Gerard Michel - CFO Nick Colangelo - President and CEO Dan Orlando - COO Mike Halpin - SVP, Quality and Regulatory Affairs

Kevin DeGeeter - Ladenburg Ted Tenthoff - Piper Jaffray

Good day ladies and gentlemen and welcome to the Vericel Corporation First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I will now like to turn the call over to Gerard Michel, Chief Financial Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Vericel’s first quarter 2017 conference call to discuss our first quarter 2017 financial results as well as the progress of our commercial business and development program. 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 on forward-looking statements represent our judgment 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 statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. With us on today’s call are Nick Colangelo, Vericel’s President and Chief Executive Officer; Dan Orlando, our Chief Operating Officer; Dr. David Recker, our Chief Medical Officer; and Mike Halpin, Senior Vice President of Quality and Regulatory Affairs. I will now turn the call over to Nick.

Thank you, Gerard, and good morning, everyone. Before I turn the call over to Dan and Gerard to review our first quarter commercial and financial performance, I would like to comment on a few business highlights during the first quarter, including those that were announced this morning. Beginning with the MACI launch. While the first quarter was a transition quarter for our cartilage repair business, we are now in full launch mode for MACI. As Dan will discuss in more detail, as of the beginning of the second quarter, our new sales representatives were deployed into our expanded territory alignment, and our payer strategy has borne early positive results as several commercial plans have updated their medical policies to include MACI since late March. We are very encouraged by the overall surgeon interest and demand for MACI, as evidenced by a significant increase in biopsies following the initiation of our surgeon training activities in late January and the fact that over 200 surgeons have been trained on MACI since that time. Of particular note, as we focus on expanding our customer base, former Carticel users and non-Carticel user target segments are leading every category of key performance indicators. As Gerard will discuss in more detail, Carticel and MACI net revenues reflect the change in estimate for revenue reserves in the first quarter based on the fact that the Company was recently notified about an unresolved contractual dispute between one of the company’s pharmacy providers and the payer which is not related to the MACI launch. In essence, we’ve assumed the claims that issue will be paid at a lower rate pending resolution of the issue between the pharmacy and the payer. If the issue is resolved in the pharmacy’s favor or the claims are processed through another pharmacy at a higher rate, we’d expect to adjust the payment estimates upward in the coming quarter or quarters. Revenue in the first quarter was also impacted by the fact that a relatively small percentage of MACI implants were shipped but not recorded as revenue in the first quarter because reimbursement was uncertain. As is common during the product launches, we’ll continue to selectively ship MACI product despite uncertainty regarding reimbursement in order to foster near-term uptake and long-term demand for the product. We also announced this morning that the company has entered into a license agreement with Innovative Cellular Therapeutics or ICT for the development and distribution of our product portfolio in the territory of Greater China, South Korea, Singapore and select other countries in Southeast Asia. China is the second largest healthcare market in the world and ICT is a leading cell therapy company with a portfolio of CAR T cell therapies for cancer treatment. Gerard will cover the specifics of the transaction, which include up to approximately $14 million through an upfront payment, equity investment and milestones as well as tiered double-digit royalty based on sales in the territory. We’re very pleased to have entered into this strategic collaboration, which allows us to begin to develop a global footprint for our product portfolio and to create another potential revenue stream for the Company. Finally, we’ve had several important developments related to our ixmyelocel-T program for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy, or DCM. From an operational perspective, we treated the final patients eligible for the open-label crossover extension portion of the ixCELL-DCM clinical study in February. We also announced in February that the FDA has designated the investigation for ixmyelocel-T for reduction in the risk of death in cardiovascular hospitalization in patients with chronic advanced heart failure due to ischemic DCM as a Fast Track Development program. Today, we announced that the FDA has granted ixmyelocel-T the Regenerative Medicine Advanced Therapy, or RMAT, designation. The RMAT designation is a new expedited program established under the 21st Century Cures Act to foster the development and approval of regenerative medicine products intended for the treatment of serious diseases and conditions. A regenerative medicine is eligible for the designation if it’s intended to treat, modify, reverse or cure a serious or life-threatening disease or condition. And preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a disease or condition. In addition to providing an avenue for increased and earlier interactions with the FDA, designated products may be eligible for priority review and accelerated approval, based on surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or reliance upon data obtained from a meaningful number of clinical sites. Being among the first products to receive the RMAT designation and to our knowledge, the first product to receive a RMAT designation for the treatment of a serious cardiovascular disease, highlights the significance of the results from the Phase 2b ixCELL-DCM study and the unmet medical need for improved therapies to treat advanced heart failure due to ischemic DCM. Our focus remains on our core commercial business. And our strategy with respect to this program remains to make relatively modest investments to maintain certain manufacturing capabilities while we explore expedited approval pathways and partnering opportunities for the program. We believe that achieving important regulatory milestones such as the Fast Track and RMAT designations enhances the value of ixmyelocel-T to potential partners since they provide a pathway for expedited development and approval. We now have orphan disease, Fast Track and RMAT designations for ixmyelocel-T. And our next step will be to request a meeting with the FDA to discuss opportunities for an accelerated approval pathway based on the RMAT designation as we pursue our goal of commercializing ixmyelocel-T in a non-dilutive manner. I’ll now ask Dan to provide further detail on our commercial results.

Thank you, Nick. Turning to our commercial performance for the first quarter. The first quarter was a transition quarter for our cartilage repair business as MACI launch activities initiated in late January when MACI became available to the market and we initiated our surgeon training programs. We are very encouraged by the overall surgeon interest and demand for MACI, and in particular, that of former Carticel users and non-Carticel user target surgeons for leading every category of key performance indicators. Biopsies increased 17% in the first quarter compared to Q1 2016 with biopsies from the former Carticel user and non-user categories growing at the fastest rate. There generally is a gap of several months between when a biopsy is taken and the membrane is implanted. So, the increase in biopsies represents a foundation of potential treatment. And we expect the impact of this increase to be seen in the second half of this year. We completed our train the trainer programs this past weekend with top European key opinion leaders with extensive experience that led the initial training of our top U.S. surgeons. These U.S. KOLs will in turn begin an aggressive schedule of regional training programs and local speaker programs planned for the balance of this year. In fact, we already conducted a handful of these programs during the first quarter. And once again, the former Carticel user and non-user segments comprised by far the highest rate of attendance. To-date, over 200 surgeons have been trained and implementing and implanting MACI with nearly half of those surgeons coming from the former Carticel user and non-Carticel user segment. Together, these facts demonstrate the strong appeal that MACI has with surgeons that previously were not interested in using Carticel based on the technically demanding nature of the Carticel surgical procedure. To capitalize on this opportunity, not only have we expanded the marketing, market access and medical affairs teams, but we have increased the number of sales territories from 21 to 28. And with all of these positions filled and the majority having completed training, we are enthusiastic about the impact of our expanded sales team and how they will drive MACI demand. Interest in MACI is strong. Since the first MACI implant was completed at the end of January, virtually all orders that we’ve received had been for MACI. For the first quarter, overall orders were split approximately 50-50 for MACI and Carticel as some orders were changed from MACI to Carticel for timing, reimbursement reasons during -- especially early in the quarter in February and even as late as March. As we mentioned in our last call and as is the case with all product launches, the gating factor for full conversion to MACI is completing the required changes to both payer medical policy and contract. We have focused on accelerating this process by requesting peer-to-peer approvals for MACI upfront in order to demonstrate the payers the surgeon community enthusiasm for MACI. Fortunately, our early-adopting physicians have been willing to support this effort. However, in some cases, we are accepting reimbursement risk where payers are not willing to entertain peer-to-peer approvals in advance. Our strategy is working as medical policies have been updated to include MACI at several of our top plans beginning at the end of March, including 4 of our top 10 commercial plans. Among the plans adding MACI to medical policies include Aetna, BlueCross BlueShield of Massachusetts task, BlueCross BlueShield plans of Texas, Illinois, Oklahoma and several other states. MACI medical policy updates have been published in draft form or in are review process at most, if not all, of our top plans. In the meantime, virtually all plans have a -- that have not yet updated their medical policies have approved the MACI cases through the review process. And although this approach does add time to the approval process, we’re glad it’s been successful, but it’s not ideal. The expansion of payer medical policy is likely to accelerate as various external payer assessments are completed. For example, a positive BlueCross BlueShield technical assessment of MACI stating that the evidence is sufficient to determine that MACI results in a meaningful improvement in the net health outcome of patients was published on May 1st by BlueCross BlueShield Evidence Street. This has already influenced several BlueCross BlueShield plans and just the past week to add MACI medical policy. We expect most plans to update their medical policy by the end of the third quarter, well ahead of the typical timeframe for new product launches. Over the months ahead, the payer updates -- as payers update their medical policies to include MACI, we believe that the surgeon and patient experience of gaining MACI approval will significantly improve and fuel our growth in the second half of the year. Turning to Epicel. Orders were down slightly for the first quarter compared to Q1 2016. However, Epicel volume in the first quarter of 2016 was the highest volume for any quarter over the past decade. Relative to Q1 2016, we saw a corresponding increase in cancellations and lower graft orders as we continue to engage new institutions that typically place smaller orders. On the positive side, Epicel biopsies were up again for the first quarter of this year. Customers have shared with us that their interest, which has represented by the increase in biopsies, is based on the compelling outcome data like that presented at the American Burn Association Annual Meeting in March this year. This outcomes data from over 950 severe burn patients continues to support the probable survival benefit in severe patient burns treated with Epicel. We will continue to work diligently to better educate physicians regarding utility of using Epicel as part of the initial treatment plan and as a complement to autograft, instead of just as a salvage therapy after attempting to use autografts alone. We’ve just added a medical science liaison and an Epicel product manager to support our training and educational efforts. And we will continue to expand our presence at major medical meetings. Finally, we are pleased to share that we are launching a reimbursement support initiative that includes a third-party reimbursement hotline to support our Epicel customers as well. There’s promising signals of potential growth for Epicel, but it will take time. And the underlying variability inherent in the small patient population will continue to cause revenue fluctuations. We continue to believe that the focus that we’re putting on expanding the usage of Epicel will yield growth over the long term. Thank you.

Thanks, Dan. Despite the challenges in the first quarter, we’re enthusiastic about the early customer response to MACI, and we understand the work that needs to be done to continue to educate burn surgeons about using Epicel earlier to provide better patient outcomes and resume growth for the product. I’ll now turn the call over to Gerard to review our first quarter financial results.

Thanks, Nick. Total net revenues for the quarter ended March 31, 2017 were approximately $9.4 million and included approximately $5 million of Carticel and MACI net revenues and approximately $4.4 million of Epicel net revenues compared to $8.8 million of Carticel revenues and $5.3 million of Epicel revenues, respectively, from the first quarter of 2016. Carticel and MACI net revenues reflect the change in estimate for revenue reserves of $2.1 million related to 2016 sales and approximately $700,000 related to 2017 sales. The Company engages pharmacies to contract with insurance providers and recently received notification of a dispute between one contracted pharmacy and a payer. Since the Company retains credit and collection risk from the end customer, we revised our estimate by assuming cases processed by that specific pharmacy will be paid at a lower out-of-network rate. The earlier estimates were based on claims being paid on an in-network basis consistent with the actual payment history and the pharmacy’s interpretation of its contract with the payer. Revenue in the first quarter was also impacted by the fact that approximately 4% of the implants shipped in the quarter did not meet revenue recognition standards and, therefore, were not recorded as revenue in the quarter. We will continue to selectively produce and ship MACI when reimbursement is uncertain in order to foster near-term uptake and long-term physician demand for MACI. In the first quarter, we reported approximately $4.4 million of Epicel net revenues. While Epicel revenues declined from the first quarter of 2016, it is important to note that Q1 2016 was a challenging comparative quarter as Epicel volume was the highest volume for any quarter over the past decade and increased 46% compared to the first quarter of 2015. To put Q1 2017 performance in perspective, excluding the first quarter of 2016, Epicel volume was 26% higher than the average first quarter volumes over the previous three years. Gross profit for the quarter ended March 31, 2017 was $2.3 million or 24% of net revenues compared to $7.5 million or 54% of net product revenues for the first quarter of 2016. R&D expenses for the quarter ended March 31, 2017 and 2016 were both $3.5 million. Clinical trial expenses for the ixCELL-DCM clinical trial and R&D expenses related to Epicel were consistent for both periods. R&D expenses related to Carticel decreased, offset by an increase in R&D expenses related to MACI. SG&A expenses for the quarter were $8.4 million compared to $6 million for the same period in 2016. The increase in SG&A expenses is primarily due to increase in consulting expenses of $800,000 for marketing initiatives related to MACI, an increase in personnel cost of $800,000, primarily related to an increase in MACI sales force, costs associated with reimbursement and patient support for both Carticel and MACI of $500,000 and an increase in professional fees of $300,000. Loss from operations for the quarter ended March 31, 2017 was $9.6 million compared to $2 million for the first quarter of 2016. Material non-cash items impacting the operating loss for the quarter included approximately $500,000 of stock-based compensation and $400,000 in depreciation expense. Other expense for the quarter ended March 31, 2017 was approximately $200,000 compared to $1.7 million for the same period in 2016. 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 2017 compared to the same period in 2016. Vericel’s net loss for the quarter was $9.8 million or $0.31 per share compared to a net loss of $3.7 million or $0.24 per share for the same period in 2016. As of March 31, 2017, the Company had $19.8 million of cash and cash equivalents compared to $23 million of cash and cash equivalents at the end of the year. In February, all shares of the Company’s Series B preferred stock were converted into approximately 1.1 million shares of the Company’s common stock. As of May 4, 2017, the Company had one class of stock at 32.8 million shares outstanding. As Nick previously mentioned, Vericel announced today that it has entered into a license agreement with Innovative Cellular Therapeutics, or ICT, a clinical stage cell therapy company based in Shanghai, China. ICT has established a broad portfolio of development stage CAR T products to treat cancer patients and is currently manufacturing those autologous cell therapies at their own manufacturing site. For the terms of the agreement, Vericel will effectively receive an upfront fee of $1 million and upon milestone achievement associated with that transfer, regulatory filings and commercializations, will receive up to an additional $8 million in milestones. Vericel is also eligible for tiered double-digit royalties on all sales of all products in all regions of the territory. ICT will be responsible for funding the development of the programs and manufacturing the products for commercialization in the territory. In addition, Vericel and ICT entered into an agreement where ICT will pay approximately $4.5 million for approximately 1.8 million shares based on yesterday’s closing stock price of $2.55. Due to currency control and other constraints, the equity deal is actually structured as a sale of warrants with an exercise price of $0.01. The funding transfer is subject to approval by the State Administration of Foreign Exchange of the People’s Republic of China and is expected to conclude in the third quarter of 2017. That completes my financial review. Now I’ll turn the call over to Nick.

Thanks, Gerard. First quarter of 2017 was challenging due to a number of factors, and we’re clearly not pleased with our financial results. There obviously is an inherent complexity when launching a next-generation product requiring a change in payer medical policy that can take quarters while physician demand immediately switches to the new product. However, we believe that we’ve implemented a payer strategy that’s accelerating this transition process. And for the balance of the year, we’ll continue to focus on increasing volume for both MACI and Epicel, and driving revenue growth. While our focus remains on our core commercial business, we’re very pleased with the other business developments announced today. We believe that the RMAT designation for ixmyelocel-T enhances the value of the product to potential partners since it provides the pathways for priority review and accelerated approval. Likewise, the license of our product portfolio to ICT provides an opportunity to develop a global footprint for our product portfolio and to create another potential revenue stream for the Company. We believe that these developments have the potential to create long-term value moving forward. That concludes our prepared remarks. Now, I’d like the operator to open the call to your questions.

[Operator Instructions] Our first question is from Jay Colby with Ladenburg. Your line is now open.

Hey. This is Kevin. Thanks for taking my questions. Congrats with regard to the RMAT designation. Can you clarify with regard to the potential for accelerated approval? Do you anticipate that that could be based on the completed 2b study, or how should we interpret that language in the context of a large existing database around ixmyelocel-T?

Yes. Thanks, Kevin. This is Nick. And I’ll start and I’ll turn the call over to Mike Halpin, who I’d like to introduce as our new Senior Vice President of Quality and Regulatory Affairs. As I mentioned earlier in the call, the standards for getting the RMAT designation is, obviously, treating a serious unmet need and then preliminary clinical evidence indicating that the drug has potential to address that unmet need. In terms of the accelerated approval, it can be based both on surrogate endpoints as well as data from a meaningful number of clinical sites. So, we certainly believe that there is a basis for engaging with the FDA in discussions around an accelerated approval based on a Phase 2b study, as we conducted that study at nearly 30 sites in the United States.

So, I think our next step -- this is Mike Halpin, would be to have a type B meeting with the FDA to explicitly discuss the accelerated approval strategy with the Phase 2b results we currently have and the other clinical data that currently exists for the product and explore the pathway.

And along those lines, can you just comment with regard to business development strategy for ixmyelocel-T in the U.S. and in other ex-U.S. jurisdiction, specifically Japan? Do you want clarity with regard to, for example, in the U.S. that may come from this type B meeting before pushing more aggressively perhaps and partnering, or are these sort of independent track considerations with regard to business development and regulatory strategy for ixmyelocel-T?

Kevin, it’s is Gerard. Certainly, assists and conversations we’ve been having and I think will continue the conversations, I do think though it would be an inflection point getting the information out of the type B meeting. So, right now, what we have is, the table set for a lot of opportunities in terms of accelerated approval, till we have the meeting with the FDA, we’ve been entirely clear what the path is. So, I expect accelerated discussions once that meeting has occurred.

And then, just one last point of clarification with regard to discussions outside the U.S., I think some of us have looked at regulatory environments, for example, in Japan. I thought that there may be faster pathways to partnering in certain geographies outside the U.S. Is that kind of consistent with your current business development focus or should we think about the U.S. is now being perhaps a higher priority or faster path for potential marketing or partnering?

I think the U.S., given its market size is -- might be a faster path to a deal. Japan, clearly, we have and we’ve discussed this on other calls, looked into that and have had conversations for reasons I’m not going to get into, that has not led to a deal there, but we’ll continue to investigate that opportunity. We’re quite familiar with the accelerated path there. There are, obviously, other regions of the world that might have great interest in the product, China, for example, given the deal that we’ve just signed. And point of fact, ixmyelocel-T was probably the primary driver of the deal in terms of significant interest in the product and the thought, then they have -- our partner has some ideas about accelerated regulatory paths there as well.

Our next question is from Ted Tenthoff with Piper Jaffray. Your line is now open.

Great. Thank you very much. And congratulations on the progress, and looking forward to seeing that transition more towards MACI. Just a quick question on ICT. Could you repeat what you said the upfront was? And was that cash included in the numbers that you gave today of 19.8?

Yes, that cash is included. So, the upfront is relatively modest, $1 million. And then, there is a $5 million payment effectively for equity. Just given some currency constraints in terms of moving money out of China, that money may end up being taxed and that’s why I gave a $4.5 million figure. And for that 5 -- whatever comes out, we’re assuming it will be $4.5 million. They’re going to get equity based on yesterday’s closing price of $2.55. That’s why it’s a bit convoluted, but I appreciate the opportunity to clarify.

Yes, Ted. Let me just clarify further that the $5.5 million essentially was not included in the $19.8 million that we reported in the first quarter.

$1 million?

No.

No. None of that was included. So, I just wanted to make sure...

I thought you were referring to when you said total payments worth up 2. No, definitely not. That was not in the financial results.

Okay, cool. So, $1 million upfront that’ll be recognized in the near-term, and then an estimated $4.5 million for the 1.8 million shares?

Correct.

Yes.

Very nice to see that. Excellent. That’s my all the questions for now. Thank you.

And I am showing no further questions. I would like to turn the call back over to Nick Colangelo for any further remarks.

Thank you, operator, and thanks, everyone, for your questions and continued interest in Vericel. Obviously, with these exciting developments that we announced today and our MACI launch in full swing pulsing, we’re excited about the opportunities ahead. And we look forward to reporting on our progress on our next call. Have a great day. Thanks.

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone, have a good day.