Earnings Call Transcript - TELA Q4 2021

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Fourth Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group. You may begin.

Louisa Smith, Gilmartin Group

Thank you, Towanda, and good afternoon everyone. Earlier today, TELA Bio released financial results for the fourth quarter and full year 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-Qs, 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 impact of COVID-19, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. With that, I will now turn the call over to Tony.

Tony Koblish, CEO

Thank you, Louisa, and good afternoon everyone. Thanks for joining us today. I am pleased to report that TELA Bio finished the year with fourth quarter revenue of $8.4 million, up 9% from the third quarter and 48% from the fourth quarter of 2020. As COVID-19 subsided in the fall of last year, our Q4 revenue started off quite strong. However, the impact of the Omicron variant affected procedures and performance in December compared with our expectations. As in Omicron, we believe we would have seen even stronger performance in the quarter. Sales for the year were $29.5 million, reflecting growth of 62% from 2020. The benefits of using OviTex are clearly gaining traction with surgeons as we have continued to capture share and grow faster than the market. As you can imagine, introducing innovation and changing the status quo requires us to educate various stakeholders. When our sales reps have the opportunity to make the case for our products, especially in person, our business thrives. However, due to COVID, traditional in-person opportunities were not always an option, so our sales representatives were quick to employ virtual sales and educational sessions. Their tenacity helped to keep our business momentum going through the most challenging periods of the pandemic. We expect that momentum to continue into 2022; therefore, we are projecting year-over-year revenue growth in 2022 of approximately 44% at the midpoint of our guidance range, assuming COVID-related disruptions are not greater than we experienced in 2021. In the fourth quarter, we entered into an exclusive distribution agreement with Next Science for SiteGuard No Rinse Antimicrobial Solution for use in plastic reconstructive surgery. This was the first step in our evolution from a focus on high-quality reinforcement materials to more broadly prioritizing the preservation and restoration of the patient’s own anatomy through soft tissue reconstruction solutions and complementary technologies. Having had the opportunity to work with SiteGuard for several months now, we are even more optimistic about the future success of this product. We believe it is an excellent way for us to build on our expertise in tissue repair procedures and is also in keeping with our record of providing patients, clinicians, and payers with effective and cost-saving solutions. We expect to continue to leverage our sales force to expand our total addressable market with additional synergistic products. Our confidence in our future, both in 2022 and beyond, is only increasing as we grow and rest on our growth, which hinges on two key competitive advantages of TELA. We offer innovative products backed by compelling data; we have a high-performing and improving sales force and support functions. First, we know OviTex is a great product line that provides excellent outcomes for patients. However, changing physician behavior requires data. The compelling results from the BRAVO Study are helping to drive OviTex adoption and increased use. Recall that BRAVO demonstrated that OviTex performed exceptionally well with an overall hernia recurrence rate of only 2.7% at 12 months and below 5% at 24 months. There will be more data to follow when the full results are published and even more from our BRAVO 2 study in the future. Additionally, a number of OviTex’s presentations have been optimized to capitalize on the growing use of robots in repair procedures and the need for reinforcement materials compatible with these technologies. In the fourth quarter of 2021, 57% of OviTex hernia repairs were done by laparoscopic or robotic surgeries. In the next several years, we expect the market to evolve such that the majority of hernia repair procedures will be done with robotic assistance, except for the most complex or extensive repairs. OviTex was designed to be flexible enough to be used in robotic surgery but still offers the surgeon strong support where needed. We believe this is well placed for this market development. Our PRS franchise continues to perform. On a unit basis, sales were up 90% in 2021 compared to 2020. As with the rest of the OviTex products, we continue to develop data in support of PRS in both clinical and preclinical studies. As the plastic and reconstruction markets continue to move away from cadaver skin-based products, we expect PRS to be a substantial contributor to our overall performance. In the fourth quarter of 2021, 12 of our reps were selling at a $1 million rate annualized. Of these, 2 reps were selling at a $2 million rate. That type of exceptional productivity resulted from having an innovative product portfolio, combined with what we’re calling Playbook90, which we launched in early 2021. Playbook90 provides comprehensive sales and resource training combined with performance measurement that permits us to quickly get high-potential reps up to speed while providing an early indication of those who might not be successful with our products. The effectiveness of Playbook90 has given us the confidence to expand our sales force to approximately 55 by midyear and 60 by year-end, up from just under 45 at the end of 2021. Another critical component to our success is physician training. When elective surgery cases decreased due to COVID, we took this as an opportunity to educate surgeons on the benefits of our products. As a result, we’ve seen an increase in the number of surgeons attending remote, live, and in-person training sessions when they haven’t had access to the operating room. In addition, we have found that once a doctor has been trained with OviTex, they are likely to adopt the technology. To date, over 300 physicians have been trained on our products. With that, I’d like to turn the call over to Roberto Cuca, our COO and CFO, for a more in-depth review of our fourth quarter and full year results.

Roberto Cuca, COO and CFO

Thanks, Tony. Revenue for the fourth quarter of 2021 increased 48% year-over-year to $8.4 million as a result of the expansion of the commercial organization and the accelerated productivity ramp from the new sales reps we’ve been seeing as a result of Playbook90. Gross profit in Q4 was $5.7 million as opposed to $3.7 million in the fourth quarter of 2020. Gross profit percentage was 68% for the fourth quarter compared to 65% for the same period in 2020. The increase was primarily due to a decrease in the reserve for excess and obsolete inventory as a percentage of revenue compared to the prior year. Sales and marketing expenses were $8.3 million in the fourth quarter of 2021 compared to $6.4 million in the same period in 2020. This increase is mainly due to the expansion of our commercialization activities. G&A expenses were $3.3 million in the fourth quarter of 2021 compared to $2.9 million in the same period in 2020. This increase was mainly due to higher compensation and increased professional, consulting, and legal expenses. R&D expenses were $1.7 million in the fourth quarter of 2021 compared to $1.2 million in the same period in 2020, primarily due to additional testing and development work. Loss from operations was $7.7 million in the fourth quarter of 2021 compared to $6.7 million in the prior year period. Net loss was $8.6 million in the fourth quarter of 2021 compared to $7.8 million in the same period in 2020. We ended the fourth quarter of 2021 with $43.9 million in cash and cash equivalents. Turning to the full year, 2021 revenue was $29.5 million, an increase of 62% compared to $18.2 million in 2020. 2021 gross profit was $18.8 million compared to $11.2 million in 2020, an increase of 67%. Sales and marketing expenses were $29.1 million for the full year, G&A and R&D were $12.5 million and $6.7 million, respectively. Loss from operations was $29.5 million in 2021 compared to $25.3 million in the prior year, and net loss was $33.3 million for 2021 compared to $28.8 million for full year 2020. Now turning to the outlook for 2022, we anticipate revenues to be in the range of $40 million to $45 million, representing growth of 36% to 53% over the prior year. This assumes that the impact of COVID-19 in 2022 is no worse than it was in 2021. Further disruption from COVID-19 could negatively affect this projection. As of today’s call, we have good visibility into performance in the first quarter of 2022. As Tony mentioned earlier, the Omicron variant negatively affected sales in December, and this effect continued into the early part of this year, suppressing January and February revenues below our expectations. We believe the market is rebounding, but the overall effect is that we expect first quarter revenues to be down slightly from the fourth quarter at approximately $8 million. This expectation is incorporated into our full year projection of revenues from $40 million to $45 million.

Tony Koblish, CEO

As you’ve heard, our business was strong in the fourth quarter of 2021, even with the headwinds from COVID-19 in December. Results from October and November gave us a glimpse of how we can perform in an operating environment minimally impacted by the pandemic. Fortunately, despite a winter flare-up, as of March, things appear to be opening up again, and our results are quickly reflecting that. We anticipate maintaining durable growth and increasing market penetration with our strategic product portfolio in 2022. Thinking beyond 2022, we believe TELA Bio has in place the key elements to be a very successful medical device company: great products that offer needed solutions, compelling clinical data, a strong sales force and infrastructure, established reimbursement, a compelling value proposition, and a vast market opportunity. We look forward to becoming a market leader in soft tissue preservation and restoration. Towanda, please open up the call for questions.

Operator, Operator

Thank you. Our first question comes from the line of Matt O’Brien with Piper Sandler. Your line is open.

Drew Stafford, Analyst

Hi, guys. Good afternoon. This is Drew on for Matt. Thanks for taking the questions, and congrats on a solid end of the year here. I do start off on the guidance. I got your comments on Q1, but you are providing a relatively wide range, almost 17 points of growth from the top end to the bottom. So I assume you’re baking in a couple of scenarios into each of those assumptions. Maybe you could just run through some of the factors that get you to the high versus the low end of that guidance range?

Roberto Cuca, COO and CFO

Sure. Thanks for the question, Drew. So obviously, as I described, we included in our assumptions that COVID-19 is no worse in 2022 than it is in 2021. But we did build in some ability for it to flare up in different parts of the year. As you know, our fourth quarter tends to be one of the strongest quarters of the year, which is one of the reasons you see the step down from the fourth quarter to the first quarter this year. So if COVID-19 would impact one of our bigger quarters, there is room in that guidance range to absorb that. We followed the standard procedures that we do for generating our guidance, which is building up by territory and by sales rep based on their current ramp and on expectations based on our Playbook90 for how they would grow over the course of the year. That all combined produced the revenue guidance range of $40 million to $45 million for 2022.

Drew Stafford, Analyst

Okay. Very helpful. Thank you for that. And then just on the sales rep expansion side, it really seems like you’re starting to lean into things a little bit. Maybe you could just flesh out those comments. Is that the right read? And then just the productivity comments as well, what – I think last year, you were targeting 50% of your reps reaching that $1 million run rate. What’s the right way to think about the productivity of that group in 2022?

Tony Koblish, CEO

Yes. I mean, we feel very confident in rep productivity, right? Playbook90 is a very prescriptive methodology for following steps on how each individual rep can build the franchise and business in their geography. It’s based on the ecosystem that we’ve built that enables every rep to succeed around and it also is based on the formula that our most successful reps have employed. So it’s based on actual data. It’s rigorous, quantitative, and measurable. By implementing it, we feel that there’s been an acceleration in productivity. We’re seeing reps be able to pay for themselves very quickly, typically within 3 to 6 months. We’re seeing reps jump to productivity and sustain growth if they can follow the playbook consistently. A lot of the work that Roberto did coming into the company to analyze the data shows that this is the right inflection point for us to start the process of scaling up the sales force more meaningfully. Rep productivity and shortening the time to that productivity gives us the confidence to keep growing the sales force. The other factors involved are clinical data maturing, contracting, and IDN processes maturing, and we are at the cusp of launching an array of new products in the next 24 months, which we want to have in the hands of more and more reps. We’ve also done a great job of building a training and coaching department, of which I am very proud. We ran our first sales school with this in-house coaching team and development team, and it was a great success. Approximately 16 reps participated in the program, which has really become a hallmark of quality. I also feel we’re able to attract exceptional talent to the company now. We’re at that $30 million revenue mark, which is a strong position for a development-stage med tech company. We’re moving beyond the questions of functionality and efficacy, and now we’re starting to see the benefits of that talent coming our way. So, there is a lot of excellent momentum and indicators that suggest we’re doing the right thing here.

Drew Stafford, Analyst

Got it. Thank you.

Operator, Operator

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

Kyle Rose, Analyst

Really thank you for taking the questions. Just wanted to talk about this overall expansion at the organization. Obviously, you made some sales rep hires in the year-end. I think you’re talking about getting to 55 by midyear and 60 by year-end, if I have those correct. Then you’re also talking about adding to the overall education team and things of that sort. I wonder if you can just put some goalposts around overall headcount at the company and how we should kind of think about operating expenses on a go-forward basis, given the investments you’re making right now.

Tony Koblish, CEO

Sure, Kyle. We ended last year with about 120 employees. A vast majority of those employees are in customer-facing roles, including the sales force, clinical development specialists, and business managers, etc. The forecast for this year, if we expand and hire everyone that we plan, is about 174 or 175 employees roughly. Again, with a big focus on commercialization but also making sure that we’re appropriately resourcing the expansion of our product portfolio. There will be sources of new products that come from multiple places. We’re going to continue to co-develop and expand the Aroa product portfolio, and you’re going to see some new developments there this year and next. We are starting to work on our in-house, do-it-yourself product portfolio, which will likely roll out next year. We are doing in-licensing activities, which you will also see more of. SiteGuard is the first example of that. And then we have some co-development activities with other players as well. Therefore, there are multiple sources that we’re going to have to draw upon, and we’re putting investments into R&D, product development, and medical education, in addition to marketing. We haven’t done much there yet. These areas are where we’ll see headcount grow, all designed to wrap around the sales force to supply it with products, data, and educational activities for our surgeon customers. This is an execution story, and we are at that crucial point. If COVID subsides this year, we’re looking at aggressive growth.

Kyle Rose, Analyst

Okay. And then maybe just tie that to how we should think about the overall trajectory of operating expenses moving forward? I mean when I look at the sales and marketing line this quarter, is that a good proxy moving forward? And then just overall on guidance, you have obviously got multiple vectors of growth, both PRS OviTex as well as some of the new technologies. How much of that growth for 2022 is organic, in-house versus bringing on some of these new products?

Roberto Cuca, COO and CFO

Yes. Let me start first with the guidance. The guidance range of $40 million to $45 million includes OviTex, PRS, and SiteGuard. It does not include any additional acquisition of products. With regard to OpEx, we haven’t provided specific guidance. However, to summarize what Tony said, the majority of growth will be in the sales and marketing line, followed by R&D, with minimal growth in G&A. Hiring will occur over the year, so you are not going to see as steep a step up as you might think based on the figure increasing from 45 to 60 sales reps by the end of the year.

Kyle Rose, Analyst

Okay. Thank you.

Tony Koblish, CEO

Kyle, we are hiring reps at a pace as they pay for themselves as well. So, that’s a factor to think about as well. They are not going to be burning cash for long periods of time as they have in the past.

Kyle Rose, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Zach Weiner with Jefferies. Your line is open.

Zach Weiner, Analyst

Hey. Thanks for taking the question. I just wanted to ask about data. Can you give some color on BRAVO 1, BRAVO 2, and any of the other trials or anything that we should be watching for over the next couple of months?

Tony Koblish, CEO

Absolutely. So, BRAVO 1, the final write-up of the 2-year data is in development right now. The goal is to get that done in the next month or so. We have journals picked out and will be submitting the manuscript for review. The time it takes for journals to approve the data publication will determine when it becomes available. I am hopeful it’s within the next three to six months, depending on the journal's timeline. BRAVO 2 is a robot-specific study, and that’s been running for a while now. It’s had a slow start due to IRB and contracting being delayed due to COVID. We expect to enroll participants in that study over the next 12 to 24 months. It will include various types of hernia repairs, including inguinal and simple ventral, all done robotically. That’s a bit of a ways out, but it should produce valuable data. We have also had about three or four different publications come to fruition over the last couple of months that showcase a wide array of excellent clinical data around different types of hernia procedures, from ReBAR and inguinal to very complex abdominal wall procedures. We’ll be discussing those in the coming months. There are a few more of those publications that will be rolled out together in a way that makes sense. Currently, we have probably over 1,000 patients in various types of studies that cover a range of complexities and types of hernias, so we have a wealth of data that will continue to roll out over the course of this year.

Zach Weiner, Analyst

Got it. That’s very helpful. Just moving on to the financials, gross margin through ‘21 has been a bit lumpy. There are several moving parts. But how should we think about gross margin in 2022 and how the shelf stabilization levels of price impact that?

Roberto Cuca, COO and CFO

Sure. One of the things that affected gross margin in 2021 was that we made a large purchase to put inventory into our European operations ahead of regulatory changes there. When we made that purchase, we had to take an accrual for potential expiration dating, so we took it all at once. The lumpiness can be attributed to those accruals for potential expirations not being in sync with actual sales. Since we now have those products in inventory and have already accounted for those accruals, the gross margin percentage is likely to be at the higher end of the range we observed in 2021.

Zach Weiner, Analyst

Okay. That’s also helpful. And then I just wanted to hit one. You guys noted that COVID impact in December were more pronounced, which is similar commentary we have heard throughout med-tech. Does that lead to any level of backlog, or is that something that you guys are able to track? If you could give any commentary there, I understand COVID continues to be a bit of a headwind at least through the beginning of 1Q, so maybe not any backlog recapture early in the year, but is there an opportunity for backlog recapture as the year progresses, and is that in current guidance? Thanks for taking the questions.

Tony Koblish, CEO

Yes. Q4 was excellent, very strong. Our strongest months were October and November, and while December was fairly good, it could have been better. In the back half of December, we started to feel the impact of Omicron, which caused some slowdown. That effect continued into January but is now beginning to lift as of March. As of now, we haven’t seen any benefit of backlog on the hernia side yet, but I expect that it should come along. It’s tough to predict whether that will be in April, May, June or a mix throughout the year. It’s worth mentioning that when there’s a COVID-related issue or nursing shortage affecting elective surgeries, hernia procedures tend to be impacted a bit more than plastic and reconstructive procedures. Although we are seeing very strong numbers in March for plastic and reconstructive, hernia remains a little behind. So, I think it will be a mixed situation until we start feeling the impacts of backlog. This backlog will happen; it’s just difficult to say when. These procedures are going to need to be done, and yes, as best as we can predict, the backlog is included in our guidance.

Zach Weiner, Analyst

Got it. That’s helpful. Thanks for taking the questions.

Operator, Operator

Thank you. Our final question comes from the line of Dave Turkaly with JMP Securities. Your line is open.

Dave Turkaly, Analyst

Thanks. Tony, I guess a quick one on SiteGuard. I think you are saying that it’s being used with PRS, but could it be used elsewhere? And could you maybe comment on sort of the ASP and the margin profile for you for that specifically?

Tony Koblish, CEO

Sure. SiteGuard is going to start off in the plastic surgery market. It can be used in conjunction with PRS, and it can be applied outside of that context as well. We do have the ability to expand our applications when the hernia application becomes available. We are very optimistic about the use of SiteGuard across all the procedures that our reps cover. The margin profile will come in a bit lower than our other products, but there will be a mix as we roll out new products this year and next year. Overall, once the full product portfolio is rolled out over the next 24 months, I think it will positively impact our margin. However, SiteGuard may have slightly lower margins to start, but the intent is that it drives usage of our other products. We view it as a companion product; eventually, I believe it could be a standalone product, but we are initiating its use as a complementary product to enhance the effectiveness of our existing products for patients and surgeons.

Dave Turkaly, Analyst

I mean, it seems pretty intuitive; is there a reason in any of the cases like that you wouldn’t use that?

Tony Koblish, CEO

There is not. There is no reason. We’re going to just expand methodically like we usually do, Dave.

Dave Turkaly, Analyst

Got it. And then you mentioned capturing share. I was just curious when you look at biologics that are out there and maybe even some of the things that are sort of in between. I mean the competitors, are they still growing based on your estimate today? Those specifically? I know the core market is not – hernia repair is probably not rapid growth, but I am just curious, are you – were you saying, versus those competitors that might be most related to TELA or are you just saying versus overall?

Tony Koblish, CEO

We track IQVIA data closely. If you look at every quarter since COVID hit, we are the only company providing these types of products that have experienced growth every single quarter. We are not the incumbent everywhere. However, we are rising up the stack rankings, and there are reports from IQVIA indicating that we may be the number two biologic in hernia repair at this point or very close. So, we continue to focus on our business strategy methodically through this period. Yes, we are capturing share, and we have been in the green each quarter during a time when many others have been in the red. We are feeling very bullish and optimistic about growth when we operate in a clean market without the impacts of COVID. We have all the factors coming together, including a productive sales force and new product additions, creating an excellent recipe for sustained growth.

Dave Turkaly, Analyst

Agreed. Thank you very much.

Tony Koblish, CEO

Thanks, Dave.

Operator, Operator

Thank you. I am showing no further questions in the queue. I would now like to turn the call back over to Tony for closing remarks.

Tony Koblish, CEO

Thanks, Towanda. I want to thank everyone again for your time this afternoon and your interest in TELA Bio. Have a great evening. We will see you next time.

Operator, Operator

Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect.