Q1 2024 Vericel Corp Earnings Call

Participants

Eric Burns; Vericel's Vice President of Finance and Investor Relations; Vericel Corp

Dominick Colangelo; President, Chief Executive Officer, Director; Vericel Corp

Joseph Mara; Chief Financial Officer; Vericel Corp

Ryan Zimmerman; Managing Director; BTIG LLC

Sam Brodovsky; Analyst; Truist Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Vericel's first quarter 2024 conference call. 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.

Eric Burns

Thank you, operator, and good morning, everyone. Joining me on today's call our Vericel's President and Chief Executive Officer, Nick Colangelo; and our Chief Financial Officer, Joe Mara.
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. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC.
In addition, all 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. And please note that a copy of our first quarter financial results press release in a short presentation with highlights from today's call are available in the Investor Relations section of our website. I will now turn the call over to Nick.

Dominick Colangelo

Thank you, Eric, and good morning, everyone. I'll begin today's call by discussing our financial and business highlights for the first quarter as well as our expectations for the remainder of the year. Joe will then provide a more detailed review of our first quarter financial results and guidance for 2024 before opening the call to Q&A. We ended the year with a great deal of momentum after an outstanding close to 2023. And that momentum continued for the first quarter as we delivered another quarter of top-tier revenue growth, including record first quarter total revenue and significant growth and profitability.
Total revenue for the quarter increased 25% to more than $51 million, which was above the top end of our guidance range with record first quarter base fee revenue in more than 60% growth in burn care reps. This strong top line growth translated into significant margin expansion and profit growth as we generated record first quarter gross margin, which increased more than 400 basis points compared to last year, and adjusted EBITDA growth of more than 300% as the company's profit growth continues to outpace our high revenue growth.
Based on the strong start to the year, we're increasing our full year revenue guidance to $238 million to $242 million. MACI had another excellent quarter with revenue growing 18% to more than $40 million, which was above the top end of our guidance range for the quarter basis first quarter performance was driven by strong underlying business fundamentals as we continue to expand the MACI surgeon customer base and drive growth in biopsies.
While the first quarter typically is seasonally lowest quarter of the year. We had the second highest number of MACI biopsies and surgeons taking biopsies in any quarter since launch behind only the fourth quarter of last year, making the last two quarters, the highest quarters ever on both of those metrics as our sales and marketing teams continue to execute at a very high level in building a strong foundation for continued growth to that end surgeon interest and engagement with nice evening time that the number of peer-to-peer programs and training labs for meeting more than doubled and overall program attendance more than tripled in the first quarter compared to last year.
The high level of surgeon interest is driven by the strength of basis long-term clinical outcomes, which were highlighted in a study published in the American Journal of Sports Medicine in the first quarter. This prospective study showed excellent long-term results for base in patients treated for both patella femoral defects where we currently have our highest penetration rates as well as federal cardiac defects, which is the focus of the ACR to reprogram prelaunch commercial activities for BCR or continue to progress in advance of our anticipated launch in the third quarter of this year.
In connection with the launch, we're expanding our target surgeon base from 5,000 to 7,000 services to include surgeons that perform high volumes and currently compare predominantly through arthroscopic procedures based on our experience to date, we expect to achieve more than 50% penetration of this larger target surgeon base over time, meaning that surgeon adoption and biopsy growth will continue to be important growth drivers for leasing in the years ahead.
In addition, MACI part through instruments target, smaller cartilage defects that comprised the largest segment of our addressable market, representing approximately 20,000 patients per year or third of the $3 billion addressable market for MACI. We believe that may see our goals and take a greater share of these procedures and provide significant upside growth opportunity for the company.
We also continue to advance the MACI development program to treat cartilage defects in the ankle and remain on track to initiate the META Group clinical study in 2025. Cartilage defects of the gold represents the second largest market opportunity for MACI we believe that a potential clinical indication with an estimated $1 billion addressable market could be another significant growth driver from MACI in the next decade and beyond.
Turning to our Epicel care franchise first quarter revenue increased more than 60% to over $11 million as we delivered another quarter of high revenue growth with total burn care revenue above the high end of our guidance range. Epicel revenue grew 56% to over $10.5 million in the first quarter represents the second highest quarterly revenue ever for Epicel. It still continues to benefit from our expanded sales force and a higher share of voice in the burn care market because there was a meaningful contribution to upsell revenue in the quarter from new or dormant accounts.
Nexobrid launch momentum continued during the quarter as we made significant progress with respect to the burn center, key performance indicators and growth in underlying NexoBrid demand metrics through the end of the first quarter 46 Epicel centers that completely P&T committee submissions, approximately 40 centers and gained P&T committee approval for more than 30 centers and placed an initial product orders. In addition, there was a significant increase in the number of patients treated with NexoBrid in the first quarter and significant growth in the number of burn center orders in NexoBrid units ordered by hospitals versus the prior quarter.
We remain very pleased with the strong surgeon interest in NexoBrid, as is demonstrated by the high level of attendance and engagement at NexoBrid events at the recent American Burn Association annual meeting, progress in onboarding burn centers, the excellent clinical outcomes and positive feedback from surgeons treating patients in the clear impact that our broader burn care portfolio and expanded sales team is having on episode performance. We believe that these factors will enable the Company to build a strong foundation for NexoBrid in 2024 and as the company is now very well positioned to deliver sustained growth in the second high-growth franchise in place.
Overall, the Company delivered another strong quarter and based on the strength of our core portfolio and the expected contributions from our new product launches, we believe the company is very well positioned for continued high revenue and profit growth in 2024 and beyond.
I'll now turn the call over to Joe.

Joseph Mara

Thanks, Nick, and good morning, everyone. Starting with our first quarter results. Total net revenue for the quarter was $51.3 million, representing 25% growth over the prior year, which was above the top end of our guidance range for the quarter. MACI revenue increased 18% to $40.2 million and total burn care revenue increased 63% to $11.1 million, both of which exceeded our guidance for the quarter.
Epicel revenue was $10.7 million, an increase of 56% versus the prior year, which represented the second highest quarterly revenue for Epicel to date. NexoBrid revenue was $0.4 million, which as anticipated was similar to revenue in the fourth quarter for underlying hospital orders and units whereas significantly versus the prior quarter. As previously noted, specialty distributor and hospital ordering patterns as well as inventory dynamics can impact quarterly revenue results.
Gross profit for the quarter was $35.4 million or 69% of net revenue, an increase of more than 400 basis points versus the prior year and the company's highest first quarter gross margin to date. Pull-through of incremental revenue to gross profit also remained very strong in the first quarter at more than 85%. Total operating expenses for the quarter were $40.8 million compared to $34.7 million for the same period in 2023.
The increase in operating expenses was primarily due to development activities for MACI arthroscopic instruments, increased headcount and related employee expenses and lease expense associated with the company's new facility that is under construction.
Net loss for the quarter was $3.9 million, or $0.08 per share compared to $7.5 million or $0.16 per share for the first quarter of 2023. Non-GAAP adjusted EBITDA for the quarter increased 325% to $7.2 million or 14% of net revenue compared to $1.7 million or 4% of net revenue in 2023. As adjusted EBITDA growth continued to significantly outpace our high revenue growth. This increase in adjusted EBITDA margin of approximately 1,000 basis points in what typically is our seasonally lowest quarter of the year, clearly demonstrates the strong P&L leverage and the top-tier profitability profile for the company.
Finally, the company generated $7.2 million of operating cash flow in the quarter and ended the first quarter with $148 million in cash, restricted cash and investments and no debt.
Turning to our financial guidance, after a very strong start to the year, we are increasing our full year total revenue guidance to $238 million to $242 million or 20% to 23%. Total revenue growth for the quarter, we expect MACI revenue to be approximately $42.5 million for burn care. We expect total revenue in the second quarter to be approximately $10 million with another strong Epicel quarter above our 2023 quarterly run rate in sequentially higher NexoBrid revenue faced in our second quarter guidance.
The trailing 12-month revenue growth rate will be above 20% for MACI for home care and total company revenue as we continue to drive high top-line growth across both of our franchises. For the full year, we continue to expect gross margin of approximately 70%, adjusted EBITDA margin of approximately 20% and operating expenses to be approximately $165 million. For the second quarter, we expect gross and adjusted EBITDA margins to be in a similar range to Q1 March.
The company had a very strong year, a strong start to the year with 25% top line growth in the first quarter and significant profitability growth and margin expansion. In addition, on a trailing 12 month basis, the Company has delivered 23% total revenue growth and 74% adjusted EBITDA growth, demonstrating sustained high growth in the top line and the bottom line as we continue to significantly enhance significantly enhanced the company's financial profile.
Overall, we believe that the company is very well-positioned for another strong year in 2024 has a solid foundation in place for continued strong growth in the years ahead.
This now concludes our prepared remarks, and we will open the call to questions.

Question and Answer Session

Operator

(Operator Instructions)
Ryan Zimmerman, BTIG.

Ryan Zimmerman

Thank you and good morning and congrats on a strong start here. I wanted to ask a couple of questions. Mariner, first on guidance, I want to I want to understand two things still expect. I think you had mentioned for that you could do NexoBrid sales in the range and correct me if I'm wrong here, Joe, $7 million to 8 million or $8 million to $9 million. I can't remember exactly what it was that level of NexoBrid sales this year.
And the second component of the guidance question is you beat by about $2 million kind of if you split that between the two franchises, guidance is moving up about $1 million. And so just talk to us about kind of where you think you're at currently holding back between MACI and Epicel for the guidance for the year, correct?

Joseph Mara

Well, I'll start with those. Good morning, Ryan, and thanks for the question. So I'll maybe start on the total guidance and then talk a little bit how we're thinking about kind of the burn care on a full year basis.
So in terms of the total guide, we had a very strong start to the year. In Q1, we are raising our guidance the $238 million to $242 million. So if you look at the midpoint there, which is where our focus on were up $1 million, so $239 million with our midpoint coming into the quarter, we've increased that to $240 million. In terms of kind of the mix on franchises on to start, you know, I would assume it had a $1 million increase is on the MACI's side and that kind of flows through to MACI given maybe it was roughly $1 million ahead in Q1.
In terms of our expectations and guidance, our metrics are very strong into Q2. I think relative to the estimate we gave last quarter, which, you know, again, there's multiple scenarios, but the framework we gave, which are the starting point for may see within the high-teens and I had referenced the $194 million, I think you can you can assume that comes up on our base case if you will, to $195 million and arrange ticks up as well, $193 million to $197 million. If you think about a kind of high-teens range. And the remaining $45 million would stay on burn care and that gets you to the $240 million in total.
A couple of things kind of around your question. So one, we don't typically adjust our burn care guidance, particularly after the first quarter or we don't adjust it rather after the first quarter of the year. So we had a very similar situation last year where we had a run rate expectation going into the first quarter. We were ahead of that. We did not adjust. And then yes, if we just think about kind of our burn care portfolio were episodes.
And so very clearly, it's doing quite well and benefited from the higher share of voice. It still can vary on a quarterly basis. And I would say it's still difficult to predict exactly what the shape of the NexoBrid launch uptake curve looks likes. So it's still early in the year. There so kind of holding guidance there. It is important to recognize that in the burn care total, this is still kind of well above it at $45 million, well above the company growth nearly on for nearly 40% on a full year basis. So we have a very sort of high expectations on the burn care side for both franchises and of course, we had a very strong start from a profitability perspective in the first quarter as well.
In terms of your question on the mix, if you will, for the balance of the year. I would say, obviously, episodic had a great start to the year with its second highest quarter to date and nearly $11 million kind of on its own. And so as we think about burn care, I think there's a number of scenarios or to your point what I referenced last quarter, you know, were numbers kind of in the call $38 million range and $7 million-ish range. I guide you to $45 million in total in burn care. If, for example, we maintained a higher run rate and Epicel that we call for to start the year throughout the balance of the year. That probably gets us closer to $40 million on Epicel and the balance would be, call it, $5 million on NexoBrid again, I think it's still early in the year. I think both products could shift a little bit. And but I think there's multiple scenarios against the 45. So I think at this point, I still difficult to predict exactly what it looks like, but we expect both both products to contribute, but NexoBrid is in a build year and clearly Epicel is operating a higher run rate.

Ryan Zimmerman

Yes. No, that's very helpful, Joe, appreciate all the color. And secondly, second question, I should say and not again, not to take anything away from profitability. It was on may say, I want to ask about Macy and the launch of Macy's or throw a little bit as you think about the broader segment to doctors that you've been one. Are you thinking about expanding your sales force? I mean, should we think about that and operating expense standpoint? And then two talk about 50% penetration over time by my estimates, I have you maybe 2,400 docs today. So call it 7,000 docs, 1,000 more. Why why is 50%, why not?
Hi, everyone. 75% or so. I'm just curious what's driving that thing.
Yes.

Dominick Colangelo

Hey, Ryan, this is Nick. So first of all, on sort of sales force expansion, I think we discussed it before that, you know, this will not the launch of ACR through adding a couple of thousand targets over 76 territories. You know, that's something that we think can give us some sort of work without having to realign territories, which, as you know, can be disruptive. What we will do as volumes continue to have increases and and some of the territory development managers that we had, for instance, last year as well in high volume territories and then arthroscopic specialists who can really help surgeons who are new to leasing our ROE or may see in general. And so you don't always call it, it doesn't do it doesn't folks may be. So kind of you know, obviously not a very significant expansion, but one that we think will aid with the MAC, our throw up uptake, the 50% reference that we kind of talk about, you know, as you know, historically launch meeting with 3,000 targets, and we got up to sort of 15% penetration and it was increasing pretty dramatically at the time from 2018 and 2019. The number of biopsying surgeons was up 25% to call it, roughly 1,400 for the year. But higher than that cumulatively, we increased the sales force. So we never got to sort of a terminal sort of penetration rate with the initial size, a target universe. Obviously, we then increased to 5,000 new, continue to grow strongly, you know, approaching 50% penetration and will expand again. So again, market gotten through to an ultimate penetration rate. But the point is it will drive, in our view, continued surgeon adoption and growth. And yes, ultimately, there's no reason it can't go above 50%. You just sort of never gotten to the point where, again, it's mature enough before we had other opportunities to add to it, expand the business.
Thank you.

Ryan Zimmerman

Appreciate the color on the interim one moment, sorry.

Operator

Yes, question comes from Sam Rebotsky with Truist Securities. Go ahead, Sam, your line is open.

Sam Brodovsky

Hey, thank you for taking the questions and congrats on the solid start and great profit number. I did want to dig into that profit side of things a little bit. Joe, did I hear you right? Is it 2Q margins we should we should expect them to be similar to 1Q? And then just yes, sort of taking that in mind, keeping keeping the gross margin guide for the year at about 75% when presumably your lowest versus the 70% one P&L, lowest lowest quarter of the year is going to be about 69 and hopefully can step off from that. Just how you're thinking about that and what gives you confidence to potentially think about moving that range up for gross margin or EBITDA?
Yes. No, I certainly appreciate the question. I mean, obviously, it kind of a great start from a profitability perspective as we've been talking about quite a bit, in particular over the last few quarters, our focus is driving the top line growth, but also on kind of margin expansion and our profitability metrics.
Yes.
So I think to your point, Q1, obviously, really strong kind of both from an adjusted EBITDA margin perspective be in the mid 10s gross margin in the high 60s. That was a bit ahead of kind of trends and expectations. If you will, I would say, as we think about the balance of the year, I mean that can certainly still ebb and flow a little bit. And I think the right baseline is obviously, Q1 is off to a very strong start. You can look at the prior year kind of enough kind of mid-to high 60s and we would expect on a full year basis gross margin to expand from 68.5, if you will, last year at about 70% range. So again, it can ebb and flow a little bit throughout the year. But I think to the kind of key part of your question, which is, I think, you know, based on that strong start, we certainly have the potential. And I think are in a good position to potentially be higher than our initial guidance. But given we're just kind of one quarter in and these are kind of approximate numbers, we haven't updated that yet, but they continue to be a focus. And these are kind of both numbers in the bottom line and the gross margin that we want to continue to improve and the other piece on the gross margin side that we look at is kind of a pull through, which was very strong in the quarter, kind of the incremental revenue pull through well, about 80%, I think, over 85%. So a good start and expect strong quarters throughout the year, and we'll kind of monitor that. But I think we're in a good position and being kind of on the higher side, if you will, tick on the gross margin side.
That's super helpful. And then shifting to NexoBrid, and I wanted to ask a bit of a higher-level question there, you obviously without providing guidance. But just as we think about where the Company is going to be positioned heading into 2025 you're already almost half of centers in the funnel to an extent certain extent or should we think about most a is not a good portion of the target centers being fully onboarded and ready to go on 24.
And then how do we think about the sales strategy changing in 2025 as you can you can you fully shift to just driving surgeon utilization?
Thanks.
Yes, hey, Sam, this is Nick. I'll take that one. Tom, you know, so for NexoBrid again, I think anyone who's done market checks or for instance, participated and attended the American Burn Association meeting. Do you see sort of the super high interest in the product from the burn care community? And obviously, you alluded to sort of performing well on sort of the burn center, KPI.s in terms of P. and T., certainly submissions approval with initial orders and most importantly, excellent surgeon feedback on patient outcomes for those who have started using the product. So we think heal because we've been kind of beating the drum on this is a build here as you get through the sort of bar crosses these. I think it's pretty well understood in the industry, and we think it will be in a good place by the end of the year.
Yes, we would expect the vast majority of PT. submissions due to pending completed and scale, hopefully approved or in the process of being approved. And as we alluded to, once you get through the P&T committee process. There are still other procedures and processes that hospitals need to get through to be able to order the product and then start utilizing it. So we're hyper focused on that issue might imagine from the level above sort of KVI.'s and getting the centers up and running. And we're pretty pleased with that performance.
Certainly, lastly, would you say, you know, changing the standard of care from a surgical excision procedure to a topically applied biologic. I think surgeons have been doing the same thing for decades. And so I think the adoption yield again moves at different paces in different hospitals, but we certainly have not changed our long-term view for NexoBrid. Just scale you go through the process.
Thank you one moment.
Our next question.
Our next question comes from George sellers with Stephens Inc. Go ahead. George, your line is open.
Good morning. Thanks for taking the question. And congrats on the quarter, maybe on SSL. I'm just curious if you could give some additional color on what drove beat in the quarter, maybe help the underlying market?
It performed well, and sizes looks like things like that. And also your perspective on impact of some sort of halo effect potentially from NexoBrid, if that it was a significant driver as well.
Hey, George, it's Nick. So just starting with the burn care market, you know, as we've talked about, we do have access to market data around the large 30% plus body surface area burns. And I would say the market was kind of normal, will be down a little bit. So that certainly wasn't driving episode performance. It really was. And just as we've talked about before we do have a larger footprint. Now we're in more burn centers than we used to be. As I alluded to in my comments, we certainly saw a significant contribution to Epicel revenue from what were formerly dormant or new accounts that we're calling on for NexoBrid. And so that is the halo effect that we expected additional pull through on episode I think we're seeing as we kind of move through the initial launch phase for NexoBrid.
Okay. That's really helpful. And then maybe on NexoBrid, I'm just curious if you could give us some additional detail on and some of the inventory and specialty distributor impacts how we should really think about. And those 30 centers that are starting to see orders, how that will flow through the P&L and then maybe the cadence as we think about the rest of this year, where inventory levels are now and how that compares to what you're seeing in terms of actual utilization?
Yes. So good morning, George and Joe. I'll take that one. So if you kind of think about NexoBrid revenue during the quarter, and we talked about this on the last call, we expected kind of a similar revenue range. We ended up about 4,000, kind of similar to last quarter, about 500. I think it's important as kind of Nick talked about in his prepared remarks, you know that the strength in the center, liver center level, KPI.'s continues to be very strong as part of your question there. I think importantly, we saw increasing increases in the number of ordering centers, a significant increase from hospital orders to our specialty distributors and also significantly more patients treated in the quarter. So I think kind of in addition to that, as we think about kind of our revenue trends, particularly early on, I think this is as much kind of an early launch dynamic. If you think back, you know that the first quarter in the market two, three of last year, we had kind of some s destocking. The second quarter the market in Q4, I'd say there was a fair amount of hospital stocking, if you will, where they were starting to order product and kind of get it on their shelves. Particularly the early adopters.
And then just as a reminder, again, we recognize revenue when our specialty distributors order and this can vary each quarter depending on ordering patterns, their inventory levels et cetera. And really what happened again, during the first quarter, the hospital orders to the SEs went up and but our orders from our specialty distributors to our 3PL, where we will we recognize our revenue came down. And essentially what that means is that specialty distributors manage to a lower inventory level. And you do often see as kind of launches progress you know, the distributors will kind of get to different inventory levels. So I think as anticipated, a little bit choppy out of the gate, but I think as we continue to progress throughout the launch. It's really going to be about are continuing to add centers, treat additional patients. See those matters come up. And also really that additional utilization as centers become more comfortable. So there's certainly going to be an element of inventory dynamics as we go through this. But generally, I think as we move forward, particularly in the back half and into next year, it's really going to be driven by patient utilization and hospital ordering. And this should be kind of a lower component, if you will, on the revenue side.
Okay. That's really helpful. Thank you all for the time this morning.
Things do allow one moment while we prepare question.
Your next question comes from Graham Keira with H.C. Wainwright.
Go ahead.
Your line is open.
Thank you. This is RK from H.C. Wainwright. A couple of quick questions. It's done, Nick, as your team, it continues to increase on the targeted surgeons right from 5,000 to 7,000? And also in anticipation of the MECAR throw on ARM. I'm just trying to understand what sort and the relative benefit could we start seeing from this increase in the cartilage repair business as some of these surgeons are most of the surgeons work on both types of injuries to cartilage and out?
Yes.
So you may see our ROE is going to address cartilage defects. As may see, our current product does, as we discussed, the instruments that is targeted to smaller defects on the femoral come down, which makes up the largest part of the addressable market for 20,000 patients a year. So while we see is certainly a go to patella femoral, the banks, larger condo effects, this allows us to have a preferred way to administer the product on those smaller defects on the femoral come down. So we think obviously that will allow us, as I mentioned on the call to have greater penetration into the large part of the segment. So the impact is presumably increased basic procedures when you have a an arthroscopic delivery option.
Perfect. And then I'm just trying to understand the comment on the commercialization. I am not sure it's the right word, commercialization process of for NexoBrid. So once on the arm, the centers on get their P&T approval and what's the time lag between? I know you are saying that there are some additional procedures that need to get done before they order product. So I know it's too early, but to call it a trend. But what are you seeing currently as the time line between approval and initial order?
Yes.
So that, you know, certainly it differs by hospital and there could be some that are of the quicker side or there can be some of that take weeks to months to be able to get what is called an Epic system, which is worth they used in the pharmacy to order all their products essentially and before a product gets and into that system deal. In certain cases, it can take quite a bit of time. And so we obviously are focused on helping centers kind of navigate that process if they happen to have an issue. But it really varies like I said from it can be days or weeks to it could be months and in certain cases. So those are just some of the kind of common processes and procedures that different hospitals have to go through before they're really able to start ordering product and treat patients.
So one last question for me, just within this come down Barnes franchise, as we had have historically noticed how Yum it is. So we could I mean, at least I know in public comments, you always said that I cannot predict how episode business will grow from quarter to quarter and year to year four for a bit of time. Are we going to see a similar trend with NexoBrid? Or do you think NexoBrid and growth will be quite a bit smaller than what we had same with episode?
Well, I would say that the way we've always positioned in our K is that with Epicel, if you think about the 40,000 hospitalized burn patients each year. There's really only, you know, call it, 6 to 800 surviving patients each year. So very small numbers. And that's what leads to the variability you see in that business at all with NexoBrid. Obviously, once you get through these initial in quarters where you've got again, centers coming on board at different paces you got no inventory and ordering pattern dynamics going on because in our view, three quarters or 30,000 patients a year are eligible for NexoBrid treatment that over time as it ramps up and we kind of work. And on a consistent basis, the overall franchise should have less variability.
Yes.
And I would just like Tom, Joe, I'd just add an interest kind of as we're thinking about the year kind of more than near term.
And just a couple of comments, just to add to that. I think obviously Epicel can vary, but we have seen certainly some strength now now over several quarters. We came into the year kind of expected to grow over last year's run rate. We'd like to think of episodic kind of the sort of the baseline from a quarterly run rate perspective, we came in with an exit rate kind of in the low to mid eight. Obviously, we were well ahead of that in the first quarter, as you know, you can't really plan on that?
Yes, I will say that I think we certainly have an expectation that it can stay at these higher rates, we came into the year and kind of said oh nine cluster or mid-9. So when you're thinking about the second quarter, we spent around $10 million I think we would certainly expect kind of Epicel to be in that 9 million plus range within that 10 certainly could be some variability there, but I think that's a reasonable expectation. And similarly, I think for the rest of the year, which is kind of how we're thinking about Epicel as well, so they could certainly be variability. And I would agree with me it kind of over time, we would expect NexoBrid to continue to build and sequentially grow. That's really the expectation as we close out the year and into next year.
Thank you.
Thank you very much, but I appreciate that.
Thank you.
One moment while we bring up, yes.
Our next question is from Mike Kratcoski with Leerink Partners. Go ahead, Mike, your line is open.
Hey, guys, this is Brad on for Mike. Thanks for taking the question and congrats on another great quarter. You guys saw a strong pull through in 1Q 22, obviously, um, how should we think about the durability of this operating leverage into the second half of 24 and 25, while you drive penetration in both existing markets in the new arthroscopic market once approved? And then obviously you have the ankle improvements or investments in 2025. How is that going to impact their ability, the operating leverage?
Yes.
I think you're referring to 1Q 24 or 2023, but brush.
Yes. So I think, Dan, so as we talked about earlier, obviously a great first quarter from a P&L perspective on the board margin expansion, the pull through is very high, et cetera. I do think on the gross margin side, you know, our sort of our expectation for quite a while in our kind of call it, midterm expectation was to get to that 70% plus on a gross margin level. And obviously, our guidance this year is at 70%. And I would say certainly as I talked about earlier, it could ebb and flow kind of within a year or even kind of margins or pull through. But on a full year basis. You know that as you know, we're kind of tracking in a very good place to kind of get to those targets. And I would say from a gross margin perspective as well. I mean, there's definitely a lot of efforts right now kind of thinking about in the right ways, where can we find efficiencies within our processes across our spend vendors, et cetera. And that's going to be pretty important as we move into a new facility in the next couple of years as well. So I think a lot of work on the gross margin side and sort of a lot of focus on to kind of make sure we're driving kind of the right savings there on the kind of operating expense side. As part of your question, I mean, there are some investments that we will need to make and we may reference Arthur. I may see that some development costs there. But obviously that's an important initiative. Similarly on ankle over the next few years, that will kind of make its way in the P&L, but that doesn't change from a bottom line perspective would be our expectation to be trending and toward that 30% adjusted EBITDA target that we've talked about for quite awhile as well. So I think it really starts with the top line growth, but a lot of focus on kind of making sure we're kind of managing the rest of the P&L, but it also just shows just the operating leverage kind of within the business, particularly as we start to scale. So I think Q1 obviously was a great quarter, but I think a good start to the year, but as we think over 24 and 25 and beyond. I mean that that's going to remain a focus, and we think we'll continue to see that leverage across the P&L Got it. That's helpful. And then one more, I guess I want to go back to our throw you mentioned six to 12 new reps likely. How should we be thinking about that the difference in outreach for those reps versus existing may see when they target those new surgeons. And then obviously, the shape of that penetration curve may be different versus what we've seen with legacy Macy. How should we be thinking about the steepness of that curve and if there's any differences to call out for the next couple of years?
Yes. So as I mentioned, as you know, we will be adding, I guess, a couple of different profiles. Sort of number one is kind of territory development managers who can kind of be at biopsy as surgeries, et cetera. And then there's arthroscopic specialists who are really kind of trading in Italy and kind of spreading best practices for the OR through delivery of leasing So through really in support functions, as I alluded to on the call, we think about an extra couple of thousand targets over the 76 territories. You're talking about a dozen or two new targets per territory. Those can easily be targeted by existing sales reps in terms of the. So it doesn't again require a realignment or a wholesale increase in the sales force. We talked about uptake. I think we can think about a couple of different surgeon segments. So there's current basic users who might do a lot of their procedures in certain parts of the knee. They can expand towards what they focus on the total release. And now they have an option that's a nice option for trading income will come down the effects year on that sort of Lincoln is an instance where you can take an experience-based user user and they start using it more broadly. So that can have very quick uptake. As you might imagine, you also have new surgeons who because you take the biopsy, then the median time from them biopsy, the implant is roughly four months. There's always a time lag there. So those are the kind of have a prospective impact on the business there. So it'll differ by segment, but again, you're taking on Well, I've known the product with great clinical outcomes and offering surgeons an option or a basin can be administered administered, less invasively in an area of need with the largest number of defects. And certainly you could have very, you know, pretty quick uptake for those who are interested in. You may see CRP.
Great.
Thanks, guys.
And thank you.
This concludes the question and answer session. I would now like to turn it back to Nick Colangelo for closing remarks.
Okay. Well, thanks, and thanks, everyone, for your questions and continued interest in Bear. So obviously, the company had a great start to the year, and we expect to deliver another full year of strong financial and operating results in 2024. So we look forward to providing further updates on our next call and have a great day.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.