Vericel - Q2 2023
August 2, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to Vericel's Second Quarter of 2023 Conference Call. At this time, all participants are in a listen-only mode. I would also like to remind you that this call is being recorded for replay. I will now turn the conference call over to Eric Burns, Vericel's Vice President of Finance and Investor Relations. Please go ahead.
Eric Burns (VP of Finance and Investor Relations)
Thank you, operator. Good morning, everyone. Welcome to Vericel's second quarter 2023 conference call to discuss our financial results and business highlights. Before we begin, let me remind you, on today's call, we will be making forward-looking statements covered under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could result, results to differ materially from expectations and are described more fully in our filings with the SEC, which are available on our website. In addition, all forward-looking statements represent our views only as of today and should not be relied upon as representing any of our views as of any subsequent date. Please note that a copy of our financial results press release is available on the Investor Relations section of our website.
We also have a short presentation with highs in today's call that can be addressed in the webcast or access on our website. I am joining the call with Vericel's President and Chief Executive Officer, Nick Colangelo, and our Chief Financial Officer, Joe Morrow. I'll now turn the call over to Nick.
Nick Colangelo (President and CEO)
Thank you, Eric. Good morning, everyone. I'll begin today's call by discussing our financial and business highlights for the second quarter, as well as our expectations for the rest of the year. Joe will then provide a more detailed review of our second quarter financial performance and our updated financial guidance for 2023, before opening the call to Q&A. The company had an outstanding quarter as we delivered significant revenue growth and record second quarter revenue, continued profitability in operating cash flow, and strong underlying business results for MACI and Epicel. From a financial perspective, total revenue for the second quarter increased 24% to approximately $46 million, with both MACI and Epicel exceeding our second quarter financial guidance.
We also continued to generate strong profitability as we delivered our 12th straight quarter of positive Adjusted EBITDA, which increased by 60% over last year, and operating cash flow of over $10 million, ending the second quarter with $147 million of cash and investments and no debt. Based on the strength of our performance in the first half of the year, which included combined total revenue growth from MACI and Epicel of 20%, we're raising our full-year revenue guidance to $190 million-$197 million. We expect the momentum in our core business to continue with the anticipated commercial launch of arthroscopic MACI and a significant contribution from NexoBrid in 2024.
We believe that we're well positioned to drive further revenue growth acceleration, with total company revenue growth of over 20% in 2024. Our financial results for the second quarter were driven by continued strength and momentum for MACI, as we generated record second quarter revenue of $36.3 million, representing 27% growth compared to last year. Our sustained MACI revenue growth over the past few quarters has been driven primarily by the continued expansion of our surgeon base and the resulting strength in biopsies, both of which were ahead of our forecast for the first half of the year.
In addition to generating record second quarter MACI revenue and implants, we also had the highest number of surgeons taking biopsies in any quarter since launch and the second highest number of biopsies in the quarter, which were only a handful short of the record number of biopsies taken in the fourth quarter last year. This performance reflects the continued strong execution of our sales and marketing teams in engaging new surgeons and the continued improvement in the overall market dynamics, as we've now delivered 3 consecutive quarters with a record number of biopsy surgeons and our 3 highest quarters of biopsies since we launched MACI. Based on these underlying business fundamentals, MACI has achieved a sustained high growth trajectory, with nearly 30% growth for the first half of the year and 4 straight quarters of mid 20% to low 30% growth.
Given these results and the continued momentum to start the third quarter, in which we expect another quarter of 20% growth, we are increasing our full-year MACI revenue guidance to $159 million-$163 million. This updated guidance range represents more than 20% growth for the full year and acceleration in the MACI growth rate versus last year. With respect to our MACI lifecycle management initiatives, we continue to advance the arthroscopic MACI and MACI ankle development programs. Importantly, we plan to initiate the human factors validation study for arthroscopic MACI this quarter and to submit the study results as part of a prior approval supplement to expand the MACI label to include arthroscopic MACI by the end of this year.
We now anticipate commercial launch of arthroscopic MACI in the first half of 2024, which we believe will positively impact the growth trajectory for MACI in the years ahead and have a significant impact on our overall business. We recently completed an extensive quantitative market research project that included more than 100 orthopedic and sports medicine surgeons to evaluate the potential impact that arthroscopic delivery could have on MACI penetration of the addressable market. This research confirmed our view that arthroscopic MACI will represent a meaningful innovation in the cartilage repair market. First, the research indicated that there was a high degree of interest in arthroscopic MACI across all surgeon groups, which included MACI users as well as non-users.
Surgeons pointed to several potential benefits and advantages of arthroscopic MACI delivery, including a less invasive procedure resulting in less postoperative pain, faster recovery, and improved aesthetic outcomes for patients. The MACI Arthroscopic Instrument Kit is designed to treat smaller 2-4 square centimeter defects on the femoral condyles. The research indicated that regardless of their current MACI usage, surgeons expected to shift a meaningful share of their procedures in this segment from alternative products and procedures to the arthroscopic MACI procedure. Importantly, 2-4 square centimeter femoral condyle defects represent the largest market opportunity for MACI, as this segment represents about 20,000 patients per year or approximately a third of the $3 billion addressable market for MACI. While MACI has significant volume in this segment, its penetration rate is lower compared to other areas of the knee.
For example, in patella defects, which represent about 10,000 patients per year, MACI's penetration is greater than 10%, and we continue to see very strong growth in this segment. If we're able to achieve similar penetration in the femoral condyle segment with arthroscopic MACI, we'd effectively double our current MACI business over the coming years. We believe that arthroscopic MACI delivery will be a valuable option in the cartilage repair market and will help drive an acceleration in the company's overall growth trajectory beginning next year. Finally, as noted in our earnings release this morning, we recently executed a long-term extension of our exclusive supply agreement with Matricel for the MACI ACI-Maix collagen membrane.
This agreement not only provides for continued supply of this key component of the MACI final product, also provides Vericel with exclusive rights to the membrane for the next decade and beyond, which is an important part of our long-term protection strategy for MACI. Turning to our burn care franchise, we reported second quarter Epicel revenue of $9.6 million, which was one of our higher quarters to date and significantly ahead of recent trends in our guidance for the second quarter, with growth of 40% versus the first quarter and 17% versus the prior year. This strong performance for Epicel was driven primarily by the fact that we continued to see a higher proportion of biopsied patients moving on to treatment with Epicel and continued stabilization in the average number of grafts per patient.
Epicel revenues of $16.4 million for the first half of the year is 20% higher than in the second half of 2022, as our burn care team has driven a significant improvement in our performance trends and increased utilization of this important product. We're also beginning to see examples of positive pull-through for Epicel from our NexoBrid sales reps based on the high level of engagement and interest in NexoBrid, helping to drive usage at dormant Epicel accounts. Although we expect that Epicel revenue will still be variable from quarter to quarter, we're very pleased to see the significant improvement in our recent results and a strong first half of the year for the product.
With respect to NexoBrid, our pre-launch activities have remained on track throughout the first half of the year, and our burn care team has generated a tremendous amount of interest and enthusiasm for NexoBrid in the burn care community. In terms of NexoBrid product availability, we received our first lot of finished product from MediWound for the U.S. market at the end of June, which currently is warehoused in our third-party logistics provider. While this NexoBrid lot met all release criteria for distribution in the U.S. market, we're not able to commercially distribute the product at this time due to a deviation associated with a third-party testing lab in Taiwan used in MediWound's manufacturing process.
As we've previously discussed, there were several manufacturing process updates that were required to be implemented by MediWound following approval of the NexoBrid BLA. All of those updates related to the MediWound facility have been successfully completed. However, one of the process updates was a new upstream in-process control test on an antioxidant solution or a preservative that's sprayed on the peeled pineapple stems in one of the first processing steps for the botanical raw material at CBC, which manufactures the intermediate drug substance for MediWound in Taiwan. This routine in-process control testing was outsourced to a lab in Taiwan that subsequently was not approved by the FDA, giving rise to the deviation at issue and invalidating the test results for all of the current lots of the intermediate drug substance currently available to produce NexoBrid finished product.
This impact will not impact, or this issue will not impact NexoBrid finished product manufactured for the U.S. market from new intermediate drug substance lots, as the in-process control test will be done directly by MediWound, which is the testing site of record in the BLA. However, absent FDA allowing commercial distribution of the finished product affected by this deviation, we would not be able to distribute this product and would expect to begin commercial sales of NexoBrid in the first quarter of next year, following the upcoming fall pineapple harvest season, which is our current operating assumption until we hear otherwise. To that end, we're currently engaged in discussions with the FDA following a formal request that the agency exercise its discretion to allow the distribution of NexoBrid lots impacted by this deviation.
Although there may be a delay in the commercial availability of NexoBrid, the FDA's determination will not affect BARDA's planned $3 million procurement of NexoBrid to replenish the national stockpile for emergency response preparedness, which we now expect in the second half of 2023. In terms of our overall burn care revenue guidance, based on our improved Epicel trends and the anticipated BARDA procurement revenue, we're increasing our guidance for the year from $28 million-$32 million to $31 million-$34 million, which Joe will discuss in more detail later in the call.
Finally, as we look beyond 2023, we continue to expect NexoBrid to make a significant contribution to our revenue growth in 2024, and that our burn care franchise will become a second high growth franchise for the company in 2024 and beyond. In summary, we're pleased with our excellent start to the year, strong second quarter financial results, and continued progress on MACI lifecycle management activities. Importantly, we've raised our revenue expectations for this year, and we expect company growth to accelerate to over 20% in 2024, with continued strong performance from our core products and significant contributions from the launch of new products. I'll now turn the call over to Joe to discuss our second quarter financial results and updated financial guidance.
Joe Mara (CFO)
Thanks, Nick. Good morning, everyone. Starting with the income statement. Total net revenue for the quarter was $45.9 million, an increase of 24% versus the prior year, driven by strong MACI revenue of $36.3 million and $9.6 million of Epicel revenue. For MACI, during the first half of the year, we generated revenue of $70.5 million, which represents 29% growth versus the first half of last year. Over the last four quarters, we've now consistently seen strong MACI growth each quarter with 30%, 24%, 32%, and now 27% growth versus the prior year. This represents a 28% growth on a trailing four-quarter basis, as MACI has resumed its high-growth profile.
For Epicel, the $9.6 million of revenue in the Q2 was our highest quarterly revenue since Q1 2022. Q2 revenue grew 40% compared to the first quarter and 17% versus the prior year. In addition, our first half Epicel revenue was more than $16 million, significantly ahead of our quarterly run rate of approximately $6 million per quarter entering the year. Gross profit for the quarter was $29.9 million, or 65% of net revenue, an increase compared to 62% in the Q2 2022. Total operating expenses for the quarter were $35.9 million, compared to $31.9 million for the same period in 2022. The increase in operating expenses was primarily due to higher sales and marketing expenses and R&D program-related costs.
Net loss for the quarter was $5 million, or $0.11 per share, compared to $9 million or $0.19 per share for the second quarter of 2022. non-GAAP Adjusted EBITDA for the quarter was $4.4 million, which grew 60% versus the prior year. Importantly, this now represents the 12th consecutive quarter that we have generated positive Adjusted EBITDA. Finally, we generated approximately $10 million of operating cash flow in the quarter. We ended Q2 with approximately $147 million in cash, restricted cash and investments, and no debt. Turning to our financial guidance. We are increasing our full-year revenue guidance for 2023.
We now expect total revenue of $190 million-$197 million, an increase compared to our prior revenue guidance of $184 million-$192 million, driven by both of our franchises. We are maintaining our profitability guidance and expect gross margin to be in the high 60% range and Adjusted EBITDA in the mid-teens % range. For MACI, we now expect full-year revenue of $159 million-$163 million, an increase versus our prior guidance of $156 million-$160 million, with growth expected to be in the low 20% range for the full year.
As Nick highlighted earlier, our MACI momentum has continued into the third quarter, and we expect MACI growth in the quarter to be approximately 20%, with revenue of $37 million. For our burn care franchise, based on the strength of Epicel during the first half of the year and with anticipated NexoBrid BARDA revenue in the fourth quarter, we now expect full year revenue of $31 million-$34 million, an increase compared to our previous guidance of $28 million-$32 million. For Epicel, based on our higher quarterly run rates over the last three quarters, we anticipate revenue of approximately $7.5 million in Q3.
In total, our increased burn care revenue guidance does not assume any commercial revenue for NexoBrid during 2023 at this point, although it does now include our share of BARDA procurement revenue of over $1 million, which we would expect to occur in the fourth quarter. Overall, we are very pleased with our second quarter performance, our strong start to the third quarter, and as we look towards 2024, we anticipate continued acceleration of our total company revenue growth rate to over 20%, with continued strong execution on our core products, as well as the anticipated contributions of arthroscopic MACI and NexoBrid. This now concludes our prepared remarks, and we will open the call to your questions.
Nick Colangelo (President and CEO)
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
Operator (participant)
Our first question comes from the line of Ryan Zimmerman of BTIG. Please, go ahead.
Ryan Zimmerman (Managing Director and Medical Technology Analyst)
Hey, guys. Good morning, congrats on a nice quarter. Want to start off, Joe, I appreciate all your comments on guidance, there's a lot of moving components here. I guess I'll start off with MACI. Given the first half 2023 performance, I guess I'd like you to speak maybe a little bit to end-market dynamics, patient behavior, and interest levels, you know, relative to last year. On that topic, you know, again, your, your third quarter commentary suggests an acceleration from your prior expectations. Maybe help us understand just broadly, you know, why that couldn't continue to accelerate in the fourth quarter, why not raise it by a bit more, given the record biopsies we're seeing?
Joe Mara (CFO)
Good morning, Ryan, and thanks for the question. You know, I'll probably take that in pieces and talk a little bit about where we were in the second quarter, kind of your point on the third quarter, and then round that out as we think about the full year and, of course, touch on Q4. You know, first off, I would say in the second quarter, you know, as we talked about, you know, just another really strong quarter for MACI, 27% growth, you know, ahead of our guidance. You know, I think the team's doing an excellent job from an execution perspective, and really just a continuation of the trends we've seen with a number of quarters now in the kind of mid-20s or 30%+.
You're looking back, you know, you're basically at 29%, relative to the first half of last year, so really strong growth. I think to that point, and to your question, you know, really the strength has been driven by the underlying metrics and really the top of the funnel. Biopsies have been extremely strong, you know, that continued in Q2, where we nearly matched our Q4 number. The growth in surgeons has continued very strong. We have three straight record quarters. Those are really kind of the, the key drivers, I would say, of our results to date this year and as we look forward.
On- from a Q3 perspective, as we touched on in the prepared remarks, you know, it's off to another strong start, and I think we expect another high growth quarter of 20%, which is approximately $37 million for the quarter. That does importantly imply a step up from Q2 to Q3, which, you know, we don't always see, so I think that's certainly a sign of continued momentum. The other piece I would say is, and this will apply to Q4 as well, but, you know, we are running into some more difficult comps in the sense that Q3 and Q4 last year were also quite strong. They grew 30% and 24%, respectively. That's certainly, you know, a consideration as we look forward.
You know, as, as we think about the full year guidance, I think it really starts with, you know, we started the year kind of in the mid to high teens. We've continued to increase that, now we're in the low 20% range, which is above the last couple of years and above the guidance from the last couple of quarters. We've certainly increased that, you know, throughout the year, and the midpoint there at $161 is about 22% on a full year basis. Both Q2 being ahead, and, to your point, H2 is also ahead of, kind of where we expected coming to last quarter. Then I think just to kind of give context on, on Q4, you know, at the midpoint, you know, it would be kind of growth in, in the mid-teens.
Certainly, I think we're set up potentially to do better than that, but, you know, I think we just want to be balanced in the sense that if you look at Q4, it kind of lines up with what we typically see. It's about a third of the full year revenue. It's still a pretty significant step up in the mid-40% range. Again, we are running into some more difficult comps. You know, broadly speaking, I would say, you know, pleased with the performance in Q2. That's continued into Q3, and on a full year basis, we're now into the low 20% range.
You know, I just think at this point, we don't want to get too far ahead of ourselves in Q4, but this would, you know, essentially call for that, that strength in the business continuing throughout the second half, and, and again, we'll, you know, we'll continue to drive the business.
Ryan Zimmerman (Managing Director and Medical Technology Analyst)
Yeah. No, that's, that's great, Joe, and appreciate all your, your color and, and thoughts there. Then, you know, Nick, on the NexoBrid launch timing, I, I think the prudent thing was to pull it out of numbers for the back half of the year. You know, I, I, I just want to understand, and I think investors would want to understand, so, so is there potential, and kind of what is your view of potential of the FDA allowing these lots to potentially be on the market this year? What would they need to see, I guess, to allow that to, you know, maybe reestablish the NexoBrid launch in the second half of this year?
Because this is, I mean, this, I think, is the second delay we've had on NexoBrid, you know, since doing the deal with MediWound.
Nick Colangelo (President and CEO)
Yeah, Ryan, you're right. It is the second delay we've had. Obviously, the product was not approved on the first go around. You know, we stepped in, got the product over the goal line. You know, obviously, we're frustrated and disappointed that we're 7 months beyond the approval, and we still don't have product from NexoBrid or MediWound that we can, you know, put into the commercial market. I think that's a fair comment. Again, we're trying to step in here now again, engage with the FDA, and be able to use these, these batches of intermediate drug substance to supply the U.S. market. I can't go into all the details of our discussions with the FDA.
As we included it in our 10-Q, you know, we have done a detailed risk assessment, and we don't believe there's any incremental risk to product quality or patient safety. You know, obviously, those are the discussions we are having with the FDA. You know, there were a number of manufacturing updates that were required to be implemented following approval. You know, as we talked about previously, we were engaged with MediWound in the inspections last fall of their Israeli facility, the drug substance facility with CBC in Taiwan. Those inspections obviously went well, and the product was approved, but we had some of these updates, or MediWound had updates that needed to be completed.
They completed the ones related to their own facility, and those were successfully completed. Again, this third-party testing lab is basically testing the, it's a microbial test of an antioxidant solution that's sprayed on the pineapple stems in one of the first processing steps. There are a number of other microbial controls that have been added. This one, the FDA did not approve this testing site. You know, we were not involved with that. Obviously, MediWound, as our contract manufacturer, is responsible for that, and they didn't execute. So we're going in and working with the FDA to, you know, try to be able to use this material. At the end of the day, again, we don't think that there's any incremental risk to using this. It's the same process that was used for all prior, NexoBrid manufacturing.
All material that was used in clinical trials, all material that was used to treat over 10,000 patients globally, the BARDA stockpile, all of that product was manufactured without this upstream, in-process control test. We think there's a good case to be able to move forward with it. I think, as you mentioned, it's prudent not to, you know, have that in our second half numbers until, and unless, we get the green light from the FDA.
Ryan Zimmerman (Managing Director and Medical Technology Analyst)
Okay. Just to follow up and 2, 2 fine, finer points on that. One, are the BARDA revenue that's being recognized in the back half of the year, are those the same lots that are being held off currently?
Nick Colangelo (President and CEO)
Yes.
Ryan Zimmerman (Managing Director and Medical Technology Analyst)
Conceivably, when would you get an update from FDA if you get one in the second half of the year, if you can share with us?
Nick Colangelo (President and CEO)
Yeah. They would be the same lots, right? Because all of the current intermediate drug substance lots were tested by this lab from both the 2021 and the 2022 harvest seasons. In terms of the timing of the FDA discussions, you know, we'd expect it to be relatively soon. Obviously, we need to-- they-- we collectively need a determination on this in, in pretty short order, so I think we'll know. Again, the operating assumption is, unless we hear otherwise, we're just gonna assume that we have to wait for the next pineapple harvest season, and that would result in new batches of both intermediate drug substance and NexoBrid finished product in the first quarter of 2024.
Ryan Zimmerman (Managing Director and Medical Technology Analyst)
Okay. Well, it's a lot of good pineapple going to waste, I guess, but I appreciate the update.
Operator (participant)
Thank you. One moment please for our next question. Our next question comes from the line of Sam Brodovsky of Truist Securities. Your line is now open.
Sam Brodovsky (Analyst)
Hi, thanks for taking the question. Just first, a quick one, and you started to touch on this a little bit before on the sequential from MACI. Should we expect a 2Q to 3Q increase as sort of normal going forward, or are there some market dynamics that are still a little unusual behind your confidence in being able to grow sequentially this year?
Joe Mara (CFO)
Yeah, good morning, Sam. You're, you're trailing off a bit at the end, but I think you're, you're asking about should we kind of expect this quarterly cadence going forward?
Sam Brodovsky (Analyst)
Yeah, sorry. Is, is anything unusual behind the sequential increase from 2Q to 3Q, or is that a more normal seasonality going forward?
Joe Mara (CFO)
Yeah, I mean, I would say, I think, you know, I think the way we're thinking about it is, you know, obviously, we've kind of got off to a good start with, with strong results in both Q1 and Q2, and I think we're off to another good start in Q3. If you look historically to kind of your point, it can certainly bounce around a little bit. You know, we certainly have seen some, some years where there's, you know, Q3 kind of stepped down from Q2. I think kind of where we are now is, you know, this certainly could, you know, change a little bit going forward.
I think what you're seeing come together this year are 3 pretty strong quarters sequentially, Q1, Q2, and Q3, which I think is, you know, kind of driven by this momentum within the, within the field and kind of driving biopsies and new surgeons, et cetera, which is great. I think it's, you know, I think it's just continued execution, and, and that's, that's playing through in terms of the cadence of the numbers, and you see 3 pretty strong quarters. You know, the step up in Q4 because of that may not be quite as high as we've seen in the past, that's kind of how this year is, is playing out.
You know, I think that's probably how we would be thinking about it going forward, but I would say, you know, it could still vary a little bit, you know, within quarters. We actually think it's certainly a good sign to see the continued momentum throughout the year.
Sam Brodovsky (Analyst)
Yeah, that's, that's great color. Then switching to, to arthroscopic, and, and thanks for the market commentary. That was really great.
How should we think about the, the scale of that launch progressing through 2024? Should we think about second half being sort of in full market release, or is that going to be phased through the year?
Nick Colangelo (President and CEO)
Yeah. Hey, Sam, it's Nick. In terms of the launch itself, you know, once the label is updated for arthroscopic MACI delivery, you know, we'll be out there, obviously, in sort of full launch mode. You know, I think the dynamic will, it'll, you know, we'll wait to see exactly how it rolls out. I think experienced MACI users who do a lot of MACI cases, you know, having an opportunity to do it, to do it arthroscopically, you know, they'll want to sort of, be trained. It's not obviously very complicated, but, you know, they'll probably pick it up a little quicker. You know, the segment of surgeons that are non-MACI users, you know, they may wait to sort of, kind of attend a peer-to-peer program. They may, you know, they may come sooner, they may come a little later.
I think, you know, we'll wait to see sort of how it plays out exactly, and it'll differ by, you know, obviously, the differing surgeons. You know, in terms of our efforts in rolling it out and making it available when we launch, we launch.
Sam Brodovsky (Analyst)
Thanks for taking the question.
Nick Colangelo (President and CEO)
Thank you.
Operator (participant)
Thank you. One moment please for our next question. Our next question comes from the line of Jeffrey Cohen of Ladenburg. Your line is now open.
Jeffrey Cohen (Managing Director and Equity Research)
Hi, Nick and Joe. Thanks for taking our questions.
Nick Colangelo (President and CEO)
Morning.
Jeffrey Cohen (Managing Director and Equity Research)
Just a couple from our end. Firstly, Nick, it sounded like you commented about BARDA in the back half of the year being a few million dollars, and Joe was talking about just a Q4 impact of approximately $1 million. What for forecasting purposes, what should we think about on BARDA for the back half of this year?
Joe Mara (CFO)
Yeah. You know, just to clarify that, what he was talking about was that BARDA, you know, will be replenishing part of their stockpile, which in total is about a $3 million replenishment from a BARDA perspective. Then there's some economics that play into that, and we would share that with MediWound. Essentially, what I said, which is, I think, the, the right number to think about from our revenue, is we would expect, you know, something, you know, over $1 million, our portion of that $3 million. You know, over $1 million, probably between $1 million and $1.5 million, and that would be, our expectation would be that it would be in the fourth quarter.
Jeffrey Cohen (Managing Director and Equity Research)
Okay. for modeling purposes, don't think about anything for the third quarter?
Joe Mara (CFO)
Exactly.
Jeffrey Cohen (Managing Director and Equity Research)
Okay, I got it. Can you talk a little bit about the NexoBrid commercial expansion? It seems like, it seems like most of your organization was in place that was expanded over the past few quarters. How does that look now, and how might that look going forward, specific to NexoBrid?
Nick Colangelo (President and CEO)
Yeah. You're right, Jeff. You know, we've kinda we mentioned that we were adding, you know, 6 reps for... that would be NexoBrid-only reps under our original and current plan. You know, that we've executed on that pretty successfully. You know, if we get the green light from the FDA shortly, then, of course, we'll kind of deploy them as NexoBrid-only account managers as originally intended, and then sometime down the line, they'd be trained up on Epicel. You know, eventually, all reps would sell both products. If we have to wait till a Q1 launch, then, you know, we'll accelerate that Epicel training, get them up to speed there as well.
You know, in the meantime, we have, as I mentioned in, in the call, you know, we've started to see the impact of, of our NexoBrid reps, you know, in terms of, you know, as they call on the NexoBrid accounts that, you know, they're actually getting some Epicel pull-through now, and we've had cases from those dormant burn centers as well, which is exactly what we were hoping to see when we expanded the sales force.
Jeffrey Cohen (Managing Director and Equity Research)
Okay, got it. That's helpful, Nick. Lastly, for us, any recent commentary to discuss about the ankle indication as far as progress or news or what we may expect in the back half of the year?
Nick Colangelo (President and CEO)
Yeah, you know, obviously, our focus, as we've talked about over the past year, is that, you know, arthroscopic MACI was, you know, kind of the nearer term and larger opportunity, and, you know, that's been kind of a heavy focus for the team. For MACI ankle, that continues to progress. There's some, you know, upfront work that needs to be done of a preclinical nature, and, that's progressing. Once we kind of get to the point where we're ready to start talking about our clinical plan, you know, we'll provide more guidance on that, either later this year or into early next year.
Jeffrey Cohen (Managing Director and Equity Research)
Okay, got it. Thanks for taking our questions. Congrats on the strong quarter.
Nick Colangelo (President and CEO)
Thanks, Jeff.
Operator (participant)
Thank you. One moment, please, for our next question. Our next question comes from the line of Swayampakula Ramakanth of H.C. Wainwright. Your line is now open.
Swayampakula Ramakanth (Managing Director and Equity Research)
Thank you. Good morning, Nick and Joe. I'm trying to triangulate your comments on continued increase in biopsies, and at the same time, trying to be careful regarding 4th quarter MACI numbers. How has the conversion rate been for the biopsies to use of MACI? With adding additional surgeons, has that conversion rate stayed the same, or is it tending to get into a higher number?
Nick Colangelo (President and CEO)
Yeah. Hey, RK, it's Nick. You know, as Joe mentioned, really the outperformance for the year so far has been driven principally by a significant increase in the number of biopsy surgeons. Obviously, 3 straight quarters of a record number of biopsy surgeons. They, of course, you know, are driving an increase in biopsy, which is really kind of the top of the funnel, and that's principally driving again, the outperformance. We did mention in the 1st quarter that there was kind of an uptick in the conversion rate, and that sort of maintained into Q2. I'd say that's kind of secondary to the prior 2 drivers that I mentioned in terms of, you know, new surgeons and their increasing biopsies.
I'd say we're kind of in the situation that we've been in, in the past, even kind of pre-COVID, where, you know, as you're adding a substantial number of new surgeons, you know, your experienced surgeons, their surgeons, segments of those surgeons, their conversion rates are going up. New surgeons typically have a lower conversion rate as they come on board, and, you know, we're kind of seeing that same dynamic now. I think that's the explanation overall in terms of the drivers for MACI.
Swayampakula Ramakanth (Managing Director and Equity Research)
Thank you for that, Nick. On, on the MACI arthroscopic product, do you need to change anything in the manufacturing of, of the product itself, or is it the same product but having a new indication?
Nick Colangelo (President and CEO)
Yeah, no, it's the exact same product. There's no changes to the drug substance or drug product, that's why we were able to, you know, move forward from a regulatory standpoint and in an accelerated manner, with a human factors study versus having to do any additional clinical work. It's really the instrument kit, that has been the development work, and that will kind of form the basis around, the human factors study.
Swayampakula Ramakanth (Managing Director and Equity Research)
Okay. With the, with the new supplier, Matricel from Germany, is that going to be making any changes, or is that just trying to make sure that you have additional supply because you're going to be adding additional indications, you know, through 2024 and 2025?
Nick Colangelo (President and CEO)
Yeah. Matricel is not a new supplier. They're actually our existing supplier for the membrane. What we mentioned is that we executed, you know, a long-term extension that will take us well into the 2030s, in terms of our supply agreement. You know, that's important because it's an exclusive agreement, so that, you know, they can't sell these membranes to anybody else who might be interested in sort of following down this path. It's an important part of our sort of long-term market protection strategy for MACI.
Swayampakula Ramakanth (Managing Director and Equity Research)
Okay, one last question from me, Nick. Traditionally, you know, you've been careful about talking through Epicel and giving guidance on Epicel sales. You know, I'm, I'm, I'm glad that you're doing that now. Does that mean you're becoming more and more confident about the dynamics of that burn, bone care market, or is it more because you have more feet on the ground for that product?
Nick Colangelo (President and CEO)
Well, no, I think it's kind of a stabilization of the market, right? Over the past year and change, you know, the, the incidence of large burns has come down, so you're kind of fighting that dynamic, and now that's stabilized more. You know, the team's just out there executing and, you know, I think that's reflected in sort of, kind of the, the stronger first half of this year that we've had, compared to the, the second half of last year. I think it's a, a, just an execution story, a market stabilization story. I do think. Again, we're not talking huge numbers of new reps on the, on the ground, right? But, you know, having NexoBrid reps in dormant Epicel accounts and then realizing, you know, both biopsies and then orders from those accounts, you know, that's a, a contributor, right?
That's important. As I mentioned earlier, it's exactly what we-- That pull-through is exactly what we were intending to happen as we expanded the sales force.
Swayampakula Ramakanth (Managing Director and Equity Research)
Perfect. Great, great quarter as, as always. Looking forward to talking to you soon. Thanks.
Nick Colangelo (President and CEO)
Sounds great. Thanks, RK.
Joe Mara (CFO)
Thanks, RK.
Operator (participant)
Thank you. All right, one moment please, for our last question. Our last question comes from the line of George Sellers of Stephens Inc. Your line is now open.
George Sellers (Research Analyst)
Hey, good morning. Congrats on the quarter, and thanks for taking my question. I guess my first one, sticking with the arthroscopic delivery option and that dynamic, I'm just curious, how does that option change the sales strategy, if at all, in terms of would you be expanding that sales force given the increased target market, or would the current sales force maybe just shift their focus, or how do you expect that launch to impact your sales operations?
Nick Colangelo (President and CEO)
Yeah, so, you know, I think as we talked about in the past, you know, when we did our sales force sizing exercise, you know, back in 2019 now, you know, we had data on, you know, 12,000 orthopedic surgeons. You know, we could obviously draw an intersection of surgeons that did high volumes of cartilage repair and open procedures, and that sort of formed the basis for our initial 5,000 targets. There was also a group of those surgeons that did high volumes of cartilage repair, but, you know, we did not have open procedure data on them. You know, the presumption is that those are kind of arthroscopic-only surgeons or predominantly arthroscopic procedure surgeons.
You know, our intention is to kind of refresh that data, and to the extent there are additional targets that we'll focus on, in that latter bucket, which I expect there will be, that would drive, you know, whether we feel like we need to increase the sales force or not. In terms of the sales process, you know, the MACI clinical data speaks for itself, and it's obviously very strong. Basically, now this just gives surgeons an option to, in appropriate cases, deliver the product arthroscopically, which again, we think and they think, there's potential meaningful benefits and advantages to do that, to doing that. It won't fundamentally change kind of how we sell. I expect we'll add some targets.
Then, you know, again, if it requires us to expand the sales force, we'll do that. I would not envision, you know, any sort of wholesale restructuring of our sales force. You know, if we add 1,000 or 2 targets, you know, you'd add, you know, maybe 12 reps, but we'll think about that as we get closer to launch.
George Sellers (Research Analyst)
Okay, that's really helpful. I, I believe you mentioned in your prepared remarks that arthroscopic delivery has the potential to, to double MACI in the coming years. I, I'm just curious, what are some of the, the key assumptions that would go into that? Is it simply, sort of what's going on now, that more surgeons taking biopsies and, and more biopsies is gonna drive that, that revenue growth, or is there any change in your expectations for, biopsy conversion rates associated with arthroscopic delivery?
Nick Colangelo (President and CEO)
Yeah, well, I'll just start, and Joe can kind of go into the sort of the, the math of the that comment. You know, what we basically said was that, you know, over the coming years, we could essentially double our current business, if we had the same share of those smaller femoral condyle defects as we do in the patella. You know, MACI's a, a go-to product in patella cases. There's about 10,000 patients in the addressable market with patella defects. There's double that in this segment of, femoral condyle defects that are 2 to 4 square centimeters in size. There's triple that if you added all, you know, femoral condyle defects below 4 centimeters. It's a big [arc], market opportunity.
The point is, you know, if we get to the same share, because now you have a delivery advantage in those smaller defects, you know, you could basically double, our, the size of our current business.
Joe Mara (CFO)
Yeah, I just to add, I mean, Nick kind of hit it. This is Joe. I would also point out, we have a slide in our earnings deck that I think is helpful, where we kind of double-click a bit on the TAM that, you know, visually shows this. You know, again, I think what we're saying there is, is again, the patella is, you know, is about a $500 million opportunity, you know, we're kind of north of into double digits on that. Again, from if we're that competitive, and it potentially could be so in this 2-4 square centimeter segment, you know, that, that could be significant, which is where, you know, kind of potentially effectively doubling the business kind of plays in.
I think the point we wanted to make, and again, I think the slide's helpful, is this is a pretty big opportunity. You know, we think arthroscopic MACI would potentially make us much more competitive in that space.
George Sellers (Research Analyst)
Okay. Okay, that, that makes a lot of sense. Thank you for that color, and thank you for the time. I'll, I'll leave it there.
Nick Colangelo (President and CEO)
Thank you.
Operator (participant)
Thank you. At this point, I would now like to turn the conference back to CEO, Nick Colangelo, for closing remarks.
Nick Colangelo (President and CEO)
Okay. Thank you, operator, and thanks, everyone, for your questions and your continued interest in Vericel. Obviously, the company had a very strong financial and business results in the second quarter, and we expect that momentum to continue in the second half of the year and beyond. We look forward to providing further updates on our next call. With that, thanks again, and have a great day.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.