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

Ted Tenthoff - Piper Jaffrey Kevin DeGeeter - Ladenburg Ryan Zimmerman - BTIG

Good day ladies and gentlemen and welcome to the Vericel Corporation’s Second Quarter 2017 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 being recorded. I would now like to introduce your host for today’s conference, Mr. Gerard Michel, CFO. Sir, you may begin.

Thank you, operator, and good morning, everyone. Welcome to Vericel’s second quarter 2017 conference call to discuss our second quarter 2017 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 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. Before I turn the call over to Dan and Gerard to review our second quarter commercial and financial performance, I would like to comment on a several business highlights through the first quarter. First, we reported very strong revenue growth for the second quarter driven by the momentum of MACI’s uptick in the first full quarter following the launch. Total GAAP net revenues for the second quarter were $17 million an increase of 32% compared to the second quarter of 2016. Total GAAP revenues for MACI and Carticel were $12.9 million, an increase of 44% over the same period in 2016. As Gerard will discuss in more detail, GAAP revenues for the quarter included $1.4 million of revenue resulting from the settlement of a previously disclosed contractual dispute between one of the company’s service providers and a third-party payer. Excluding this partial reversal of revenue reserves, Carticel and MACI revenues increased 28% compared to the second quarter of 2016. We also saw a significant improvement in gross margins with margins increasing to 55% of total revenues compared to 43% of the net revenues in the second quarter of 2016. I am very pleased to report that all of our key launch performance indicators including the number of surgeons trained, the increase in biopsies, uptick by surgeons that were former on non-Carticel users and total orders for the quarter, all point to an acceleration in MACI uptake. We expect this momentum to continue particularly in light of the fact that we currently have less than 10% penetration into the patient population who could benefit from MACI on an annual basis. Dan will provide further details on both our promotional activities and key launch performance indicators. While MACI uptake is driven primarily by its favorable product profile, it's also supported by our transition to a new case management and pharmacy distribution model which we implemented in the second quarter. In this new model, we directly contracted with the case management service provider to manage reimbursement of patients support services for MACI. By directly managing the customer facing portion of the medical authorization and benefit review, we can ensure a high-quality experience for both the surgeon offices and patients. We’ve also transitioned to pharmacy distribution agreement with Orsini Pharmaceutical Services under which Orsini will be the exclusive pharmacy distributor of MACI for the bulk of our commercial business. Orsini has experience with a wide range of unique specialty pharmacy products and maintains contracts with most of major payers. Under the distribution agreement, Orsini takes title to MACI upon shipment of the product and assumes credit and collection risk. While there is no typical or well-defined model to follow for reimbursement in our tautologies products delivered on an outpatient basis, we’re confident that we now have the right players in the right roles to improve the experience for both physician and patients while minimizing the credit risk and maximizing reimbursement for the company. Turning to other important business developments, during the second quarter we announced that the company had 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 South East Asia. China is the second largest healthcare market in the world and ICT is the leading cell therapy company with a portfolio of Carticel therapies for the treatment of cancer. We’re very pleased to have entered in the 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, as we also reported in the second quarter, the FDA is granted its minus LT the regenerative medicine advanced therapy or remap designation for the treatment of advanced heart failures due to an ischemic dilative cardiomyopathy or DCM. The RMAT designation is a new expedited program established under the 21st century Curezak to foster the development and approval of regenerative medicine products intended for the treatment of serious diseases and conditions. In addition to providing an avenue for increase in earlier interactions with the FDA and eligibility for priority review, RMAT designated products may be eligible for accelerated approval based on surrogate or intermediate end points reasonably likely to predict long-term clinical benefit or reliance upon data obtained from a meaningful number of clinical sites. ixmyelocel-T is 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. The designation highlights both the significance of the results from the Phase 2b XL DCM clinical study and the unmet medical needs for improved therapies to treat patients with advanced heart failure due to ischemic DCM. We now have orphan disease, fast track and RMAT designations for ixmyelocel-T and we continue to execute on our stated strategy of pursuing expedited approval pathways and partnering opportunities for the program. To that end, we have a confirmed Type B meeting scheduled with the FDA at the end of this quarter to discuss a potential accelerated approval strategy for ixmyelocel-T based on existing clinical data. We are excited about the potential value and accelerated approval would create as we pursue our goal of commercializing ixmyelocel-T in a non-dilutive manner. I will now ask Dan Orlando to provide further detail on our commercial results.

Thanks, Nick. The second quarter represents the first full quarter of MACI market availability and the first full quarter with our expanded sales force of 28 representatives. Excluding the impact of the partial reversal of the revenue reserve that Nick previously mentioned, Carticel and MACI combined revenue for the second quarter increased 28% over the second quarter of 2016. Reflecting surgeon demand for MACI, Carticel represented only 15% of orders in the second quarter. Last Carticel order was filled on June 29th. And as planned, Carticel is no longer commercially available as of the end of the second quarter. With FDA approval for our MACI clean room expansion plan, we have already begun the process of decommissioning the Carticel clean room in order to expand MACI capacity to handle anticipated growth for foreseeable future. We are very encouraged by the overall surgeon interest and demand for MACI and in particular, that the surgeons who either have never used Carticel or have not used Carticel in the past two years, as they represent a key to long-term growth by expanding the number of implanting surgeons beyond those who routinely use Carticel. To that end, the number of new surgeons using MACI is up significantly in the first half of 2017 and this group represents the fastest growing segment of implants among our target surgeons. By far, the most important leading indicator for near term is biopsies. Biopsies increased 23% in the second quarter and 20% for the first half of 2017 respectively compared to same periods in 2016. As is the case with implant new surgeons and former Carticel users are leading the growth in biopsy. The number of new surgeons providing biopsies and the total number of biopsies from new surgeon has increased over 50% from the first half of 2017 versus the same period in 2016. And the increase in biopsies has accelerated over the last couple of months. Given that implants typically lag biopsies by approximately six months, we expect to see a commensurate increase in implant volumes in the second half of the year. Execution of our MACI payer strategy continues on schedule. We expected payer medical policies to be updated within the nine months or so following launch and we are very pleased with the progress to-date. Currently 18 of our top 28 plans have updated medical policy for MACI. We estimate that this represents approximately half of covered lives and MACI is in final review with several other plans. Notably, a few large payers that have not yet updated ACI policy namely United and AFM [ph] which we believe account for approximately 30% of covered lives in the US. Nonetheless, we have been able to gain access in case-by-case approvals for the patients covered by plans such as these that do not yet have updated medical policies. While broad access to MACI is available, is the case-to-case process does slowdown the medical authorization. So as payers continue to update their medical policies to include MACI and with our significantly improved case management and pharmacy provider relationships in place, we believe that the surge and patient experience of gaining MACI approval will dramatically improve and fuel our growth in the second half of the year. Another important component to MACI’s launch is education through peer group program. Currently there is 32 trained speakers in our MACI speaker bureau. These speakers conducted 12 events in the first half of the year with over 160 attendees. Attendance to these programs remains strong and the number of programs will expand considerably in the second half of the year combining online and in-person training to-date over 350 surgeons have been trained on the MACI’s surgical procedure with approximately half of those surgeons coming from the former Carticel user and non-user segment. MACI is clearly engaged Carticel users and non-users. Finally, in terms of increasing surgeon awareness of MACI we had a strong presence at the recent American Orthopedic Society for Sports Medicine or AOSSM annual meeting. In addition to a prominent new MACI group and training kiosk, we hosted a symposium on the use of MACI for treating articular cartilage [indiscernible]. Symposium presentations led by US and key global opinion leaders included a review of MACI published clinical studies, patient case profile and a discussion of the regulatory approval process for MACI. Approximately 75 sports medicine surgeons attended this symposium and 20 physicians, 50 opportunities to complete MACI training while they are at the AOSSM meeting. In summary, the MACI launch is progressing according to plan and momentum continues to build for this exciting new product. Now turning to Epicel, revenue in the second quarter was 4.1 million, up 6% over 2016. While the numbers of orders was roughly flat versus 2016, the average order size increased significantly reversing a decrease in order size seen in the first quarter. As in the first quarter, the rate of cancellations continues to be high compared to prior years. Over 50% of the order cancellations are due to patient expiry. As we previously discussed, the first phase of Epicel growth was in re-engaging surgeons who had previously used Epicel and were trained on the optimal use of the product. In an effort to improve the cross-sectional patient survival, we will continue to work diligently to better educate new physicians regarding the utility of using Epicel as part of the initial treatment plan and as a complement to autograph [ph] instead of a salvage therapy after attempting to use autograph [ph] alone. While we believe Epicel’s story is compelling given the survival data in our label, influencing the surgical practices of surgical specialty takes time and especially accelerated life-threatening conditions. In order to accelerate these efforts, we are developing treatment protocol for Epicel and peer-to-peer educational video series to establish a standard of care and help surgeons identify Epicel patients. We are focusing on messaging on graph take rates and patient survival to reinforce the powerful potential life-saving benefits of Epicel. Along with our increased promotional efforts, we have improved our presence at Burn Association Meetings including speaker programs targeted to major local and national burn conferences. And we will have a presence at more than half a dozen important conferences and programs over the remainder of the year. Finally, we also have created a reimbursement hotline staff with fill-in experts at eight hospitals with coating and reimbursement for Epicel. Epicel can be an important lifesaving therapy for severe burn patients. We are pleased with our investments to-date and have expanded its utilization. And we are confident that through our continued support, we’ll reach more patients. I will turn the call back to Nick now.

Thanks, Dan. The commercial team has done an outstanding job in driving MACI uptake, expanding access to MACI and optimizing the patient and physician experience in case management and pharmacy provider services. I am optimistic that these efforts will continue to drive growth for MACI and that our commercial and medical initiatives for Epicel will increase the product’s penetration in the severe burn market. I will now turn the call over to Gerard to review our second quarter financial results.

Thanks, Nick. Total GAAP net revenues for the quarter ended June 30, 2017 were approximately $17 million and included approximately $12.9 million of MACI and Carticel net revenues and approximately $4.1 million of Epicel net revenues compared to $8.9 million of Carticel revenues and $3.8 million of Epicel revenues respectively in the second quarter of 2016. Total GAAP net revenues increased 32% compared to the second quarter of 2016 with MACI and Carticel revenues increasing 44% and Epicel revenues increasing 6% respectively compared to the same period in 2016. MACI and Carticel GAAP net revenues included a partial reversal of a revenue reserve established in the first quarter of 2017. In April 2017, the company received notification of contractual dispute between a contracted service provider and a third-party payer related to certain insurance reimbursement plans associated with Carticel and MACI surgeries performed in 2016 and 2017. This dispute was subsequently resolved and the negotiated reimbursement resulted in the company’s ability to recognize $1.4 million in additional MACI and Carticel revenues in the second quarter. Excluding the $1.4 million partial reversal of the revenue reserve, total revenues increased 21% and MACI and Carticel net revenues increased to 28% respectively compared to the second quarter of 2016. Gross profit for the quarter ended June 30, 2017 was $9.3 million or 55% of net revenues compared to $5.5 million or 43% of net product revenues for the second quarter of 2016. Excluding the impact of the $1.4 million partial reversal of the reserve, gross margins were 51% for the second quarter. Research and development expenses for the quarter were $3 million compared to $4.1 million in the second quarter of 2016. The reduction in second quarter research and development expenses is primarily due to a reduction in ixCELL-DCM clinical trial expenses. Selling, general and administrative expenses for the quarter ended June 30, 2017 were $8.8 million compared to $6.4 million for the same period a year ago. The increase in SG&A expenses is primarily due to an increase in expenses for marketing initiatives related to launch of MACI and an increase in personnel costs primarily related to the launch and increase in the MACI sales force. Loss from operations for the quarter ended June 30th, 2017 were $2.5 million compared to $5 million for the second quarter of 2016. Material non-cash items impacted the operating loss for the quarter included $1.3 million of stock based compensation expense and approximately 800,000 in depreciation expense. Other income for the quarter was approximately 100,000 compared to $1.9 million for the same period in 2016. The change in other income for the quarter is primarily due to interest expense and the outstanding revolving credit agreement and term loans and the change in the fair value of warrants in the second quarter of 2017 compared to the same period 2016. Varicel’s net loss for the quarter was $2.4 million or $0.07 per share compared to a net loss of $3 million and $0.22 per share for the same period in 2016. As of June 30th, 2017, the company had $40 million in cash compared to $23 million in cash at December 31st 2016. It is very important to note that the vital care settlement and change in our hub and pharmacy distribution model will have a positive impact on cash flow as we benefit from 60-day payment terms we’re seeing and continue to collect on the $9.6 million of outstanding accounts receivables due from vital care enrolment at the end of the quarter. Augmenting this increase in cash flow will be the expected $5.5 million payment related to licensing agreement with ICT. The funding transfer is subject to approval by the state of administration of foreign exchange in 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 George. We had a very strong second quarter driven by the accelerating update of MACI, a robust revenue growth and margin expansion reflect the success of our commercial team sales and marketing initiatives coupled with strong physician enthusiasm for MACI. While our focus remains on our commercial portfolio, the RMAT designation for ixmyelocel-T opens up a number of exciting possibilities for the future of the program. Likewise 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 results position the company for both strong, short-term and long-term growth. That concludes our prepared remarks. Now I’d like the operator to open the call to your questions.

So quick question if I may just on this revenue reversal. It looks to me like the majority of that would be related to Carticel. Is that a correct assumption?

Yeah, the majority of that was Carticel, again in prior quarters.

And it looks like the organizational changes that have led to really maximize the MACI effort are taking effect. Do you think there is going to be a point when more sales reps are going to make sense to continue to broaden the distribution effort to more and more surgeons?

Well yes that is something we are looking at right now. Obviously, we are very pleased as Dan mentioned, that much of the growth in biopsies and many of the surgeons who have been trained are either former Carticel users or non-users of Carticel. So clearly there is a larger universe of physicians out there that fall into that category and the appropriate reach in frequency to make sure we are able to access those physicians is something we are considering right now.

Thank you. Our next question comes from the line of Kevin DeGeeter of Ladenburg. Your line is now open.

Hey, good morning guys. Thanks for taking my questions. Just a couple from me. With regard to biopsy growth, I mean really, really strong here. But can you just talk a little bit about how you’re structuring incentives for the sales force? I know you took Carticel over from Sanofi, you really sort of drove home the importance of revenue over and above biopsy growth, I recognize MACI had a different point into adoption curve. But how do we sort of think about the right way to incentivize the sales force to not just grow biopsies but ultimately to grow revenue and how do you work that into comp?

Yes, Kevin, this is Dan. Thank you. There is no incentive for driving biopsies from representative standpoint unless it’s converted to an implant. So, their incentive is solely on implant.

Got it. And appreciate the update with regard to market access for MACI and payer coverage. Can you just characterize on a high level the nature of discussion with kind of the other large payers who have not converted [indiscernible]? Are there substantial differences in just how they were thinking about the way to position MACI relative to the prior position on Carticel or would you characterize the discussions would be largely administrative timing?

Exactly that, it’s administrative timing. Some of the policy approach is that they do an annual review and others have accelerated that review because of the removal of Carticel. So that was strategic on our behalf to try and accelerate MACI approvals and changing policy by others like some of the large payers have their approach and they are sticking to it.

Okay, got it. And then …

As I shared though, it’s important to note that we do get cases approved on a case-by-case basis, it’s just that, that approach is slow for a physician, slow for patients, and can be not just time consuming but also there is other layers of review within that approach.

Understood. And then just lastly from me. With regard to ixmyelocel-T and the upcoming Type B meeting, how do you anticipate communication to investors to play out following that meeting? Do you anticipate coming back and providing us an update based on the acceptance of that or should we assume that no news is good news and you know just how do we sort of know, it's been pretty long updates and a pretty long road since we’ve had a kind of update on the next ixmyelocel-T progress?

Yeah, well as you know we went through this process obviously with the MACI regulatory strategy and so on. And so, you know we will meet with the FDA towards the end of the third quarter. As you know the processes, when it meeting minutes [ph] are then reviewed and exchange probably 30 days after that, we will get a sense on where things stand and so it kind of works nicely in terms of timing at our next earnings call in early November that we’ll be able to share some updates on our strategy going forward.

Okay. Great and then actually if I can just sneak one more related to that. Should we think about the potential timing of any business development around ixmyelocel-T outside the US as being anywhere related to the discussions with FDA or they’re really sort of independent tracks.

I think they are somewhat independent in terms of the start of the conversations, it's certainly as conversations with the FDA progressed, it's certainly assisted in getting the deal done.

Thank you. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Great, echo everyone’s sentiment on the strong topline execution in the quarter guys. So, if I could begin, in terms of -- you call the Carticel orders have been about 15% of orders in the quarter. Is that -- just a housekeeping question, is that 15% inclusive of the revenue reserve at sales because that would imply some organic Carticel revenue but my math and given that it ended on June 29, so we expect a little bleed over Carticel revenue recognition into the third quarter.

The Carticel, that percentage has nothing to do with the revenue reversal reserve and we would not expect any bleed over into the next quarter, as Dan mentioned we’re no longer producing Carticel.

Understood, thank you. And then in terms of the revenue that you guys did in MACI revenue in the quarter. Well how should we think about the productivity of the 28 reps that are up and running now relative to their total capacity given what you did in this quarter?

This is Dan. It really is dependent on how strong the biopsies were prior to the reps arrival in the geography because as we talked about there is about a six-month lag in biopsy to conversion here in plant. So, if a rep walked into a territory that was relatively healthy and that there is a lot of physicians already participating, saying Carticel or early on in MACI we find them to be fairly productive. But I would say in general we’re probably talking about 25% of their overall effectiveness. On the flipside, I will say you do have some standouts, we hired a lot of these representatives from other sports medicine, orthopedic companies that had surgical experience and relationships in place. So, we’ve seen some pretty quick starters but if I had to guesstimate on their overall effectiveness, I would put it in about the 25% bucket.

Appreciate the color there. And then just lastly from me and I will hop back in queue. I mean the gross margins are certainly tracking above expectation and growing in line with the growth that you are seeing in MACI. How should we think about your gross margins overtime given the growth you are seeing in MACI? Thank you.

Yes, we are modeling that approximately let’s say 75% to 80% of the marginal dollar probably close to 80%, on the top-line we'll drop to the gross margin line. Basically, the majority of our costs whether it is facility costs, here in low cost Cambridge or labor costs, [indiscernible] with QATC [ph] folks, the operators, they are here really staffed to our peak funds. So, we have plenty of excess capacity in those months to put more through that with the only marginal cost being materials.

Thank you. We now have a follow-up Mr. Ted Tenthoff, Piper Jaffray.

A question on gross margins too but since that was answered, what were shares outstanding at the end of the quarter?

$32.8 million.

$32.8 million, so right around that same amount. Okay, great. Thanks.

Thank you. And I am showing no further questions at this time. Please proceed with any further remarks sir.

Okay. Well, thank you everyone for your questions and continued interest in Vericel. We are excited about the opportunities ahead. And look forward to reporting on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.