TELA Bio, Inc. Q3 FY2021 Earnings Call

Good afternoon, everyone, and welcome to the TELA Bio Third Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I will now hand the call over to Hannah Jeffrey from the Gilmartin Group.

Thank you, Suzanne, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the third 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 Chief Executive Officer; and Roberto Cuca, Chief Operating Officer and Chief Financial Officer. 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 2020 Form 10-K and subsequent Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. These factors may include, without limitation, statements regarding product development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I'll now turn the call over to Tony.

Thanks, Hannah, and good afternoon, everyone. Thanks for joining us today. Throughout the third quarter, our main focus was on gaining market share with our OviTex product line in hernia procedures and tissue reconstruction. Over the last 24 months, we have built a stable foundation through diversified strategies and pathways that drive our top line growth. As the market remains unpredictable and continues to experience periodic slowdown, we believe the structure we have put in place provides stability and positions our company for future success. Before turning to our results for the quarter, I would like to give a brief overview of the market. While we are encouraged by the strength we experienced in the first two months of the quarter, the market underwent a slight decline in September as the Delta variant began to rise. Throughout the quarter, there were varying micro surges across the globe, which caused fluctuations in surgical volumes and increased pressure on hospitals from labor shortages and supply chain constraints. As a result, we began to see an impact on elective procedures. We believe these trends will be relatively short-term in nature and expect the market to return to normalcy. With that in mind, our third quarter results represent an increased focus on fundamentals and building a foundation to cultivate growth, a strategy designed to position TELA to continue to grow regardless of underlying market trends. Driven by a continued increase in our OviTex and PRS product lines and strong organic growth outside the U.S., revenue was $7.7 million in the third quarter, representing growth of 44% compared to the third quarter of 2020 and up sequentially. In addition, we saw increased demand for our OviTex PRS product line in the third quarter as internal strategies, including increased brand awareness and commercial execution, continue to cultivate new business and customers. We believe increasing brand awareness of our OviTex and OviTex PRS product lines is essential to achieving broader adoption. We think about brand awareness as having two key components: clinical data, and education. First, starting with clinical data. Physician adoption of any new medical technology is contingent upon the strength of supporting clinical data; therefore, having a current library of industry-leading, robust, and abundant clinical data is critical. Currently, we have a clinical development team of 11, working to support all stages of product development with a focus on clinical data. For example, yesterday, we announced the publication of our 12-month analysis from our ongoing BRAVO study in moderate to complex ventral hernia patients. Twelve-month follow-up data in 75 patients treated with OviTex demonstrated an overall hernia recurrence rate of 2.7%. Twenty-four-month follow-up has also been completed, with overall hernia recurrence rates remaining below 5%. Additionally, positive clinical research on OviTex was presented at the recent Society of American Gastrointestinal and Endoscopic Surgeons meeting. These data included the following: a study titled robotic assist ReBAR of 111 inguinal hernias presented by Dr. Cory Banaschak and Dr. Paul Szotek. The authors concluded that robotic transabdominal peritoneal inguinal hernia repair with OviTex represents a viable and more natural repair alternative in minimally invasive surgery and techniques typically reserved for permanent synthetic meshes. Another study from the same authors was recently published in the Journal of Clinical and Medical Research; this prospective study of 619 implants using the ReBAR technique for a variety of open and minimally invasive inguinal and abdominal hernia repairs reported an overall recurrence rate of just 1.3%. And also at SAGE, Dr. George DeNoto, the Director of General Surgery at St. Francis Hospital in New York published on the use of ovine reinforced tissue matrix in bridge incisional hernia repair, where he analyzed recurrence rates in the treatment of abdominal hernias that require reinforcement in the absence of a primary repair. This is the most complicated hernia repair, abdominal wall reconstruction possible. In this series, patients with bridge repairs using OviTex had a 14% recurrence rate, which is approximately half of the recurrence rate typically seen when repaired with porcine mesh products in a similar patient population. Over the past few quarters, we have produced and captured valuable clinical data that we believe demonstrates the benefits of natural mesh solutions, which brings me to the next step of the process: physician education. In efforts to continue educating surgeons, we have succeeded by employing virtual sales and marketing programs. These programs have allowed us to reach both new and current surgeons regardless of the market slowdown. These initiatives, including TELA LIVE, will remain a priority as we continue to use them to educate surgeons about our product portfolio and clinical data. We held over 20 events during the third quarter and engaged over 250 surgeons, including events held in areas experiencing Delta-related micro surges. Each touchpoint with a surgeon at the medical education events opens the potential for the use of OviTex in more applications and an opportunity for new business. We have seen an excellent correlation between educating surgeons about our products and surgeon adoption. Combining our virtual sales and marketing initiatives and increased clinical data efforts have been vital as we invest in brand strength. Brand strength is the foundation needed to grow sales and serves as the basis of our second initiative: commercial execution. Armed with multiple sales avenues and robust supporting data, commercial execution means scaling our direct sales force, driving account manager productivity, and securing additional utilization and contracts. We continue to sign new accounts while growing our existing accounts, building a cohesive sales funnel. We now have 40 sales reps producing in 45 sales territories, promoting geographic diversity and enabling the business to withstand localized COVID-19 hotspots that limit surgeries in those areas. Currently, although our sales team is not at capacity, our sales reps are generally exceeding expectations. We continue to build our sales team to our desired goal and expect these additions to accelerate our top line growth further. To further our strategic initiatives, we recently entered into a distribution agreement with Next Science. This agreement gives us exclusive rights to sell and market Next Science’s proprietary antimicrobial surgical wash with XBIO technology across the U.S. plastic reconstructive market. We also have the first right of negotiation for the EU market upon successful CE approval. Next Science's proprietary biotechnology controls potential surgical infections by addressing the biofilms that make bacteria more resistant to traditional antimicrobial agents, disinfectants, and most immune defenses. Also, its no-rinse delivery allows it to provide over 5 hours of ongoing protection against bacterial biofilms. We are thrilled to offer this novel infection-control solution to customers in the United States, combining our best-in-class OviTex PRS portfolio of reinforced tissue matrix with Next Science's advanced anti-biofilm surgical wash, which not only diversifies our supplier base but also transitions our company to one that offers an innovative soft tissue reconstruction and preservation portfolio. In addition to our strategic initiatives, in September, we announced the appointment of Roberto Cuca as the company's new Chief Operating Officer and Chief Financial Officer. As COO and CFO, Roberto will lead the execution of the company's business plan and manage the company's finances. Roberto joins the TELA team with over 25 years of experience in relevant operational and finance positions within the healthcare industry. Although he has only been with TELA for just over a month, Roberto is already contributing to the company and has quickly become an integral part of the team. With that, I will now turn the call over to Roberto to discuss our financials.

Thanks, Tony. After commenting on our third-quarter financial results, I'll review our financial guidance for the full year 2021. As Tony mentioned, revenue for the third quarter of 2021 increased 44% year-over-year to $7.7 million due to the continued performance of our commercial organization, increased penetration within existing customer accounts, and stronger-than-anticipated international sales. Our third-quarter revenue grew slightly on a sequential basis. Gross margin was 60% for the third quarter, a decrease of approximately 170 basis points compared to the third quarter of 2020. The decrease was primarily due to an increase in the reserve for excess and obsolete inventory as a percentage of revenue as a result of growth in the company's product inventory over the course of the third quarter. Sales and marketing expenses were $6.9 million in the third quarter of 2021 compared to $6.3 million in the same period in 2020. This increase was mainly due to higher travel and consulting expenses. G&A expenses were $3.5 million in the third quarter of 2021 compared to $2.6 million in the same period in 2020. This increase was mainly due to greater professional consulting and legal expenses, increased insurance expenses, and higher recruiting fees. R&D expenses were $1.4 million in the third quarter of 2021 compared to $1.2 million in the same period in 2020. This increase was primarily due to increased testing and development expenses. Loss from operations was $7.2 million in the third quarter of 2021 compared to $6.9 million in the prior year period. Net loss was $8.3 million in the third quarter of 2021 compared to $7.7 million in the same period in 2020. We ended the third quarter of 2021 with $53.6 million in cash and cash equivalents. Now turning to the outlook for 2021. We are maintaining our guidance for revenues to be in the range of $28 million to $30 million, representing growth of 54% to 65% over the prior year period. This reflects our most recent assessment of the current environment and continuing uncertainty relating to the evolving impact of the COVID-19 pandemic. With that, Suzanne, please open up the call for questions.

Our first question comes from Matt O'Brien from Piper Sandler.

This is Drew on for Matt. And congrats on a nice quarter and congrats, Roberto, on the new role as well. I wanted to start off a little bit on PRS because that was really the area of the business that stood out to me. It looks like it grew sequentially despite what was a more difficult environment. So maybe you could just talk to kind of what you're seeing there from an account penetration perspective? And just any thoughts on how quickly it can ramp in a less COVID-impacted environment that we're transitioning to?

Yes, it's interesting. We did a lot of work last quarter meeting with plastic surgeons for various planning activities. Some of the surgeons indicated they definitely saw an impact due to COVID, with cases being delayed or pushed out, and others really saw no impact. So I was a little interested in that. I thought these would be a little more immune, but I do think there was a bit of an impact. So PRS right now for us is still in that early phase of the release where we're finding the heavy users. They're evaluating how the product is working and then they continue forward. So it's still a little bit up and down in terms of starting, waiting, assessing, and then continuing. But for the most part, we're progressing quite well with PRS. And we're figuring out what our value proposition is slowly but surely. We're figuring out the algorithm of how and when to use the different versions of our product. One of the things that's working quite well for us is to have different products within the portfolio that can serve different needs, different technique preferences, different patient needs, different degrees of difficulty. I think that process is going to yield a tremendous product portfolio. But right now, we are still in the process of working through and figuring out where each piece of the puzzle fits. But yes, I mean, so far, it's looking good, and I think it's going to continue to be an important piece of our business. We're probably running about 85%, 15% in terms of ratio on units and maybe more like 80%, 20% or so in dollars. So definitely keep an eye out for PRS. It's coming along nicely. We're pleased.

Okay. Perfect. And good to hear. And then on the core hernia side, if my numbers are correct, and please correct me if they're not, it looks like it was down a little bit sequentially compared to last quarter. I assume that's largely related to COVID. And I know you provided some helpful commentary in the marketplace in the past. So maybe just an update on recent trends. Anything you can say on October would be helpful as well.

Sure, Drew. And just before Tony steps in to give some color on the market, just to clarify, OviTex was up sequentially from the second quarter, and PRS was actually down slightly sequentially from the second quarter. So Tony, if you want to touch on...

Yes. Yes. So hernia is our foundation, and we're getting used more and more broadly for sure. We're up to about 60% estimate of hernia units being done either robotically or minimally invasively, which is up from 50%, 52% the last couple of quarters. So the hernia business is really feeling strong. It's bolstered by that clinical data. I think we were chugging along quite well with both hernia and PRS through up to September. Most certainly, we were losing some cases here and there in the first two months of the quarter. But really, for us, it was a concentration of effect in September. And to give you a little bit of color on that, we usually do about 40% of our revenue in the last month of a quarter, which is really probably centered mostly around incentive compensation being quarterly based and PO collection schedules, etc. We only did about 30% of the quarter's revenue in September. So we were rocking and rolling and then we fell into a bit of a hole in September. And then I would say October was improved from September, but I'm going to classify it as sort of a taper climbing out of the September hole; we're tapering up and now I'm quite happy where we are again. So it's interesting. We've had a more concentrated effect here that hopefully remains short-lived.

Okay. Perfect. That's very helpful. Thanks for the correction there. And then just last one for me on the rep side of things. I think you mentioned about 40 reps. If I remember correctly, you had been targeting around that 50 number by the year-end. So that, if I got the numbers correctly there, seems like a sizable step up here in Q4. So maybe you could just help us understand how that's trending relative to what you guys were discussing last quarter and just how the productivity metrics are trending as well, would be great?

Yes, our representative productivity is looking promising with significant improvements. Two-thirds of our sales force is either achieving or on track to reach $1 million in sales, particularly those in the $500,000 to $750,000 range. The remaining third has been with us for less than a year, yet their productivity is also improving. We have not been stronger in terms of account engagement and representative productivity. Part of this progress involves addressing low performance, guided by precise metrics implemented by our Chief Commercial Officer and the commercial team over the past year. This enables us to identify effective activities based on past successes. If a rep isn’t engaging in those activities, it might not be the right fit for them. By adopting this thorough process, we initially reduced our rep count but are now starting to rebuild. We're hiring more gradually, with a stronger focus on thorough interviews and using our metrics as a benchmark to ensure future hires align with our proven formula for success. I anticipate that our rep hiring will accelerate by the end of this year or early next year. While we may fall short of our 50-rep goal by year’s end, we expect to catch up in the first half of next year. The positive takeaway is that we are achieving more with fewer resources.

Our next question comes from the line of Anthony Petrone from Jefferies.

This is Frank Pinal on for Anthony. Just two quick ones, I guess. First one, on robotics, I'm just wondering if you can sort of trace out how the penetration works out over the next year or two just sort of looking at da Vinci robotics procedures. I think they crossed the 250k mark last year. Just wondering how you're thinking about that from a TAM/penetration standpoint? And then just as a follow-up question, just wondering what you're seeing in terms of hospital access and staffing impacts? And how long you think that could persist?

Yes. So on the robotics front, I've said this before, and I guess I'll say it again, a robot is going to eat hernia maybe all except the most complicated Ab Wall reconstructions or special circumstance cases. If you just look at the inguinal market at 750,000 to 1 million procedures roughly, the robot is 25% penetrated. Our strategy, our goal, and what we're accomplishing is to be in lockstep with the robot through maniacal focus on compatibility, right? So the LPR product line center a little more reinforcement, a little more polymer, works extremely well with the robot. That's really what I would consider to be a second-generation version of our product. Our entire product portfolio is robot-compatible, but LPR is more robot-compatible. We're working on a next-generation product in the next couple of years. We'll have a third-generation product that's even more robot-compatible. So we're going to go lockstep with the robot or robots. As they scale, we scale. This has been a very conscious, deliberate choice from the beginning, and it's working. We spent two quarters hovering at about 50%, 52%, and now we're at 60% or roughly thereabouts. I expect us to just continue to invest in the ReBAR technique, which is enabled by our technology and our products, and robot compatibility is a key feature of that. In terms of the COVID situation, I feel like if this is the third impact point that we've seen since it all started, the character here is different than previously, right? I think previously, it was protect the hospitals and ICUs, or the ICU fills up and then depletes, fills up and then depletes. This time, it feels a little bit different. It feels more like aftershock where we're seeing nursing/labor shortages or just supply chain issues. I think these elements are harder to predict when they're going to come and go. I think they're going to continue to be patchy. They may persist longer, but the impact is different, right? Our reps can still get into the OR; they can do the selling activities and servicing activities. That is much improved. It's just case volume, I think that's going to be the factor. There are some things that we can do to make ourselves grow through that, just like our plan initially was to grow through the first phase of the pandemic through TELA LIVE. Certainly, TELA LIVE is going to be a big piece of that program going forward. The next piece is investment in inventory, right? We've got to have enough inventory so that in case there are supply chain issues for little commodities, we're ahead of the game, and we've done that. We're in good shape on inventory. The next thing is increased consignment volumes, right? COVID always favors the incumbent, and as a new player, we're not the incumbent. If we can get on the shelf through consignment, then we're in good shape. The last phase is more reps and account managers in diversified territories, which means that we can survive any micro areas that go up or down for whatever reason and continue to grow through all of this. For reference, we've doubled the size of our business since COVID started, and we really started commercializing right before COVID started. I think we've got a formula here that's well thought out. There's a little acronym here that I was just playing with: L-I-V-N, LIVN, TELA LIVE, inventory consignment, and new reps. That's kind of what we're thinking. I think we've proven the model out because of the rep productivity.

Our next question comes from the line of Kyle Rose from Canaccord.

So I just wanted to see if we could get a little more color on the Next Sciences partnership here and maybe what we should expect from a medium term with respect to the business model? And then just longer term, from a product development perspective, I know you guys have been pretty prolific from your R&D perspective as far as you're bringing new products to the market. Maybe what can we expect over the course of the next 12 to 18 months?

Thanks for that question, Kyle. I'm going to frame it as a 24-month time horizon basically because we have some stuff that's shorter term, but most of it is a little out there. What we're doing is we're suddenly repositioning our company to have a bigger play in soft tissue, right? So soft tissue reinforcement and reconstruction or soft tissue reconnection is what we have been traditionally with all of the products in our OviTex range. We're now thinking about a bigger opportunity around the concept of soft tissue reconstitution and maintenance support. So there's two subcomponents there. One is reinforcement, which is our current product line, and the other is what we're calling soft tissue management. The Next Science product is a great example of soft tissue management, things like anti-infection or antimicrobial, dead space management, fluid management, stuff like that. There's a whole range of technologies that we can take a look at if we invest in, we'll make the reinforcement products work very well and create almost a whole solution around the soft tissue reconstitution. That's where we're focused. So you're going to see a range of new reinforcement products that roll out in that time horizon, and you're going to see, hopefully, a range of different types of soft tissue management products that roll out in that time horizon. Our goal is to be the expert in how to make the soft tissues heal and become reconstructed in a better way. We've hit on a bundled solution, and that's the direction we're going to be taking the company from a strategic perspective. We'll have more to say about it as things get closer. But for now, we're pretty pleased with the Next Science deal. We really like the concept of an anti-biofilm technology, and we're going to do a phased release. The first phase will start, hopefully, very soon, and we should start generating revenue once we test out the alpha launch and make sure we understand the nuances of how to position the product and how to price the product and all that good stuff. We should start to see revenue maybe in the second or third quarter of next year, but we'll be doing plenty of cases to learn between now and then, and we'll keep you posted as we learn.

Great. Could you provide an update on your core accounts? I believe you mentioned sales rep productivity, but I'd like to know where you currently stand with Health Trust.

Yes. I mean, Health Trust is ticking up as we work our way through supply chain issues. I think we're up to about 37% of our business is coming from Health Trust. We're probably getting up to about a $10 million run rate or so, up from about a $1 million run rate when we started. I think that's going well, but we're also doing quite well in outside IDNs, which bodes very well for future contracting activities around premier, perhaps suspension, and maybe eventually longer term, Vizient. We have a strategy, and we have a play across all of those GPOs, and we're doing quite well at the individual IDN level, and many of those IDNs do roll up to those GPOs. Our strategic accounts team is doing a great job, and the data and value proposition continue to solidify and look strong as we get better known from a branding perspective; all that works to our advantage in these contracting schemes. We’re very excited and think we have a great opportunity to move forward with some of those or all of those.

Our next question comes from the line of Dave Turkaly from JMP Securities.

Tony, I'd like the sound of that LIVN program. So thanks for that. I guess I have a question here for BRAVO. The two-year follow-up, how many patients are done? Is it similar to the 75 in the one year? And when do you think that will be published?

We have just completed the one-year publication and locked the database for the two-year analysis, so we will need to develop the manuscript. It may take about six months before it is published. The data remains robust, and the patient count is roughly the same, although there may have been some losses due to COVID between the first and second year. We will provide more information once it is published, but we want to acknowledge that the two-year results are similar to the one-year results. Overall, the study has shown consistency, and we are satisfied with the findings. Additionally, we are pleased with the ancillary data we reviewed today, which indicates a very low recurrence rate across various procedures and techniques.

Got it. And I know BRAVO II is much longer. I think it's supposed to take more time. But given that you're sort of the only option that can be used with the robot I imagine it's not quite as important as the original BRAVO, but I guess just any update there, any thoughts?

Yes. I mean, BRAVO I actually has roughly 20 patients that were done robotically in it. So there's a subset already. And then certainly, the ReBAR stuff that was presented at SAGE is mostly robotics. So our robotic data set is looking fairly good before even BRAVO II. So Bravo II is going to be nothing but additive to what we already have in hand. Those are also good signals that our results are looking good across all these different techniques and procedure types.

At this time, I would now like to hand the conference back to Mr. Tony Koblish.

Thank you, Suzanne. We are pleased with the progress we've made this quarter and we are optimistic about our ability to continue growing through our strategic initiatives. We believe the foundation we have established will support our growth under various market conditions. As I mentioned, if the impacts persist, leading to labor shortages and other challenges, our aim is to navigate through them and clearly outline our approach. We feel well positioned and appreciate everyone's time and interest in TELA Bio this afternoon. Stay tuned, as there is more to come, and take care. Have a wonderful evening. Thank you.

This now concludes today's conference call. Thank you for participating. You may now disconnect.