TELA Bio - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by, and welcome to TELA Bio third quarter earnings conference call. At this time, all participants on the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Greg Chodaczek. You may begin.

Greg Chodaczek (Investor Relations Contact)

Thank you, Justin, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the third quarter, 2023. A copy of the press release is available on the company's website. Joining me today, on today's call are Antony 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 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 COVID-19 pandemic, recessionary concerns, banking instability, and inflationary pressures, the regulatory environment, the introduction of new products or product enhancements by us or others, including those which may be perceived to negatively impact the demand of our products now or in the future, sales and marketing strategies, capital resources, or operating performance. With that, I will now turn the call over to Tony.

Antony Koblish (Co-founder and CEO)

Thank you, Greg. Good afternoon, everyone, and thanks for joining us today for our third quarter 2023 earnings call. We are pleased to report another quarter of strong financial results and operational execution. Revenue in the third quarter was $15.1 million, growing 35% year-over-year. Notably, this was the 11th successive quarter of 35% growth or greater, driven by continued market share gains and increased surgeon adoption of the OviTex product portfolio. PRS growth was especially strong, up 46% year-over-year, notably driven by the launch of the long-term resorbable version of OviTex PRS, which includes specific design features aimed at enhancing the clinical utility of OviTex PRS for surgeons and patients in plastic and reconstructive surgery.

In addition, our hernia portfolio continues to perform, with OviTex recently becoming the most implanted biologic hernia repair mesh in the United States, reflecting the growth recognition of the clinical utility of the product for this application. Today, I'll review with you the progress we've made on the five factors that combine to drive our growth. Roberto will provide a more detailed review of our financial results, and then I'll make closing remarks before opening the line for your questions. I'll start by discussing sales force size and individual sales representative productivity together, as they had a joint impact on our Q3 revenue. As of today, we have 79 commissioned sales reps, with our goal being to end the year with 75 to 80 filled positions. Of these 79, 55 have been in their roles for at least six months.

During our second quarter earnings call, we had 75 reps, of which 50 had at least six months tenure. The newness of a third of our reps at our last call was the result of turnover in the second quarter, affected by new regional managers who we have hired at the end of last year and who identified opportunities for upgrading talent in certain territories. While 35% organic growth is outstanding, we believe it would have been even higher, but for the transition of territory responsibilities in the second quarter. That said, I am pleased to report that the newer reps are quickly progressing along the learning curve, and their productivity ramp is consistent with our standard six-month to break-even profitability metric. Therefore, we anticipate the impact of reps turnovers to be meaningfully lower in Q4.

Additionally, we have taken the following steps to accelerate the productivity of our newer reps and our sales performance in general. First, we rolled out intensive PRS sales training to ensure that all our reps are comfortable selling the product compliantly and effectively. This additional training, added to the availability of the OviTex PRS Long-Term Resorbable, should help all our reps, but particularly those with less than six months experience on the job. Second, we've implemented two supplemental incentive programs in the fourth quarter further to drive increased performance through the remainder of this year and into next. The first incentivizes those reps already on track to achieve their quotas to further outperform. The second provides a boost to those reps who might be short of quota, but who have the potential to contribute incrementally more.

These steps are already helping us to promptly return to over 35% growth, as anticipated, and should set us up for a strong 2024 performance. Moving on to the third factor, driving revenue growth, GPO access. Expansion within existing GPO contracts is on track, and efforts to add additional GPOs and IDNs are going well. TELA has contracts with three national group purchasing organizations that enable enhanced and more efficient access to hospitals and surgeons throughout the country. These GPO contracts are critical to TELA's commercial strategy and provide the opportunity for surgeons to use the OviTex product right off the hospital storeroom shelf without requiring approval from hospital administrations. The first of our three GPO contracts is our long-standing relationship with HealthTrust, with whom we re-signed a four-year renewal.

The second contract is with Premier, with whom we've now had a full year of implementation as it became effective on October 1st, 2022. Premier is the second-largest GPO in the country, giving us access to over 4,400 hospitals within its extended network. Lastly, our most recent GPO relationship offers us a dual source contract in the biosynthetics category. There is tremendous upside opportunity for TELA within these three contracts, as well as from new contract opportunities, and we look forward to providing updates as our access further expands. Our fourth factor is the range of complementary products in our portfolio that enables us to leverage the existing sales force and call points across the soft tissue reconstructive space. We have launched four products so far in 2023.

The first two, the large-size OviTex LPR for use in minimally invasive surgeries and the NIVIS Fibrillar Collagen Pack, are gaining market share with different levels of surgeon familiarity to leverage by our sales force. The third, OviTex PRS long-term resorbable, launched in the third quarter and has taken off quickly, given surgeons' prior knowledge of the product line and interest in the new performance characteristics. Finally, and most recently, we are in the process of launching the LIQUIFIX hernia mesh fixation devices, LIQUIFIX FIX8 and LIQUIFIX Precision. These products, which are indicated to fix mesh to tissue inside the body and to close the peritoneum, the membrane surrounding the abdominal cavity, have been marketed in Europe under the brand LiquiBand FIX8 and represent the first product of its kind to be approved for sale in the U.S.

We believe that this product line allows our sales force to call on surgeons in a technology space where they are comfortable and will increase access to additional surgeons, eventually opening opportunities to also discuss the benefits of OviTex in other areas of their hernia practice. Regarding our fifth factor, clinical data, we continued to collect data both prospectively and retrospectively for our hernia and PRS products, respectively. We're proud of the performance of our products, and we'll expand our datasets through, for example, our BRAVO II study, which measures the effectiveness of OviTex products when implanted robotically. I'd like to now address the question that has been top of mind with investors. That is: What is the potential negative impact of GLP-1 Agonist drugs on the markets that TELA serves?

Specifically, if patients lose weight on these medicines, how might that affect the rate of hernia repair and plastic and reconstructive surgeries? With regard to the latter, much PRS is used in plastic and reconstructive procedures that we believe are both unrelated to weight loss and on account of weight loss. With regards to hernia, we have consulted with general surgeons in this space, whom collectively have identified four potential ways in which GLP-1s may, in their opinion, actually increase the need for hernia repairs. First, an important contraindication for surgery in general and hernia repair specifically, is morbid obesity. Patients who lose weight could become newly eligible for repairs that a surgeon might previously have advised against. Second, a risk factor for hernia is physical activity, and to that extent, it would be reasonable to expect more need for hernia repairs with weight loss.

Third, obesity can conceal existing hernias, in particular, umbilical hernias, and weight loss can reveal the need for these repairs. Finally, GLP-1s are apparently associated with acid reflux conditions, which could necessitate hiatal hernia repairs in response. Although these examples indicate the potential for GLP-1s to increase the need for hernia repair, the real takeaway is that we do not expect GLP-1 to meaningfully reduce hernia repair rates in any reasonable scenario. With that, I'll now turn the call over to Roberto to review our financial results and outlook.

Roberto Cuca (COO and CFO)

Thanks, Tony. Third quarter revenues grew 35% year-over-year to $15.1 million, with OviTex and OviTex PRS growing 30% and 46%, respectively. These increases are attributable to the ongoing expansion of our commercial organization, leading to new customers, increased existing customer penetration, and a growing international sales presence. Tony mentioned that revenues and growth would have been even higher absent the disruption of second quarter sales rep turnover and described the steps we are taking to quickly regain previously planned performance levels. It's worth noting that, though, that in those territories that were continuously filled, that is, those not affected by turnover, performance was consistent with the higher level of revenue growth we had expected. This validates that our underlying forecast assumptions, other than turnover, were robust and reliable.

Gross margin for the quarter was 69%, compared to 66% in the same period of 2022. The margin improvement was driven primarily by more efficient inventory management practices, which resulted in a decrease of obsolete and excessive inventory as a percentage of revenue year-over-year. We expect our gross margins to continue at or around this level as we operate using more rigorous inventory practices. Operating expenses were $20.6 million in the third quarter, compared to $16.8 million in the prior year period. This increase was a result of additional headcount as we continue to expand our organization, consequent higher compensation and employee-related expenses, increased travel expense, as well as an increase in consultant fees and higher study costs.

Loss from operations was $10.2 million in the third quarter of 2023, compared to $9.5 million in the prior year period. Turning to our outlook for full year 2023, we now expect revenues to range from $57 million to $60 million, reflecting growth of 38% to 45% over the full year 2022, and implying revenue for the fourth quarter ranging from $15.5 million to $18.5 million, compared to $11.6 million in the fourth quarter of 2022.

Although both the third and fourth quarters have come down from our prior expectations, we anticipate that the steps Tony outlined that we're taking to address the sales force turnover disruption will allow us to return to subsequent growth, excuse me, sequential growth, more similar to that reflected in our prior guidance. Or said another way, we believe the sales rep disruption is largely behind us, and that our sales growth rate from Q3 to Q4 is on track with our prior expectations, but from a lower base due to the impact of the turnover in the second quarter. We ended the third quarter with $58 million in cash and cash equivalents, compared to $65 million at the end of the second quarter, meaning that we used $7 million in the quarter.

As our revenues continue to grow and as OpEx is held to a much lower growth rate, we expect cash usage to decline. We'll have more to say about this on our fourth quarter earnings call when we announce revenue guidance for 2024, but for the moment, know that we remain confident in our cash position and continue to believe it will be sufficient to fund us to profitability. I'll now turn the call back to Tony for closing remarks.

Antony Koblish (Co-founder and CEO)

Excellent. Thank you, Roberto. I'd like to reiterate my excitement for the success TELA Bio has achieved to date. On September 30th, we completed our 11th consecutive quarter of 35% or more year-on-year growth. This was driven by our continued focus on developing and expanding each of the five factors in parallel to achieve consistent share capture. Notwithstanding our exceptional performance so far, TELA Bio represents only a small part of the hernia market on a unit basis, with plenty more room to expand and the possibility of a material growth inflection in the future. We are focused on taking full advantage of this opportunity to improve patients' lives with our products. I want to thank the TELA Bio team for their achievements this quarter, especially those who helped us efficiently expedite the impact of the sales transition. As a result, we remain on track for continued strong growth.

We are confident about our future prospects as we believe we have the key pieces in place to continue to take share, including extensive GPO coverage, broad sales coverage in high volume markets, industry-leading product performance data, a robust R&D pipeline that continues to deliver new products, an experienced management team, and a path to profitability with our current balance sheet. Even though we keep growing our market share each quarter, most of the market is still there for the taking, and we plan to do just that. With that, I'll now ask Justin to open the line for your questions.

Operator (participant)

Thank you.

Antony Koblish (Co-founder and CEO)

Justin, go ahead.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Frank Takkinen from Lake Street Capital Markets. Your line is now open.

Frank Takkinen (Senior Research Analyst)

Great. Thanks for taking the question. Hey, Tony, Roberto. Just wanted to follow up on some of the sales force commentary. I was hoping you could take us a little bit deeper into maybe the reasoning behind some of that turnover and why it was higher than expected. I don't know if there was a certain background or characteristic associated with those less effective in the sales force, or essentially getting at what are you doing differently now to ensure a more stable sales organization that can grow per rep productivity more effectively and consistently?

Roberto Cuca (COO and CFO)

Sure. Thanks for the question, Frank. I'll start, and Tony can jump in. So, as we've discussed before, we revitalized our RM team, so that's the regional managers who sit above the territory managers, which is what we call sales reps, in the fourth quarter of last year, to the tune of about 12 new RMs. And those RMs came in in the first quarter and evaluated their teams of approximately seven reps apiece. And over the course of the first quarter, roughly one of each of those RMs identified a territory manager that they felt could be upgraded.

The territory, you know, might be at above breakeven levels of revenue, but the growth was not where we wanted it to be, to be getting to $200 million in the short term that we're hoping to get. So over the course of the second quarter, those RMs independently proposed and then followed through on replacing those TMs, the territory managers. So that happened starting at the end of the first quarter, extended through the second quarter, and was complete by the second quarter, such that, as Tony mentioned, on our second quarter earnings call, we mentioned that we had 75 reps, of which 50 had been with us for six months or more, suggesting or indicating that 25 had been with us for six months or less.

So those were the turnover reps of roughly 13, and then the remainder were new hires to expand our sales force. So essentially what we were doing is reaching higher up into the organization from the perspective of lower performers, and replacing reps that might be hitting greater than break even numbers, but whose growth had become a bit slower, and the RM had determined that that could be upgraded. So that all took place in the second quarter. We entered the third quarter in the first month, believing that we were on track to hit numbers notwithstanding. But saw some of that peter off in the latter part of the third quarter.

And so what we're doing, to answer the second part of your question, which is, you know, what are we doing to make sure that we get back on track, and that we have the right reps in place, and that they're growing at the right growth rates? We have a couple of programs in place for the fourth quarter, to both address the fourth quarter and the longer term. So the first is we have two new training sessions in place. So our new sales reps are going through a longer introductory training session, and then all reps are going through deeper PRS training. One of the things we found is that new reps tend to be a little slower on the uptake of PRS sales, and that's a greater potential source of sales and growth.

Second, we put in place two incremental IC plans. One, for those reps that are on track to exceed their quotas for the fourth quarter, to incentivize them to further than they already are grow beyond their quotas. And then for those reps that might be short of their quotas, that is, you know, forecast to be short of their quotas, an additional incentive plan to give them additional motivation to sell and not just wait for the reset of their quotas in the next quarter.

Antony Koblish (Co-founder and CEO)

Yeah, Frank, I think philosophically, right, we're, you know, we run the business with an eye towards long-term, durable, sustainable growth and quality, right? So we did a massive upgrade in talent with our regional manager team, and we gave them the task of figuring out where we had some stagnation or slower growers, and they did just that. You know, we made the decision, and I, and I'd do it again, to have the strongest team in place at the end of this year. You know, this year is gonna be what this year is gonna be, but we're already thinking about next year. If you just look at the key metric, which is we drove this type of growth with only about 50 or 55 reps that were even on board for six months.

We've got a bolus of 25, 25+ reps that are right now getting trained, seasoned, and matured, and we want them to be passing through that six-month point of productivity, higher talent, by the way, right as we start next year. So, we're thinking ahead, not just to triage what Roberto mentioned for the rest of this year, but really the focus is back 12 months after that and the 12 months after that. Our goal remains $200 million company as efficiently, and effectively as possible.

Frank Takkinen (Senior Research Analyst)

Okay, that's good color. And then maybe just for my second one, can you just talk to some of the factors between the low end and high end of guidance?

Roberto Cuca (COO and CFO)

So, you know, just, you know, the rate at which we're able to get our reps up to speed, you know, unpredictable things in the economy. You know, we expect to see, as we normally do, that the fourth quarter is the strongest of the year. We tend to see a strong push in December as both physicians and our sales reps push to hit their numbers. But, you know, exactly how that all comes together is really something that's a little bit variable, and so the range just accounts for that variability.

Antony Koblish (Co-founder and CEO)

We tend to have a big run at the end of quarters, right?

Frank Takkinen (Senior Research Analyst)

Frank, I'll stop there. Thanks.

Antony Koblish (Co-founder and CEO)

Frank, things come, things come together at the end of quarters, right? So, we wanna make sure that we have this thing maturing and, and peaking at the right moments, not just in a year, but during each quarter as well. So it's timing. Thanks, Frank.

Frank Takkinen (Senior Research Analyst)

Got it. That's good color. Thanks for the questions.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Caitlin Cronin from Canaccord Genuity. Your line is now open.

Caitlin Cronin (Director and Equity Research Analyst)

Hey, thanks for taking the questions.

Roberto Cuca (COO and CFO)

Thanks, Caitlin.

Antony Koblish (Co-founder and CEO)

Thanks, Caitlin.

Caitlin Cronin (Director and Equity Research Analyst)

I know you talked a little bit in the last question about how you saw a little bit of weakness kind of coming out of the Q3. What have you seen, you know, coming into October and November, you know, for Q4 in terms of, you know, the business environment and, and just kind of rep productivity?

Roberto Cuca (COO and CFO)

Sure. So one of the ways we analyze the quarters is we measure the ratio of the first month of the quarter to the actual fully achieved quarter. So we have historical data on that, obviously, ever since post-COVID. Well, we have it even pre-COVID, but it's, you know, useful post-COVID. And what we see is that the ratio of our actually achieved October sales to what we forecast for the fourth quarter is right in line with our historical data of what actually occurs. So we feel pretty comfortable based on that, and then based on the activities, the tactics that we've put in place to get our reps back up to speed, that we're on track for hitting the quarter.

Antony Koblish (Co-founder and CEO)

Yeah, and, and to back up what Roberto said, Caitlin, you know, if you looked at July, right, in Q3, that metric that Roberto mentioned as a percent, the first month was not, was not in line, right? So there was a difference.

Caitlin Cronin (Director and Equity Research Analyst)

Got it. Makes sense. Okay, and then just for my second question, any thoughts on 2024 growth or, you know, at least, maybe comment on thoughts of where the street is right now for 2024? It's a little bit over $80 million.

Roberto Cuca (COO and CFO)

So, you know, we're still in the process of putting together our budget right now, and that includes the revenue budget. I think that off of the prior street numbers, the growth rate was probably, you know, on the lower end of a reasonable range. But given the new numbers that we could be coming out of the year with, that number might be on track. You know, we think a bit more about the growth rate than the actual, you know, the single number.

But we're digging into that, and as Tony said, you know, one of the things about what we've just done is we've put in place a sales force that, as of today, we have 79 sales reps in place, of whom 55 have been with us for six months or more. And then by the first quarter of next year, that should be much closer to the full complement of 79 being at that six-month mark with some additional hires between now and then.

Antony Koblish (Co-founder and CEO)

Yeah, I mean, to give you, to give you a feel, Caitlin, we're running a week-long sales school right now, and I think we have 35 attendees, five or six new regional managers, and the rest are all reps. And I think it's by far the strongest, best pedigreed group that I've ever seen, right? So things are just getting better and better and better, which reduces your tolerance for, you know, decent performance, mediocre performance, you know, coupled with stagnation. As Roberto said, this is about growth, right? And next year will be about efficient growth, holding our infrastructure as solid as possible, absent the sales force and customer facing. But, you know, we're gonna. We basically have the infrastructure to drive that growth and attract that talent pool.

You know, we're gonna take advantage of it. So that's it.

Caitlin Cronin (Director and Equity Research Analyst)

Awesome. Thanks for taking the questions.

Roberto Cuca (COO and CFO)

Thanks, Caitlin.

Antony Koblish (Co-founder and CEO)

Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Matthew O'Brien from Piper Sandler. Your line is now open.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Afternoon. Thanks for taking the questions.

Antony Koblish (Co-founder and CEO)

Hey, Matt.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Sorry to harp. Hey, sorry to harp so much on Q4, but, you know, two months ago, you guys were talking about a midpoint at 62.5, and now we're about 58.5, so it's down about $4 million for the back half of the year alone, you know, over the last two months. So it just seems pretty, you know, significant as far as that drop goes. And, you know, I'd just love to hear a little bit more about that specifically. I mean, I don't know if there was like, yeah, 10 or 15 people that were doing, you know, tons and tons of revenue that you lost, or you moved on from, or how that works.

And then the bump from Q3 to Q4 in absolute dollars is the biggest bump, as far as the midpoint of the range goes, that the company has seen, actually much more than the company's ever seen. So just again, the comfort level on that, what bridges you to get that extra revenue, you know, in Q4 as you have a, you know, a third of the reps that are still pretty junior?

Roberto Cuca (COO and CFO)

Sure. So let me start with the bump question first. You know, as I mentioned on a prior question, one of the ways we analyze our thinking about the quarters in the year is we take a look at what we've achieved in the quarter to date. And, you know, the rough way to do that is the first month of the quarter, and then how that measures up against what we are hoping to do for the full quarter, and then how that ratio compares to historical achievement in prior quarters and in the prior, you know, year's quarters, so the seasonalized quarters.

So based on what we've seen in October revenues, and comparing that to what we expect to see at the midpoint of the range for the quarter, that's right in line with what the historical average is for achievement, first month to full quarter. So on that data point, and then on the initiatives that we've put in place to incentivize the reps to close the gap from the performance we had in the third quarter, we feel comfortable about hitting those numbers. And again, that's, you know, a series of training and then some incremental incentive plans.

As far as Q4 and the reduction of approximately $4 million from the midpoints of the prior year's guidance range to the current, and that $4 million impact on the second half of the year. The turnover in the sales reps that occurred largely in the second quarter is what drove that. So as Tony mentioned on the last earnings call, we had 75 reps. Of those, a third had less than six months tenure. So that was a bit more turnover than we had initially budgeted. We thought it was the right thing to do based on the analysis of the RMs. We believe it puts us in the best place for continued significant growth, our goal being to grow the best company we can as quickly as possible.

We put in place some steps to make sure that we get back to the growth rates that we had previously planned for as quickly as possible.

Antony Koblish (Co-founder and CEO)

Yeah, Matt, also, something to consider is, you know, given where we are in our development stage and our growth, you know, a lot of the usage of our product is based on rep presence, right? So, you know, if we were bigger, more established, bigger market share player, you might just have natural momentum, more of it. We have some of that, certainly, but it's a presence thing, right? So when you do that transition, you know, you tend to dip. So even though we had stagnation or mediocre performance in some of these territories, likely those went down, but now they're filled with stronger talent, and we should start to see that, you know, move. The other factor to consider is the PRS LTR product, right?

We did a soft launch of that around August or so, and it's well over $2 million, $2.5 million or so. Probably 50% of that is new business. So, you know, that's gonna be a superb driver for us over the next 24 months, and it's just warming up. It's not even in everyone's hands yet. So, you know, from a timing perspective, we feel very good about where we are, you know, over the next six months. And again, like I said, focusing really hard on the start of next year and continuing to drive that stronger growth rate next year.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Got it. And then maybe just as kind of a follow-up to that, Tony, how much did it cost, do you think, this transition of these? I, I think it sounds like, I don't know, 15 or 20 reps.

Antony Koblish (Co-founder and CEO)

Yeah.

Matthew O'Brien (Managing Director and Senior Research Analyst)

No, less than that, maybe eight to 10 reps. How much did it cost you in Q3, do you estimate? And then how productive were those-

Antony Koblish (Co-founder and CEO)

From a revenue? From a revenue perspective?

Matthew O'Brien (Managing Director and Senior Research Analyst)

Yeah.

Antony Koblish (Co-founder and CEO)

Yeah, I mean, I think.

Matthew O'Brien (Managing Director and Senior Research Analyst)

And how productive.

Antony Koblish (Co-founder and CEO)

Yeah.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Sorry, just real quick. How productive were those remaining reps? It seems like the remaining reps did an unbelievable job in Q3.

Antony Koblish (Co-founder and CEO)

Well.

Matthew O'Brien (Managing Director and Senior Research Analyst)

To get you this kind of growth.

Antony Koblish (Co-founder and CEO)

Roberto is going to jump into the meat of your question, but I'm glad you brought that up. That's a superb observation, Matt. You know, I think you got to focus on the fact that we drove the revenue bulk and growth with 55 reps, with a chunk of those six months, right? Certainly, there's longer-tenured reps, but that's a pretty powerful impact, right? So, you know, I think you can just see that this thing is set up, right, to have the full complement of 79 or 80 reps now being at the level of the previous 55, again, as we start next year, right? So.

Roberto Cuca (COO and CFO)

Yeah. And Matt, so I realize I didn't hit the first part of your first question squarely, which was, you know, did we lose a lot of high-performing reps? We didn't.

Matthew O'Brien (Managing Director and Senior Research Analyst)

No.

Roberto Cuca (COO and CFO)

So we retained all of our highest-performing reps. You might think about it as us reaching up higher from the lowest-performing reps and taking out reps that, while not obvious underperformance cases, were maybe at higher than break-even revenues, but were not on the growth trajectory that we needed. And to your question about the cost of making these changes, so of the 25 reps that were with us for less than six months, about 13 of those were turnover reps, and the remainder were new hires to fulfill our growth goals for the year. In the turnover category, we typically provide severance of about three months. And so the cost, the incremental cost, would be how much overlap there is when we get the new reps in.

And given that we did end the second quarter with 75 reps, there's probably some overlap, but that base pay amount of overlap is not going to be a huge amount affecting our P&L.

Antony Koblish (Co-founder and CEO)

Yeah, I mean, one, one more comment, Matt, you know, since this is the strong, heavy topic here, is, you know, of those 55 tenured reps, you know, they, they did an excellent job of attaining forecast, right? And if you look at the underserved or turnover territories, right, most of that shortfall was due to the vacancies or the transition. And, you know, we had a target that was higher than consensus, so the loss was probably a smidge higher than consensus, right? So there's a, you know, there's a powerful, productive sales force that's coming together here. I'd say this is a timing dislocation or a growing pain.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Okay. I'm sorry, Tony, to keep harping on this and monopolize everything here.

Antony Koblish (Co-founder and CEO)

Bring it! We love it.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Was the productivity of this group, that 55 up double digits from Q2 to Q3? Because that's what I'm getting in the model, in a seasonally soft quarter.

Antony Koblish (Co-founder and CEO)

Yeah, we'll have to think about that.

Roberto Cuca (COO and CFO)

We had, yes, very strong performance in the existing reps. You know, one thing to know is in the turnover territories, the new reps were coming into territories that previously had revenues, so it's not like they achieved, you know, zero.

Antony Koblish (Co-founder and CEO)

Yeah, and reconstituted. Yep.

Roberto Cuca (COO and CFO)

So there was continuity in some of those territories. But yes, our existing reps had very high performance levels.

Matthew O'Brien (Managing Director and Senior Research Analyst)

Okay. Thank you.

Roberto Cuca (COO and CFO)

Thanks, Matt.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Michael Sarcone from Jefferies. Your line is now open.

Michael Sarcone (Senior Equity Research Analyst)

Good afternoon, and thanks for taking the questions.

Roberto Cuca (COO and CFO)

Thanks, Michael.

Antony Koblish (Co-founder and CEO)

Thanks, Michael.

Michael Sarcone (Senior Equity Research Analyst)

Just to follow up on Matt's question about the sales reps. So you just mentioned your internal targets were maybe a little higher than consensus, which was at a little over $16 million. So I guess that's around a $1 million shortfall in Q3, and you took guide down by $4 million at the midpoint. Does that mean, you know, the original expectation for Q4 was just kind of midpoint of the Q4 guide plus that $3 million? Is that a fair way to think about it?

Roberto Cuca (COO and CFO)

No. So I think Tony didn't specify exactly what our internal expectations were.

Michael Sarcone (Senior Equity Research Analyst)

Okay.

Roberto Cuca (COO and CFO)

Yes, we had very high-performing reps, as I said. We had some turnover that we didn't expect at the beginning of the year. We did it for the right reasons. We've reset the sales force. We have reasons to believe that the newly recruited RMs, who come in and who are very high quality, had good enough eyes to bring in new reps who are going to perform even better than the reps that we already have. The reps that were on board continuously in our territories, as was pointed out in the prior question, did perform at a very high level to achieve what was achieved in the third quarter.

You know, I think it's worth reiterating at least one more time, that, you know, we had 35% growth in the third quarter.

Antony Koblish (Co-founder and CEO)

Yeah.

Roberto Cuca (COO and CFO)

So, yes, we had high expectations. There was a disruption to them. We believe we fixed that, and we continue to have high expectations.

Antony Koblish (Co-founder and CEO)

And look, we set a high bar. We push ourselves, and we're constantly focused on analyzing continuous improvement and doing the right thing. But Michael, I wanna point out some qualitative thoughts, right? The qualitative positive indicators for the company right now are through the roof. They've never been better, right? I already talked about the LTR and its uptake. But you know, we just came out of the American Hernia Society meeting. We sponsored a lunch and learn, which are really usually pretty sparsely attended. We had well over 200 surgeons packed. Every seat was filled. They were standing room only against the back wall. You know, that to me is a massive signal of interest in the company, interest in the product, and that's been our biggest challenge, is getting the visibility and the validation.

You know, we are running a super aggressive and sophisticated medical education program. Our target was to train and educate a thousand HCPs this year. We're already over 1,100, right? So that's both on the plastic side and the hernia side. So the exposure and interest in what we're doing is huge, and the message is being promulgated in a big way. Well, we just came out of the ASPS meeting in Austin, and again, we had a huge showing there. We had hundreds upon hundreds of docs and participants in some of our sponsored events. Our booth traffic was super high. We ran two ad boards. I think we had something like 30 different surgeons through those ad boards. So, again, you know, the validation and getting to know us is huge.

But I'm really excited about the fact that, you know, we are accelerating our penetration and relationships with robotic surgeons that are KOL trainers and proctors, for, you know, the major robotics company. So, we're starting to set up case observation sites now. Every time one of these educators, you know, mentors a surgeon, you know, they're gonna be exposed to our product. So, you know, I kinda think that if we can get into that robotic platform from the grassroots ground up, through surgeons, that, you know, that's a huge footprint and opportunity, and we're just starting that out, but we've made a tremendous amount of progress in the last quarter. So I offer that up as some ancillary qualitative assessment. They're through the roof. All those metrics have never been higher.

Michael Sarcone (Senior Equity Research Analyst)

Got it. Thank you for that. That, that is really helpful. And, you know, forgive me on this one, 'cause I know, Roberto did give us a little teaser and said, you know, "Hold on for the questions," but I'm just curious because I do get a lot of inbounds on, you know, the consensus right now models, you know, continued cash burn on a $25 million to $30 million range for the next few years. I was wondering if you could give us any incremental color or tidbits on your ability to, to drive leverage in the model.

Roberto Cuca (COO and CFO)

Absolutely. So I'm glad you've asked that question. You know, the one thing that I think we do feel comfortable with talking about next year versus this year is we expect growth in OpEx to go down considerably. And our goal is to constrain it to single digits. You know, we burned $7 million of cash in the third quarter. You know, that cash burn can be a little seasonal. We ended the quarter with $58 million of cash. You know, if you divide that by seven or divide that by something higher, you can see that, you know, even straight lined, we have a pretty long pathway, but that doesn't factor in the improvement to cash burn as our revenues grow at considerably higher rates than our OpEx does.

There's still room, too, for our gross margin to improve, even from the levels that we've currently been achieving.

Antony Koblish (Co-founder and CEO)

Yeah, we understand where we are, we understand the job for next year, and, we are on track, as Roberto said, to constrain that OpEx, at a lower level and to start to drive leverage. We have the infrastructure in place to make the growth happen.

Michael Sarcone (Senior Equity Research Analyst)

Okay, thank you.

Roberto Cuca (COO and CFO)

Thanks, Michael.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Dave Turkaly from JMP Securities. Your line is now open.

David Turkaly (Managing Director and Senior Equity Research Analyst)

Hey, good evening, guys. I just want to clarify one point. Not trying to beat a dead horse here, but the 12 new regional managers that you hired in Q1, were those replacements or you did not have them before?

Antony Koblish (Co-founder and CEO)

We had seven regional managers, and we basically upgraded each one of those and added to get to 12.

Roberto Cuca (COO and CFO)

One of them was promoted to become an area manager.

Antony Koblish (Co-founder and CEO)

Oh, that's right. That's right.

Roberto Cuca (COO and CFO)

The remainders were upgraded, and that was in the fourth quarter.

Antony Koblish (Co-founder and CEO)

Yeah. I mean, this is a massive, you know, push for, for continuous improvement and upgrade, right? To set ourselves up from the $50 million to $60 million business we are now, to have the talent in place to go beyond $100 million to $200 million.

David Turkaly (Managing Director and Senior Equity Research Analyst)

I got it. Then, in your comments about the incremental programs, I'd love to just get color, you know, if you would, if you could give it to us, how many of your folks are above quota and how many are not? A broad percentage stroke, if you can give it to us.

Roberto Cuca (COO and CFO)

So, the quota is not by month, but by quarter. So it's, it's projections of likelihood of hitting quota, and the majority of them would be above quota. So, Tony mentioned that, as of today, we have 79 reps, and 55% of them have been with us for at least six months. It'd be very unlikely for any of the 55 to be expected to be below quota.

Antony Koblish (Co-founder and CEO)

Yeah.

Roberto Cuca (COO and CFO)

And of the shorter tenured reps, you know, some of them are gonna be in their first quarter, in which the quota is essentially nominal. But the remainder, you know, should be on track or being helped considerably. So, you know, I'd say the large majority of our reps are on track for at least hitting quota.

David Turkaly (Managing Director and Senior Equity Research Analyst)

Great. Thank you for that.

Roberto Cuca (COO and CFO)

Thanks, Dave.

Operator (participant)

And thank you. I'm showing no further questions. I would now like to turn the call back over to Antony Koblish to close the call out.

Antony Koblish (Co-founder and CEO)

All right. Thanks, Justin, and thank you everyone for joining us. We appreciate your continued interest in TELA Bio. Have a great rest of the evening, and we look forward to talking to you again next time. Thank you.

Operator (participant)

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