TELA Bio, Inc. Q2 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to TELA Bio's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared comments. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Stuart Henderson, Vice President of Corporate Development and Investor Relations for TELA Bio. Sir, the floor is yours.

Thank you, Joanna, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the quarter ended June 30, 2020. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and CEO; and Nora Brennan, CFO. Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Forms 10-K, filed on March 30, 2020; and 10-Q, filed on May 15, 2020, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources, operating performance, or potential impact of COVID-19. With that, I will now turn the call over to Tony.

Thank you, Stuart, and good afternoon, everyone. We hope you are safe and healthy. Thank you for joining us. Total revenue for the second quarter was $3.5 million, an increase of 6% from the same period last year. Our second quarter, like many in the MedTech space, was a tale of two quarters with the second half being nothing like the first. In early April, when hospitals were postponing many non-emergent procedures, our daily sales fell precipitously. For the full month of April, our daily sales were more than 70% below our average daily sales prior to the beginning of the COVID-19 pandemic. However, throughout May and June, our daily sales experienced steady improvement. And in late June, our volumes exceeded our pre-COVID-19 levels. While we are very encouraged by the accelerating sales we experienced in May and June, the situation remains fluid in the United States, with several of our sales territories located in current COVID-19 hot zones. Though our early read on our sales in the current quarter looks similar to the trend we experienced in late June, we have recently been hearing that several hospitals in these territories have limited or even stopped performing elective procedures. The impact to our third quarter remains unpredictable with this recent resurgence of COVID-19 cases and the possibility of a second wave in other regions. Despite this uncertainty, what remains clear is the strength of our team's commitment and our drive to push our initiatives forward as we scale up to position TELA Bio for growth into 2021 and over the long term. To that end, throughout the second quarter, our commercial team worked tirelessly to support our customers and patients, continuing to cultivate and make meaningful progress on our strong surgeon pipeline. We adjusted quickly and implemented two virtual sales solutions designed to educate surgeons about our product portfolio and clinical data. The first is a virtual version of our VIP tours, whereas we previously brought surgeons to our facility here in Malvern to learn about our products and discuss different use scenarios with our senior management and clinical team, we are now utilizing virtual solutions in an effort to achieve the same experience. Our second virtual solution is for KOL seminars. This solution offers surgeons a platform to engage with KOLs and importantly discuss the growing clinical data and their case history using OviTex and OviTex PRS. I'm happy to report these settings have been broadly well received by the attending surgeons as well as with our KOLs and sales staff. Through the end of July, over 120 surgeons have attended our virtual VIP tours or our KOL webinars. Among surgeons who participated in the event in Q2, we have seen close to a 200% increase in average monthly revenue from our products. Due to the success of these solutions, we will continue to use these strategies moving forward and are excited to introduce branding of our virtual approach to customer engagement. It's called TELA LIVE leadership-initiated virtual engagement. We expect to continue to add to our suite of virtual programs and are actively exploring additional platforms to provide our customers with virtual support and case coverage as well, which we call virtual proctoring. Our sales reps have done an excellent job providing continuous support to their surgeon and hospital customers. The hospital access environment continues to evolve throughout this pandemic and varies from hospital to hospital. Our sales team continues to adapt and comply with these various policies to mitigate disruptions and develop innovative solutions to meet customer needs and build their territories. While we are now generally seeing improved hospital access, our reps are flexible and remain ready to adjust as localized hotspots may arise within their regions. On the clinical front, we recently announced the results of an interim analysis of our post-market BRAVO study. The analysis included patient outcomes at several time points, including the all-important 24-month follow-up period. At 90 days post-op, there were no recurrences, reoperations, or implant removals among the 85 patients analyzed. At 12 months of the 57 patients that had been assessed, only one patient experienced a recurrence. Notably, this recurrence stemmed from a location adjacent to the original repair in an area of abdominal weakness, and the initial repair using OviTex remained intact. Of the 20 patients that reached the 24-month follow-up, none experienced a recurrence or long-term complication. This interim analysis continues to clearly demonstrate the effectiveness of OviTex in improving patient outcomes in ventral hernia repair. These data have been submitted to a medical journal for publication, and additional analyses of these data have been submitted to upcoming medical conferences. As a reminder, the BRAVO study is a post-market study designed by TELA Bio and its investigators to evaluate postoperative complications and reherniations following the use of OviTex in subjects with moderate to complex ventral hernias. Due to many hospitals limiting nonessential visits because of COVID-19, we are working very closely with our study locations to make sure all follow-up visits can occur in a timely manner as much as possible. Turning next to our operations. During the first quarter call, we discussed several cash conservation strategies we initiated in April, including, among other things, a hiring freeze. On the heels of our successful capital raise in June and the lifting of hospital moratoriums on performing elective procedures, we are revisiting several of our capital conservation measures. In late June, we began cautiously scaling up our sales force in territories where non-emergent procedures are being performed close to pre-COVID-19 levels and where we have hospital access through our existing IDN and GPO contracts. These new sales territories are being added within our existing six regions. So, each region will consist of approximately eight territories. At a regional level, we are managing the business nimbly, employing both virtual and in-person strategies as appropriate, given the local situation related to COVID-19. We continue to actively monitor the situation, make sure we move with our operational growth initiatives while judiciously managing our cash. Regarding our GPO contracts, we are in communications with supply chain and clinical resources within hospital systems about the favorable efficacy and economics of OviTex when compared to other natural repair technologies. Supply chain functions at hospitals have come online in recent months to engage with suppliers, and we are focused on reinitiating discussions to drive our implementation strategy within contracted accounts. We also continue to make progress on securing additional IDN and GPO contracts. But timelines are variable as each organization manages its priorities relative to the pandemic. We are continuing to stay in front of the decision-makers and support our business partners through this tough time, leveraging virtual solutions where possible, and we look forward to updating you on our progress in the months ahead. Lastly, we continue to make progress in the plastic and reconstructive surgery market with OviTex PRS products. Following a limited commercial launch period, where we solicited feedback from a core group of surgeons, we expanded our commercial launch in June. Our clinical development team has done an excellent job engaging plastic surgeons through our TELA LIVE program, and we expect to continue to broaden our surgeon base over the coming quarters. We also continue to work with plastic surgeons to identify opportunities to further refine and advance our OviTex PRS portfolio and play a similar approach to our OviTex hernia portfolio expansion. So now I'll turn the call over to Nora.

Thanks, Tony, and hello, everyone. Please refer to our press release issued earlier today for a summary of our financial results for the second quarter of 2020. Revenue for the second quarter increased 6% year-over-year to $3.5 million. Though our revenue increased over the prior year period, it was impacted by lower-than-expected procedural volumes due to hospitals and patients deferring elective procedures because of COVID-19. Gross profit as a percentage of revenue improved in the second quarter compared to the prior year period, primarily due to a decrease in the charge recognized for excess and obsolete inventory as a percentage of revenue. Second quarter gross margin increased to 59% from 58% in the prior year period. Sales and marketing expenses were $4.1 million in the second quarter of 2020 compared to $3.9 million in the same period in 2019. The increase was due to higher salaries, benefits, and commission costs as a result of our sales expansion activities. However, the increase was partially offset by the salary reductions, lower travel, and consulting expenses resulting from the cost containment actions taken in Q2. G&A expenses were $2.1 million in the second quarter of 2020 compared to $1.2 million in the same period in 2019. The increase was due primarily to increased costs associated with operating as a public company. R&D expenses were $1 million in the second quarter of 2020 compared to $1.1 million in the same period in 2019. This slight decrease was due to reduced outside development expenses and a lower level of laboratory spend. Loss from operations was $5.2 million in the second quarter of 2020 compared to $4.3 million in the prior year period. We ended the second quarter of 2020 with $85.5 million in cash. In late June, we successfully closed our underwritten public offering of 3 million shares, increasing our cash position by approximately $45 million. This additional capital will allow us to continue to build our team strategically, invest in clinical support and R&D, and support our growth initiatives. Based on these plans, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for the long term. Now turning to 2020 guidance. Due to the continued uncertainties from the impact of COVID-19 on our business, we will continue the suspension of our full-year 2020 guidance. With that, I'll turn the call back over to Tony.

Thanks, Nora. In closing, I want to thank everyone again for your time this afternoon and for your interest in TELA Bio. I also want to thank our team for your continued energy, creativity, and dedication to working as one to help patients and support our customers throughout these challenging times. I'm confident in the fundamental strength of our business, and I'm very optimistic that we will continue our success and achieve sustainable growth in the long term. So I'll now turn the meeting back over to the operator and queue up questions.

Your first question comes from the line of Raj Denhoy from Jefferies. Your line is open.

Good afternoon.

Hey, Raj.

So I wonder if I could maybe ask a little bit about how the business ended in June and how it's looked here now in July and part of the way through August. You gave that guidance for that – that update I should say kind of mid-June about you were tracking kind of I think two to one – $2.1 million to $2.3 million ended up at $3.5 million. So obviously a very sharp recovery in the back half of the quarter. But I'm curious how that's sustained now, as you've looked at July and August. Has it continued to ramp? Or what are you really seeing on the ground now?

Yes. So keep in mind that our business is really quarterly, as most MedTech businesses are. So we can see in perfect times, without COVID, 40% to 45% of revenue come in for a quarter in that last month. So in Q2, April was so low, a little bit back in May. There's a distortion of those ratios, right? So, I would say that we came in a bit heavy at the very end of June, better than pre-COVID levels. And I'd say in July, we saw a continuation of that, but maybe a little bit of moderation based on the fact that we're just starting the quarter out, I believe, Raj. So, I don't think we'll really know if we're seeing that acceleration until we get through the full quarter. But I can tell you that, if you use pre-COVID measures, we were right there at that pre-COVID level, maybe a little bit better through July. So we were very happy with where July started almost relative to any other month we've had. But I just want to throw those caveats out there. As we went through the month of July, I believe that was the first month where we saw these flare-ups in Texas and that kind of thing. So, there was a little bit of undulation in territories. Overall, our business, if you just looked at the top line number, it was great. It was fine for July. But if you look at some of the underlying components that add into that, we did see some undulations, down a little bit by I don't know 8% or so in Texas, Arizona, a little bit in Florida. So, we're treating this, I guess, philosophically almost as rolling brownouts, right, that we're just going to have to contend with. Not blackouts. I think those days are behind us for sure. So in a brownout, you're not going to see elective procedures go to zero. You may see a slowdown; you may see a shift to other facilities; you may see all kinds of mitigating factors as hospitals fight, and they will fight to keep the procedures going. So our goal here is to almost create our own reality, where we operate aggressively, nimbly, and agilely into whatever each territory has given us. So for example, if there's a rolling brownout, bam, we go hit hard with TELA LIVE; we go virtual; we drive those programs, and we bank those new customers for the next couple of months. Where it's open, we go hard, right? So I think I focused the team on that. Let's control what we can control, and let's just assume it's going to be rolling brownouts as we go forward, off and on, maybe sometimes week-to-week adjusting. Our goal is going to be to grow through that and optimize through that. So I feel pretty good that we've got a system in place and a team in place that can do all that. So that's a long answer, but that's a bunch of color too thrown in Raj.

That's super helpful. And maybe just as a follow-up, and this may be a difficult question to answer as well. But when one thinks about what drives your growth, whether in this period there's some level of deferral catch-up versus underlying hernia demand, breast reconstruction as well that sort of underlying demand and then also now opening up new accounts or sort of competitive wins, is there any way you can maybe parse out what has been driving the recovery for you? Are there any one of those that's maybe more important right now?

Well, like I said on our last earnings call, Raj, we have so many factors that have come together for us, right, whether it's new products with PRS and LPR, whether it's the new data, it's the expanding sales force. And now I'm going to say this TELA LIVE program has been a really great weapon for us. So even if we look at Q2, right, we had only a handful of new territories. I think 35 versus 31 in Q1. But our new reps that we hired in 2020, and look they've had no time in the field in the real world, they've been doing it all virtually. They contributed 11%, roughly well over 10% of revenue in Q2. So I think there are a few things going on here. Was there a little bit of a pent-up demand in the second quarter? Probably; you probably could have spread a little bit of that June kick across April or May. But I think that gets overwhelmed by all the other factors that we have. And we also have a diversity of procedure as well, right? We've got an array of hernia procedures from complex to simple, touching different types of surgeons, and then we have the plastic and reconstructive, which touches a different type of surgeons. So there's a diversity of opportunity, as I spoke about last quarter as well in terms of docs and procedures. But like I said, we're creating our own reality. We're going to maximize all the assets that we've built and make this thing go no matter what's handed to us. All we need are procedures somewhere, right? And I feel like we can make this thing happen.

That’s great. Appreciate it. Thank you.

Your next question comes from the line of Matthew O'Brien from Piper Sandler. Matthew, your line is open.

Afternoon, thank you for taking my question. I actually have a few, if that's alright. To start, Tony, I believe you reported $1.3 million for the last two weeks of June. Are you indicating that you had a similar performance in the first half of July, with around $1 million in each of the first two weeks of the quarter?

No. What I'm saying is, keep in mind that the last month of the quarter is 40% to 45% of revenue. Right? So what I'm saying is, July was very strong when compared to pre-COVID levels, right? So we started Q3 off at a very good place. There's a lot of PO cleanup; maybe there was some of that pent-up demand that I just described thrown into the end of June too, Matt. So if we saw the last two weeks of June now ramping to infinity, we'd be very, very happy. But that's not the case. We're not there yet. There's still these rolling brownouts, patchiness. Rep access is still hit or miss. I think we're smoothing that out particularly with our TELA LIVE program, which I think is very effective. But I think we can outkick and grow through all of this, and I think we'll really know how we look in the last two weeks of this quarter when we compare that to the last two weeks of June, right? So I'm looking forward to that in September. But the trend in July was excellent. Excellent, in terms of where we started the quarter relative to Q2, even relative to Q1, I think. So, yes, we're pleased with it.

Okay. And then you started giving us a little bit of a peek behind the curve as far as the performance of the sales force. And I think you said that the reps you added in 2020 are doing about 10% of revenue in Q2?

A little higher.

I think you added four representatives in the first quarter, which would suggest they are generating about $100,000 each just in Q2. This indicates a rapid ramp-up. Can you elaborate on why that might be? Are they concentrating on HealthTrust? Also, there was a 200% increase in the number of doctors who evaluated TELA LIVE. Could you share more about the other metrics you're observing that support these results? The growth this quarter is notable, especially compared to MedTech's overall contraction. What additional metrics can help us understand the stronger-than-expected performance of your business and where it might lead in terms of acquiring new accounts?

Yes. So let's level set. And I'll just ask Stuart to correct me if I'm out of whack on the rep counts versus territories. But going into the IPO, we really had in the 20s, let's say. And we really ended last year, 2019, with about 30, right?

30 bodies.

We have about 30 representatives now, and I've included all of them in this discussion. There is a group of new representatives who have been quite successful, primarily driven by the TELA LIVE program. I've mentioned previously that we've seen around a 200% increase in average monthly revenue among surgeons who took part in this program. This growth has been significant for us. There are areas in the country where we previously had no representatives before the IPO, and now those territories are beginning to generate results. The primary method we've used to achieve this is through TELA LIVE virtual sessions and contracting, and we've ensured that our live programs coincide with the contracted areas. Additionally, we are conducting these LIVE programs for existing customers to encourage them to expand their usage of our products. For example, if they start with complex ventrals, we aim to help them use our products for simpler hernias, or for new customers in PRS. We are experiencing around a 60% increase in revenue from existing customers who are engaged in the LIVE program. Currently, we're seeing over a 50% conversion rate among new users of our products who have participated in a LIVE virtual program since April, and I anticipate this metric will continue to improve. There are various factors that might affect why some may not be starting, such as elective procedures or delays related to hospital processes. However, across nearly every measure, these TELA LIVE programs are showing a positive effect. This success is attributed to the access we have with HealthTrust and other IDNs. This is what's driving our progress, and it aligns with our concept of creating our own reality. We’ve established and mastered this approach, and now our focus is on consistently executing it. We are currently averaging over 20 LIVE surgeon engagements per month.

Okay. That's really helpful. Last one is actually for Nora. Nora, was it the same kind of 90-10 split between hernia and plastic this quarter? And then the OpEx came in, I know you had indicated it was going to decrease in Q2 but it was about 10% lower than I expected. I know you're adding a few reps here. Should we expect levels that are slightly higher than Q2? And as far as thinking about Q3 and Q4, are we going to go back to Q1 levels on OpEx?

So I'll answer your first one, Matt. So it is roughly about 90-10 still the split between OviTex and PRS. With respect to OpEx, I mean as Tony mentioned, we're going to start investing in our commercial program again. As surgeries come back, we're going to spend a little bit more money. And so we'll see it in the commercial as well as within R&D. So we should see some increases in our spending going forward, certainly higher than Q2.

Got it. Very helpful. Thank you.

Thank you, speakers. Your next question comes from the line of Kyle Rose from Canaccord. Your line is open.

Great. Thank you very much for taking the questions. Can you hear me all right?

Yes, Kyle.

Yes.

Good afternoon. So I had a couple of questions that dovetail on some of the other topics previously. So maybe just to start, you mentioned pent-up demand a couple of times. I mean, obviously you were really priming the pump with the TELA LIVE programs. But you already had some existing utilization with your underlying core user base. So maybe when you think about the growth that you saw in May and June, can you just try to tease out how much of that was just catch-up versus some of these new accounts coming on board?

Yes. I mean, it's hard for me to say there was any catch-up in May. May was 50% pre-COVID levels. We were scratching and clawing, but diligently executing these LIVE programs, right? So I think the only place I can point to where I feel like if there was a pent-up demand perhaps could have been PO cleanup at the back end of June. That's it. So I don't think there was any kind of sustained pent-up demand much more than a couple of weeks. So I think most of what we drove was through this LIVE stuff that we've been doing. And keep in mind, we started doing it right at the very beginning in March, April, May over and over and over again. And so we're just starting to see the fruits of that given the timelines that it takes to get new customers up and running or just to go through the process. And we didn't really have access to a lot of the supply chain, OR director-type people to get the hospitals moving much beyond the surgeons until really the end of May, early June. So right now, it's just a little bit phase, right? I think we're starting to see supply chain, OR director engagement starting in June and is now picking up to more normal levels albeit virtual. And then the surgeon side of things, the case volume really did not seem at good levels until we started to get through June and into July. But, again, by July, we started to see this rolling brownout or patchiness here and there. So, I think overall, most of what we drove here so far is due to our own efforts in Live. That's where my head is at. We just talked to so many surgeons. It's impossible for it not to be a big driver.

Okay. That's very helpful. And then I appreciate the breakout of OviTex versus PRS. I'm wondering if you could just give us a little more insight on the OviTex side there, specifically, around the minimally invasive and the laparoscopic utilization.

That's an interesting question. Last quarter, we believed that the complex ventral procedures would lead our growth, particularly with the PRS involved. To some extent, that proved true. However, when examining the quarter's performance, we found the ratios of different types of hernia procedures remained quite similar to pre-COVID levels. In Q2, approximately 64% of our hernia cases were classified as ventral, umbilical, and parastomal, compared to 63% in Q4 before COVID. The inguinal procedures increased to 19% in Q2, whereas it was about 12% prior to the pandemic. The percentage of hiatal procedures did decrease slightly, from about 22% in Q4 2019 to around 13% recently. The distribution between open, robotic, and laparoscopic procedures has remained consistent. Approximately 60% of our procedures, or 57% in Q2, were open, compared to 53% in Q4. The robotic procedures have grown, with the pre-COVID ratio at about 27%, now increased to 33%, while laparoscopic procedures have declined from 18% to 10%. These procedure ratios suggest a significant recovery in the hernia sector, indicating that patients are returning with various issues to be addressed, which is a positive sign overall.

I really appreciate the insights there. And then, just one last one then on, if I can sneak one in, is just HealthTrust. I think on the Q1 call, you talked about being somewhere north of 65 accounts, but a lot of those hospital administrators had been furloughed and kind of were waiting to come back. So just how that has trended from a getting them contracted and into those hospitals standpoint?

Yes. Our percent of revenue in Q3 from HealthTrust accounts was about 30%. If you look at pre-COVID, that's up a bit, right, from high 20s or mid to high 20s. And if you look at the number of accounts, we were pretty solid in Q2 at 55 HPG accounts. Q1, if you think of the first part of that quarter, was really driving those new accounts to come on and then fell off in March and really didn't recover. Like I said, we didn't have access to the supply chain folks until just starting in May, a little more so in June and July. So we expect that this HPG will go up. What's really gratifying is if you look at our GPO contracting strategy, Kyle, step one is implement HealthTrust, right? So I think we're doing fine there. COVID has set us back, but we'll be back. That's going well. But the good news is that the second underlying strategy underneath that is to drive large IDNs. And that's happening. For example, we just got what amounts to almost a sole agreement at Allegheny Health Network. We're on contract at Mayo in Florida, and there's just a great pipeline of consignment agreements and RFPs that are in motion. So this is a never-ending process. It's going to be HealthTrust implementation, job one. Job two is this B2B process that's really going to be focused on IDNs and consignment. We know that if there's consignment inventory on the shelf we can do cases, particularly with our virtual proctoring programs that are emerging. And then as far as the other GPOs go, we're just going to surf that wave, and whenever those RFPs come up, we'll do them. But for the most part, I feel like we've got more than enough to work with here on the GPO and IDN front between the IDN strategy and the HealthTrust implementation. So we're really focused on making those parts of the business go now.

Great. Thank you for taking the questions.

All right.

Your next question comes from the line of Dave Turkaly of JMP Securities. Dave, your line is open.

Hey. Thanks, and yes, congrats on posting growth in a super difficult quarter. Tony, I was wondering maybe if you would be willing to share with us the number of active users that you may have had at the end of the quarter? And then I was just trying to get an idea around what percent were up and running and then maybe a guess at the percent where you're seeing these brownouts, like what percent of the business that is? If possible?

Yes. While Stuart thinks about the numbers, I’ll provide some context on the rolling brownout issue. We focused on a segment that includes Texas, Florida, and Arizona. In Q2, those three states represented about 25% of our business, which dropped to about 19% in July, so under 20%. This illustrates one area experiencing rolling brownouts, and there are likely several similar occurrences elsewhere. Even within this cluster, conditions vary; Texas has limited certain counties, and Florida has paused some HealthTrust accounts, while Arizona shows mixed results. The situation fluctuates weekly rather than monthly, resulting in a 6% decline. These regions should ideally have continued to grow for us, given their concentration of Integrated Delivery Networks and HealthTrust accounts, particularly in Florida with our LIVE programs. We previously observed strong growth from these programs, but that has recently started to decline. Stuart noted that we had about 270 customers in Q2, up from around 265 in Q1. So, despite the challenges, we are expanding our customer base, which is a positive indicator.

Okay. Thanks for all that detail. I guess maybe just, sort of, a quick follow-up, just the pipeline. I think you have a new LPR coming. And anything else you'd highlight for us in the remainder of the year? Thanks a lot.

Yes. So we've got a bunch of new products in the pipeline that we'll talk about probably next year. Some really good ones. As I said in my remarks, our plan is to have a suite, a portfolio of PRS products, and then we've got some really interesting new robot-specific hernia-based products that are in development. We got the bulk of our LPR product range out in Q1, so that's still finding its footing. We're not going to really add to that for the rest of this year. And then we're really not going to add to the PRS product set for this year as well. So we've launched a bunch of new products this year. Our goal is to launch new products every year. So we're not ready to talk about next year yet. The timing of some of those is in flux, getting our folks into the labs and doing contract research, animal studies, etc. But we're tracking well for all those new products. We'll have more to say next year on that or maybe at the end of this year. All right.

Thank you. Speakers, I am showing no further questions at this time. I would like to turn the conference back to Mr. Tony Koblish, President and CEO.

Thanks, everybody for your interest, and we'll see you next time. Stay safe out there. Bye.

Thank you. Thank you, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.