Gerard Michel - CFO Nick Colangelo - President and CEO Dan Orlando - COO David Recker - Chief Medical Officer Ross Tubo - Chief Scientific Officer

Kevin DeGeeter - Ladenburg Chad Messer - Needham Company Ted Tenthoff - Piper Jaffray

Good day ladies and gentlemen, and welcome to Vericel Corporation’s First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I will like to introduce your host for today's conference Mr. Gerard Michel, Chief Financial Officer. Sir, you may begin.

Thank you, operator, and good morning everyone. Welcome to Vericel’s first quarter 2016 conference call to discuss our first quarter financial results, as well as the progress of our commercial business and development programs. 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 in forward-looking statements represent our judgments as of today. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC, which are also available on our website. In addition, any forward-looking statement represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, Vericel’s Chief Operating Officer; Dr. David Recker, our Chief Medical Officer and Dr. Ross Tubo, Vericel’s Chief Scientific Officer. I will now turn the call over to Nick.

Thank you, Gerard, and good morning everyone. Vericel had an outstanding first quarter across all facets of our business. Our commercial team delivered strong sales growth, as we achieved record first quarter revenues. Total Carticel and Epicel net revenues were $14.1 million, an increase of 31% compared to the first quarter of 2015. This significant revenue growth was driven by both Carticel and Epicel with Carticel revenues increasing 24% and Epicel revenues increasing 46% compared to the first quarter of 2015. As we mentioned on our last call, 2015 was a transitional year of rebuilding the foundation of the Carticel commercial organization. While Carticel growth is been variable, with our new sales professionals are now established in their positions, we remain confident in our plan to grow Carticel revenues in 2016, ahead of the potential MACI launch next year. Epicel had very strong growth in the first quarter which was entirely based on an increase in graft volume. In fact, Epicel sales in the first quarter represented the most orders in graft shipped in a quarter in over 5 years. Epicel continues to benefit from increased promotional support and our continued focus on reengaging burn centers that used the product in prior years. We're excited to build on these advances as we continue to increase our sales and marketing support for Epicel. In addition to increasing our Epicel sales force to five sales reps last month, for the first time in the products history, Epicel branding and promotional materials have been developed and were rolled out at the American Burn Association Annual Meeting last week. These materials include new information from new revised Epicel label, including information relating to the probable benefit of Epicel mainly related to survival in adult and pediatric patients. Turning to our financial results. We improved our gross margins to 54% of net revenues compared to 49% for the first quarter of 2015 and reduced our operating loss to $2 million and our EBITDA loss to $1.1 million for the quarter. Our expanded Carticel and Epicel sales and marketing efforts and our strong sales leadership in operational performance are clearly having a positive effect. While we experienced quarterly seasonality for both products in our commercial business, we believe that we will remain on a path to profitability. Our clinical and regulatory team also made extraordinary progress on our key priorities during the first quarter. We received FDA approval of the Epicel Humanitarian Device Exemption supplement, which revised the Epicel label to include pediatric patients and specify the probable survival benefit for adult and pediatric patients, which allows the company to sell Epicel for profit on up to 360,000 grafts per year, representing more than 50 times our 2015 graft volume. We also a submitted a Biologics License Application for MACI for the treatment of cartilage defects of the knee, which was accepted for review by the FDA in the first quarter. The FDA provided a PDUFA goal date of January 3, 2017, and stated that it is not currently planning to hold an advisory committee meeting to discuss the application. The FDAs acceptance of the MACI BLA for review represents another important milestone for our goal of providing a new treatment option for the repair of symptomatic cartilage defects in the knee of adult patients, and we look forward to continuing to work closely with the FDA during the BLA review process. Finally, we announced results from the Phase 2b ixCELL-DCM clinical trial of ixmyelocel-T for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy, which we believe is the largest double blind randomized cell therapy trial completed to date for the treatment of advanced heart failure. As reported at the recent American College of Cardiology Scientific Sessions and published last month in The Lancet, the trail met its primary endpoint with patients in the ixmyelocel-T group having a 37% reduction in all-cause deaths, cardiovascular hospitalizations or unplanned outpatient and emergency department visits to treat acute decompensated heart failure during the 12 months following treatment with ixmyelocel-T compared to placebo. Importantly, the primary endpoint was driven by a reduction in both all-cause deaths and cardiovascular hospitalizations. With respect to the secondary endpoint, while none of the differences were statically significant, there were improvements shown in the ixmyelocel-T group compared to the placebo controlled group for many of the secondary endpoint. Finally, the incidence of adverse events, including serious adverse events in the ixmyelocel-T group was comparable to or lower than the placebo group. Consistent with study protocol, given that the trial met its primary endpoint, patients randomized to placebo in the double blind portion of the study or patients randomized to ixmyelocel-T that did not receive treatment will be offered the option to receive treatment in an open label extension of the study. We're just initiating the work necessary to offer ixmyelocel-T to these patients and expect to begin treating patients in the second half of the year. We are developing plans to meet with the FDA and other regulatory authorities to determine the development pathway for bringing ixmyelocel-T to market in the US and other territory and we plan to evaluate applicable expedited development and review programs available for serious conditions such as advanced heart failure. Future development plans are dependent upon input from these regulatory interactions and our preference for non-dilutive financing. As we've stated previously, we focused on determining the most appropriate manner to fund any future development with ixmyelocel-T balancing risk to the overall business, solution to current shareholders and retaining a significant portion of the upside potential of the program for the company and our shareholders. I'll now turn the call over to Gerard, to review our first quarter financial results.

Thanks Nick. Total revenues for the quarter ended March 31, 2016 were approximately $14.1 million and included $8.8 million of net sales of Carticel and $5.3 million of net sales of Epicel. Total Carticel and Epicel net product revenues in the first quarter increased 31% over revenues for the first quarter of 2015 with Carticel revenues increasing 24% and Epicel revenues increasing 46% compared to the same period in 2015. Gross profit for the quarter ended March 31, 2016 was $7.5 million or 54% of net product revenues, compared to $5.3 million or 49% of net product revenues for the first quarter of 2015. R&D expenses for the quarter ended March 31, 2016 were $3.5 million, compared to $4.4 million in the first quarter of 2015. The decrease in research and development expenses in the first quarter is primarily due to a deduction in clinical trial expenses. Selling, general & administrative expenses for the quarter ended March 31, 2016 were $6 million compared to $5.5 million for the same period in 2015. The increase in SG&A expense is primarily due to an increase in shared facility fees. Loss from operations for the quarter ended March 31, 2016 was $2 million compared to $4.6 million for the first quarter of 2015. Material of non-cash items impacting the operating loss for the quarter included $0.5 million of stock based compensation expense and $400,000 in depreciation and amortization expense. Other expense for the quarter ended March 31, 2016 was $1.7 million compared to less than 300,000 for the same period in 2015. The change in other expense for the quarter is primarily due to the change in the fair value of warrants in the first quarter of 2016 compared to the same period in 2015. Vericel reported an adjusted net loss for the quarter ended March 31, 2016 of $2 million or $0.08 per share compared to an adjusted net loss $4.5 million or $0.19 per share for the same period in 2015. The adjusted net loss excludes the non-cash change in the fair value of warrants and the non-cash accumulated dividend on the Series B convertible preferred stock. The adjusted earnings per share calculation increase includes, common shares reserved as treasury shares received in exchange for the Series A non-voting convertible preferred stock. Vericel's GAAP net loss for the quarter ended March 31, 2016 was $3.7 million or $0.24 per share compared to a net loss of $4.9 million or $0.27 per share for the same period in 2015. As of March 31, 2016, the company had $13.5 million in cash and cash equivalents compared to $4.6 million in cash and cash equivalents at December 31, 2015. Given our current cash balance, and continued growth of our commercial business, and our recent transaction with Silicon Valley Bank, we believe that we have adequate access to capital to operate the business as planned, including the additional expense to conduct [ph] the open label extension of the ixCELL-DCM trial. That completes my financial review. Now I'll turn the call over to Nick.

Thanks Gerard. In summary, we had a tremendous first quarter with strong revenue growth and expanded gross margins, reduced operating and net losses, significant advancement of our clinical and regulatory priorities and access to new sources of low cost non-dilutive capital to support our commercial operations and long-term growth plans. That concludes our prepared remarks. Now I'd like the operator to open the call to your questions.

Certainly. [Operator Instructions] Our first question comes from the line of Kevin DeGeeter of Ladenburg. Your line is now open.

Hey, good morning, guys. Congratulations, very nice results all around. A few questions from me. First off, with regard to Epicel, and the strong demand in the quarter, was that really driven, principally by just greater attraction with the expanded sales force or did you find the revised label, including the survival benefit was important in driving demand from certain customers?

So, this is Dan. The benefit of the label was just released this past weekend. So it’s the first time that we're presenting updated label to physicians in a promotional way. So the advance in the quarter is first of all seasonal and Gerard, I think he has done great job of alerting investors the best impact over it. I think every quarter recall it - we had for the last couple of years. So we had a very good impact on season, but also we have – as you recall we expanded to four representatives. We had a new representative in one of those territories who had that significant impact as well. And so I would say that the majority of Epicel volume increased in Q1 was due to just great execution both operationally and via the sales force and the label is yet to come.

So I'll add to that, this was definitely subsequently strong first quarter. I think for Epicel we definitely expect to see the growth in most quarters compared to the same period in the prior year. But I wouldn’t expect 46% every quarter, although I'd love to sign Dan up for that. So I think it might be a very, very low volume product. Over time I expect and continue to see perhaps double-digit growth, but probably not for this level, so keep in mind the volatility in such a small volume product.

Sure. It’s fair enough. And moving over to DCM program for a moment, when do you anticipate you being able to have a meeting with FDA to find plans going forward and then what should we expect in the investment community with regard to what type of update – you are anticipating being able to provide in terms of – should it be simply, when we see a transaction we'll understand what you're thinking is or do you anticipate being able to provide an explicit update on your preference with regard to – in term of development versus non-dilutive sources, you know, prior to actually announcing a transaction?

This is Nick.

Go ahead…

Hi, Nick.

I will start Kevin and then turn it over to Dave. So obviously the definitive feedback on this program will come at an ANDA [ph] Phase 2 meeting. I think we've been pretty clear that our first quarter of business is to explore expedited development and review pathways in the various – with the various regulatory authorities in different geographies. So that will be the first step. Keep in mind we also have a MACI BLA under review, which we need to make sure we are attentive to and is a priority for us and then we'd expect an ANDA Phase 2 meeting some time after that. But I – whether its definitive feedback from the FDA or other regulatory bodies or some sort of partnering deal, which obviously I think will depend on sort of the pathways forward, I don’t think we're going to see real priority on those fronts until after the end of this year.

Okay. Fair enough. And then just with regard to the Carticel sales force and just general positioning in the market, where do we stand in terms of current Carticel sales rep kind of headcount and how do you anticipate the size and configuration of that sales force as we look forward to a potential MACI launch next year?

So, we are evaluating the MACI's forecast right now, the implications for both the number of physicians we're going to reach both in our current call on physicians, as well as non-users. We – I don’t think you should expect a large expansion in the sales force would be needed. At this point we're not giving guidance as to what our forecast are, but I think that our current sales footprint is close, but we may come with some reasonable expansion as that group is prior to the launch a MACI.

And I guess just to the first part of your question, we are currently - we have all territories filled.

Okay. That’s very helpful. I'll get back in the queue.

Thank you. And our next question comes from Chad Messer of Needham Company. Your line is now open.

Great. Thanks let me add my congratulations on a strong first quarter. Just with regards to the open label extension for ixmyelocel-T, can you maybe go back through and give us a little more detail, you said it will start in the second half. So these are patients that were in the Phase 2b. So I guess there are some of them that have been off treatment for certain amount of time and you're going to start treating them again. How is that going to work and how long could patients stay in the open label extension?

Yes, so the open label extension is absolutely part of the study protocol. It was included as an amendment to the original protocol. And one truth it was - one of the reasons might be growing [ph] it was to incentivize patients to enroll. So as you know, it was a double blind randomized controlled trial, patients had a 50% chance of being randomized to after excel - ixmyelocel-T or to placebo. To somewhat incentivize those patients who were enrolled and treated with or were randomized to placebo, we offer the option at the conclusion of trial, the trials were not there to be positive, the option of receiving accurate ixmyelocel-T. So the only patients that looked – receiving ixmyelocel-T in the open label extension are those patients who did not receive the product during the double blind portion of the trial. Anyone who might now be - the product is used only as a single therapy, a single injection for those patients who receive that injection during the course of the trial has actually done, they have gotten the active product. The open label extension is designed to treat those patients who as I said did not receive active therapy, did not receive its ixmyelocel-T during the double blind portion of the trial.

Okay. Understood, very helpful. Can you remind me how many patients you had on placebo and any idea how many of them are basically still alive and trackable?

Yes, we're – the another part to your question too is that, and that’s as I said it’s an option for patients and for investigators. We're planning some where between 30 and 45 patients who are eligible and who would in fact participate in the open label extension. We're getting the extension on track right now, speaking with investigators and trying to get everything we need to have ready to begin the open label extension.

Okay. And are there any exclusions based on how the condition of the patients to receive ixmyelocel-T or is this open to anyone perhaps even if they are condition is greatly deteriorated?

Great, question. The FDA actually assisted when we filed the amendment with them over a year ago, that patients meet the same enrollment criteria as the original protocol. The part is actually the opposite, so patients maybe too healthy to participate in this trial, as you know this disease state it’s highly unlikely for patients to improve by themselves. So our patients who are so sick, that they just couldn’t undergo a cardiac catheterization and probably will not participate. But the criteria per se, for the open label extension is identical to that for the double blind portion.

Okay. Great, thanks. And then if maybe turning over to Epicel and Carticel, you know, as you start to prepare and I know you are doing the work now, so its – like it’s a good time to ask the question, but maybe you won't all the information, but what do have, how do you look at the sort of a transition of the launch, if you do get an approval from MACI in January, how quickly do you expect to be able to be providing MACI, are there any sort of steps on manufacturing your CME that would also be gating? And how does the transition look, I mean, do you stop selling Carticel and start selling MACI, are the products going to be available in overlapping measure, and I think we've discussed before that MACI would likely cannibalize Carticel, is that immediate, is that gradual, how do you look at that sort of transition between going from one product to the other?

Yes, this is Nick, I'll start and Dan you can chime in as required. Well, certainly if we – if the product is approved in accordance with the PDUFA goal date in early January, we certainly expect to launch the product in the first quarter. As you touched upon, there are requirement, this is a surgical procedure, so there is training requirements and so on, so that needs to be taken into account. But we had certainly planned to launch the product in the first quarter, we'll spend the balance of this year getting ready from a manufacturing standpoint and at this point again, we anticipate a Q1 launch. In terms of the transition, we certainly would like to make that transition in conversion, a hundred percent to MACI as quickly as possible. You have to keep in mind thought that there is an existing store of biopsies for patients whose biopsies taken with the intention of being treated with Carticel. So we certainly expect the FDA to weight in on, the transition plan as well. But I can tell you that it’s our preference to make that transition as quickly as possible and as you also stated we expect a hundred percent conversion from Carticel to MACI and then an expansion of the market.

Okay. Great. Thanks and congratulations again.

Thanks, Chad.

Thank you. Our next question comes from Ted Tenthoff of Piper Jaffray. Your line is now open.

Great. Thanks. Picking up on Chad's question, beyond just converting existing Carticel patients to MACI, how large do you think the market can actually get beyond that?

Yes. So, Ted, this is Dan. At this point we're not giving guidance on our forecast for MACI. We are collecting through a number of vehicles those are market research that we have ongoing efforts in that regard. So we are talking to physicians who have either formerly used Carticel or so and have fallen off and physicians who have not used Carticel and how were attracted to MACI profile. We do expect that those physicians will adopt, but again, we're not giving formal guidance on that this point.

Okay. That’s fine. And looking further updates on ixmyelocel-T and the rest of programs as well. Good first quarter.

Thanks, Ted.

Thank you. And at this time, I am showing there are no further participants in the queue. I'd like to turn the call over to management for any closing remarks.

Thank you for your questions and continued interest in Vericel. We’re excited about the opportunities ahead and we look forward to be reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may all disconnect. Everyone have a great day.