will differ by segment, but again, you're taking a well known product with great clinical administered less invasively in an area of the need with the largest number of defects. And so you could have very pretty quick uptake for those who are interested in using ACR2.

Speaker 8

Great. Thanks guys.

Operator

Thank you.

Speaker 3

Thank you. Thank you.

Operator

This concludes the question and answer session. I would now like to turn it back to Nick Colangelo for closing remarks.

Speaker 3

Okay. Well, thanks. And thanks everyone for your questions and continued interest in Vericel. Obviously, the company had a great start to the year, and we expect to deliver another full year of strong financial and operating results in 2024. We look forward to providing further updates on our next call and have a great day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Vericel Q1 2024
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