Vericel Corp

NASDAQ:VCEL

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Third Quarter 2024 Conference Call. [Operator Instructions] 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.

[Eric Burns, executive]

Thank you, operator, and good morning, everyone. Joining me on today's call are Vericel'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.

Please note that a copy of our third quarter 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.

[Dominick C. Colangelo, executive]

Thanks, Eric, and good morning, everyone. The company had another outstanding quarter as we generated total revenue growth of 27% and record third quarter revenue of approximately $58 million, which exceeded our guidance for the quarter. This strong performance was highlighted by record third quarter MACI revenue and the highest Epicel revenue in any quarter to date. We also delivered another quarter of significant margin expansion and operating cash flow as the company's profit growth continues to outpace our high revenue growth. Finally, the company achieved two very important regulatory milestones with the FDA approval of MACI Arthro and the NexoBrid pediatric indication, which positions the company for sustained high revenue and profit growth in the years ahead.

MACI had another solid quarter and was well positioned for a strong close to the year as the momentum in underlying growth drivers continued through the third quarter. We achieved record third quarter highs for MACI biopsies in the number of surgeons taking biopsies, driven by robust growth in both biopsy surgeons as well as biopsies per surgeon, which has become a meaningful growth driver for MACI this year. The strength of these key growth drivers, together with another quarter of significant increases in peer-to-peer programs, which more than doubled in the third quarter compared to last year; and attendance at those programs, which is at the highest level at any time since launch, demonstrates that surgeon interest in the core MACI procedure remains extremely high.

In addition, with the recent approval of MACI Arthro, MACI is now the only restorative biologic cartilage repair product approved for arthroscopic administration. The first MACI Arthro case was successfully performed a few days after we announced the approval, and there's been a considerable engagement and interest in MACI Arthro from both current MACI users and nonusers at training programs as well as our launch meeting at the Orthopedic Summit in September, an important early indicator of the potential for MACI Arthro to meaningfully expand utilization and sustain MACI's high revenue growth over the long term.

Turning to Burn Care. Epicel's third quarter revenue was its highest quarterly revenue to date, and we continue to generate significant Epicel revenue from NexoBrid selling activity at previously dormant burn centers. NexoBrid adoption continued to progress with more than 70 burn centers completing P&T Committee submissions and approximately 50 burn centers obtaining P&T Committee approval in placing initial orders since launch. With the NexoBrid pediatric indication now in place, more than 1/3 of the pediatric burn centers have completed P&T submissions with several pediatric centers placing initial orders.

Finally, NexoBrid recently received the Category 3 CPT code, which is scheduled to be posted on the AMA website on January 1 and go into effect on July 1 next year.

Overall, the company had an excellent third quarter and, importantly, we remain on track to meet all of the key objectives for 2024 that we established at the beginning of the year, including sustaining high revenue growth for MACI and the company, establishing a second high-growth franchise in Burn Care, securing FDA approval and launching MACI Arthro in the third quarter and continuing to drive substantial margin expansion and profit growth.

I'll now turn the call over to Joe to provide a more detailed review of our third quarter financial results and guidance for the remainder of 2024.

[Joseph Mara, executive]

Thanks, Nick, and good morning, everyone. As Nick referenced, Vericel had an excellent quarter across all financial metrics with a record third quarter revenue and profit margins coming in ahead of our guidance for the quarter.

Total net revenue for the third quarter was $57.9 million, an increase of 27% versus the prior year. MACI revenue grew 19% in the third quarter to $44.7 million and remain on track for a strong fourth quarter and approximately 20% growth for the full year.

Total Burn Care revenue in the third quarter grew 66% to $13.2 million, well ahead of our guidance. The outperformance was driven by record quarterly Epicel revenue of $12.2 million with the increased graft volume primarily due to considerably higher grafts per order. Importantly, based on our higher share of voice in the burn care market, both new and dormant Epicel accounts have contributed a meaningful portion of Epicel's nearly 30% growth on a year-to-date basis.

NexoBrid revenue grew sequentially to $1.1 million for the quarter as we continue to add new ordering centers and a number of centers regularly using NexoBrid increases.

The company's substantial revenue growth translated into significant margin expansion with gross profit of $41.7 million or 72% of net revenue, an increase of 480 basis points compared to 2023, which also represents a record quarterly gross margin outside of our seasonally highest fourth quarter. Through the third quarter, the company has generated gross margin of 70%, an increase of 450 basis points versus the prior year.

Total operating expenses for the quarter were $44.1 million compared to $35.7 million for the same period in 2023. The increase in operating expenses was primarily due to development and commercial launch activities for MACI Arthro, increased headcount and related employee expenses as well as additional marketing initiatives that helped drive a significant increase in physician engagement across both franchises.

Net loss for the quarter narrowed to $0.9 million or $0.02 per share compared to $3.7 million or $0.08 per share in the prior year. In addition, the company has generated positive net -- positive GAAP net income on a rolling 12-month basis and, importantly, we remain on track for positive GAAP net income for the full year.

Adjusted EBITDA for the quarter increased 84% to $10 million or 17% of revenue, an increase of over 500 basis points versus the prior year as we continue to drive very strong bottom line growth. On a year-to-date basis, adjusted EBITDA has more than doubled to nearly $24 million.

Finally, the company generated over $10 million of operating cash flow and ended the third quarter with $151 million in cash, restricted cash and investments and no debt. Notably, our cash and investment balance has remained consistently in the $150 million range throughout the year as the company's strong financial and cash generation profile has allowed us to completely self-fund the investment in our new manufacturing facility to support the company's future growth.

Turning to our financial guidance. For the full year, we are maintaining our total company revenue guidance of $238 million to $242 million or 20% to 23% total revenue growth, which implies fourth quarter revenue of $76 million to $80 million. In terms of our profitability guidance, based on the company's financial performance year-to-date and expectations for a strong fourth quarter, we are increasing gross margin guidance to 72% and adjusted EBITDA margin guidance to 22% for the full year compared to the prior guidance of 71% and 21%, respectively.

Overall, 2024 is set up to be another very positive year for the company with another year of high top line growth as well as significant margin expansion and profit growth ahead of our initial expectations. As we look ahead to next year, we believe that the durable growth in our core portfolio, together with our recent product launches, positions the company to sustain strong top line and bottom line growth and deliver a meaningful inflection in our cash generation given significantly lower CapEx as we complete the construction of our new facility early next year.

I will now turn the call back over to Nick.

[Dominick C. Colangelo, executive]

Thanks, Joe. The company has performed extremely well to date in 2024. And as we move into 2025 and beyond, we expect the momentum across our business to continue. While we're still very early in the MACI Arthro launch, we're seeing substantial interest and engagement with both previous MACI targets as well as the incremental 2,000 high-volume arthroscopy surgeons that are now part of our 7,000 target surgeon base. As I mentioned earlier, the first MACI Arthro case was performed within days of approval, and surgeons have already performed or scheduled dozens of MACI Arthro cases to date.

Importantly, surgeon feedback has been very positive with respect to the potential patient benefits noted by surgeons in our market research as the MACI Arthro Arthur procedure offers a less invasive treatment option requiring smaller incisions, which may result in less postoperative pain and overall faster postoperative recovery for patients.

We're very pleased with the launch to date. And given that the MACI Arthro incidents target the largest segment of the MACI addressable market, representing approximately 20,000 patients per year, we believe that MACI Arthro will have a meaningful impact on overall MACI utilization and potentially bolster its current high-growth trajectory, providing a significant potential upside growth opportunity for the company in the years ahead.

We also continue to advance the MACI Ankle development program. We remain on track to submit an IND in the first half of 2025 and expect to initiate the Phase III clinical study in the second half of the year. A potential MACI Ankle indication represents a substantial longer-term growth driver for MACI with an estimated addressable market of $1 billion that would enable the company to expand into other orthopedic markets.

Lastly, we'll be moving into our new facility early next year and plan to begin commercial manufacturing of MACI at that site in 2026. The new facility is designed to meet both U.S. and global manufacturing requirements, which provides strategic flexibility for the company to potentially commercialize MACI outside the United States. We're initiating an evaluation of the market opportunities and regulatory requirements in several OUS geographies as we continue to expand the long-term growth and value creation opportunities for the company.

Overall, we believe the company is well positioned not only for a strong close to 2024, but also to deliver a unique combination of sustained high revenue and profitability growth in 2025 and beyond based on the strength of our core portfolio, the recent launch of MACI Arthro and continued progress on other long-term growth initiatives.

This concludes our prepared remarks. We will now open the call to your questions.

[Operator]

[Operator Instructions] And our first question will come from Ryan Zimmerman from BTIG.

[Ryan Zimmerman, analyst]

Congrats on a really nice quarter. I guess I want to start with NexoBrid because it's getting off the ground this year. There's some decent expectations on NexoBrid in the next year as it normalizes and becomes more routine of a product versus having to go through the P&T process. And so Joe, I know you're not going to give guidance for '25.

But conceptually, I guess, can you talk a little bit about kind of the drivers for growth next year, kind of where you see NexoBrid potentially settling into a rhythm or when you see it settling into a rhythm and whether or not MACI Arthro is really an accelerant or a sustainable kind of driver of current MACI expectations.

[Joseph Mara, executive]

Yes. So Ryan, I'll kind of start there, maybe kind of just talk a little bit about the framework from a guidance perspective for '24 and then kind of how we're thinking about '25. So for '24, I think we've been consistent kind of all year in our framework. And I think as we think about MACI, we think that's still very much on track for 20% -- around 20% growth on a full year basis this year. So that hasn't changed. As we move into 2025, I would say, kind of the way we're thinking about -- from a company perspective, kind of thinking about the framework for next year, we haven't given specific guidance at the company level or at the product level as of yet. But we have pointed out that we do expect another year of strong growth. We talked about kind of being in the 20% plus range.

So I would say just kind of more as a framework as we move towards next year, I think the right starting point as we think about '25 is really to think about the total company growing at a similar range as kind of where we started this year and kind of the range we're in from a growth perspective. So what does that mean kind of across the franchises? For MACI, obviously, the leading indicators have been extremely strong this year kind of throughout the year. Biopsies have been strong driven by surgeons and biopsies per surgeon. The initial feedback on MACI Arthro, as Nick talked about, has been very strong. But I think as we think about next year, probably the way we're thinking about MACI to start is just based on those strong leading indicators and their core growth drivers, and I would kind of say a modest contribution from MACI Arthro, we think MACI can kind of be in a similar growth rate next year, just thinking about it that way.

And maybe just to kind of round out '25, I think on Burn Care, I think from a NexoBrid perspective, I think our expectation at this point, we're 3 quarters into the year, kind of getting to our first year launches. I think as we move into next year, I think at this point, we'd expect continued progression kind of each quarter on NexoBrid. And then from an Epicel perspective, probably more typical growth. This year has been a little bit kind of outside from a growth perspective. So I still think Burn Care will have very strong growth next year but probably more in line with the company growth.

And then lastly, I would say kind of on both MACI Arthro and NexoBrid, we don't want to get ahead of ourselves, but there's certainly potential to outperform kind of at the starting point here. If MACI Arthro, kind of the impact is greater than we initially assumed, it may come faster. And then similarly, from a NexoBrid perspective, it really comes down to -- we've had a lot of penetration in terms of total centers. But in terms of the centers really using it more regularly and kind of moving our centers kind of up the segment chain, if you will, that could potentially lead to faster growth on the NexoBrid side. But we're not going to assume that out of the gate on Arthro or NexoBrid as we think about '25.

[Ryan Zimmerman, analyst]

Okay. That's very helpful. And Nick, maybe turning to MACI Arthro for a minute. We heard it was -- and I could be wrong on this. We heard of a standing room only at the OSAT conference in Vegas about a week or 2 after MACI Arthro got approved. And so certainly a positive data point in terms of investors -- or excuse me, surgeon interest.

Can you talk about -- when you talk about record biopsies, you talk about biopsies per surgeon, what are you seeing from those 2,000 or so doctors that are incremental right now as we get going? And the second part of that is, are you seeing an uplift in your existing MACI customer base as a result of Arthro? Or do you expect that to be more of the driver than, say, new physician adoption as it gets going?

[Dominick C. Colangelo, executive]

Ryan, thanks. That's a great question. And when we kind of talk about MACI Arthro and have in the past, we really think about, obviously we had kind of our current or prior MACI 5,000 targets and then adding the new 2,000 surgeons. And as we think about segments within those kind of broader groupings, you have current MACI users from the 5,000 targets. One bucket of then principally kind of looks at MACI as a patella or patella femoral joint option for patients. Others do that plus femoral condyle. And so we kind of look at the surgeon segments in that way. And then you have kind of an opportunity for non-MACI users out of those prior targets and then the new 2,000 surgeons.

And I would just say of the first few dozen cases that I referenced earlier, we actually have surgeons who have either performed or have scheduled MACI Arthro procedures out of all 4 of those buckets. So we think that's a great leading indicator. As I've said on prior calls, certainly the low-hanging fruit is our previous targets who had biopsies that haven't yet converted that are amenable to the arthroscopic approach. And of course, when we had Dr. [indiscernible], who's on our website, he did the first case the week we announced the approval. Obviously that was a previously scheduled case, previous biopsy that he was able to perform the arthroscopic MACI procedure with. So that's -- those are the ones that are going to be easiest. And as we've talked about kind of we have that pool of unconverted biopsies for the year that each rep can go out and talk to the surgeons about.

But as I mentioned, we've also had non-MACI users from our original targets. And then the new 2,000 targets where surgeons have actually taken biopsies in scheduled cases. So again, we think that's a great sort of early leading indicator for the potential that MACI Arthro can have as we move forward.

[Operator]

Our next question comes from Richard Newitter from Truist Securities.

[Richard Newitter, analyst]

Congrats on the quarter. Maybe just the first question here, following up on Ryan. Just I might have missed it. You might have said it when you were answering him, but with respect to the portion of the market where you see MACI Arthro giving you better accessibility or to the lesion sizes, the [indiscernible] -- I'm sorry, down the femoral condyle, rather. What -- are you seeing those dozens of initial cases getting used in that seemingly expansionary segment of the market? Is that kind of what you would have expected to see? And maybe just elaborate on that a little bit, and I'm sorry if you had said that when you were answering the last question. I might have missed it.

[Dominick C. Colangelo, executive]

Thanks, Rich. No, I didn't address that part. But as I mentioned on prior calls, so the entire MACI Arthro instrument approach is designed for 2 to 4 square centimeter defects on the femoral condyles. Those are the most common defects, represent about 20,000 of the 60,000 patient TAM or about $1 billion a year. And typically, with the open procedure, either patella defects or the larger femora condyle defects where kind of the go-to defects for MACI. And it doesn't mean we didn't have surgeons doing MACI procedures for those smaller defects, but we had a much smaller penetration compared to, say, patella or large defects. And so that is the opportunity for us to get a deeper penetration into the largest part of the TAM.

And then yes, that's, of course, where the initial cases are going. Because the instruments, again, they come in pairs of 2, 3 or 4 square centimeter cutters, cannulas and the implant device. And so that's exactly the size in the initial location. But we've also seen surgeons, and again we're just kind of in the early days, doing not only femoral condyle cases but other areas of the knee as well. And of course, that could open up even broader utilization.

[Richard Newitter, analyst]

Very helpful. And maybe just -- I know you're not giving official '25 guidance, but similar to kind of the way you parsed out some of the considerations and ways to think of starting points for revenue. Can you do the same down the P&L? It's a great profit inflection that we're seeing in the business continuing in '24. It looks like that's continuing to '25. But anything you want to call out as we refine our models for next year, cadence and maybe if you feel comfortable opining on where consensus forecast are?

[Joseph Mara, executive]

Yes. No, I appreciate the question, Rich. So I would say it's probably too early to get into the specifics on next year. But I would say a couple of things. So one, obviously, the performance kind of this year, whether you look at individual quarters, kind of year-to-date where the full year is trending from a margin perspective, whether you're looking at gross margin or adjusted EBITDA, has been very strong. And I generally say probably a bit ahead of our expectations and ahead of our schedule for kind of getting up the curve there. So as I think as we think about 2025, I would say, we just want to be a little bit mindful of that.

I mean, said differently, I would not assume we're going to see the same kind of year-over-year expansion as a starting point in either gross margin or the adjusted EBITDA margin next year. We will start to see some of the depreciation and whatnot in the buildings start to play its way to the P&L and that's more to get into for next year. But those are some of the considerations from an overall P&L perspective. That said, I would say, when you look at gross margin, we're kind of at or ahead of our -- what was essentially our mid- to long-term expectation of 70%. So that is certainly great to see. And I think that's something we think we can certainly continue to improve upon. And from an adjusted EBITDA perspective, I think we're tracking nicely there as well. I think we're well set up to kind of make progress and kind of hit our, call it, midrange targets of 30% plus.

What it means for next year is we'll probably start out with, I would say, the kind of right expectations for that to continue to increase, but at a lower rate on a year-over-year basis to start the year. I would also say -- and I guess on those two, I would say, at the appropriate time we'll probably think about updating some of those long-term targets. Obviously, we're kind of at the 70%, for example, on gross margin or 70% plus. So that's -- we'll update that at the right time.

I'll just broaden it a bit as well and just say, as we move to next year, the last couple of years for us, we talked about and I think we've experienced that inflection from a profitability perspective on the P&L. But as we move to next year, I think there's a couple of other important dynamics which is, one, this year we're expecting to be GAAP net income positive. We obviously expect to build on that next year. So that will be something that I think will be very important as we move into next year and beyond. And then we referenced it in the prepared remarks, but from kind of a financial profile and cash generation perspective, we did want to point out, we self-funded our entire facility primarily this year but over the last few quarters. And essentially, once we get into early next year, that will be behind us.

So in addition to kind of the P&L metrics that we're obviously very focused on as well as the top line, I think the cash generation should -- will significantly improve in '25 and beyond. So that's something I'd say we're focused on as well.

[Operator]

Our next question comes from Mike Kratky from Leerink Partners.

[Michael Kratky, analyst]

Maybe another one on MACI Arthro. How is the early wave of MACI Arthro procedures that are being done or scheduled guided your outlook both for 4Q and 2025 just in terms of, one, the portion of implants that are going to be done arthroscopically? And then two, again, just kind of the degree to which you could see any uplift from MACI procedures overall?

[Dominick C. Colangelo, executive]

Yes, I'll start, and then Joe can jump in as well. So as we mentioned, the surgeon interest for obvious reasons is very strong. And we have had, as we expected, sort of the low-hanging fruit, as I mentioned, is surgeons who had these biopsies that are amenable to arthroscopic procedures and then converting those cases, essentially doing them arthroscopically instead of open. So most of those are cases that I think you could say likely would have gone forward in the fourth quarter. Probably some were incremental as we've seen surgeons, again, kind of get pretty enthusiastic about it. So we had said that we knew we would end up doing some cases this year.

But given the dynamics of the launch in September, and obviously, each surgeon who is in that bucket of 2,000 new surgeons and then those who had taken biopsies for MACI in the past, that's all prospective business. And as we've talked about, the median time for biopsies to convert is about 4 months. And that's why we said consistently that we see kind of the bigger impact from MACI Arthro in 2025 and beyond.

So lots of momentum, as Joe mentioned, in the core business. We expect to have some incremental, obviously, as we get into '25 MACI Arthro. And exactly how quickly that inflects, I think, remains to be seen. But we certainly, based on the initial enthusiasm -- and it's just obvious, right? It's a less invasive surgery. As we talked about, surgeons and patients expect that there's less postoperative pain, faster postoperative recovery or overall recovery, and so that's what's driving a lot of the enthusiasm. .

[Joseph Mara, executive]

Yes. And just to chime in briefly on 4Q and kind of the guide as well. So I think as we've talked about on MACI, I think another strong quarter in Q3. I think we're set up well, kind of still at the 20% kind of growth for the year. From a Q4 perspective, I'd say the kind of right place to start on MACI is $68 million in Q4, approximately $68 million. That kind of -- that gets you to that 20% on a full year basis.

And just on that kind of on the question, that's not -- that's really based on the strong leading indicators and really what would be typical seasonality. So that's based on just kind of the trends we've seen throughout kind of MACI's history there with the step up in Q4. It is not based on a significant kind of uptick in MACI Arthro. So that's not really the driver of Q4 guidance.

And then just quickly on the Burn Care side, just to round out Q4. Obviously, a great third quarter particularly on Epicel, which is great to see. And it's performed well really throughout the year. I would say from a guidance framework perspective, I think we've been pretty consistent on this. We don't typically raise our guidance based on one quarter or a prior quarter of Epicel performance just because it can vary so much quarter-to-quarter. And just as a reminder, for example, even in the second -- sorry, in the first quarter, we had $11 million of Epicel revenue. In the following quarter -- we did not change our guidance. In the following quarter, it was $7.8 million.

So I think that's a good example of kind of holding our framework. It's certainly appropriate, and we continue to believe that's the best approach just because it's a difficult product to predict on the Burn Care side. So in terms of Q4 on the Burn Care side, I would say, still early in the quarter, and Epicel clearly remains very difficult to predict. But I think at this point, it's probably trending closer to Q2, which was in that, call it, $7.5 million to $8 million range. I think it was about $7.8 million. So that would point to Burn Care trending to around $9 million in Q4. So as we think about Q4 and closing the year, we think we're set up for a very strong close. But kind of our framework is $68 million on the MACI side and $9 million on the Burn Care side. Of course, there could be some variability, but we think that's the right place to start.

[Michael Kratky, analyst]

Understood. Yes. Super helpful color there. So I appreciate that. Maybe one quick follow-up. Epicel had definitely been a really positive surprise. Do you expect that the NexoBrid launch has kind of helped you drive additional engagement there? And do you expect that, that is a trend that could be more durable in 2025 and beyond?

[Dominick C. Colangelo, executive]

Yes, that's a great question. And said even since last year when we were first getting ramped up with NexoBrid that we've definitely seen pull-through and now meaningful contribution to Epicel growth from the NexoBrid selling activities in either new or dormant burn centers. And yes, it's been a meaningful contributor, probably as much as NexoBrid itself for the year. And so expect that will continue as we move into 2025. And I think we mentioned on our last earnings call that we had realigned probably on the earlier side to both expand the number of burn care reps and ensure that all of them are selling both products now.

If you recall, when we first launched NexoBrid just, because the training requirements on Epicel are pretty steep, that we kind of had a group kind of an overlay configuration where the NexoBrid reps were calling just on the new NexoBrid accounts with the long-term vision that we would, at some point, have all of our reps selling both products. And we implemented that in the third quarter. And so long story short, yes, we expect that the cross-selling opportunities will continue to help Epicel as we move forward. And it's really been great. I mean, obviously, even based on the guidance Joe just mentioned, it will be up close to 30% for the year. So good, strong performance for Epicel.

[Operator]

Our next question will come from Josh Jennings from TD Cowen.

[Joshua Jennings, analyst]

Nick and Joe, congratulations on another strong quarter. I wanted to just ask about the MACI biopsy bank, and you referenced one of the first procedures. There had been a biopsy that was taken prior to approval is my assumption. But I mean, were you seeing some of that pent-up demand flow through with kind of femoral condyle biopsies as you headed into the MACI Arthro approval? And any sense of how that could -- kind of what that pent-up demand looks like in the biopsy bank?

[Dominick C. Colangelo, executive]

Yes. So we did have a number of surgeons, and I believe we've talked about this on our last call, roughly 100-ish surgeons that either we're involved in sort of the design of the instruments in development in the human factor study and the voice of the customer labs following the submission to the FDA. So there were clearly, call it, 100-ish surgeons who had participated in this. And so as you'd expect, some of the early procedures are coming from those who were familiar with it. We obviously also have biopsy transmittal forms with the size and location of the biopsies.

So for biopsies essentially taken in 2024 which had not yet converted and were amenable to arthroscopic administration, again based on the size and location, we were able to arm our reps with the surgeons and patients that they could have a discussion about would it be appropriate for an MACI Arthro. So I would say, though, that it's not -- we obviously couldn't promote the Arthro approach until it was approved. So there wasn't a whole lot of discussions kind of ahead of the approval or moving towards it, as you referred to. It was really once we got approval, then they're armed to go out and have those discussions with the surgeons about the approach.

[Joshua Jennings, analyst]

Excellent. And just wanted to get an update on MACI pricing and how to think about price increases in 2025. And kind of within that, just remind us the incremental revenues from MACI Arthro instrumentation in those cases. Sorry for the multipart question here.

But I also just wanted to ask about -- just to review the commercial thrust to attack these 2,000 high-volume arthroscopic orthopedic surgeons and just to make sure that there's -- you guys feel well equipped and positioned to maintain that kind of farming of your current accounts and hunting those new to new arthroscopic camp that you're [indiscernible].

[Dominick C. Colangelo, executive]

Yes. So I'll just start with kind of the general MACI pricing. We typically take a mid- to high single-digit price increase each year, and we'll expect to do that in 2025 as well. In terms of the MACI Arthro instruments, we do -- those are disposable instruments. So unlike an open procedure,where we have an implant kit that we basically provide to the surgeons and then we have to actually kind of process that sterilize it, et cetera, these are disposable instruments that we sell to the surgeons in the MACI Arthro cases. And so yes, you'll see kind of what was in our 10-Q previously as the biopsy kits as a line item for MACI will also now include the instrument revenue that we generate there as well. Again, compared to sort of the reimbursement for the J code for MACI, it kind of pales in comparison. But we are charging for the instruments in the MACI Arthro cases.

[Joseph Mara, executive]

I think the last piece, Nick, was just equipment in terms of...

[Dominick C. Colangelo, executive]

Oh, yes. So the other -- so the last piece of that is we are definitely planning early next year to kind of do a refresher on sort of sales force sizing. As you might recall kind of pre-COVID -- each year, we basically increased the size of the MACI's sales force postlaunch in 2017. So we did it in '17, '18 and '19. And then for 2020, we actually engaged associates and did a pretty comprehensive assessment, and that's when we went from roughly 48 to 75 territories. So it was a pretty big expansion. And that has served us well to date in this intervening period.

We have, as I've mentioned before, added territory development representatives in some of the larger volume territories. And we did that again this year to kind of help with the volume in those territories. But we'll be kind of refreshing that for the very reason you mentioned, which is to make sure we have kind of the appropriate reach and frequency based on the interest we're seeing in MACI Arthro. And again, if we end up expanding -- kind of run the same playbook that was very productive for us. We've often mentioned each year that we expanded the sales force. Rep productivity actually went up in terms of revenue per rep. And so there's a playbook we follow when we do that. So we'll do the evaluation early next year. And then to the extent we want to increase the sales force, we'll do that sort of in the back half of next year and rolling into 2026.

[Operator]

And our next question will come from Caitlin Cronin from Canaccord.

[Caitlin Cronin, analyst]

Congrats on a great quarter. So with Arthro, you're again increasing your surgeon base, as you noted, after reaching about 50% penetration from the previous base. I guess just with this larger base, do you think that there is a limit to the penetration you can reach with MACI longer term? Or if you have kind of a number that you're targeting there?

[Dominick C. Colangelo, executive]

Well, we've kind of said we've got two data points, I guess. One is, prior to the larger expansion that I just mentioned in 2019, we had about 3,000 surgeons at that time. The last year in 2019 that we had reported data, we increased biopsy surgeons by 25% to about 1,400 that particular year. Cumulatively, it was greater than that on the original 3,000 targets. So we were around 50%. And then we expanded to 5,000 surgeons. And over the course of kind of last year into this year, we were approaching that 50% penetration rate again, and now we're expanding with 2,000 more.

And as we've said, we expect that dynamic will continue where we'll relatively rapidly, I think, get to kind of the 50% penetration. And we would never kind of run the experiment to get to a terminal sort of penetration rate. But as I said, cumulatively, it's typically more than you see in any particular year. So we expect the same kind of dynamic. And as we've mentioned, growth in biopsy surgeons will continue to be an important growth driver for the company over the next several years.

[Caitlin Cronin, analyst]

Great. And then just turning to Epicel. With the dormant accounts reengaging with Epicel, how many have reactivated and how many burn centers are now actively using the products?

[Dominick C. Colangelo, executive]

Well, that's kind of -- it's typically in a -- the year is not done, obviously. And we have said in the past that of the 140 burn centers, there's kind of a subset that routinely treat kind of Epicel patients. And often, even if you're an accredited burn center, those patients will be transferred to some of the larger centers because the smaller ones don't necessarily routinely see or treat these kind of catastrophic burn patients.

So I think in the past, we've said in any given year, we can get biopsies from 70 to 80 of those burn centers because not all the patients end up being treated because of health issues or patient expiry. Routinely, you'd have roughly 40 to 50 centers that would end up ultimately treating the patients. So I don't think that's markedly changed yet, but there's obviously opportunity to do that as we move forward.

[Operator]

Our next question comes from Jeffrey Cohen from Ladenburg Thalmann & Co.

[Jeffrey Cohen, analyst]

Nick and Joe, congrats on a strong quarter. Just one question from our end. If you could talk upon about the instrumentation for MACI Arthro and the training of doctors out there. What are you finding as far as learning curve or lesson learned? And then perhaps talk about how that may play out in the future for Ankle as well.

[Dominick C. Colangelo, executive]

Yes. Well, thanks, Jeff. As was the case with MACI open procedures, the training is often done online. And for the MACI Arthro submission, we submitted online training materials. So for those who are really experienced both with MACI and arthroscopic procedures, which are a lot of the surgeons, they don't really have to do any additional training if they don't want to. So it's not sort of like a bottleneck you have to work through. Now of course we do, like we did at the Orthopaedic Summit, and I appreciated the comments of standing remote only because it really was in the demonstration, kind of in the middle of the center.

But we also had training labs there. So surgeons could come and do cadaver labs and practice doing MACI Arthro. And so often, surgeons will do that. We have examples of a case that was scheduled for Tuesday, the Friday before the rep goes down. they train on cadaver knee and then they go into the surgery. We also have models that we can provide surgeons, a model knee where they can practice -- not on a cadaver knee but on the model. And we've had an example of that, the [ Mardi ] model being used to train the surgeon before they went in to do their first procedure. So online cadaver training, we're using the [ Mardi ] model are the ways that the surgeons can train before they do their first procedure.

[Jeffrey Cohen, analyst]

Got it. And would you expect that to follow a similar pathway for Ankle?

[Dominick C. Colangelo, executive]

In terms of the administration? Right now, obviously, we're kind of working with the FDA on -- in getting prepared to submit an IND and start the study in the second half of next year. We don't currently have MACI arthroscopic instruments developed for that study. So it will be kind of a traditional administration as they're treating anchor cartilage defects now. Certainly, that is something over the course of the clinical study that we could follow the same playbook if that ends up being sort of a preferred route of administration for our MACI Ankle procedure.

[Operator]

Our next question will come from Swayampakula Ramakanth from HCW.

[Swayampakula Ramakanth, analyst]

This [indiscernible] ore from H.C. Wainwright. Most of my questions have been answered. Just quick question, a high level. So as we get Arthro going in the market, just trying to understand how we should start thinking about synergies on the operating margin, especially as Arthro gains adoption. And can that happen early? Or is this going to be a little bit of a long-term gain from here?

[Joseph Mara, executive]

Yes. R.K., so this is Joe. why don't I start on that one. I think as we kind of think about the outlook into '25 and beyond, I think the real advantage here with Arthro is we essentially have a significant kind of built-in synergy already, right? So this is no change to the kind of field force, same number of territories to start. As Nick said, we'll take a look and make sure we're kind of -- we have kind of the right reach and frequency, et cetera.

But from kind of a margin P&L perspective, there's really there's nothing really significantly different from an Arthro perspective versus an open case. So as we talked about, there's actually some degree of revenue. So there's a bit of a top line contribution when physicians are -- when they purchase the instruments. There are some additional costs. They're pretty minor in the cost of goods sold side.

But I wouldn't think of this kind of impacting where we're going from a P&L perspective. I think, again, having the top line revenue to support -- and to kind of add to the total is helpful. I don't think that will be hugely material. It's a small number relative to the cost of the implant. But I think we're kind of well set up with Arthro, and that should impact our kind of long-term outlook.

[Operator]

And our last question will come from Ryan Zimmerman from BTIG.

[Ryan Zimmerman, analyst]

Sorry, just a quick follow-up. I don't think I heard anything just on the fourth quarter implied guidance. Is there any contribution or impact from either the hurricanes or the IV shortages that are impacting particularly MACI procedures, if there is continuous irrigation used for those cases?

[Dominick C. Colangelo, executive]

Yes. Thanks, Ryan. So to date -- obviously, it's something the industry and we are monitoring to date. Kind of from an implant perspective, we haven't seen any impact. A MACI open procedure is a pretty low IV fluid procedure, so -- especially compared to things like rotator cuff surgeries or ACLs, et cetera. So we haven't really seen that.

Could there be a case that there's hospitals that are in short supply and they're trying to manage it? In Arthro case, we'll use a little more fluid than an open case. And could one of the Arthro cases be converted over to an open case? Sure. But to date, we're not really seeing any impact at all on the kind of implant side.

[Operator]

Thank you. And I am showing no further questions from our phone line. I'd like to turn the conference back over to Nick Colangelo for any closing remarks.

[Dominick C. Colangelo, executive]

Okay. Well, I just wanted to say thanks again for your questions and your continued interest in the company. We had a great third quarter. We're excited to deliver a strong finish to the year and continue with our high-growth momentum into 2025. So we look forward to providing further updates on our next call. Thanks again, and have a great day.

[Operator]

Thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.