TELA Bio - Q1 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, welcome to the TELA Bio first quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group. Ms. Smith, please go ahead.

Louisa Smith (Principal)

Thank you, Chris, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the first quarter of 2023. 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 companies may 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 annual report on Form 10-K and quarterly reports on 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 and pipeline opportunities, product potential, the impact of various macroeconomic conditions, including the ongoing response to the COVID-19 pandemic, recessionary concerns, banking instability and inflationary pressures, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. With that, I'll now turn the call over to Tony.

Tony Koblish (President and CEO)

Thank you, Louisa. Good afternoon, everyone, Thanks for joining us today for our first quarter 2023 earnings call. I'm pleased to report the TELA team delivered another outstanding quarter, with revenue of $11.9 million growing 45% year-over-year. Our hernia and PRS products both posted impressive gains, even though elective procedure volumes have still not returned to 2019 pre-pandemic levels. We are seeing evidence of procedures trending in the right direction. As I've been doing in our recent earnings calls, I'll take a few minutes to update you on our progress on the five factors that drive our revenue growth. I'll start with GPO access. TELA currently has contracts with three national group purchasing organizations, HealthTrust, Premier, and a third whose name we aren't permitted to share.

Combined, these GPOs provide TELA with access to more than 50% of the hospitals in the United States. HealthTrust was the first GPO to onboard OviTex in 2020, but this unfortunately coincided with the outbreak of the COVID-19 pandemic. Although this slowed uptake, the GPO was sufficiently impressed with our performance that they have now renewed our contract for a 4-year term, expanded from the initial 3-year term. The Premier agreement, our second GPO win, became effective in October of 2022 and contribute incremental new volume in the first quarter, which offsets the cost of discounts to existing customers that adversely impacted revenue in the fourth quarter of 2022. Finally, the third GPO with whom we entered into an agreement in mid-February provides a dual source contract in the biosynthetic category that places us in competition with only a single other vendor.

Although we've been able to achieve significant growth even without extensive GPO access, these agreements should greatly streamline the process for a surgeon to adopt our products with a resultant uptick in OviTex utilization across a variety of hernia and abdominal wall procedures. The second factor we focus on is sales force size. To fully capitalize on the hospital access we have attained through our GPO contracts and leveraging our continued track record of recruiting and training sales reps to become productive contributors within 6 months, we are targeting ending this year with 75-80 total reps. This is from a base of 61 at December 31, 2022. As of today, we have 72 reps on board. We remain confident that we will be able to achieve and potentially exceed this goal with strategic hiring of additional experienced sales reps.

We expect one of the primary uses of the proceeds from our recent capital raise will help us further accelerate this growth in our commercial organization more generally. Third, we remain committed to expanding our portfolio of complementary soft tissue restoration and preservation solutions, as evidenced by the addition of three new product lines in the first quarter. In January, we launched NIVIS Tubular Collagen TAC. NIVIS is an absorbent matrix of type one and three bovine collagen designed to manage exudating wounds and control minor bleeding. These collagen types have been shown to stimulate cellular activity and contribute to new tissue development. In February, we announced the launch of two larger configurations of the OviTex LPR device that are designed specifically for use in minimally invasive procedures, repairing ventral and incisional hernias.

We've previously noted that surgeon preference is shifting with more doctors treating hernias using minimally invasive techniques. In the first quarter, 43% of OviTex uses were in robotic procedures and 20% were implanted laparoscopically. Finally, in March 2023, we announced the 510(k) clearance of OviTex PRS long-term resorbable for plastic and reconstructive surgery. This product is intended for implantation to reinforce soft tissue where weakness exists in patients requiring a soft tissue repair or reinforcement in plastic and reconstructive surgery. It also complements the existing OviTex PRS portfolio with a third product configuration that expands its clinical utility. We expect another significant use of the proceeds from our recent capital raise will facilitate these R&D efforts, leading to additional complementary soft tissue restoration and preservation products channeled through our growing sales organization to the ultimate benefit of our customers and their patients.

Our R&D pipeline is robust, and we will continue to invest in developing innovative technologies and design advancements to our current product portfolio. The fourth factor driving growth is our portfolio of clinical data. One of the reasons we've been able to convert physicians to the use of OviTex is the extensive set of clinical data that we and the independent investigators have generated examining the performance of our products in a wide variety of hernia and abdominal wall procedures. We remain focused on expanding this clinical data, including through our active enrollment of patients into both our BRAVO II study, measuring the efficacy and durability of OviTex when used in robotic hernia repair, and our PRS retrospective clinical study assessing outcomes of our OviTex PRS patients who had previously undergone breast reconstruction. Finally, the fifth growth factor we focus on is sales reps productivity.

As I mentioned above, our newest cohort of reps continue to reach profitability in under six months. A more recent driver of this productivity is our focus on training reps to sell both OviTex and OviTex PRS products into their accounts. As I've described before, those customers that buy both categories of products from us buy more on average than the sum of separate accounts that buy only 1 or the other product. That is, the sum of one and one is not just two, but something more like three or four. The faster we can get our reps comfortable in selling across the product lines, the more productive and profitable our growing sales force can be. Finally, as I referenced earlier, a couple of weeks ago, we went to the equity capital markets and raised over $46 million in net proceeds.

We expect to invest these resources in the five factors that drive our growth and most immediately into the continued expansion of our sales force. We grew revenue 45% year-over-year in the first quarter. We aim to maintain at least this level of growth over the remainder of the year. I'm pleased to say that these new resources position us well for continued achievement this year and beyond. With that, I'll ask Roberto to review our financial results for the first quarter.

Roberto Cuca (COO and CFO)

Thanks, Tony. As Tony mentioned earlier, revenue for the first quarter of 2023 increased 45% year-over-year to $11.9 million, during which OviTex revenue grew 42% year-over-year and OviTex PRS grew 52%. Gross margin was 66% for the first quarter and was driven by the cost of goods of product actually sold within the quarter, as well as amounts reserved for expected expiration of inventory purchased within the quarter, whether or not sold within the quarter. As we described in our previous earnings call, we expected gross margin to step down from the fourth quarter as a result of the timing of our inventory purchases, but that gross margins for full year 2023 will show improvement from 2022.

Sales and marketing expense was $13.5 million in the first quarter of 2023, compared to $9.4 million in the same period in 2022. This increase was mainly due to higher compensation costs as a result of the expansion of our commercial organization, higher travel and consulting expenses, and additional employee-related costs due to the increased headcount, particularly in our customer-facing roles. General and administrative expense was $3.6 million in the first quarter of 2023, compared to $3.5 million in the same period in 2022. R&D expense was $2.1 million in the first quarter of 2023, compared to $2 million in the same period last year.

Loss from operations was $11.3 million in the first quarter of 2023, compared to $9.8 million in the prior year period. Net loss was $12 million in the first quarter of 2023, compared to $10.9 million in the same period in 2022. We ended the first quarter with $30.1 million in cash and cash equivalents. In mid-April, we conducted a public offering, which raised $46.4 million after commissions and expenses. As Tony said, the use of proceeds will be primarily for sales force expansion and next to fund our R&D pipeline and clinical data collection efforts.

Turning to the outlook for 2023, we are reiterating our full year guidance of revenues to be in the range of $60 million-$65 million, representing growth of 45%-57% over the full year 2022. I'll now turn the call back to Tony for closing remarks. Tony?

Tony Koblish (President and CEO)

Thanks, Roberto. As you just heard, we have great reason to be very excited about 2023 and beyond. We started the year strong and expect that momentum to continue over the course of the year. Our growing sales force can leverage our expanding GPO access, exceptional clinical data, and new product offerings to continue capturing market share. We estimate our total addressable market at $2 billion across our product offerings, of which we are just beginning to scratch the surface. We are confident that we have the leadership team in place to advance our five factors of growth, and we look forward to demonstrating that as the year unfolds. With that, I'll now ask Chris to open the line up for your questions. Chris, please proceed.

Michael Sarcone (Research Analyst)

Thank you.

Operator (participant)

To ask a question, please press star one one on your phone and wait for your name to be announced. To withdraw your question, please press star one one again. Stand by as we compile the Q&A roster. One moment please for the first question. The first question will come from Frank Takkinen of Lake Street Capital Markets. Your line is open.

Frank Takkinen (Senior Research Analyst)

Hey, thanks for taking the questions. Was hoping I could start with one on the Premier GPO. I know last quarter there was some commentary out there about, some challenges related to new account onboarding. It sounds like that has since subsided, but maybe just touch on that concept specifically. While on that topic, maybe talk about how the initial onboarding of new accounts within GPO number three is trending thus far.

Roberto Cuca (COO and CFO)

Sure. Just to recap, in the fourth quarter, we had been selling. Well, I'll take one more step back. Prior to the fourth quarter, we had been selling to hospitals that became members of our GPO or our Premier GPO contract in the fourth quarter. The immediate effect of that was that they began to get discounts that they previously hadn't gotten. We'd initially expected that the increased volume from new customers would make that up. Because of some administrative challenges within the contracting process, it took longer for new customers to get up to speed than we expected. What we said in the fourth quarter earnings call was that we expected that that would turn around in the first quarter, which in fact has occurred.

First quarter revenues are now where we expected them to be, making up for the discounts that we're offering to older customers, via new volume. As far as the onboarding of the third contract, that doesn't take effect until April first. We are doing preparations for it, but we don't expect to see any sort of challenges with that contract of the sort that we saw with Premier, in large part because it's a very compliant contract. We're selling very little into that contract ahead of entering into the contract. We won't have that double whammy of giving new discounts to pre-existing customers and then having to wait for additional customers to come on board.

Tony Koblish (President and CEO)

Frank, I'll just add maybe some additional framework color around how we're thinking about the GPOs, right? There's really three GPOs that are being implemented right now. Don't forget that HealthTrust has just renewed as of April or so for a new four-year term, and the first implementation was really encumbered by COVID. Within HealthTrust, we really only implemented in one, maybe 1.5 of their six or so shareholders. There's a lot of new, fresh opportunity within all of the shareholder base within HealthTrust that's coming online right now coincident and in parallel with Ascension. I think the way we're looking at this is we're doing 3 implementations. There's gonna be various timelines associated with each of the three with HealthTrust and GPO number three, you know, being more compliant and faster to start.

I think the way to think about this is everything's gonna phase in over the year. To me, it's just nothing but opportunity, you know, for the rest of the year and into next year as we phase in all these new three contracts.

Frank Takkinen (Senior Research Analyst)

Okay. That's good color. Then maybe for my second one on, related to the guide that's out there, I was hoping you could help us think about the sequential cadence of revenues throughout the year. Clearly a significant growth profile right now, but that still does imply a good sequential cadence through year-end. Maybe help us understand maybe first half or second half or any early Q2 trends you're seeing right now to help us understand where Q2 could maybe come in versus the entire year.

Roberto Cuca (COO and CFO)

Absolutely. As I think I discussed on the fourth quarter call there, you can think about it as there being three layered sources of growth. The first is any territories that existed at the end of the fourth quarter, we built in growth for those territories by increasing the quotas for the sales reps in those territories. There's that base rate of growth. We are adding new territories over the course of this year. We ended last year with 61 sales reps. We expect to have 75-80 by the end of this year. As those new reps come on in new or newly created territories, that will be a source of de novo growth.

Third will be growth from the three products that we're launching over the course of this year. When you put those all together, you get some steep growth from quarter to quarter. We would expect, you know, a reasonable step-up in the second quarter, and healthy steps up in the third and fourth quarters. Last year, the second to third quarter was a small step, but we're expecting that to be a bigger step this year because of that, you know, three layers of growth.

Frank Takkinen (Senior Research Analyst)

Okay. That's good color. I'll stop there. Thanks for taking the questions. Congrats on all the progress.

Roberto Cuca (COO and CFO)

Thanks, Frank.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from Kyle Rose of Canaccord Genuity. Your line is open.

Kyle Rose (Managing Director)

Great. Good afternoon, everyone. Thank you for taking the question. Just wanted to ask a couple of questions about the GPO side of things. When you look at your business now, obviously you've got the three GPOs. I realize Premier and, you know, the, you know, mystery GPO are relatively new. Can you just kinda help us understand what percentage of your revenues now are, are with those three GPOs and kinda how we should think about that trending, I guess, over the, over the remainder of this year?

Tony Koblish (President and CEO)

Yeah, Kyle, thanks for the question. you know, if you look at HealthTrust and then, a couple of quarters of Premier, and really nothing yet, through the end of Q1 of Ascension, we're really in the mid-50s right now in terms of percent of revenue. you know, our thoughts are that's certainly gonna exceed 60% as we march through the year. Right now, it's about 56%-57%, of total revenues in Q1.

Roberto Cuca (COO and CFO)

The one bit of color I'll add, Kyle, is that even though Premier, our second contract, was not under contract until the fourth quarter of last year, we were selling amounts to their members that were almost equal to or in some cases exceeded what we sold to HealthTrust. That pre-existing customer base was, you know, what led to the challenge we had in the fourth quarter with those customers getting a new rebase that they hadn't gotten before. That is not true of the third GPO. We sell virtually nothing into that group of contracting hospitals because they are such a strictly compliant contract.

Tony Koblish (President and CEO)

If you think about it, Kyle, you know, HealthTrust is a continuous implementation, right, from the last contract to the current. There's nothing but upside there. Premier, you know, we had a hole to fill due to administration fees. That's been filled as of the end of Q1. We're back to par there. Then mystery GPO number three, you know, is really, you know, starting from scratch in Q2. Like I said, there's gonna be a layer in effect throughout this year with the three implementations.

Kyle Rose (Managing Director)

Okay. No, that's very helpful. Just I'll ask my last two questions just together here. One, you know, any pricing trends to consider? I mean, obviously volumes are going up, you know, we try to monitor pricing trends just as far as, you know, large sizes versus small sizes being used and just kinda the type of procedures they're being used in. Secondarily, yeah, I know you break out PRS and OviTex. Just any thoughts or direction that we should be considering for, you know, the new products, the collagen product that doesn't necessarily fit in either one of those categories from a reporting perspective and the contribution we should see there?

Roberto Cuca (COO and CFO)

Yeah. Let me start with that one since you're talking about NIVIS. We, you know, we believe that over the course of this year, we will get some real contribution from that product. It is a cheaper product, but it can be used outside of the two surgery types that we primarily sell our tissues into. As surgeons get used to using that product, see that it has greater utility than some of its competitive products, and as hospital purchasers notice that it's cheaper than those competitive products, we expect it to, you know, contribute in a meaningful way over the course of the year. As far as pricing, we haven't changed the list pricing of any of our products over the past couple quarters.

The changes in ASP have to do with mix. you know, we did see a little bit of a step up in the PRS ASP, and that may be just due to the mix of techniques being used. Some surgeons will fully wrap an implant in the tissue, and so consequently use a bigger piece. There haven't been any significant trends, in a material direction either way. ASP is fairly constant.

Tony Koblish (President and CEO)

Yeah, it's been stable. I think the other thing to recognize is there's not a whole lot of pricing differential in the GPO contracts as compared to our initial HealthTrust pricing. you know, the GPO impact, other than administration fees, would probably be subordinated to just the mix of the sizes, as you said, Kyle. so far, the ASPs have been pretty stable.

Kyle Rose (Managing Director)

Okay. Thank you for taking the questions.

Roberto Cuca (COO and CFO)

Thanks, Kyle.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from Michael Sarcone of Jefferies. Your line is open.

Michael Sarcone (Research Analyst)

Hey, good afternoon, and thanks for taking my question.

Roberto Cuca (COO and CFO)

Sure. Thank you.

Michael Sarcone (Research Analyst)

Just to start, can you talk about what's baked into guidance, around your assumptions from a macro standpoint, like procedure recovery and staffing challenges?

Roberto Cuca (COO and CFO)

Yeah. Yeah. We assumed that procedure volumes and availability of surgery times in 2023 would be at least as good as it was in 2022. We didn't make any major assumptions about significant improvement. Even though we've seen some positive trends in the first quarter, it's unclear just how much improved that will get.

Michael Sarcone (Research Analyst)

Okay, great. Thank you. You know, as it relates to the capital raise, you talked about kind of the main priority for spend would be accelerating the commercial organization, you know, but you're still sticking to your 75-80 reps by the end of the year. Are there other areas of spend within the commercial organization that you are accelerating, you know, related to the capital raise?

Roberto Cuca (COO and CFO)

When we budgeted for this year, we budgeted at a size of sales force and investment in commercialization efforts that assumed that we would do a capital raise. You know, it wasn't like there was investment that was contingent on the raise, that we just expected to be able to do it and invest. Which is why, you know, we're holding the guidance at $60 million-$65 million, because we based that on the growth of the sales force to 75 to 80 reps by the end of the year.

Tony Koblish (President and CEO)

Yeah, Michael, we're also taking a look at, you know, some GPO implementation strategies, which I think this capital raise frees us up to think a little bit more aggressively about things like SWAT teams and things like that to go take a look at these various implementation strategies. That's early in its development, but, you know, it's all part of the commercial plan.

Michael Sarcone (Research Analyst)

Great. Thank you. If I could sneak one more in. Do you think you could talk a little bit or elaborate on, you know, what's in the R&D pipeline and kinda what timing can be for additional products?

Tony Koblish (President and CEO)

Yeah. Just taking a look at this year, you know, NIVIS and large LPRs were really first quarter launches. Like Roberto said, I think NIVIS is gonna start to contribute in the second half of this year. There's a lot of prep work being done right now, sampling, contracting, IDNs, that type of thing. Large-sized LPR slots right into one of our fastest-growing products, tied to robotic surgery, so that's already contributing and it's gonna contribute nicely. Our new PRS product, our third PRS product, has been cleared but will launch at the start of the third quarter. That product, I think, could be the biggest of the three for this year, and we expect that to do some nice things for us in the second half of this year.

There's a nice cadence through this year with those three products sorta layering in, as Roberto said, and contributing. You know, for next year, we anticipate launching products again next year. We're not ready to lay those out yet, given the fact that we're still working through timing issues. You can expect, you know, at least one nice new product next year, and hopefully more than that.

Michael Sarcone (Research Analyst)

Okay, thank you.

Roberto Cuca (COO and CFO)

Thanks, Mike.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Dave Turkaly of JMP. Your line is open.

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

Great. Thank you. Tony, I just wanted to hit one on the volumes. We mentioned that not back to 2019, but trending in the right direction. Obviously, you have two pretty different product, you know, surgeons that you're selling into. I was just curious, a lot of our other companies sort of on the ortho side, they saw sort of a big uptick. I imagine it's hernia that's still lagging a bit, but any color you could give us there?

Tony Koblish (President and CEO)

Yeah, I think that's probably... You know, it's been consistent for us for a while now that hernia is gonna be a little bit of a slower recovery, procedure volume story. The PRS side, I think, likely is pretty close to normal, or back to normal. You know, but that said, you know, as the previous question and as what Roberto said, we've baked that all into our thoughts and assumptions around guidance. You know, at the end of the day, our job is to grow, and our market share right now is very, very small, even, you know, even at, just under $12 million and 45% growth this quarter. There's a lot of room for us to grow into.

I think procedure volumes, you know, in the amplitude and order of magnitude that we're talking about at this point, are less impactful on us given that we have such low share than if we were the market leader, right? You could see that having more of an impact if we, you know, had exposure to 50+% of the market. You know, where we are now, there's plenty of headroom for us.

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

Got it. May follow up for Roberto. The inventory levels. I know you guys are still growing at a rapid pace, but any thoughts on turns or, like, where that should sort of normalize or, you know, what we should be looking for there kind of as we move through the year?

Roberto Cuca (COO and CFO)

Sure. As we described on the fourth quarter call, typically we order the least inventory in the fourth quarter, because our manufacturer in New Zealand shuts down over the holidays, and, you know, we just work through inventory towards the end of the year, and then we replenish in the first quarter. That's why you typically see that step down in our gross margin because we have some negative impact from reserves that we have to take for potential expiration of the product we have in hand. As we grow over the course of the quarter, and over the course of the year, and our guidance implies that we'll be growing 45%-57%, we expect to be buying additional inventory to supply that level of revenue.

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

Thank you.

Roberto Cuca (COO and CFO)

Thanks, Dave.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from the line of Matt O'Brien of Piper Sandler. Your line is open.

Matt O'Brien (Senior Research Analyst)

Hi. Thanks. This is Sam on for Matt. Thanks for taking our question. I guess you had previously spoken about the hernia-related backlog, and, you know, we fully appreciate that that's gonna take some more time to come back, those procedure volumes take more time to come back. I guess could you just give us kind of where that stands today?

Tony Koblish (President and CEO)

Yeah. I think our assumption and the way we're operating the business, again, from a low market share, high ceiling, high growth potential, is that it's gonna be a rolling sort of recovery, right? I think the backlog is gonna roll as we go forward. You know, you'll see patients come out of the backlog, patients go into the backlog. It should be a slow, tapered recovery. It may take the rest of this year into next year. I think it's gonna be a tapered rolling backlog recovery is the way I would describe it.

Matt O'Brien (Senior Research Analyst)

Great. Thank you.

Roberto Cuca (COO and CFO)

Thank you.

Operator (participant)

Thank you. I am seeing no further questions in the queue. I would now like to turn the conference back to CEO, Tony Koblish, for closing remarks.

Tony Koblish (President and CEO)

Thank you, Chris. Thank you to everyone for joining us this evening, and thank you for your interest in TELA Bio. We look forward to seeing you next quarter.

Operator (participant)

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.