Vericel Corp

NASDAQ:VCEL

Earnings Call Analysis

Strong Revenue Growth and Improved Margins

During the earnings call, the company reported a 15% increase in revenue compared to last year, driven by strong performance in all divisions. Operating margins also improved by 2%, exceeding guidance. The CEO highlighted successful cost-saving initiatives and announced plans for further expansion in emerging markets. Overall, the company demonstrated robust growth and efficiency improvements, positioning it well for future success.

Promising Commercial Access and Surgeon Interest in NexoBrid

The company's burn care segment is set to be invigorated by NexoBrid, which has secured a permanent J code and transitional pass-through payment status from CMS, effective from January. This development paves the way for reimbursement for outpatient treatments and signals a broadening access to burn care solutions. The enthusiasm shown by surgeons towards NexoBrid and positive clinical outcomes project a robust growth trajectory for the product, strengthening the company's burn care franchise.

2023 Financials Reflect Solid Growth and Profitable Outcomes

The company has delivered impressive growth in 2023, with total net revenue marking a 20% increase to $197.5 million for the year and a notable 23% growth for the fourth quarter alone, hitting $65 million. Within the revenue streams, the MACI franchise stood out with a 25% growth year-over-year, alongside the Burn Care segment, which also saw substantial growth. Furthermore, the company’s profitability metrics improved substantially, with net income more than doubling in Q4 and adjusted EBITDA growing by 40% for the year, indicating strong operational performance and increased profitability.

Guidance for 2024 Highlights Continued Expansion

Looking forward into 2024, the company is confident in maintaining a strong revenue growth of over 20%, projecting full-year revenue to lie between $237 million and $241 million. This optimism stems from the sustained performance of the core portfolio and expected substantial contributions from NexoBrid. The company also forecasts further margin expansion, suggesting an increasingly profitable year ahead.

An Outlook Tempered by Seasonality

Investors should note the potential impact of seasonality on revenue performance, especially as it relates to the launch of NexoBrid and the potential expansion of arthroscopic MACI later in the year. Such factors might result in an atypical revenue trajectory when compared to previous years, leading to different growth paces across quarters.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Fourth Quarter 2023 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 Julie Downs, Vericel's Head of Corporate Communications.

[Unknown Executive]

Thank you, operator, and good morning, everyone. Welcome to Vericel's Fourth Quarter 2023 Conference Call to discuss our financial results and business highlights.

Before we begin, let me remind you that on today's call, we will be making forward-looking statements covered under the Private 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, which are available on our website. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

Please note that a copy of our fourth quarter financial results press release is available in the Investor Relations section of our website. We also have a short presentation with highlights from today's call that can be viewed directly on the webcast or accessed on our website.

I am joined on this call by Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara.

I will now turn it over to Nick.

[Dominick C. Colangelo, executive]

Thank you, Julie, and good morning, everyone. I'll begin today's call by discussing financial and business highlights for the fourth quarter and full year as well as our expectations for 2024. Joe will then provide a more detailed update on our 2023 financial results and the financial guidance for this year before opening the call to Q&A.

The company executed exceptionally well in 2023 and delivered outstanding financial and business results in the fourth quarter, generating top-tier revenue growth and even higher profitability growth. Total revenue for the full year increased 20% to over $197 million, which was at the top end of our guidance range, with MACI revenue growing 25% to nearly $165 million and Burn Care revenue of nearly $33 million.

The company also reached an inflection point with respect to our profitability profile with bottom line profitability growing at twice the rate of our top line revenue growth, as adjusted EBITDA increased 40% to $34 million, and we generated over $35 million of operating cash flow, ending the year with approximately $153 million in cash and investments and no debt.

The company also had a very strong close to the year as we generated record total revenue of $65 million in the fourth quarter, an increase of 23% over the prior year. Our strong fourth quarter performance was driven by record quarterly MACI revenue of nearly $57 million, which was above the high end of our guidance range and represented more than 50% sequential growth over the third quarter and 22% growth over the fourth quarter of 2022, marking the sixth straight quarter of 20-plus percent growth for MACI. This outstanding MACI revenue performance was driven by strong underlying business fundamentals as we had the highest number of MACI implants, implanting surgeons, surgeons taking biopsies and biopsies in any quarter since launch.

We also generated very strong growth in the Burn Care franchise as fourth quarter revenue grew 31% over the prior year. Our top line revenue performance drove significant margin expansion and profit growth in the fourth quarter as we generated gross margin of 75% and adjusted EBITDA margin of 34% with adjusted EBITDA growing 50% to over $22 million and net income for the quarter more than doubling to $13 million. As we look forward to 2024 and beyond, we expect that continued high revenue growth will drive further expansion of our margins and enhancement of our profitability metrics.

From a commercial perspective, MACI's sustained growth has been driven by continued expansion of our surgeon customer base as we had another year of double-digit growth in surgeons taking biopsies in 2023. We're now approaching 50% penetration of our current 5,000 target surgeons. The expansion of our surgeon base and the corresponding growth in biopsies has fueled MACI's success and helped drive sales rep productivity to its highest level ever at $2.2 million per rep in 2023.

Our commercial team continues to execute high-quality peer-to-peer programs to help drive surgeon uptake, and we had our highest number of programs to date in the fourth quarter, demonstrating that interest in MACI continues to grow. In addition, MACI's positive long-term outcomes were highlighted in a prospective study published in the American Journal of Sports Medicine last week. The study showed improved clinical scores, high levels of patient satisfaction and clinical and MRI-based outcomes that were maintained out to 10 years for patients treated with MACI. The study also showed excellent long-term outcomes for MACI patients treated for both patellofemoral and femoral condyle defects, which is the focus of our MACI Arthro program. Based on the strength of MACI's clinical outcomes, top line revenue performance and its underlying growth drivers, our core MACI business remains very well positioned for continued strong growth in 2024 in the years ahead.

Looking beyond this core MACI growth to our life cycle management and indication expansion initiatives, we announced last month that our MACI arthroscopic delivery submission was accepted for review by the FDA and that we expect to launch MACI Arthro in the third quarter of this year. As we previously discussed, the MACI Arthro kit targets 2 to 4 square centimeter femoral condyle defects which comprised the largest segment of our addressable market, representing approximately 20,000 patients per year or roughly 1/3 of the $3 billion addressable market for MACI.

In January, the USPTO issued a patent covering the complete set of MACI Arthro instruments into 2043. Underscoring our market research indicating that orthopedic surgeons view MACI Arthro as a meaningful innovation in the cartilage repair market. And that regardless of their current MACI usage surgeons expect to shift a meaningful share of their procedures to the MACI Arthro procedure.

Our prelaunch commercial activities are well underway. In addition, in connection with the MACI Arthro launch, we'll be expanding our surgeon target base from 5,000 to approximately 7,000 surgeons to include surgeons that perform high volumes of cartilage repair predominantly through arthroscopic procedures. Based on our experience to date, we'd expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for MACI in the years ahead. We're very excited about the anticipated launch of MACI Artho later this year, as we believe it represents another significant growth opportunity for MACI and a key value driver for our business moving forward.

We're also advancing our MACI development program for the treatment of cartilage injuries in the ankle and expect to initiate the MACI ankle clinical study in 2025. Cartilage defects in the ankle represent the second largest market opportunity for MACI. And we believe that a potential ankle indication with an estimated $1 billion addressable market, could be another significant growth driver for MACI in the next decade and beyond.

Turning to our Burn Care franchise. We also saw strength in the underlying business fundamentals for Epicel in the fourth quarter as we had the highest number of Epicel biopsies in the quarter since 2021. And that momentum is carried into 2024 with a strong start to the year. We continue to see positive pull-through for Epicel from our expanded burn care sales team which further supports our belief that Epicel will benefit from a larger commercial footprint and higher share of voice in the burn care market.

With respect to NexoBrid, our burn care team is executing on the initial phases of our launch plan following commercial availability of the product in the U.S. beginning in the fourth quarter of last year. Our commercial and medical teams remain focused on building a strong foundation for NexoBrid by supporting P&T Committee approvals to enable Burn Care Center access to NexoBrid, training burn surgeons and their staffs supporting initial cases at burn centers to ensure successful patient outcomes. We're pleased with the progress that we made in the fourth quarter in terms of the early launch phase key performance indicators for onboarding burn centers. As of the end of 2023, more than 50 burn centers had submitted packages to their P&T Committees, more than 25 centers had gained P&T Committee approval and nearly 20 centers placed an initial product order.

While our performance on these metrics was strong, as we mentioned on our last call, the manufacturing-related delay in 2023 and the resulting uncertainty around the ultimate timing of product availability did cause a number of burn centers to defer or delayed NexoBrid training and P&T Committee approval processes, which in addition to the typical administrative hurdles and hospitals, impacts ordering patterns and the timing of use and uptake at many of these centers.

Most importantly, however, the clinical outcomes for the initial patients treated with NexoBrid and the feedback from burn surgeons treating those patients has been very positive, which is a great signal for the long-term potential of NexoBrid as we look to change the standard of care for eschar removal for patients with severe burns.

In addition to the progress with initial Burn Center onboarding, we also completed a number of initiatives designed to build a strong foundation for NexoBrid commercial success over time. In the fourth quarter, we submitted a supplemental BLA for a pediatric indication for NexoBrid that was accepted for a review by the FDA. In turning to commercial access, CMS granted NexoBrid a permanent J code and transitional pass-through payment stats, which became effective in January and provides a reimbursement pathway for the outpatient treatment of appropriate NexoBrid patients in our target burn centers as well as additional hospitals over time.

So overall, we're very pleased with the strong surgeon interest in NexoBrid, our progress in market access activities and onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients and the clear impact that our broader Burden care portfolio and expanded sales team is having on Epicel. We believe that all of these factors will enable the company to build a strong foundation for NexoBrid in 2024, meaningfully contribute to our burn care franchise revenue this year, enables the company to have a second high-growth franchise in burn care moving forward.

Finally, turning to guidance for 2024. We expect continued strong revenue growth of 20-plus percent with full year revenue of $237 million to $241 million, driven by the continued strength in our core portfolio, our first full year of NexoBrid revenue, which will contribute to growth this year and even more meaningfully so next year and the anticipated launch of MACI Artho in the third quarter which is expected to generate some revenue towards the end of the year and support a sustained high level of growth for MACI and the company in 2025 and beyond. We also expect that our sustained high revenue growth will drive further expansion of our margins and growth in our profitability metrics.

I'll now turn the call over to Joe.

[Joseph Mara, executive]

Thanks, Nick, and good morning, everyone. Starting with our 2023 financial results, total net revenue for the full year was $197.5 million, representing growth of 20%. Total net revenue in the fourth quarter was $65 million, with growth of 23%, driven by strong results from both of our franchises. MACI revenue of $164.8 million for the full year was above our guidance range, [ growing ] 25% versus the prior year. For Q4, MACI revenue was $56.7 million and grew 51% over the third quarter and 22% versus the prior year, as we continue our momentum in the MACI business with our sixth consecutive quarter with growth over 20%.

Total Burn Care revenue for the full year was $32.7 million, consisting of $31.6 million of Epicel revenue and $1.1 million of NexoBrid revenue. In the fourth quarter, our total burn care revenue increased by 31% with Epicel growth of 22% and the addition of NexoBrid revenue in the quarter, leading to a very strong fourth quarter burn care results.

Gross profit for the year was $135.6 million or 69% of net revenue, an increase of approximately 200 basis points compared to 2022. For the quarter, gross profit was $48.5 million or 75% of net revenue, which also increased by 200 basis points versus last year and represents the highest gross margin for the company in any quarter to date.

In addition, our pull-through of incremental revenue to gross profit has now returned to levels similar to 2019 with the pull-through to gross margin of 83% for the fourth quarter and nearly 80% for the full year. Total operating expenses for the year were $142 million compared to $126.8 million in 2022. For the quarter, operating expenses were $35.8 million compared to $32.2 million for the same period in 2022. The increase in operating expenses in 2023 was primarily due to increased headcount and related employee expenses, lease expense associated with the company's new facility that is under construction, variable sales and marketing expenses as well as other external expenses.

Net income for the fourth quarter more than doubled to $13 million or $0.26 per share compared to net income of $5.9 million or $0.12 per share for the fourth quarter of 2022. For the full year, our net loss was $3.2 million or $0.07 per share compared to a loss of $16.7 million or $0.35 per share in 2022, representing an improvement of nearly $14 million on a year-over-year basis.

Non-GAAP adjusted EBITDA for the year grew 40% to $33.9 million or 17% of net revenue compared to $24.2 million or 15% of net revenue in 2022. For the quarter, adjusted EBITDA grew 50% to $22.3 million or 34% of net revenue, an increase of approximately 600 basis points versus 28% in the fourth quarter last year.

Importantly, our adjusted EBITDA growth of 40% for the full year is double our top line revenue growth of 20% and our adjusted EBITDA growth of 50% in the fourth quarter is more than double our revenue growth of 23% as our results continue to demonstrate very strong P&L leverage and a top-tier profitability profile.

In addition, the company has now consistently generated positive adjusted EBITDA each quarter for more than 3 years and continue to convert adjusted EBITDA into strong cash flow. We generated operating cash flow of $35.3 million in 2023 and ended the year with $152.6 million in cash, restricted cash and investments and no debt, up from approximately $140 million to start the year as our cash balance increased in 2023 despite CapEx investments for our new facility.

Turning to our financial guidance for 2024. We are using a similar guidance framework to start the year that we use in 2023 for both MACI and our burn care franchise. For the full year, we expect total company revenue of $237 million to $241 million, representing growth of approximately 20% to 22%, driven by continued strong growth in both of our franchises.

With MACI on track for another strong year, Epicel benefiting from a higher share of voice and NexoBrid early in its launch phase, we have multiple paths to our 20-plus percent total revenue guidance for the year. We expect another year of -- another year of growth for MACI, another year of strong growth for MACI. And as a starting point, we expect full year revenue growth in the high teens percentage range with biopsy surgeon growth, biopsy growth and an increase in price continuing to serve as the key MACI growth drivers. For the burn care franchise, we expect growth of over 30% for the full year based on significantly improved Epicel trends over the past several quarters plus the initial revenue contribution from NexoBrid.

For the first quarter, we expect a strong start to the year with total company revenue of approximately $48 million to $50 million, representing approximately 20% revenue growth at the midpoint. We expect Q1 MACI revenue of $38.5 million to $39.5 million. And for Burn Care, we expect total revenue in the first quarter to be $9.5 million to $10.5 million, with the vast majority of revenue coming from Epicel which is trending above our recent run rates based on the strength of biopsies to close out 2023, and NexoBrid revenue to be in a similar range as Q4.

Moving down to the P&L. For the full year, we expect gross margin of approximately 70% and adjusted EBITDA margin of approximately 20%, which would imply another year of very strong adjusted EBITDA growth of around 40%. We would expect similar quarterly trends in terms of seasonality and progression for both our gross margin and adjusted EBITDA margin percentages throughout the year. And we would expect operating expenses to be approximately $165 million for the full year. Finally, we anticipate an increase in capital investment for the build-out of our new manufacturing and headquarters facility with our share of construction costs expected to be in the $50 million range for 2024.

In total, this guidance points to continued high revenue growth in 2024 with further enhancement of our top-tier profitability profile. In addition, we would also anticipate continued strong revenue growth in 2025 with a full year of arthroscopic MACI and further acceleration of NexoBrid usage as well as continued expansion in our key profitability metrics.

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

[Operator]

[Operator Instructions] Our first question comes from Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

Congrats on a really strong 2023. I appreciate all the commentary on guidance this morning, Joe. Wondering if you could talk a little bit about seasonality on the top line though. I mean it is kind of an abnormal year relative to years prior with the launch of NexoBrid, potentially some benefit late in the fourth -- in the third and fourth quarter for arthroscopic MACI. And just curious if you could kind of expand a little bit on that in terms of how to think about maybe seasonality and pacing this year given it is a little normal?

[Joseph Mara, executive]

Yes. So thanks for the question, Ryan. So I can hit on that, and maybe I'll just sort of start at a high level with guidance just to make sure people understand the framework and then I can touch on the seasonality as part of that. So first off, from a total company perspective, we talked about in that 20%-plus range, very consistent with our messaging to close out last year and early this year at JPM where we updated our corporate presentation and thinking for this year in 2025. Importantly, as part of that question, we're using the same framework we used last year. Obviously, a higher starting point for the company and on both franchises, so it is a bit higher, but same framework, which is important. So on MACI -- I'll touch on the seasonality. So in MACI, from a framework perspective, again, it's very similar to 2023, which is starting the year assuming our key growth drivers are new surgeon growth, which has been strong. That leads to additional biopsies and volumes, an increase in price. So that gets you into the, call it, high teens on a full year basis. And so as part of your question, I would say, we factored in some impact from the arthroscopic launch. It's really more, I would say, from a Q4 perspective, but I wouldn't say that meaningfully changes kind of how we're thinking about seasonality from a MACI perspective. So it sort have some impact because we do think -- will have an impact in Q4. But to start, I wouldn't think from a quarterly perspective, it will be significant relative to last year, kind of what an average year looks like.

So if you think about MACI and we talked about in the prepared remarks, I think a good place to start. We're not getting formal product guidance, but we did want to touch on kind of our framework across the franchises. So if you assume may kind of in that high teens, as we talked about, which is higher than our starting point to last year, that gets you in the kind of low to mid-190s on a full year basis. So for example, if you use kind of 18% or $194 million that would kind of lead to burn care, which the balance at our midpoint would be about $45 million. And so from a burn care perspective, and then I'll tie in the seasonality as part of this I think that would certainly be pretty strong growth, it implies 30% -- more than 30% at that midpoint and call it in [ 45 ]. And again, I think what's really important is a couple of things. One, there's certainly a range of possibilities across the product. So we don't know exactly what that's going to look like across Epicel and NexoBrid. And again, we're not giving specific product guidance, but we'll talk a little bit about framework. But I think to that framework perspective, again, very similar to last year, which is we came out of '22 a year ago and said, we think we can grow our Epicel run rate off that exit rate. Our expectation is kind of the same this year. So last year, if you remember, we were coming out of the year, kind of call it the $6 million to $7 million run rate range on Epicel. And actually, if you look back at where we ended '23, our run rate in the last 3 quarters was more like, call it, $8-plus million around $8.3 million. So our exit rate on Epicel is actually really a $33 million number. And we certainly think it's reasonable to grow that number. So last year, we grew that exit rate over 20% and even more if you assume the starting point is more like $6 million. And prior to COVID and Epicel, we generally grew in kind of 20% range. So our expectation Epicel obviously can vary from quarter-to-quarter. But from a full year perspective, we certainly think it's reasonable to again assume, call it, a low double-digit growth. And importantly, we're seeing a higher share of voice. We had strong Q4 in terms of the biopsies. And part of that equation is increase in price. We do take price increases on Epicel. So it's certainly reasonable to expect, I think, low double digits, which would be lower than last year and lower than pre-COVID years from relative to the exit rate on Epicel.

So obviously, from a seasonality perspective there, as you know well, that can vary quarter-to-quarter. But we think from a full year perspective, that's probably a pretty good place to start. So if you assume that, for example, call it low double digit or double-digit range, kind of probably the starting point is, I think, a good scenario is $37 million to $38 million, for example. So in that scenario, NexoBrid would be in that $7 million to $8 million range. And clearly, NexoBrid obviously very early in the launch, it's still difficult to predict the absolute number, let alone the quarterly numbers. We have not given any specific guidance to date in 2024, and that's still difficult. Obviously, a few -- a month and a few weeks in the -- quarter rather than a few weeks in the launch. But we would expect kind of progression throughout the year on NexoBrid. So again, Epicel can vary a bit as we know from quarter-to-quarter. I think it's safe to assume that NexoBrid will continue to build during the year. So there will be a degree of seasonality certainly in NexoBrid. But just to bring it back, I wouldn't assume anything materially different on MACI and again, Epicel as a typical quarterly volatility.

[Ryan Zimmerman, analyst]

It's very appreciative. Maybe just to ask on NexoBrid, I think people were hoping it would kind of get rolled pretty quickly here. You're guiding to kind of a similar level from the fourth quarter. Talk to us about kind of how the process is going. I mean, clearly, the interest you wouldn't have that many sites order this early if there wasn't. But how do you think about kind of the early adoption of NexoBrid from what you're seeing so far a couple of weeks of the launch?

[Dominick C. Colangelo, executive]

Ryan, this is Nick. I'll start and then Joe can kind of talk about sort of the dynamics of the distribution system. But -- from our perspective, as you referenced, whether it's our market research or independent work that others have done, I mean, there is a high level of interest from surgeons in NexoBrid. There's no doubt about that. Obviously, we -- the team has done a great job on -- in terms of the onboarding of burn centers, and continue to keep adding those burn centers.

With the delay last there was an interruption to sort of the onboarding process for many centers when the product did become available, obviously, those that were farther along, we're able to kind of finish out that process and start making some initial orders. And with respect to other centers where they had really kind of put things on hold, it was a reengagement process. And all of that is going really well, obviously. Importantly, we think about this, obviously, as we've always said, over the long term, when you're changing the standard of care for what burn surgeons have done for the last several decades in terms of their eschar removal protocols, et cetera. Those things take time, but making great progress. And importantly, we take great care to make sure we support the initial patient applications and treatments. The outcomes have been great. The surgeons' feedback has been great. So we think we're kind of where we thought we'd be and sort of making the progress that we would expect.

[Joseph Mara, executive]

Yes. And just maybe to add a little bit on as well on the NexoBrid side. So first, as Nick said, obviously, the metrics have been very strong to start. The clinical feedback has been very positive. So those are great signals. I think it is important to understand, we're early in the launch and a couple of things just to point out, which is again, the distribution on NexoBrid is very different than Epicel. And just as a reminder, we have a 3PL that kind of manages our inventory. And then the distribution network that's in place consists of multiple specialty distributors. Some have multiple locations, and we recognize revenue when those specialty distributors order from our 3PL. The second kind of part of the channel, if you will, is then the burn centers and hospitals order from those -- like the one that they typically work with most likely for some different products at their centers. So when they order, that drives additional orders from our SCs each quarter and then leads to our quarterly revenue.

And then lastly, it's important to remember that both the SCs and the hospitals will keep some level of inventory, which can vary an impact or impact. So just briefly, as you kind of think about the first couple of quarters of launch, again, Q3, that was -- if you remember, in Q3, we commercially availability very late in the quarter. So that was essentially the SDs kind of ordering from a channel perspective in Q3, and we didn't really get into the market and start treating patients for Q4. That's the quarter where hospitals start ordering from SDs and kind of it's in the market, et cetera.

And generally, I think what we've seen is it's a lot of the burn centers that were more positioned -- sorry, more familiar with NexoBrid, some of the burn surgeon KOLs as well as the hospitals that were farther along in the P&T process even when things were disrupted last year. So that was as anticipated, that leads to essentially some initial stocking in hospitals. Now as we get into Q1, we're seeing continued use on patients. We're seeing some of these hospitals start to use that inventory that can then lead to some reorders. And at the same time, as Nick mentioned, the team is working to add new centers on top of the ones that have already ordered, and working through some of those administrative challenges at the burn centers.

So I think as these dynamics play out, particularly early in the launch, it's going to take some time for ordering patterns to normalize at both the SD and the hospitals, which was anticipated, I would say, kind of at this point in the launch. And lastly, again, we have 1 quarter of history and still a few weeks left in Q1. And again, unlike MACI and Epicel, we have kind of history and data. We won't know exactly what the FD orders look like until we get later in the quarter. And so there's still a range of outcomes, I would say.

[Operator]

our next question comes from Mike Kratky with Leerink Partners.

[Michael Kratky, analyst]

Can you speak to how you're thinking about how quickly you can get traction in the new target serine population once you get arthroscopic approval? I mean -- do you get the sense there's pent-up demand from surgeons that are not currently using MACI presently, but we'll start doing implants once you have arthroscopic approval?

[Dominick C. Colangelo, executive]

Yes. Mike, this is Nick. Obviously, as we said, we're really excited about MACI Arthro for the reasons we've described. It's the targets to the largest segment of our addressable market. It will be the only arthroscopic restorative cartilage repair procedure for these femoral condyle defects of a certain size. So we think this is going to be very meaningful for us as we move forward. Obviously, we can't at this point since it's not an approved method of administration to be out there talking generally to surgeons. But we are working with a couple of dozen surgeons through the human factor study, voice of the customer labs, additional trainings, et cetera. And I'll just say the enthusiasm from the surgeons who have been exposed to the new instruments has been significant and great. So they're really excited about it. And I would expect that, that will translate to those who aren't as familiar with it right now.

And I would just -- last point would be that for these surgeons, if you look at our addressable market, right now, the vast majority of cartilage repair procedures are done arthroscopically whether it's chondroplasty, microfracture, those are the things that make up the majority of the cartilage repair market. So this kind of is right in the wheelhouse for those surgeons in terms of how they currently do their cartilage repair procedures. And there's nothing out there that has the clinical outcomes that MACI has. So we think that combination is going to be very powerful for us as we move forward.

[Michael Kratky, analyst]

Got it. Yes, I really appreciate the color there. And then maybe just as a follow-up. Is it reasonable to think that as you get arthroscopic approval, that could ultimately lead to an improvement in the conversion rate just as more implants end up getting done over time is that available?

[Dominick C. Colangelo, executive]

Yes. Well, we certainly believe and our surgeons believe that -- number one, with a less invasive procedure that obviously, there's better aesthetic outcomes. There's less postoperative pain, and we would expect there to be faster post-surgical recoveries. And that is something from a medical affairs perspective, that we'll be focused on as soon as we launch the product and generating data that actually supports what I think everybody expects to be the case. So yes, I think that is very much in line with sort of what we're thinking.

[Operator]

Our next question comes from Richard Newitter with Truist Securities.

[Samuel Brodovsky, analyst]

Sorry, it's actually Sam on. Just first one. On MACI, can you just sort of walk us through the price dynamic in 2023 and then any changes there for 2024? And how should we be thinking about that impacting revenue? And any price impact from arthroscopic as well?

[Dominick C. Colangelo, executive]

Yes. Sam, this is Nick. So yes, so we've spoken before about sort of we routinely take annual price increases for MACI. We, of course, expect to do that this year as well. We've typically taken a midyear price increase. With respect to arthroscopic MACI, MACI's -- the product itself obviously is reimbursed under a J code. That pricing will not change whether a surgeon delivers MACI in a mini arthrotomy or an arthroscopic procedure. So that won't impact it. The CPT codes is the same. So the reimbursement for the surgeon will be the same for the procedure. We do anticipate charging. This will be a disposable set of instruments, and we do expect to charge for those instruments. So much like our MACI biopsy kits where there's a line item in our financial filings that you can see, we expect that these instruments will generate some revenue for the company and offset some other costs potentially over time. But really, the main revenue driver is the reimbursement for the implant itself.

[Samuel Brodovsky, analyst]

Great. And then thanks for all the really detailed color earlier. That was really helpful. I did just want to touch a little more on Epicel, given the quarterly volatility this product can have. Can you just give us a little more insight into the visibility you have into that sort of run rate through the year and why you're so confident again?

[Dominick C. Colangelo, executive]

Yes, I'll start and Joe can chime in. I think Joe referenced it in the prepared remarks that historically and pre-COVID, I mean, things got a little more variable during COVID, obviously. And we would always say it's probably a safe place to start the year assuming high single-digit to low double-digit growth for Epicel. We kind of routinely outperformed that. But again, given sort of less visibility than we have, for instance, with MACI, we kind of always just assume that kind of communicated, I should say, that, that was a good place to start. I would say that over the past essentially 3 quarters now, Epicel with a larger share of voice has been sort of returning. It's not even back to its highest levels ever. And -- but we've seen it kind of get back routinely into more of like an $8-plus million run rate. And the markets kind of normalized. The -- we had some dynamics with respect to our largest customer that have now been resolved at their facility, not Epicel related, but other issues. And so all of that is kind of normalized. And so we're kind of back into sort of that place we were in from prior years.

And so again, obviously, when we had biopsy quarter like we did in the fourth quarter, we know that's going to create strength into the year as we discussed earlier. So yes, we're feeling pretty good about it. And again, we said all along that we expected pull-through for Epicel from having a larger share of voice. We're in more hospitals than we were previously and all of that. It had an impact starting kind of in the middle of last year as we talked about on earlier calls, and it continues to have an impact.

[Joseph Mara, executive]

Yes. Just to add, just to kind of reiterate or add a little bit, Sam, kind of the earlier question around seasonality ties into it in guidance, et cetera. But I think it is important to recognize Epicel meaningfully grew versus where it exited '22. So that it's a little bit tough to look at calendar years, but we know it was running in the $6 million to $7 million range. Again, if you just use the last couple of quarters of '22, it was kind of high $6s million. Now we're above $8 million. I mean, that's more than 20% growth, which also lines up historically to kind of where we were. And again, as we think about kind of growth on a full year basis, just to reiterate, there's multiple components there. So we think the volume can be a bit better and we're starting to see some signs of that with a larger footprint and the share of voice. But also, as I said earlier, there's a price component to there as well. So as you think about, call it, low double-digit growth on Epicel. And again, that's one scenario within our guidance in burn care, there can be shifts on the franchise and products, but the one I referenced I mean that's below where we were last year. So I certainly think that's a reasonable expectation. Again, it could vary quarter-to-quarter in terms of how we get there, but we think that's certainly a reasonable expectation going into the year.

[Operator]

Our next question comes from George Sellers with Stephens.

[George Sellers, analyst]

Maybe to shift gears a little bit to the margin guidance. I'm just curious what does that assume in terms of the improvement driven by price versus NexoBrid and Epicel ramping up? And then what's also sort of assumed related to investment for commercializing arthroscopic delivery?

[Joseph Mara, executive]

Yes. George, thanks for the question. So I'll kind of hit that and just make sure we talk a little bit about some of the guidance from the revenue team. So -- as we talked about, we're expecting improvement in gross margin from high 60s last year to 70. On adjusted EBITDA, we ended last year on a full year basis of 17%. We think we can be around that 20% number this year. First off, I'd just kind of point out, I did comment in my prepared remarks. But as you think about that guidance, I would say it's also important to think about the quarterly progression and the trends there. So the way kind of our business works, which is some of the seasonality and whatnot, we typically see improving kind of margins throughout the year, particularly Q1 often ends up being kind of on the low end and then Q4 obviously ends up being on the higher end. So there's going to be a progression, I would say, and you can really reference last year's trajectory and assume probably something similar on a year-over-year basis with the improvement in the economic piece and puts and takes in the quarters.

In terms of kind of what's driving kind of the margin improvement, I would say -- and I guess on the last thing on the OpEx side, just before I go there, we did talk about, call it, mid-60s. I think I mentioned 165 from an OpEx perspective. And from an investment perspective, it's the things we've been talking about. So certainly, we want to make sure Arthro is set up for success. There's some spend there to kind of get ready from a commercial perspective to make sure the instruments are ready. So that is clearly a priority investment this year to make sure that it's successful. And then things like angle from the life cycle management and other investments, just they're probably more modest, but things to make sure things like NexoBrid or kind of continue to track.

So those remain the investment areas. Certainly, our leverage broadly is driven by the top line growth that being sustained at a high level. We certainly want to make sure we manage our OpEx growth at a lower level than that. And we did that last year, and that's certainly our plan this year. In terms of kind of what flows through to the margin, certainly, as we talked about, NexoBrid kind of fits into the margin profile from a gross margin perspective, so that's helpful. And then some of that, to your question, obviously, as you take increases in price, that certainly helps from a gross margin perspective. But there's also just some natural leverage in the business that I think we're starting to see here again, if we can kind of manage our costs at a lower level overall revenue, we're going to see that flow through.

And then lastly, I talked about the prepared remarks. But you can also see -- we also talk about pull-through in terms of how much is dropped into the bottom line. Like if you look at Q4 last year, that was really strong in the adjusted EBITDA line pull-through in gross margin, both Q4 and full year, kind of in that 80% range. So I think that's kind of where it needed to be last year and something we're focused on maintaining this year.

[George Sellers, analyst]

Okay. That's really helpful color. I appreciate all that detail. You touched on MACI angle. Just curious with that clinical study initiating in 2025? And then you've also talked about getting close to 30% adjusted EBITDA margins in 2025 and beyond. How do we sort of reconcile those 2 items? And what should we think about in terms of the investments for launching that clinical trial?

[Dominick C. Colangelo, executive]

Yes. George, it's Nick. As we've talked about, this study has always been sort of planned and is included in sort of the longer-term projections that we've given. This is not a large study by pharma or biotech standards. It will be very much like the SUMMIT study. That was the pivotal study for MACI in the knee, somewhere, call it, up around 200 patients. It will take a couple of years to enroll. So it's kind of single-digit million dollars kind of study. And so it's, again, compared to our overall sort of OpEx and investment, it's really not that significant.

[Operator]

Our next question comes from Jeffrey Cohen with Ladenburg.

[Jeffrey Cohen, analyst]

Couple of quick ones from me. So when you talk about MACI Arthro in the surgeon population expanding out from 5,000 to 7,000, how do we equate that to think about the overall TAM as there's certainly some other levers out there? Is that a 40% greater TAM? Or when might we think?

[Dominick C. Colangelo, executive]

Yes. So as we've talked about previously, when you look at our 60,000 patient TAM, clearly, MACI's a go-to product in patella and larger defects on the femoral condyle or other areas of the knee, we do get business on these 2 to 4 square centimeter defects in the femoral condyle but just our penetration rate there is lower. And we think MACI arthroscopic will allow us to have deeper penetration there. So for MACI Arthro it's really about sort of deeper penetration into the existing addressable market. of $3 billion plus. The TAM expansion for MACI occurs when you move to other joints, and that's where MACI ankle comes into play. And as I mentioned in my prepared remarks, that's about a $1 billion addressable market opportunity for us with around 20,000 eligible patients per year.

[Jeffrey Cohen, analyst]

Okay. Got it. And then lastly, first, could you talk about cash a little bit strong Q4 with $10 million of free cash flow. Any thoughts on cash? I know that some portion of that would be for the facility, but any thoughts there?

[Joseph Mara, executive]

Yes. So I think we talked about a pretty strong year from kind of a cash flow perspective. I think it was great to end the year at a higher place than we started, even as we started seeing the building. I think as I talked about in the prepared remarks, I mean, this is more of the year where you're going to see some more substantial kind of capital or cash kind of allocated to our new building. But we also expect to continue to generate kind of additional cash and sort of self-fund that. So that's probably the key dynamic, I would say, as you think about the cash flow in 2024.

[Operator]

Our next question comes from Swayampakula Ramakanth with HCW.

[Swayampakula Ramakanth, analyst]

Nick and Joe, most of my questions have been answered, but I just have a quick question regarding how to think through NexoBrid, not just over '24, but even beyond? Just like what we had seen with Epicel, I remember even about a year, 1.5 years ago, you folks are not quite sure how to talk through the dynamics of Epicel. But now you're able to give guidance for the year. And also, I listened to what Joe had talked about special centers and specialty centers and how the product moves through it. So should we expect similar dynamics? Or since you have had some learnings with how to commercialize Epicel, NexoBrid probably will get to decent dynamics earlier than what you had experienced with Epicel?

[Dominick C. Colangelo, executive]

Yes. RK, I'll try to parse that out and just the variability that we had seen -- have seen historically with Epicel is really just a matter of a smaller patient population that you're typically treating, right? So if you have a few more or less treatments per year when the average treatment is pretty significant in terms of revenue, it can bounce around a little bit. And that's why we kind of historically said before again, COVID sort of disruptions that starting out high single digit or low double digits for Epicel is usually safe ground and we typically outperform that. So it's really kind of reverting back to kind of what we did previously. With NexoBrid, of course, you're really sort of playing more at the top of the addressable market funnel, where there's multiple times more patients, 30,000, we believe, out of the 40,000 hospitalized patients each year are eligible for NexoBrid treatment. And so yes, once you get through, as Joe was talking sort of the initial dynamics around specialty distributor, stocking -- hospital stocking. You have kind of a more mature customer base that has more kind of normalized or routine treatment protocols, then you kind of -- we would expect, as we've said for a long time that it will help dampen any variability that you would see with Epicel as NexoBrid kind of revenues grow over time. So nothing has changed in terms of our belief on how that will play out and sort of our excitement around NexoBrid.

[Swayampakula Ramakanth, analyst]

One quick question. So do you think you have better leading indicators with NexoBrid then obviously, it's difficult to do that with Epicel, but is NexoBrid in a better place in that sense?

[Dominick C. Colangelo, executive]

Yes. Well, again, yes. The answer is definitely yes. Because, again, as we kind of get into sort of you can kind of think about we have a certain number of centers, right, 140 burn centers. We've got certain tiered targeting of those as you onboard those, they get P&T Committee approvals and then they start to make their initial order and you see penetration into the patients that they see, you'll see sort of routine and more routine reordering patterns. And we're just so early in this right now that those patterns haven't emerged yet. But once they do, we certainly will have sort of more visibility in terms of forecasting as we go out.

[Operator]

I'm showing no further questions at this time. I'd now like to turn it back to Nick Colangelo for closing remarks.

[Dominick C. Colangelo, executive]

Okay. Well, thank you, everyone, for your questions and continued interest in Vericel. Obviously, we had outstanding financial and business results in 2023, and we expect that the momentum in our core portfolio and new product launches will drive continued strong revenue and profit growth in 2024 and the years ahead. So we look forward to talking to you again at our next call. And thanks, and have a great day.

[Operator]

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