© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day ladies and gentlemen and welcome to the Vericel Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is recorded.
I would now like to turn the conference over to your host Mr. Gerard Michel, Chief Financial Officer. You may begin.
Thank you operator and good morning everyone. Welcome to Vericel's third quarter 2019 conference call to discuss our financial results. Before we begin, let me remind you that on today's call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. And all of our projections and forward-looking statements represent our judgment as of today.
These statements may involve risks and uncertainties that could cause actual results to differ from expectations and they are described more fully in our filings with the SEC which are also available on our website.
In addition any forward-looking statements represent our views only as of today and should not be relied upon [technical difficulty] any subsequent date. Please note that a copy of our third 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 access on our website.
I will now turn the call over to Vericel's President and Chief Executive Officer, Nick Colangelo.
Thank you, Gerard and good morning everyone. We had an outstanding third quarter which we believe demonstrates our ability not only to generate top-tier revenue growth, but also to generate strong annual profit and cash flow growth in the years ahead.
Total net product revenues of $30.5 million increased to 36% over the third quarter of 2018 marking the 10th consecutive quarter with record revenues for the reported quarter and our trailing four-quarter revenues rose to approximately $110 million. Based on these results, we've raised our full year guidance for 2019 to $116 million to $118 million, up from our previous guidance at $112 million to $116 million.
Our revenue growth generated exceptional profit growth with gross margins for the quarter of 69%, an increase of more than 550 basis points over last year and net income for the quarter of $3.5 million, an increase of $4.5 million over last year. Highlighting the strength of our business model, we also generated approximately $8 million in operating cash flow for the quarter.
Our combination of an innovative product portfolio, highly productive sales forces, and a largely fixed cost manufacturing footprint allows us to invest for revenue growth while still providing significant returns on that growth.
Given our relatively low penetration rate to the large addressable markets for MACI and Epicel, we expect to maintain strong double-digit revenue growth in the years ahead and based on the operating leverage of our business to generate gross margins in the mid-70% range and operating margins in the 20%-plus range in the next few years.
To ensure that we capitalize on this opportunity, we're making additional targeted investments in both our sports medicine and burn care commercial franchises. Based on the strong market adoption of MACI and the expansion of our target audience from 3,000 to approximately 5,000 surgeons who perform a high volume of cartilage repair procedures, we plan to expand the MACI sales force from our current 49 territories to 76 territories and from six to nine regions by the end -- by the second quarter of 2020.
Based on the results of our salesforce sizing project with ZS Associates, we believe that 76 representatives is the appropriate salesforce size to support both the forecasted growth from our current target audience which by itself would have required an expansion of the salesforce as well as the additional target surgeons that are likely to treat MACI appropriate patients.
Given the success of our previous three salesforce expansion since the launch of MACI, we're very confident in our ability to successfully execute the upcoming expansion. As with our prior expansions, we'll initiate recruiting in the fourth quarter target on-boarding and training new hires in the first quarter of 2020 and the new reps will move into the new territory alignment at the start of the second quarter next year.
To give you a sense of the momentum we're seeing with MACI and the opportunity that lies ahead, we've received biopsies from approximately 1,300 surgeons in the past four quarters, which is up 26% from the previous four quarters ending in Q3 2018. This represents roughly a quarter of the 5,000 target surgeons providing a significant opportunity to maintain strong double-digit growth for the next several years by adding new surgeons who adopt MACI as part of their treatment algorithm.
Not only is the number of biopsy and surgeons, a key leading indicator of long-term growth, but we expect that our larger sales force will be well positioned to generate additional growth by increasing the average number of biopsies from each surgeon and increasing the biopsy to implant conversion rate over time.
Turning to the burn care franchise. Third quarter Epicel revenue of $9.9 million was up 64% over last year and represented the highest quarterly Epicel revenue in history, as we treated a record number of patients with a record number of graphs. Under new sales leadership, the Epicel team has expanded from six to nine sales representatives and burn clinical specialists to support current Epicel users and to expand Epicel utilization in new burn centers.
While we expect to see continued high variability in Epicel revenue on a quarterly basis, we remain confident that on a rolling four-quarter basis will generate single to low double-digit revenue growth for Epicel. We believe this investment in our burn care franchise will not only increase Epicel penetration, but also prepare for the launch of NexoBrid upon FDA approval, which will more than double the addressable market opportunity for our burn care franchise.
We continue to target Q2 2020 for the NexoBrid BLA submission and pending approval, we'd expect to launch the product in the first half of 2021. We recently announced the initiation of the NexoBrid Expanded Access Treatment Protocol or NEXT to treat patients at up to 30 sites in the U.S. during the preparation and review of the BLA.
Next, we'll expand the number of NexoBrid trained physicians and health care providers in the U.S. and generate additional awareness, advocacy and use at U.S. Centers of Excellence prior to commercialization of NexoBrid, which we believe should enhance overall uptake of the product to product approval.
Finally, since acquiring this business five years ago, we've more than doubled the volume of MACI and Epicel without any material increase in fixed costs. As a result, we consistently increased gross margins a trend that we expect to continue given that we can meet forecasted demand for several years without significant capital investment. The increase in gross profit combined with the operating margin leverage resulting from our high sales force productivity gives us confidence that we're well positioned to generate strong profit and cash flow growth in the years ahead.
I'll now turn the call over to Gerard to provide more details on the third quarter financial results and an update on 2019 guidance.
Thanks Nick. We reported total revenues of $30.5 million in the third quarter and $78.5 million for the first nine months of 2019, representing growth of 36% for the quarter, 32% year-to-date over 2018. We saw strong sales performance across both products in the quarter with MACI revenue of $20.6 million and Epicel revenue of $9.9 million.
The third quarter Epicel revenue was more than $3.5 million higher than any other previous quarter since the product was launched. Our gross margin was 69% in the quarter, an increase of over 550 basis points from the third quarter of 2018.
Operating expenses of $18.1 million in the quarter increased $2.4 million over the prior year. As a percentage of revenue, operating expenses dropped 1,000 basis points to 59%, and we expect that to continue to improve as revenue grows. The increase in operating expenses was primarily due to a $1.1 billion increase in stock-based compensation expense, $800,000 increase in marketing expense and approximately $700,000 increase in MACI sales force expenses, driven by the sales force expansion in the second quarter of 2019.
The strong revenue growth helped contribute to a significant improvement in profitability and our operating income in the quarter was $3.1 million compared to a loss of $1.3 million in the third quarter of 2018. Net income was $3.5 million or $0.07 per share compared to a loss of $1.1 million or $0.02 per share in the [Technical Difficulty] 2018.
Adjusted EBITDA for the quarter was $6.8 million, compared to about $900,000 last year. For details reconciling non-GAAP measures, please see the table in this morning's press release. The significant increase in profit measures in this quarter versus Q3 2018 is a trend we expect to continue in the years ahead since revenue growth should continue to outpace expense growth resulting in rapid earnings growth.
We also see our top line growth now translating into strong cash flow. And in the quarter our cash and short-term investment balance increased by $8.7 million.
As of September 30, 2019, the company had $74.7 million in cash and short-term investments, compared to $82.9 million at December 31, 2018. Excluding the $17.5 million payment for NexoBrid, our net cash and short-term investments are up $9.3 million beginning of 2019.
Looking forward for the remainder of 2019, we expect total net product revenues for 2019 to be in the range of [Technical Difficulty] up from our previous guidance of [Technical Difficulty] We expect full year MACI revenue growth to be between 35% and 36%, which represents growth between 33% and 36% for the fourth quarter versus the fourth quarter of 2018. We now project Epicel growth to be between 10% and 15% for the full year.
Gross margin in the fourth quarter is forecasted to be in the mid-70s, bringing our full year gross margin to approximately 68%. Operating expenses for the year including the second quarter $17.5 million NexoBrid payment will be approximately $92 million.
Excluding the $17.5 million one-time NexoBrid payment, we expect to generate meaningful adjusted net income for the full year, a significant [Technical Difficulty] using the midpoint of our revenue range [Technical Difficulty] results in approximately $5 million in adjusted net income with the margin and operating expense guidance [Technical Difficulty]
That concludes our prepared remarks. As a reminder the presentation is available on our website, provides highlights of today's call including the sales force expansions, third quarter results and our updated full year guidance.
Now, I'd like the operator to open the call to your questions.
[Operator Instructions] And your first question comes from Danielle Antalffy with SVB Leerink.
Hey good morning, guys. Thanks so much for taking the question, and congrats on a really solid quarter. Just wanted to follow-up on MACI and some of the commentary you gave about the sustainable double-digit growth rate for the company. And as we look ahead to 2020, what are the different tailwinds and headwinds we need to consider? I mean, obviously, the momentum has been very strong. Comps are difficult.
You're getting into a little bit of law of large numbers. But from a tailwind perspective you also have the significant rep expansion. So can you help us balance how -- as we look ahead to 2020, I know you can't give guidance but maybe qualitatively help us think about how you're thinking of MACI growth going forward?
You mentioned the 26% growth in physicians submitting biopsies over the last four quarters that seems like a good base number. I'm not sure if I'm thinking about that correctly but maybe help us a little bit there.
Yeah. We think the best leading indicator we have for I’ll say one to two years out is the rate of growth of new biopsy surgeons. If we assume that earnings that come on board start biopsy, over time start acting like our more legacy doctors. Those have been around for a while [Technical Difficulty] to be a decent guide to what we expect over the next one to two years. So that's why we decided to get that [Technical Difficulty]
Okay, okay. That's helpful. And then Epicel was very strong this quarter, just curious about the different drivers specifically to this quarter? And how sustainable that is? Because the implied guidance would assume a pretty meaningful step down in Q4 from $1 perspective, so just curious about how to think of that? And how sustainable the performance we saw this quarter might be? Thanks so much.
Yes Danielle, thanks, it's Nick. Obviously as we mentioned we had the highest revenue and number of patients treated in history that was driven by more biopsies coming in from more centers and more grafting centers as well. So we're encouraged I think very strong performance to say the least.
As you know Epicel and as we commented in the script there's high variability. And the fourth quarter last year was -- until this quarter, the highest quarter ever for Epicel, right? So we believe there is strength in the product. But again, it's sort of early in the quarter and until we sort to see how the rest of the quarter shapes up, we think it's prudent to give the guidance we did which was 10% to 15% growth for the year.
Thank you very much.
And your next question comes from Ryan Zimmerman with BTIG.
Great. Thanks for taking the questions. Congrats on the quarter. I wanted to just follow-up on some of Danielle's questions there. Turning to FY 2020, I recognize you're not going to guide FY 2020 at this time. But with the rep hiring plans, it would suggest a similarly higher number, just based on productivity rates of your reps.
So, maybe just help me understand kind of how you're thinking about the productivity of reps in FY 2020? And whether that can stay constant or continue to grow as it has before into next year, just given how big the sales force is getting?
Sure, Ryan. I think the reason why you're not -- we significantly can't take the current [Technical Difficulty] reps at the start of the second quarter. I think [Technical Difficulty] turning to implants and that's a multiple quarter. [Technical Difficulty] up with the work that has to be done to support existing docs as they grow.
So, just if we weren't even expanding -- expand reach and frequency, which we are, we still have to hire [Technical Difficulty] to support the docs for the increasing amount of business they're doing.
All right. That's helpful. And then, just following up on Epicel. So, appreciate that you're getting more centers, but is this also a product of market awareness? And maybe you could just speak to kind of what the additional sales force hires are doing in terms of the existing centers you're in? And how much of that is new patients, as you said at new centers, versus just broader and deeper penetration in your existing centers? Thank you.
Yes. So, I think, the expansion, Ryan, for this year is -- really has just taken place recently. So I wouldn't say that the increase in Epicel is driven by sort of the sales force expansion. I think, we've been consistently looking to expand the number of centers that use Epicel.
We've been able to do that. And there are times, when I just think we are certainly focused on making sure that every Epicel appropriate patient has an opportunity to be treated with the product and that's really what's driving it.
Going forward, we're really redesigning and restructuring, as I mentioned in the script, to include both the burn therapy specialists or sales reps who will be principally charged with bringing on new burn centers and demand generation, but also supporting those folks with clinical or burn clinical specialists who really will provide the case support.
So that's something that takes a lot of time right now for these critically ill patients and we think by sort of dividing up the roles and responsibilities, we'll be able to focus the sales representatives on demand generation and the burn clinical specialists on caring for the patients being treated with Epicel. And we think over time that will drive -- continue to drive uptake in demand, both from new centers, but deeper penetration within the centers that are currently using Epicel.
Thank you.
Your next question comes from Kevin DeGeeter with Oppenheimer.
All right. Thanks, guys. So a couple of questions for me. First, maybe, Gerard, can you just comment on the 49 reps that were selling MACI? What number or a portion of those will see their territories potentially reconfigured as part of this exercise and trying to appreciate longer term, I think, we all kind of see the growth trajectory, but kind of near term, are there some adjustments or perhaps dislocations we need to be mindful of as we think about the next six months?
Yes. Kevin, this is Nick. Certainly with any sales force expansion, including the three that we've done since MACI launch, there are always adjustments to territory alignment. As Gerard mentioned, given the growth of the business, there was a reasonable number of reps that we were going to have to add over time, anyway just to support the business.
So we're, as I mentioned, going to run the same playbook, which our commercial team has run successfully. We focus on making sure we minimize any potential disruption in terms of the points in time when we hire the reps. So we obviously want to stay focused on the fourth quarter demand generation.
And so we really towards the end of the fourth quarter and into the first quarter focus on hiring the reps, they go through extensive training field-based and home-based and then we'll roll into their new territories at the beginning of the second quarter.
So it's a playbook that's worked well for us. We obviously involve the sales leadership, the regional directors and sort of territory recommendations for the alignment. So again, I think our team has done a good job of doing that in the past and we expect it to be successful next year as well.
And one further comment or question on Epicel. One of the things we've traditionally focused on is seasonality for both of the product lines MACI and Epicel. I think some of us have tended to think about 3Q is being a relatively weaker quarter for Epicel historically. That clearly didn't play out in this quarter.
Is there a fundamental difference with regard to seasonality, as you increase the number of burn centers that are using Epicel that we should think about that a bit differently than the past? Or is it just as simple as it's always been a lumpy business and the strong results in the current quarter reflect that somewhat random lumpiness?
Kevin, I think for Epicel, if you average out multiple, multiple years, you can see some trend of seasonality. But I think you can -- we've decided to throw seasonality out of the window and we think through projecting Epicel, given that the variability. The seasonality should really pay attention to is for MACI. And so I don't think seasonality really -- if that's washed out in the noise of the variability – product.
Great. And then maybe one last one for me and then I'll get back in the queue. And then maybe this is Gerard. Gerard, can you just give us some metrics to think about as we think about OpEx build related to the expanded sales force in terms of – obviously, we're not just going to kind of multiply SG&A by the percentage increase in sales force but kind of on a more bottoms-up level? What might be some helpful kind of contemporary metrics to think about in terms of the fully-loaded expense ad related to both MACI and the Epicel reps?
Yes. I think probably the best thing to do there is just take the number of incremental reps and multiply it by whatever you believe the fully-loaded cost is for rep. And if there really isn't too much else besides cars and T&E and their salaries, that's going to increase our sales and marketing expense. So that's probably the best thing to do.
Thanks for taking my questions.
And your next question comes from Chad Messer with Needham Company.
Great. Thanks. Good morning and let me add my congratulations on another solid quarter. On Epicel, can you comment on how broad the growth was this quarter? Is it driven by a small number of centers? Or was this truly a sort of just nationwide increase in sales?
I think the best way to look at – two factors here. Long term over any trailing four quarter period, we're confident we're going to single-digit to low double-digit growth for this product. It's going to bounce all over the map and I frequently say, don't cry on your coffee, if it's a down quarter, don't pop the champagne bottles, if there it's way up.
We're very confident that the product will [Technical Difficulty] over time and the trend line is not going to be terribly steep because you have to train surgeons how to use this. And as you know changing any surgeon's practice takes time but we still have plenty of addressable market to penetrate.
So for multiple years, we see continued growth at the levels I mentioned. But it's going to bounce all over the line and it's going to drive you guys [Technical Difficulty] any particular driver this quarter and more centers, more patients I can't confidently say anything.
All right. I guess it's a high-quality problem but a headache we'll have to keep dealing with. Maybe just another one on gross margins, I know in the past you've talked about for your incremental sales approximately 20% in incremental gross margin costs it looks like you beat that by a good bit this quarter? Are your gross margins improving at an even faster rate than that historical 20% you've talked about? Or is that just kind of a rounding error?
They've got a little bit better than we've guided and perhaps to our manufacturing team here for that. But I think I want to guide in a realm where we're confident we could achieve. So, I'm going to -- 20% marginal cost and the marginal revenue dollar.
All right. Great. And congratulations again.
Your next question comes from the line of Jeffrey Cohen with Landenburg Thalmann.
Hi, Nick and Gerard. How are you?
Good. Thanks. Hey, I wanted to – I am going to circle around on MACI and the expanded sales force if you could talk a little bit about – it seems like you kind of re-trigger the number that you're going to get to which sticks for a few quarters, I mean grows out again. But how are you thinking about the territories? Is it more of a having a rep in the one million-plus population territories? Or are you realigning? Or you're going after where you know more of cases are being done out there in the marketplace? And how do you think about that? And how does that change? What you're doing now versus what you'll be doing over the coming quarters?
Yes. So, Jeff thanks. It's a little bit of all of the above, right. As I mentioned earlier certainly when you increase the sales force as we've done the previous three years it always involves some realignment, what's really driving this is two things. Number one there's a workload activity to support the cases.
And as that volume goes up even within our current target audience we were going to need to add additional sales representatives to keep up with the business and to focus on the other part of the equation, which is reaching your target audience for the appropriate frequency. And so to be able to do that we were going to end up having to increase our sales force just for our current target audience.
As you know we did a large project over the past year and identified an additional group of surgeons that do a high-volume of cartilage repair, do open procedures and we think our productive targets to go after.
So that's what's really driving the ultimate number forecasted volumes plus the reach and frequency on the different segments that we think are productive. And so it's pretty straightforward much like we've done in the past few years.
Okay. So you'll continue to step it up as it progresses?
Yeah. I think this one was intended to last us for a while. So we've increased every year. We don't anticipate having to do that certainly next year.
Okay. Perfect. And then -- that does it for me. You answer my other questions. Thanks very much.
[Operator Instructions] Your next question comes from Swayampakula Ramakanth with H.C. Wainwright.
This is RK from H.C. Wainwright. A couple of quick questions. I'm just trying to understand the increase in biopsies that you were stating about like the 26% increase in biopsies in the last four quarters and how to think through for the future. As you said that's like a leading indicator, but this increase is that increase coming from the sports medicine docs?
Because I'm just trying to let that as well as you're trying to increase your target audience from the sports medicine docs to the orthopedic surgeons that you were talking about in the last couple of quarters. So how is – how should we think about this? And as you increase this target audience what sort of an increase are you anticipating when you move to the orthopedic surgeons? Or how easily acceptable are they for -- to MACI?
Yes. RK, let me just clarify. This is Nick. So what we said was, we saw a 26% increase in the number of surgeons that have sent in biopsies over the past four quarters compared to the prior period. So those are biopsying surgeons, not biopsies.
And as Gerard mentioned, we think that's a good leading indicator as these surgeons engage with the brand. As you know there's often a time lag between biopsies and meaningful time lag between biopsies and implants. So we think it's the best metric to say, how many surgeons are engaging in MACI and with MACI and making it part of their treatment algorithm.
And so that's why we gave you that metric. In terms of the larger audience as we mentioned, we really focused on surgeons whether they call themselves sports medicine surgeons or not, who do a large amount of cartilage repair who do open procedures and are perfectly capable of using MACI.
And so we -- the point is that with 1,300 surgeons who have sent in a biopsy out of a target audience of 5,000 we think there's a lot of room to grow in the years ahead.
Thank you. Regarding Epicel growth this quarter and I'm also thinking about your preparation for NexoBrid as you started the EAP on that, has the EAP actually been -- has it brought in any patients at all? Or is it on the paper at this point and you are still waiting to initiate therapy with the patient?
And then at the same time, I'm also thinking about -- is some of the Epicel growth coming from your conversations with potential centers that could use NexoBrid as well as Epicel?
Yes. So we're -- as you know we're planning on [Technical Difficulty] NexoBrid BLA by the second quarter of next year [Technical Difficulty] with our partners MediWound are engaging with centers for the next study which is a study which will educate docs on how to use the product in setting.
Obviously those individuals involved there are not actively promoting NexoBrid you can't do that in a tight fashion. We do believe longer-term that NexoBrid will synergistically not from a clinical perspective primarily, but just from a presence in the burn center perspective increased revenue of Epicel as we have more opportunities to engage in conversations with burn centers.
They will occasionally be patients who are very severe who will go for next to Epicel, but that will be the primary growth driver there. I think it will just be having a larger sales force and more opportunities for conversation that will be what drives more Epicel business from having NexoBrid in our bag.
Thank you for taking the question.
And I'm showing no further questions at this time. I would like to turn the conference back to Nick Colangelo.
Okay. Well thank you for your questions and continued interest in Vericel. Obviously we had another outstanding quarter and we're really excited about the growth opportunities for our business that lies ahead in the years to come. So thanks again and have a great day.
Ladies and gentlemen this concludes today's conference. Thank you for participation and have a wonderful day. You may all disconnect.