TELA Bio, Inc. Q1 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Hannah Jeffrey from Gilmartin Group.

Thank you, Kathy, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the first quarter of 2021. 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. Tony will begin the call by providing an overview of our operational highlights, and then Nora will provide a detailed analysis of our first quarter financial performance. 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 Forms 10-K and 10-Q, 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 or operating performance. With that, I'll now turn the call over to Tony.

Thank you, Hannah, and good afternoon, everyone. Thanks for joining us today. So we are off to a strong start in 2021 with $5.9 million in revenue for the first quarter. This represents a year-over-year growth of 58% and sequential growth of 3.7% compared to the fourth quarter of 2020. As we mentioned in our Q4 2020 earnings call at the end of March, we experienced COVID-19 headwinds in the beginning of Q1. As the COVID infection rates decline, we began to see an improvement in procedural volumes in February and March, and we realized our best month ever in March, and it has continued into Q2. In the first quarter, demand for our OviTex product line increased throughout the quarter as a number of hernia procedures continued to rebound. As we have seen throughout 2020, our OviTex LPR product experienced the most growth out of our OviTex product line. For the first time in our history, minimally invasive procedures using OviTex eclipsed open hernia procedures on a quarterly basis. The continued migration from open to robotic hernia procedures that we have been experiencing is in line with what has been reported by the major surgical robotic provider. This continues to develop and solidify our position and provide a natural repair hernia solution as an alternative to plastic mesh. This movement from open to minimally invasive procedures is a bit of a double-edged sword for us in the short-term. While we are pleased OviTex has become a preference for many surgeons performing robotic hernia repairs, OviTex LPR does have a lower average selling price. The difference in selling prices is strictly a function of size, as currently most robotic procedures use a smaller piece of OviTex than a traditional open hernia repair. However, we are noticing that the robot is being utilized for more complex hernia procedures, which should lead to the use of larger sized OviTex products and ultimately higher average selling prices. Long-term, we believe this trend demonstrates our ability to become a major player with a broad product portfolio. Turning our attention to OviTex PRS product for the quarter, sales were up approximately 150% year-over-year, but down sequentially over the fourth quarter of 2020. Based on our analysis of new and existing PRS accounts, we believe a pattern is emerging. Many of the surgeons in our new accounts have been trialing PRS before committing to using it in additional procedures. This is evident with our plastic surgery customers, who perform reconstructive procedures, as many prefer to evaluate how well OviTex PRS performs during a 3 to 6-month post trial period. Based on our current understanding of how our new plastic surgeon customers are trialing PRS and the cadence of new accounts, we are expecting our PRS revenue to continue to grow year-over-year as more plastic surgeons adopt the product. We are beginning to see broad adoption with PRS, with strength in April and May. As a reminder, the fourth quarter of 2020 was robust in terms of signing up new accounts, which we believe we will harvest and make productive in Q2 and beyond. On the commercial side, access to surgeons is steadily improving. New cities and regions are still difficult to manage, but overall, our access to surgeons in hospitals and during their office hours has increased. We continue to target 48 territories by mid-year, but we could increase this target if demand continues on this current trend. As we mentioned during our fourth quarter conference call, we are adding sales territories that align with HealthTrust accounts. On that front, we are making solid progress on adding HealthTrust associated hospitals. During the first quarter, the hit rate for our new HealthTrust reengagement program has improved. That being said, I want to reiterate, there is still work to be done. Although we believe we are beginning to make good traction with many HealthTrust accounts, it takes time from contract signing to implementation. We believe most HealthTrust accounts are becoming more open to new product evaluations as COVID-19 hospitalization rates recede. Before turning the call over to Nora, to review our financial performance in the first quarter, I would like to thank our participating surgeons and investors for making our Key Opinion Leader Webinar a great success. For those who could not attend this virtual event, we hosted two surgeon speakers who discussed when and how they use OviTex for hernia repair procedures and why they avoid polypropylene mesh in certain situations. The webinar was very informative, and I invite all of you who did not attend to go to the Events page on the Investor Relations section of our corporate website to view a recording of the webinar. With that, I will 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 first quarter of 2021. After commenting on our financial results, I will also provide an update on our financial guidance for the remainder of 2021. Revenue for the first quarter of 2021 increased 58% year-over-year to $5.9 million. While we experienced significant year-over-year revenue growth, we did experience increased volatility in demand for our products as COVID-19 cases and hospitalizations increased in January. This volatility lessened in February and more so in March 2021. Gross profit as a percentage of revenue was 59% for the first quarter, in line with the first quarter of 2020. Sales and marketing expenses were $6.3 million in the first quarter of 2021 compared to $5.3 million in the same period in 2020. This increase was mainly due to higher compensation, benefits and commission from additional sales personnel, offset by lower travel and consulting spend. General and Administrative expenses were $2.8 million in the first quarter of 2021 compared to $2.5 million in the same period in 2020. This increase was primarily due to higher compensation and benefits and higher stock-based compensation expense, partially offset by a decrease in bad debt expense. Research and Development expenses were $1.7 million for the first quarter of 2021 compared to $900,000 in the same period in 2020. This increase was due to higher development costs and higher compensation and benefits. Loss from operations was $7.3 million in the first quarter of 2021 compared to $6.5 million in the prior year period. Net loss was $8.1 million in the first quarter of 2021 compared to $7.2 million in the same period in 2020. We ended the first quarter of 2021 with $65.8 million in cash and cash equivalents compared to cash, cash equivalents and short-term investments at $46.7 million in the first quarter of 2020. Now turning to the outlook for 2021, we are confirming our revenue guidance in the range of $27 million to $30 million, representing growth of 48% to 65% over the prior year period. We will continue to assess the current environment and provide updates on our quarterly calls as continued uncertainty relating to the dynamic environment with the COVID-19 pandemic could materially impact that projection. With that, I will turn the call back over to Tony.

Thank you, Nora. For those who have not yet read through the 8-K we filed this afternoon, Nora has decided to pursue a new direction. On behalf of everyone at TELA Bio and our Board of Directors, I want to thank Nora for her many contributions during her tenure with the company, including her strong leadership through TELA Bio's IPO and follow-on offering. Nora, we really appreciate your dedication and wish you all the best in your future endeavors. Now with that, Kathy, let's open it up for questions. Thank you.

Your first question is from Matt O'Brien from Piper Sandler.

Hi, this is Karin on for Matt. So first, starting on Q2 trends, I know you're not providing quarterly guidance, but you said that April and May were a little bit stronger and doing well. Can you just add any more color on that with some recent coverage resurgences? Are you still seeing some pressures from COVID? And also, I was trying to see some of those newer accounts start to contribute.

Yes, so thanks for that question. I'm going to go through a bit of historical information from the start of Q1 through to where we are today. I'm not going to get into month-by-month numbers; I don't want to fall into that habit, but I'm going to give you some context. So when you look at Q1, almost 80% of Q1 sales came in during February and March. So January was a really tough month and we expected that. On our last earnings call, I indicated that we anticipated a tough start to Q1 based on the end of Q4, and it really concentrated for us in January, but February snapped back fairly well and March was exceptionally good, and that has continued into April and through the start of May. So I think we're looking at a situation where all of the work that we've done to get stronger during COVID is starting to pay off. We've stockpiled a significant number of new accounts. If you look at the new accounts accumulation from Q3 of 2020, we had 46 new accounts, 57 in Q4 of 2020, and 40 in Q1 of 2021. Now all of these accounts haven't started contributing yet, but it's a significant stockpile and they're going to start contributing. We're seeing that start to happen in March, April, and May, so we're very bullish about our ability to step up and keep the business growing. I think we’re now at a point where we’ll start to see all the moving parts and elements that we put in place starting to work.

Great, thank you, that's super helpful. And then just one more from me on Tela LIVE, can you just speak a little bit on the clinician conversion you're seeing from that, and is that starting to translate to top-line or is it still too early to tell?

Well, I mean all that new account work that I just mentioned, there's no other way that that happened other than Tela LIVE. We brought on 22 new reps in 2020 basically to strengthen, and COVID was at its peak at that point. Most of the work that they were able to do was due to Tela LIVE. So we had a situation where roughly 40% of our reps that haven't been around very long that came on in 2020 are doing about 20% of our revenue, and then we also had 40% of the reps, these are the ones that are a little bit more established and have been around longer. They're running anywhere on an annualized run rate basis between half a million and over a million dollars. Both of those groups of reps are very much benefiting from the Tela LIVE program, and it's really been the only mechanism that we've had, especially for our PRS plastic surgery products. We just went for launch with those in Q3 more aggressively. So we're only a couple of quarters into starting to see that step up materialize. All of that has really been driven by the Tela LIVE program. We've put about 200 surgeons through Tela LIVE, and the productivity that comes out of that has been excellent as detailed by all of those metrics.

Your next question is from Anthony Petrone of Jefferies.

Congratulations, Nora, and good luck on the transition.

Thank you.

As we look at this year, as we go through GPO contracting, just want to revisit GPO contracting, and sort of how that transition will continue to play out through the year in terms of additional GPO contracts. But of the GPO contracts that are currently in place, how should we be thinking about onboarding of new facilities through existing GPOs? And then as we look outward this year, and perhaps into next, how many additional GPOs are out there that could be onboarded? I have a couple of follow-up questions.

Yes, so we're in two modes right now, Anthony. We're in HealthTrust implementation mode and we're in IDN mode. The other big GPO contracts I think are further out. The request for participation will come in the future. Everything we've been doing here is really focused on HealthTrust and the IDNs. HealthTrust has been a bit of a struggle for some of last year because of COVID. They have literally stopped and started a couple of times as COVID has heated up and then cooled down. I think we're getting through that. I think as you look at what COVID does to the business, we're in a mode now where we’re not worrying about hotspots anymore. I told our team, our job is to grow and exceed our numbers no matter what the situation throws at us. We're done with the whole COVID as it relates to filling up the ICU beds and affecting. We have to find a way. I think the last phase of COVID's impact is on the supply chain and their willingness to look at new stuff. We're starting to see that improve. Even with all that stuff going on, 40% of our total unit sales in Q1 came from the HealthTrust accounts, and that's with a pretty limited ability to drive those dialogues. If you look at our IDN situation, four of our five top IDNs are growing nicely, between 15% to 25%. Our top five IDNs contain a mix of different GPOs that they are associated with. We're having excellent success at the IDN level, which I think is going to help set us up well when the Vizient and the Premier and the resource group contracts come into play. They're not there yet, but as long as we're knocking down these IDNs and HealthTrust accounts, we have plenty of open geography and turf to work with to have an excellent year.

That's helpful. I have a couple of quick follow-ups before I return to the queue. First, regarding the latest BRAVO data from the ongoing 100 patient study, there are record low recurrence rates for hernia safety data. How is this BRAVO data being received in the market? What kind of feedback are you hearing? Is it resonating? Lastly, I want to clarify the headcount commentary. Tony, by the end of this year, is the target for 48 reps? If that is the case, what will be the schedule for adding those reps as the year goes on?

Yes, let me address the second part first. It's interesting that our thinking is evolving a bit. We're beginning to consider a combination of factors within our commercial organization. The first is the number of representatives; currently, we have around 43 reps. Additionally, the clinical development specialists are becoming increasingly important to us. We currently have about 4 or 5 of these specialists, and we're planning to hire around 8 more. There may be some adjustments where we swap a few representatives for clinical development specialists, as these specialists are critical for our PRS side. With our growing success, there might be opportunities to enhance the productivity of our existing reps by collaborating with these specialists, who can cover large areas using Zoom and traveling as needed. We're refining our model for the sales force. Yes, we aim to reach 48 reps, but it could be 48 plus 6, or slightly fewer on the rep side while potentially adding 8 or 10 on the clinical development side. The overall figure might remain similar. We'll wait until mid-year to evaluate our position after Q2. We're optimistic about our Q2 performance based on a strong exit from Q1, which is encouraging. We may invest further if we determine it's beneficial and could add more reps throughout the year. While I don't have a precise number, we do plan to hire more clinical development specialists. Currently, we have 8, and I wouldn’t be surprised if that number reaches 10 or 12 by the year's end. It will be some combination.

Your next question is from Dave Turkaly from JMP Securities.

Nora, I will be sad to see you go. Tony, in the press release, you mentioned the mesh litigation on your KOL event. One of the doctors had done a survey, said that 94% of customers would prefer a synthetic option like OviTex. I'm just curious to get your updated thoughts there. Did anything new occur, or are we just highlighting that that's sort of a tailwind for you this year?

Yes, I have no new information. Sadly and stubbornly, the litigation did stall due to COVID backlogs. Our contacts have indicated that not much progress has been made, but I feel that the market is slowly shifting. That survey worked with NICE—it told us what we've been feeling already when we talked to surgeons. We had our data team start to look at all the sources of usage for all the different types of products. As of the last cut that we looked at—whether it's IQVIA or DRG data, straight-up plastic polypropylene mesh seems to be down about 15% while natural repair products such as ours—biologics and resorbable synthetics are up. At least in that market data—forget about surveys, the data probably gives a better picture. It looks like we're at the very beginning of increasing interest in natural repair versus plastic polypropylene. We're going to keep an eye on that IQVIA and DRG data and just look at the raw numbers. I think it will tell the story going forward. It takes a while for this phenomenon to kick in, but it's being driven by patients and publicity. So that's a trend we're going to monitor, and it should continue to improve. We're also seeing it in our business. Our LPR product line is cranking, with 51% of our hernia units going in either through the robot or laparoscopically, and that's all stuff that is less complex. That's a great sign for us having a broad product range. Our goal is to be very compatible with the robot. Our goal is to be able to replace any product in any procedure with a natural repair solution. If you look at our internal trends with LPR at 51% and that 15% across the mesh landscape, I think it's happening—it's slowly happening. We'll keep an eye on it.

I appreciate that. And then maybe just a quick follow-up, maybe for Nora. I get the guidance reiterated this quarter was strong; it was almost what we had for the second quarter and we know second quarter has got the weird comp from COVID last year. As we're looking towards the back half and hoping that COVID is sort of a non-event, do you think there's a chance that you could do even better than that in the back half of the year?

Dave, we certainly think that we could do better, but we are being conservative at where we're at now. Again, until we get better clarity with respect to the hospitals, the supply chain, and COVID, I think we're going to stay at this level at this point.

Yes, I think we'll see the value in that. We'll reevaluate at the end of Q2. There's a lot to navigate between now and then. We're setting ourselves up for success. I realize, Anthony, I never answered the BRAVO question, so I’ll just add a couple of words on that. Yes, the BRAVO data is excellent; it's highly differentiating. Until the whole thing is out at two years, I don’t think it will have the full power. By the end of this year, we'll have everything out at two years. We've submitted the one-year data as an interim to a journal, and we're waiting to hear back. Once we get that published, we can thoroughly showcase that one-year data, and we’ll do the same thing once we're through the two-year data. For now, the BRAVO data looks really, really good, and we expect it to finish strong. Some other good news is BRAVO 2, which is going to be a redo of that study, but focused on robotics. We're finally moving past the COVID IRB start-up phase and are very close to starting to enroll patients there. We're pleased that we’re rounding out our clinical data quite well with full two-year data, and that robotic study further demonstrates our commitment to all things robotic with our hernia platform.

And your final question is from Kyle Rose of Canaccord.

Nora, congrats, we will miss you. Yes, Tony, a lot's been asked, but I guess kind of want to start big picture because in the last question, you talked about the percent going through LPR in robotics. So I guess a two-part question is: talk about the backlog that you see developing in the market, if there is a backlog; what are your hospital and clinical partners talking there? We think about the delayed procedures. Obviously you're seeing in your business a shift towards more of the simple procedures like the MIS, using the LPR. I'm just trying to understand if we see more of a normalization come in the back half of the year, are we going to see this consistent flow of these LPR robotic type procedures and then add on some of the bigger, more complex abdominal wall procedures? Just trying to understand what that mix might shift like towards the second half, because that would imply revenue acceleration into the back half purely on price.

Yes, that's a very interesting question. Let me go back to the start of what we were trying to accomplish when we first launched this natural repair anti-plastic hernia platform. We wanted to be broad; we wanted to have a product range that could handle anything in hernia, and I think we have that, and we're going to expand. There is way more we can do with it. We're going to put out new products over the next few years that are going to help accelerate our capability. Our initial starting point was moderate to complex ventral hernias; that's where we wanted to start. BRAVO supports this, and we wanted to prove ourselves in challenging abdominal wall procedures. I think by and large, we've done that and we continue to do that. We have a superb value proposition in those procedures compared to any other product. BRAVO 1 backs that up. So step 1 is underway. I won’t say it's complete, because with more contracting, access, and reps, it's going to grow. Step 2 was always to leverage our experience in the performance of the product. If we could handle those procedures and make our product easy to use and implant compared to plastic, we should be able to chip away at the simpler procedures. We're in the early stages of starting to see that happen. The LPR has been a catalyst for that for sure. There are four or five sizes, and we need more sizes. We have to keep enhancing our product portfolio aimed at robotics. We’re figuring out what we have to do to be as easy to use as plastic, and we can achieve that. We’re in the third inning of moderate to complex hernias and the first inning on the simple procedures. The breadth of our focus will be driven by the robot and enhanced by product additions that we're developing. Yes, it's working—the plan was a two-step plan from the beginning. We believe we’re seeing it happen. The other factor that's interesting is that I think PRS is going to bolster hernia. When we meet with IDNs and GPOs, they want to discuss PRS first—that's where the massive cost savings exist. Until Q3 or Q4 of last year, we were focused on hernia first and said we'd get to PRS eventually. That isn't where they wanted to start. Now we're saying, 'You're interested in PRS? Let's discuss it and get that moving.' We will lead with that if necessary, and that should help us get hernia on the shelf. That synergy between product lines hasn't started yet, but I expect it will down the line as well.

And there are no further questions. I will now turn the call back over to Tony for closing remarks.

All right, thank you, Kathy, and thank you, everyone, for joining us. We are experiencing an improving sales trend from last quarter and into the start of this quarter. We believe that we're just going to start focusing on COVID and get on with meeting and beating our numbers. The last remaining challenges we see are with supply chains opening up, so let's just hope that continues. That will do nothing but help us. We’re optimistic about the future. We believe, as I detailed here, that we're well-positioned to take advantage of all these improving trends. Thank you for your interest in the company, and stay tuned—the best is still to come.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.