TELA Bio, Inc. (TELA) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio's First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the prepared comments. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Stuart Henderson, Vice President of Corporate Development and Investor Relations for TELA Bio.

Thank you, Lauren and good afternoon everyone. Earlier today, TELA Bio released financial results for the quarter ended March 31, 2020. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and CEO; and Nora Brennan, CFO. 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 Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include without limitation statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources, the impact of the COVID-19 pandemic in our business or operating performance. With that, I will now turn the call over to Tony.

Thank you, Stuart, and good afternoon everyone. I want to begin by thanking our healthcare community, including all hospital workers and staff, for your dedication and sacrifice as you battle the COVID-19 pandemic. We greatly appreciate your heroic contributions to saving lives. In addition to reviewing our first quarter results, I want to use our time today to discuss the impact of this global crisis on our business, and the various initiatives we have taken to position ourselves for continued growth. Nora Brennan will start with a review of our first quarter results. And then I will provide remarks on the impact of this pandemic on our business. I'll now turn the call over to Nora.

Thanks, Tony and hello, everyone. Please refer to our press release issued earlier today for a summary of our financial results for the first quarter of 2020. Revenue for the first quarter increased 13% year-over-year to $3.7 million. The increase was primarily driven by the rise in new sales of product from the expansion of our commercial organization and increased penetration within existing customer accounts. Total revenue increased over the prior year period. It was impacted by more than expected procedure volumes in the second half of March 2020 to the hospitals and patients deferring elective procedures and other factors related to the COVID-19 pandemic. Gross profit as a percentage of revenue improved in the first quarter compared to the prior year period increasing to 59% of revenue from 54% of revenue in the prior year period to the higher quarterly revenue and the decrease in the charge recognized for excess and obsolete inventory. Sales and marketing expenses were $5.3 million in the first quarter of 2020, compared to $4 million in the same period in 2019. The increase was due to higher salaries, benefits and commission costs as a result of our sales expansion activities. G&A expenses were $2.5 million in the first quarter of 2020, compared to $1.3 million in the same period in 2019. The increase was due primarily to the increased costs associated with operating as a public company. R&D expenses were $0.9 million in the first quarter of 2020, compared to $1.7 million in the same period in 2019. This decrease was due to reductions in licensing payments, reduced outside development expenses, and the lower level of laboratory expense. Loss from operations were $6.5 million in the first quarter of 2020 compared to $5.2 million in the prior year period. We ended the first quarter of 2020 with $46.7 million in cash, cash equivalents and short-term investments. Based on our business plan today, we believe that our existing cash resources and short-term investments will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. We've initiated several cash conservation strategies for the second quarter, including a reduction of third-party spending temporary base salary reductions for all employees, ranging from 5% to 35%, and a hiring freeze. We will continue to monitor our cash burn relative to our revenue and adjust our spending as appropriate. Based on the ongoing impact from restrictions on surgical procedures and shelter-in-place policies, we expect revenue to decline in the second quarter of 2020 as compared to the most recent completed quarter and same quarter in 2019. At this time, the full extent of the impact of the COVID-19 pandemic on our revenues cannot be predicted with reasonable accuracy we will continue our suspension of full-year 2020 revenue guidance. With that, I'll now turn the call over to Tony.

All right. The world continues to face an unprecedented time of uncertainty from this global pandemic. As this crisis significantly impacts each of our lives, recovery is dictated in part by government guidelines, and mandates that continue to evolve based on a multitude of factors that remain dynamic and vary by geography. Beginning in the middle of March, hospitals began preserving their time, space and resources to address the emergent and potential need for treating COVID-19 patients and also to mitigate the spread of the virus. This change in focus has caused delays in non-emergent and elective procedures in many parts of the world. However over the past few weeks, we understand that certain hospitals in some areas of the country are beginning to lift their moratorium on performing elective procedures. And we have begun to see an increase in surgery volume relative to several weeks ago in these geographies. Our portfolio as a reminder consists of product for hernia repair, and plastic and reconstructive surgeries. The majority of these procedures can be deferred and postponed to a later date. However, hernias worsened with time and will eventually require surgery. And patients with complex hernias often have other comorbidities and health challenges that require intervention. Plastic and reconstructive surgeries are also critical to our patient's health, and we expect that most of the cancel procedures will be rescheduled. As a result, we anticipate our volumes to rebound as the country recovers from this pandemic and elective procedures come back online. As we navigate this challenging time, I continue to be impressed by the resilience of our team and our shared commitment to emerge stronger as we position the company for sustained growth. Our priorities are focused on these main areas; first, ensuring the health and safety of our employees customers and patients; second, the conservation of capital; third, driving quality engagement with our customers during the presentation - including the presentation of our BRAVO clinical data and developing a high caliber commercial organization; fourth, the continued implementation of our recently awarded GPL contracts; and lastly, the expanded rollout of our OviTex PRS products for plastic and reconstructive surgery. Turning first to the health and safety of our employees and our customers. Following guidelines mandates, our employees continue to work remotely with non-essential travel restricted. To protect our employees as they work, we have increased sanitizing measures and have implemented specific protocols for employees to practice physical distancing. We are also developing safety protocols for our field based employees as they prepare to reenter hospitals. Manufacturing at our partner facility in New Zealand continues to be operational as an essential service and in support of our customers. And to-date we have not encountered any delays or supply shortages. As Nora discussed earlier, we have taken several proactive measures to reduce our spending for the second quarter to ensure we can invest in driving growth as we recover from this pandemic. We continue to invest in and make progress on our primary strategic initiatives, and we'll monitor our expenses as we gain visibility to surgical procedures returning. Our commercial team remains focused on supporting our customers and developing a strong surgeon pipeline. We are continuing to operate with virtual solutions that have allowed our teams to effectively educate surgeons on our product portfolio and clinical data. We have been impressed by the level of engagement in these virtual programs and have successfully reached over 100 surgeons. We have also established virtual training initiatives throughout our commercial organization to increase our level of service and to ensure that our team provides supportive resources to our customers. We continue to build a pipeline of quality candidates to recruit and place in high potential geographies to service our hospital customers when surgery volumes improve. Clinically, we remain on track with BRAVO, our multicenter prospective post market study, which has shown a 0% hernia recurrence at 24 months in the first 20 patients studied, and a 2% recurrence rate in the first 57 patients at 12 months. As the BRAVO data continues to mature, we plan to provide additional data over the next several quarters. Prior to COVID-19, we were awarded multiple GPO contracts, providing us with access to approximately 1,900 hospital accounts, while interactions with supply chain and clinical resource directors within hospital systems have been limited, engagement has improved in recent weeks. As hospitals began to come back online. We remain laser focused on leveraging the GPO contracts that we have been awarded to drive the adoption of our OviTex and OviTex PRS products. We also appreciate that many of our hospital customers are facing economic challenges as they manage their businesses through this crisis. And we remain at their service to provide our product portfolio at significant cost savings relative to competitive natural repair technologies. For plastic and reconstructive surgery, we are continuing with the limited launch of our OviTex PRS products and have experienced high engagement with new surgeon customers via our virtual education programs. We are working to expand our surgeon network as surgeries are rescheduled and continue to collect feedback on our product portfolio to identify additional product opportunities. We plan on leveraging our existing adaptable technology platform to develop new generations of both OviTex hernia and OviTex PRS products. Circumstances arising from COVID-19 are rapidly evolving and continue to be uncertain. At this time, the full extent of the impact – of the COVID-19 pandemic on our business cannot be predicted with reasonable accuracy. Looking ahead to the coming month, we continue to actively monitor the progression of COVID-19 on our outlook, especially with hospitals beginning to come back online for elective procedures. In closing, I want to thank everyone again for your time this afternoon and for your interest in TELA Bio. I also want to thank our team for the continued commitment to our mission. I have confidence in the fundamental strength of our business as we support our healthcare community to overcome this challenging time. We are well positioned to deliver on our initiatives and I remain optimistic that we will continue our success and achieve sustainable growth in the long-term. I'll now turn the call back over to our operator Lauren and open it up to questions.

[Operator Instructions] Our first question comes from Raj Denhoy with Jefferies. Your line is now open.

What if I could start with how the quarter has progressed and so I appreciate that April was probably quite poor as it was for most companies and then maybe a bit of recovery as you described. But maybe you could just ground us in how bad things got in April, and what you're seeing in terms of procedures coming back?

Sure, Raj. So April started very slow and I'd say improved somewhat as the month progressed, and has continued to improve at least thus far in May. We believe that we saw at least the decline in the 70% level for April in comparison to pre-COVID-19 surgical volumes. So far in May, I mean it's early, but I'd say we are doing better. And we may be more like in the 50% range, compared to pre-COVID for the first week.

Right, right, that's helpful. I guess when one thing about - what would have been driving your growth, right? So the adoption of the technology by new surgeons and certainly exploiting the GPO contract wins you've had recently, how has that been progressing, right? So I imagine there was surgeons who had already seen the product that maybe couldn't access it because it wasn't on contract within their institution. Have you seen any sort of steady adoption despite not having sales people that could push the product?

Yes, so I'll - what I should have said to finish off, I think your first and second question are related. So if you look at the cases that we are doing right now, I would say on the hernia side, we're doing the more complex procedures, right? So complex ventrals will lead us out. We're also seeing PRS continue to be cases - continue to be done. So our view is that - complex ventral and PRS will lead us out. So we have had tremendous success with virtual surgeon VIP programs. We spend up to two hours with the surgeons. And I think that's a unique time because they have time, and we've cranked these out. And in many of those meetings, we're gaining commitments to either expand usage of the product or to start using our products. So we've already seen some of those new customers come online and use the products in early May, in places where things have cracked open a little bit. I can say just from a color commentary perspective that we've touched so many surgeons through this VIP zoom process that for all of April, most of April I would say, they all appeared to be home in street clothes like the rest of us. Recently, the last week or so, maybe week and a half, we're starting to see the surgeons in scrubs, they're in their offices or they're somewhere in the hospital. They're by no means doing a full day's work, but they're starting to do some things right. They're starting to do emergency cases, some emergent cases, maybe some simpler cases. They're certainly starting to see patients again. So we're starting to see a little bit through this VIP program surgeons as they migrate from home to their base of operations in the hospital. So yes, I think it's a little bit of everything. I think as you look at the base business in April, complex ventral and PRS probably mostly legacy. And as we're starting to see May come online, we're very pleased that we're seeing new surgeons, again, more oriented towards complex, ventral and PRS start to come online.

Great, that's very helpful. And maybe just lastly Nora for you, last couple of quarters operating expenses have been roughly $8.7 million, $8.8 million. And I appreciate you guys are looking at cost reductions, but where can you take those expenses how much levy do you have to actually cut into those?

So, Raj, I think when we talked last time, we went through in our variable expenses between 20% and 25%. So that's exactly where we're cutting is - so our commissions are going to come down naturally just from lower sales. But there's also some spending that we had around some consultants that we had or whatever variable costs we can remove, we did. So we also mentioned the salary reductions that we put through for the entire organization. And that's really to conserve cash in Q2, the same levels where we closed out on previous quarter Q1 and Q4.

Yes, Raj just a little bit of color on that. So our goal for Q2 is to try to balance the equation. Whatever we lose in sales in Q2, we're trying to cut out of the operating expense. So that we do not go backwards in cash consumption, that has been our target.

Our next question comes from Matthew O'Brien with Piper Sandler. Your line is now open.

Few from me, we’ll start this with Nora, I didn't hear the split between OviTex and PRS, can you provide that? And then, the gross margins were just softer than we were anticipating in Q1 again, I know basically came a little bit lighter than I think you guys were anticipating given the slowdown in the back half of March. But was there something there as far as mix shift or something else that led to gross margin being a little wide of what we were modeling?

No, so I will answer the first question, Matt. So I think that mix between OviTex and PRS was about 91% for OviTex and about 9% for PRS. So again as we managed our limited launch on PRS, so staying around 10%. With respect to gross margins again, it says we get our arms around our inventory management. We've done a better job – with launches and we've implemented some additional systems with respect to inventory management, but it's really on this excess and obsolete inventory. So, as we've mentioned before, on our polypro products, we have 36 months of shelf life. It's just managing the renewable polymer to get that up to 36 months because that's right now at 18 months.

Okay that's helpful. That kind of leads into my next question and Tony, I think you kind of addressed it already as far as what's going to lead you out of this. But given what's going on, given how big and established the market is with a lot of competitors that maybe not - maybe not as paying his close attention as they should be, are you guys going to focus a little bit more on the near term here, given what's going on with COVID on the hernia side of the business, and maybe push a little more aggressively on the breast side next year or on the plastic side next year and beyond or is it still more of the same strategy going forward?

Yes, I think you're going to see actually an uptick in PRS as a percent ratio of our sales, at least in Q2, right. As we work through, the shift in procedure types. So I think we're going to be firmly - be in the more complex ventral arena and in the PRS arena. And that's what we're going to go after and be of service I would say. I think it's more likely to be of service. I don't think you're going to see simple inguinal and hiatal which we've seen a big shift towards as we've discussed in our previous call. I don't think you're going to see those come back I mean the way as soon. I think the way we're looking at this is the simpler the procedure. The last it comes back, right so complex, ventral, you may have an infection, you may have pain, suffering, mesh removal required, a polypropylene mesh likely has to come out. These are going to come back first. And then PRS are also going to be more emergent as well, given the nature of those procedures. So we're going to crack open PRS starting in end of May, early June as much as possible. We've already started that process through this virtual surgeon VIP program, which has touched many surgeons. And then, I think on the ventral side, we run a virtual KOL webinars series, where we just block a full day. We have our KOL, do a presentation every hour on hour, and we get surgeons to interact with our KOLs. Those are mostly focused on OviTex hernia. So I think we've got a balanced approach here that is going to basically, allow us to be of service where we're needed which is PRS and complex ventral.

Okay, that's really helpful. And then last one is just on the backlog on there is just - a big part of your strategy for this year was really, moving market share over to your products, given the backlog some of these clinicians are going to be seeing and how busy they're going to be trying to get through it. How challenging is it going to be for you guys to add new surgery customers over the last maybe, five to - four to five months of the year?

Well, I think the volume of surgeon VIPs that we've done virtually is amazing to me. And we're going to keep doing them and we're going to make it a permanent part of our repertoire. It's not going to fully replace bringing surgeons in to have the tour like, like you had. I think it's very impressive to see our labs and our technology and our testing rigs and our data and need to team. But I think what we're realizing is that we can do many, many more within an hour to two hours. The management team, full management team can be on these calls. The surgeons can have a full interaction with Q&A and we can get 80% of what they would have got by coming here done. On a good month we are doing four or five VIPs is more like a usual month. But at the height of this process last month, we were doing four and five a day at some points and not every day. So, I think our ability to think through using screens, to have our management team, be highly involved in the selling process allows for the throughput and for telling the story in absolutely the perfect way. And surgeons can understand touch and feel, what this team is about and how we're committed to innovation and cost savings. And then if we wind up having our sales team, running the logistics to make sure the product is getting to where it's got to go that's fine with us. So, we're going to dedicate ourselves to being agile, nimble, flexible, and then continue with this screen based virtual approach. Not all of our reps are going to get back in the hospitals, we know that. So we've already covered cases through FaceTime. We're looking at can we get onto the screens in the OR through this integrated operating room. Thing that could be emerging and I think our clinical development team which are very, very sophisticated clinical development specialist we can really crank out the screen based half hour, one hour, 1.5 hour sessions to get the best possible presentation and then have our reps come in behind us and help flow things out in service and provide logistics. So I think could be a model that’s in place for sometime here and that’s the way we’re going to choose to spend our time solely committed to that. The other thing that in terms of market share movement is everything I just described we can do for CRDs and VCRDs in the supply chain and HealthTrust to any GPO. Now they went away they disappeared on us either they were redeployed or furloughed through most the last month or so but they are now coming back. So we’re starting to do these virtual programs for them as well. So supply chain is now getting in on this. We have tailored value props and messaging for them as well. And I think that's going to help us because they can now help us organize surgeons for our virtual program to drive implementation and cost savings. Don't forget, we offer tremendous cost savings around PRS and complex dental. This is the sweet spot of where we offer the highest value proposition. And if hospitals are in financial dire straits, we can be a very nice solution for them, right now. So, we're pulling out the stops to continue this business and to emerge from this stronger with a better toolkit that's more aligned with speed, efficiency and volume in terms of interaction.

Our next question comes from Kyle Rose of Canaccord. Your line is now open.

So I wanted to just continuation of some of the prior questions. And I guess just a little help with how much work you were able to do in the HealthTrust accounts, just from a contract and an access standpoint. I guess upfront, and then how you expect the utilization in those accounts to kind of trend over the course of I guess, the recovery here in May and then in the June?

Yes, so I'll just ground you that we had basically one month, right. We had implementation started on February 1, so we had maybe okay, maybe five weeks or so. Q3 of 2019, we were in about 45 HealthTrust account as they started to loosen the grip a little bit, as we got closer to a real implementation. By the end of Q1, we were in 65 HealthTrust hospitals. So that's really a very short amount of time, a lot of that first month was spent getting to know the process and the meeting the people. So I think it's a very good sign that we made excellent progress with 20 or so accounts in a fairly short period of time. A lot of the new sales reps that we brought on and I guess the other thing is, is that we've retained our entire commercial organization. Right, they were part of the reductions. But we made the decision that to come out stronger, that we were going to keep the team intact, and then train the heck out of our sales team. So in addition to all the surgeon interactions, they've been training every day. So this is a rare time as well, where we can hopefully give them maybe seal type training while there's downtime. Not training them while they're running around hospitals trying to get their business up and running. So high degree of focus on training our commercial team, and a lot of those reps were hired in the key geographies of where HealthTrust accounts are, and a lot of the surgeons that came through our VIPs program so far, a decent percentage of those have been HealthTrust. And like I said, the next phase of that is going to be to start the presentation process to the supply chain, and then help organize surgeons as groups via that process so that we can continue down this track and offer our innovative cost savings products that I think a critical time. So I think we have a very good shot at building momentum here as the reopening of the lab.

Yes, that's very helpful. I appreciate the incremental color. And then just when you think about the states that have started to lift the moratoriums, where you're starting to see cases, you know, maybe get back on the schedule. Any context, as far as what percentage of revenue historically might lie in the states that look like they're getting better from a procedural standpoint. And then the same question as far as when you look at like the HealthTrust opportunity, both - and maybe just the 65 accounts that you have, you were in exiting the Q1. I mean, what is the opportunity there for them to become productive here basically Q2 versus maybe in the back half of the year?

Yes. So look, I think one of our - I think Texas, Oklahoma, these are two good markets for us, that are - have historically been strong, and also have excellent prospects for future growth as well. Florida is a place where we have not been strong, the Southeast in general, but I think we have tremendous opportunity to drive growth, a lot of the virtual VIP program was centered around the South, which means HealthTrust basically. I think the way we look at this is a key piece of being Johnny-on-the-spot available for these complex ventral and PRS cases is consignment. So we are rationally aggressively pushing consignment where we can. And this is a program that we've always had, and we're going to continue to drive it. We have multiple versions of consignment. We have consignment via agreements directly to the hospitals. We have rep consignment. We have provisional consignment, I mean any way that a hospital can take product in, we will provide product availability for them to take it in. And a very high percentage of our sales, I think 90-ish percent, 87% or so in Q1 came from some type of a consignment flavor that - and it's probably going to be more in Q2. I know that the shipments have been growing in May. Usually, large shipments of product going out as sales come in, mean that we're reloading the shelves and consignment, which is a good sign for future. So, I think consignment is going to be the key, for us to be there to provide our products and services to help patients and hospitals in that complex ventral and PRS arena.

Our last question comes from Dave Turkaly with JMP Securities. Your line is open.

You may have said it or may not have changed, I was wondering, would you be willing to comment on the number of reps you have and then the actual hospital accounts coming out of the quarter?

Yes, help me out Nora.

So at the end of Q1, we ended up with about 39 territories. And about 34 of them were filled. So I think going into April, we may be added one more, but we're on a hiring freeze right now. But as Tony already mentioned, I think earlier about how we're building a pipeline of good reps to understand the phase. So we ended Q1 with 39 territories.

Yes, I mean, I think we can get to 50 from here. If you know we saw the soft circle that we have in place of reps that we have contact with. We have never stopped recruiting. We've recruited through this process and we'll continue to recruit in this process and are having candid conversations about start dates that hopefully will align with particular regions reopening. So as we gain confidence in certain regions, we’ll gain confidence in bringing new reps on to continue the build out?

And just the - you had commented on active accounts, I understand one of them [indiscernible] and you spoke the updated data was very solid. I'm curious to hear how that's whether they may be during some of these VIP events. And then, when do we expect to hear specifically, I mean, you said in the coming quarters, but any closer or bit more color about exactly when we might get another update? Thanks.

Yes, so the update on BRAVO, we’ll get another cut at the data in Q3 or so. We'll have 70 some odd patients at the 12-month time point and what do you think after 2 year? 50 or so, yes 50 after two years. So the next solid cut data will be in Q3 that’s when it will be in-house, and that continues I think uninterrupted. As far as where we are going to present it, we have been presenting this data on these virtual VIPs tours. It’s a centerpiece of our discussion. And I think it had a very important effect on gaining commitments to use a product. We had a lot of very good conversations about the applicability of the BRAVO data in the moderate to complex arena. So this exactly lines up with the cases that are emerging here first. So it’s been very positive. We've got abstract, I think it’s five, six abstracts drafted for various cuts of this data including a robotic series within BRAVO, that have been accepted at various meetings. These meetings have been cancelled or postponed. So, we're trying to figure out the best approach here on how to present this data and get it out into the hands of our sales force and surgeons efficiently. One approach is going to be just to take this interim cut, and write it up as a paper, and then submit the journal. So this process is already underway. And we will submit fairly soon. So hopefully, we can get the data out via that mechanism. The other thing we're going to do is just to continue to work with the meetings and get their advice and make sure that we're not burning any bridges that we can continue to present the data, but we are taking a logical approach on how we can get the data out. This data is super important. It's very helpful compared to competitive products in terms of recurrences and helping patients. And it's a big piece, I think of us coming out of this strong, particularly with the focus on the complex ventrals that have to start. So we're very, very focused and aggressive on getting the data out in the best possible way, given the circumstances.

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Tony Koblish, for any closing remarks.

All right, thank you everybody for attending this call. We really appreciate your interest in the company. We are committed and I feel very confident that we will come out of this stronger like I hope we all will come out of this stronger. We've done a lot of good things. I've been impressed with how our team has evolved and reacted and worked hard. All of our development programs, all of our work continues in a remote fashion. And we continue to interact with our customers in a positive way. Our goal is to be of service. We think we can add a lot helping hospitals with cost savings and high performing clinical products. And we really appreciate everybody keeping track of us, and we'll talk to you next time. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.