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Good day, ladies and gentlemen, and welcome to the Vericel Corporation First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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.
Thank you, operator, and good morning, everyone. Welcome to Vericel's first quarter 2018 conference call to discuss our first quarter 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 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 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 in 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 with MACI's uptake in it's first year following the 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% to 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 positive operating cash flow as we continue to move our current business towards sustained profitability. Overall, we have 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 the survival benefit and expand the number of burn centers across the country that utilized this potentially life-saving product. Likewise, MACI uptake remained strong as we continue to expand the number of sports medicine surgeons using the product. We believe that our efforts will be enhanced so 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 3 Summit extension study in the American Journal of Sports Medicine, which demonstrated the sustained clinical benefit of MACI out to five years. MACI is the only FDA-approved cartilage repair product that has demonstrated significantly greater improvement versus microfracture in a Phase 3 controlled clinical trial, and it's important to both clinicians and patients that MACI, in addition to demonstrating significant improvements compared to microfracture as early as one year, maintains improvements over microfracture out to at least five 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.
Thank you, Nick. First quarter of 2018 caps an outstanding launch year for MACI. The appeal of MACI has solidified the market as we're 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 reinforced our belief in the future use of MACI by these surgeons.
We expect this momentum to continue as we execute on our four 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 that highlight success stories on MACI.com. Additionally, our sales representative will now be able to leverage the summit extension study results demonstrating the sustained clinical benefit of MACI out of five years. In every market, there are adopters that will wait until long-term data is available. Because of the prior European experience with MACI and the timeline to it's introduction in the United States, our representatives will have the unique advantage of promoting five year clinical outcomes for MACI, just one year after launch; this certainly is an opportunity that our sales team will make the most of.
Our second strategic imperative is increase the number of surgeons utilizing MACI. To aid in this effort, we have expanded the sales force from 28 representatives in four regions to 40 representatives in five regions. The new representatives have completed their training and the new territory alignment was initiated on April 1. Inline 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 trained approximately 100 new surgeons so far this year; that brings our total to just over 600 physicians now trained on MACI. We have three upcoming regional training programs scheduled for the second quarter and additional education events scheduled at the American Orthopedics Society for Sports Medicine meeting in July this year. We [indiscernible] of programs and KOL webinars scheduled for over the next two quarters, with more come throughout the year.
Our third strategic imperative is to streamline and extend MACI plant access. We are very pleased to report that now, all of the 30 largest commercial plants 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 to do not already do so.
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, five-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 improved biopsy conversion rates.
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 will now turn to Epicel, which also had another very strong quarter. While Epicel volumes are inherently better 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 featured decision points in criteria to help surgeons identify patients earlier and expand the patient types 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 cadabra [ph] training program with a small number, surgeons at our headquarters and will roll this enhanced training program out and scheduled advancing to second quarter. In addition, our Epicel team was so very busy at the 50th Annual Meeting of the American Burns Association last month. Two posters of patient cases were presented, we held a very well-attended educational program and an advisory board meeting with KOL.
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 specialist can offer to current and perspective customers along with a reimbursement hotline.
In summary, Epicel is an important life-saving 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.
Thanks, Dan. The commercial team has done a great job in driving continued MACI uptake and expanded access utilization. I'll now turn the call over to Gerard to review our first quarter 2018 financial results.
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 first quarter of 2017.
As a brief reminder, the $2.8 million revenue reserve was related to a contractual dispute between one of the companies 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 in 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 switching the effect of the revenue reserve in the first quarter of 2017. Clearly, we are capturing the benefit of a 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 expense is primarily due to an increase in the MACI sales force, growth in case management services to support MACI, and higher non-cash 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 non-cash 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. The change in other expense for the quarter is primarily due to the $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 defined adjusted EBITDA as net income plus income taxes, depreciation, amortization, non-cash charges for stock based compensation, warrant evaluation and significant one-time non-recurring items. A full reconciliation can be found in both our press release and related 8-K earnings released 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 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 totaled net product revenue. As we have previously stated, our historical revenue seasonality as an average been 21%, 25%, 21% and 33% in the first four quarters respectively. However, we would consider results within two percentage points of the average from a quarter to be inline 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 impact 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 wanted to add additional color on our first quarter 2018 spend. In the first quarter, we booked an incremental $800,000 of non-cash 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.
Thanks, Gerard. We had a very strong first quarter and a great start to 2018. Our robust revenue growth and margin expansion reflects the success of our commercial teams sales and marketing initiatives together with strong position enthusiasm from MACI and Epicel. We believe that these results positioned 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 for your questions.
[Operator Instructions] Our first question comes from Ted Tenthoff with Piper Jaffray. Your line is now open.
Turning to profitability; I guess picking back up on the MACI performance, can you give us a sense for how training new physicians is helping drive biopsy's and procedural growth? Is this really that the physicians are more comfortable with the procedure and are recommending it more? Is it more patient [indiscernible], what's really driving this success?
So the interest in training is basically that the Carticel procedure because of the full ergonomic [ph] and the surgical technique and suturing was unappealing for many surgeons. And our answer 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 training and really the ideal training is whatever the physicians chooses. If they like to go to a [indiscernible] lab, we take them there; if they want to do a video online, we can do that as well. So we created venue of options based on the physicians comfort and that is really what's been more successful for us. I can tell you it's been one type of training but having the 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.
And I found that the R&D Day [ph] that you guys did with the input from the doctor who is doing the tall surgeries was really interesting. Is there a typical progression like [indiscernible] and give it six months and see how it goes and then do two or -- can you give us a little something about how the new doc or new surgeon adoption tends to playout?
Sure. There really isn't a typical yet; we are interested in answering that very question Ted and we've been looking at new adapters, old adapters, the physician that you experienced at our Investor Day is a physician who adopted very quickly, who was -- did not use Carticel previously but was a cartilage specialist, and those physicians adapt at such a rate that as an example, she used 15 MACIs and planted 15 patients last year in her first year on market. Now we do have other physicians who aren't necessarily cartilage specialist, who will treat couple of patients and then wait until the patients have rehab; and during that time we see that they continue to take biopsy's, so that we -- they are predicting a good outcome but they are waiting to see the patient recover before they jump-in.
So we are also trying to project the adoption of new users, unfortunately we haven't landed on a standard yet, some are quick to adapt, others hit a few patients and then wait to see the recovery.
What about from a patient side; how do they start to pull from a patient side? I think Dara Torres experiences is telling -- but is this signal a more direct-to-patient advertising or outreach?
So it's three-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 each year 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 in cryopreservation so that we can communicate with that patient appropriately overtime. So that's the second component of it.
And then third, once they sign-up, we send them a care kit from My Cartilage Care and that also includes some of the patient efficacy and stories like Dara Torres. Understand, she is not the only one, we have others that we are building a menu off so that patient can either find the motivational, aspirational context of past Olympian; or they can find a patient that kind of looks like them on that level as well. So we're -- we've taken a multi-pronged approach to this, and we've -- we hope to the benefits of that certainly in 2018.
Our next question comes from Ryan Zimmerman with BTIG. Your line is now open.
Just one follow-up on Ted's question; a little bit around biopsy's. 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 most of 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 long enough? I'm just curious around these dynamics. Thank you.
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 Dan has to do -- I'm looking at Dan and smiling; and that's part of what the outreach program is; for with the patients to let them know 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 consent 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 a PC change in conversion rates, I suspect we might see a change in timing as well.
And then, on Epicel -- it continues to be very strong, just curious around -- you've ramped up in your 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 is still a significant runway of additional burn centers that you could be in? Thank you.
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 never 100% penetrated into your target institutions and so we've 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 comparatives, medical education, peer to peer education, stronger presence at burn association meetings, etcetera, and we've seen that pay dividends previously and we certainly expect that will be the case going forward as well.
Our next question comes from Daniel [ph] with Leerink Partners. Your line is now open.
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. So could you help us understand why you're reiterating guidance given that dynamic?
Sure. So I think we do two things when we look at kind of our revenue. We're always comparing the same quarter, this quarter to the same quarter in the prior year and then we look at seasonality. I think it's important to think through some one-time and unusual dynamics that are occurring. Thinking through just in terms of comparative quarters, the question we need to keep in mind and you did worth mentioning the 55% that we had as $2.8 million reserve in the first quarter last year which would skew GAAP revenue and I would just remind everyone to keep it in mind that there will be $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 were some business push from Q1 into Q2 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 doctors who couldn't get training in time, we believe kind of pushed their business into Q2. Similarly, we didn't have all the pair policies change, 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 competitor and we're facing a slightly stronger Q2 competitor 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, 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 do we do in the second half of the year because I think we'll smooth out those effects.
Secondly, in terms of seasonality, I think we'll actually see a bit of a skew -- it will be roughly in line with what we typically see; but I would expect we'd see about 2% increased -- like a 2% skew towards the fourth quarter of this year as we move from transitioning to 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 for the back half of the year.
And then, just a question on the performance in the quarter and the recent [indiscernible]; 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; this is 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 opened. Thanks so much.
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, they are -- those territories reflected their efforts and 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 the territories that -- in some of these territories they did not have a strong base, and they will be growing those overtime, 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.
Our next question comes from Chad Messer with Needham. Your line is now open.
Let me just start maybe with Epicel; I know it's a lumpy product in terms of revenues but two good quarters in the $6 million range after a few more sort of four 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?
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.
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; just wondering if there is anything to be commented on there. Are you getting people to pay you faster or that's more of a one-time shift?
I think it's a function of two things; cash receivable always piles up at the end of the fourth quarter because the fourth quarter is so strong. And then we're just slowly working through the tail end of those pharmacy disruptions, that were [indiscernible] accounts receivable piled up in some of those hiccups the occurred last year. But the bulk of it really is the fourth quarter normal pile up of AR due to seasonality.
Our next question comes from [indiscernible]. Your line is now open.
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 -- you look at it from a perspective of facilities that have ordered Epicel once either and now it's 12-18 months peak year metric [ph]?
I'll just size the entire market. There is approximately 124 self-identified burn centers. Now of that there is approximately 80 that are American Burn Association certified; so it's a combination certification between the surgeon, society and burns 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 in the expansion of the number of burn centers that are utilizing Epicel. We believe we're about 50% payer, so in context, if you think that there is probably a total of about 80 that really could handle these critically injured patients and execute well with Epicel. Does that answer your question?
It does, that's helpful. And then, just -- kind of coming -- background to questions of business development; just generally your thought process to product profiles it would fit well into you -- there is this burn call point or orthopedics, of course?
I think as we mentioned during our Investor Day, we really kind of take a two-pronged approach, the business development. First is adding products around our core sports medicine, and severed burn care franchises and so there is a set of products that we continually look at that are 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 is probably more opportunities in the sports medicine franchise area than burn care but we certainly have the 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 and development manufacturing, regulatory etcetera 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.
At this time, I am showing no further questions. I would like to turn the call back over for closing remarks.
Well, I just wanted to thank you again for your questions and continued interest in Vericel. We obviously we excited about the opportunities ahead and look forward to reporting on our progress on our next call. Have a great day.
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.