TELA Bio, Inc. (TELA) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Hannah Jeffrey from Gilmartin Group.

Thank you, Kathy, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the first quarter of 2021. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and CEO; and Nora Brennan, CFO.Tony will begin the call by providing an overview of our operational highlights, and then Nora will provide a detailed analysis of our fourth first quarter financial performance. 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 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 or operating performance. With that, I'll now turn the call over to Tony.

Thank you. Hana, and good afternoon, everyone. Thanks for joining us today. So we are off to a strong start in 2021 with $5.9 million in revenue for the first quarter. This represents a year-over-year growth of 58% and sequential growth of 3.7% compared to the fourth quarter of 2020. As we mentioned in our Q4 2020 earnings call at the end of March, we experienced COVID-19 headwinds in the beginning of Q1. As the COVID infection rates decline, we began to see an improvement in procedural volumes in February and March, and we realized our best month ever in March and it has continued into Q2.In the first quarter, demand for our OviTex product line increased throughout the quarter, as a number of hernia procedures continue to rebound. As we have seen throughout 2020, our OviTex LPR product experienced the most growth out of our OviTex product line. For the first time in our history, minimally invasive procedures using OviTex eclipsed open hernia procedures on a quarterly basis. The continued migration from open to robotic hernia procedures that we have been experiencing is in line with what has been reported by the major surgical robotic provider. This continues to develop and solidify our position and provide a natural repair hernia solution as an alternative to plastic mesh. This movement from open to MIS procedures is a bit of a double-edged sword for us in the short-term. While we are pleased OviTex has become a preference for many surgeons performing robotic hernia repairs, OviTex LPR does have a lower average selling price. The difference in selling prices is strictly a function of size, as currently most robotic procedures use a smaller piece of OviTex than a traditional open hernia repair. However, we are noticing that the robot is being utilized for more complex hernia procedures, which should lead to the use of larger sized OviTex products and ultimately higher ASPs. Long-term, we believe this trend demonstrates our ability to become a major, broad product portfolio player.Turning our attention to OviTex PRS product for the quarter, sales were up approximately 150% year-over-year, but down sequentially over the fourth quarter of 2020. Based on our analysis of new and existing PRS accounts, we believe the pattern is emerging. Many of the surgeons in our new accounts have been trialing PRS before committing to using it in additional procedures. This is evident with our plastic surgery customers, who perform reconstructive procedures, as many prefer to evaluate how well OviTex PRS performs during a 3 to 6-month post that period.Based on our current understanding of how our new plastic surgeon customers are trialing PRS and the cadence of new accounts, we are expecting our PRS revenue to continue to grow year-over-year as more plastic surgeons adopt the product. We are beginning to see the broad adoption with PRS with strength in April and May. As a reminder, the fourth quarter of 2020 was robust in terms of signing up new accounts, which we believe we will harvest and make productive in Q2 and beyond.On the commercial side, access to surgeons is steadily improving. New cities and regions are still difficult to manage, but overall, our access to surgeons in hospitals and during their office hours has increased. We continue to target 48 territories by mid-year, but we could increase this target, if demand continues on this current trend. As we mentioned during our fourth quarter conference call, we are adding sales territories that align with HealthTrust accounts. On that front, we are making solid progress on adding HealthTrust associated hospitals. During the first quarter. the hit rate for our new HealthTrust reengagement program has improved. That being said, I want to reiterate, there is still work to be done. Although we believe we are beginning to make good traction with many HealthTrust accounts, it takes time from contract signing to implementation. We believe most HealthTrust accounts are becoming more open to new product evaluations, as COVID-19 hospitalization rates recede. Before turning the call over to Nora, to review our financial performance of the first quarter, I would like to thank our participating surgeons and investors for making our Key Opinion Leader Webinar a great success. For those who could not attend this virtual event, we hosted 2 surgeons speakers who discussed when and how they use OviTex for hernia repair procedures and why they avoid polypropylene mesh in certain situations. The webinar was very informative and I invite all of you who did not attend, to go to the Events page on the Investor Relations section of our corporate website to view a recording of the webinar. With that, I will 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 2021. After commenting on our financial results, I will also provide an update to our financial guidance for the remainder of 2021.Revenue for the first quarter of 2021 increased 58% year-over-year to $5.9 million. While we experienced significant year-over-year revenue growth, we did experience increased volatility in demand for our products as COVID-19 cases and hospitalizations increased in January. This volatility lessened in February and more so in March 2021.Gross profit as a percentage of revenue was 59% for the first quarter, in line with the first quarter of 2020. Sales and marketing expenses were $6.3 million in the first quarter of 2021 compared to the $5.3 million in the same period in 2020. This increase was mainly due to higher compensation, benefits and commission from additional sales personnel, offset by lower travel and consulting spend. G&A expenses were $2.8 million in the first quarter of 2021 compared to $2.5 million in the same period in 2020. This increase was primarily due to higher compensation and benefits and higher stock-based compensation expense, partially offset by a decrease in bad debt expense. R&D expenses were $1.7 million for the first quarter of 2021 compared to $900,000 in the same period in 2020. This increase was due to higher development costs and higher compensation and benefits. Loss from operations was $7.3 million in the first quarter of 2021 compared to $6.5 million in the prior year period. Net loss was $8.1 million in the first quarter of 2021 compared to $7.2 million in the same period in 2020. We ended the first quarter of 2021 with $65.8 million in cash and cash equivalents compared to cash, cash equivalents and short-term investments at $46.7 million in the first quarter of 2020.Now turning to the outlook for 2021, we are confirming our revenue guidance in the range of $27 million to $30 million, representing growth of 48% to 65% over the prior year period. We will continue to assess the current environment and provide updates on our quarterly calls as continued uncertainty relating to the dynamic environment with the COVID-19 pandemic could materially impact that projection. With that, I will turn the call back over to Tony.

Thank you, Nora. For those who have not yet read through the 8-K we filed this afternoon, Nora has decided to pursue a new direction. On behalf of everyone at TELA Bio and our Board of Directors, I want thank Nora for her many contributions during her tenure with the company, including her strong leadership through TELA Bio's IPO and follow-on offering. Nora, we really appreciate your dedication and wish you all the best in your future endeavors. Now with that, Kathy, let's open it up for questions. Thank you.

[Operator Instructions] Your first question is from Matt O'Brien from Piper Sandler.

Hi, this is Karin on for Matt. So first, starting on Q2 trends, I know you're not providing actually quarterly guidance, but you said that April and May were a little bit stronger and doing well. Can you just add any more color on that with some recent coverage resurgences, are you still seeing some pressures from COVID? And also, I was trying to see some of those newer accounts start to contribute.

Yes, so thanks for that question. I'm going to -- I'm just sort of going to go through a bit historical from the start of Q1 through to where we are today. I'm not going to get into month-by-month numbers, I don't want to fall into that habit but I'm going to give you some color, right. So when you look at Q1, almost 80% of Q1 sales came in in February and March. So January was a really tough month it and we expected that, right. So on our last earnings call, I said that we expected a tough start to Q1 based on the end of Q4, and it was really concentrated for us in January, but February snapback fairly well and March was exceptionally good, and that has continued into April and through the start of May. So I think we're looking at a situation where all of the work that we've done to get stronger during COVID is starting to pay off. We've stockpiled a heck of a lot of new accounts, right. If you look at the new accounts stock piling from back to Q3 of 2020, we had 46 new accounts, 57 in Q4 of 2020 and 40 in Q1 of 2021. Now all of these accounts haven't started contributing yet but it's a heck of a good stockpile and they're going to start contributing. We're seeing that start to happen March, April, May, so we're very bullish about our ability to step up and keep the business growing. So I think we just -- we're at that point now where we're going to start to see all the moving parts and elements that we put in place starting to work.

Great, thank you, that's super helpful. And then just 1 more from me on Tela LIVE, can you just speak a little bit on the clinician conversion you're seeing from that, and is that starting to translate to top-line or is it still too early to tell?

Well, I mean all that new account work that I just mentioned. You mean, there is no other way that that happened other than Tela LIVE, right. We brought on 22 new reps in 2020 basically to strengthen, and COVID was at its peak at that point. And most of the work that they were able to do was due to Tela LIVE. So we had a situation where roughly 40% of our reps that haven't been around very long that came on in 2020 are doing about 20% of our revenue, and then we also had 40% of the reps, these are the ones that are a little bit more established and around a little longer. They're running anywhere on an annualized run rate basis between 500 and $1 million or higher than $1 million. And so both of those groups of reps are very much benefiting from that Tela LIVE program, and it's really been the only mechanism that we've had, especially for our PRS plastic surgery products, right. I mean that -- those, we just through open for launch in Q3 more aggressively or more fully. And so we're only a couple of quarters into starting to see that step up start to materialize. So all of that really has been driven by the Tela LIVE program. We've put about 200 surgeons through Tela LIVE and the productivity that comes out of that has been excellent as detailed by all of those metrics.

Your next question is from Anthony Petrone of Jefferies.

Congratulations, Nora, and good luck on the transition.

Thank you.

As we look at this year, as we go through GPO contracting, just want to revisit GPO contracting, and sort of how that transition will continue to play out through the year in terms of additional GPO contracts, a. But of the GPO contracts that are currently in place, how we should be thinking about on boarding of new facilities through existing GPOs? And then as we look outward this year and perhaps into next, how many additional GPOs are out there that could be on-boarded? And I have a couple of follow-up questions.

Yes, so we're in health, we're in 2 modes right now, Anthony. We're in HealthTrust implementation mode and we're in IDN mode, right. The other big GPO contracts I think are further out. The request for participation et cetera is going to come in the future. So everything that we've been doing here is really focused on HealthTrust and the IDNs. HealthTrust has been a bit of a struggle for some of the year last year because of COVID. They have literally stopped and started a couple of times as COVID has heated up and then cooled down. I think we're getting through that, right. I think as you look at what COVID does to the business, I think we're in a mode now where we're not worrying about hotspots all that much anymore. I told our team, our job is to grow, exceed our numbers, no matter what the situation throws at us, right. We're done with the whole COVID as a filling up the ICU beds and affecting -- and that is we have to find a way. And I think the last phase of COVID's impact is on the supply chain and their willingness to look at new stuff. And so I think we're just starting to see that get better and better. So even with all of that stuff going on, we are running, about 40% of our total unit sale in Q1 have come from the HealthTrust accounts, and that's with a pretty limited ability to drive those dialogs, right. If you look at our IDN situation, right, 4 of our 5 top IDNs are growing, right, and they're growing pretty nicely, 15% to 25% and our top 5 IDNs contain a mix of different GPO there that they are associated with, right, Anthony. So these IDNs, they tend to roll up to 1 or maybe more than 1 GPO. So we're having excellent success at the IDN level, which I think is going to help set us up for, we know when the Vizient and the Premier and the resource group contract comes into play. They're not there yet, but as long as we're knocking down these IDNs and HealthTrust accounts, I think we have plenty, plenty of open geography in turf to work with, to have an excellent year. So that's the way we're looking at it, right, it's HealthTrust and it's IDNs, 1, 2.

That's helpful. A couple of quick follow-ups and I'll hop back in queue here. 1 on the BRAVO data, the latest round of BRAVO data being out there, ongoing 100 patient study, again, record low recurrence rates for hernia safety data. Just wondering how BRAVO data is being received in the marketplace? What sort of feedback are you getting, is it resonating? And then the last 1, of course, from me, just -- I want to just clean up I guess the headcount commentary. Did you see Tony, that by the end of this year, the target is for 48 reps and if so, what would be the cadence of adding those reps as the year progresses?

Yes, yes, so let me -- I'll take the second piece first. So it's interesting. I think our thinking is evolving a little bit, right. So I think we're going to start to think and talk about a combination of things in our commercial organization, right. The first it's going to be the rep count, right. We're running right now, I don't know, about 40, somewhere about 43 reps or so, and then the clinical development specialists, right, almost the missiles, right, this group, I think is emerging to be quite important for us. We were running 4 or 5 of those Clin Dev specialists. Now we did put offers out, we're going to be staffed up, add about 8. So we may wind up trading a little bit, right, where there may be a little bit of a trade between reps and clinical development specialists to the claim Clin Dev specialists are super important on the PRS side for us. And as we're starting to see success in growth there, there may be a way to leverage more productivity into the reps that we have with these clinical development specialists. They can cover big geographies, they can use Zoom, they can get on planes. We have them working the whole country where they're needed. So I think there is a little bit of refinement, not much in our model. But -- so I think when we're thinking about sales force build out, yes, we want to get to 48 reps, it may be 48 plus 6 or it may be a little less on the rep side, plus 8 or 10 on the Clin Dev side. So the ratio is going to be, the total number may be similar. I think we're going to wait until mid-year, Anthony, and then we're going to see how we come out of Q2. We're feeling great about where we are with Q2 at the start. The strength of the exit coming out of Q1 is persisting, which is terrific. And I don't think we're going to be shy, right. I think we're going to invest, if we feel that it's the right thing to do. We might put a few more reps down on the ground as we go through the rest of the year. I don't have an exact number for you yet, but I can say, we're going to hire clinical development specialists, right. We're at 8 now, I wouldn't be surprised if we are 10 or 12, by the end of the year. So it's going to be some combo.

Your next question is from Dave Turkaly from JMP Securities.

Nora, I will be sad to see you go. Tony, in press release you mentioned the mesh litigation on your KOL event, 1 of the docs had done a survey, said the 94% of customers would prefer synthetic option like OviTex. I'm just curious to get your updated thoughts there. Did anything new occur or we've just kind of highlighting that that's sort of tailwind for you in the year?

Yes, I have the new information. I mean, sadly and stubbornly, the litigation did install due to backlog COVID. Our contacts have indicated that really not too much progress has been made, but I feel that the market is slowly shifting, right. I mean that survey worked with NICE, surveys of survey, it's sort of told us what we're feeling already, when we talk to surgeons, but what we did is, we had our data team start to look at all the sources of usage for all the different types of products. And as of the last cut that we looked at whether it's IQVIA or DRG data or what have you, it's straight up plastic polypropylene mesh seems to be down about 15% and natural repair, and I'll say natural repair products such as ours, biologics, resorbable synthetics are up. So at least in that market data, forget about surveys, the data probably is wider better look. It looks like we're at the very beginning of an increasing interest in natural repair versus straight up plastic polypropylene. So we're going to keep an eye on that IQVIA and DRG data and just look at the raw numbers, and I think that will tell the story going forward, right. It takes a while for this phenomenon to kick in, but make no mistake, it's being driven by patient, it's being driven by the publicity such as that exists today. So that's a trend we're going to take, keep our eye on and it should continue to improve. We're also seeing it in our business, right. Our LPR product line that is cranking 51% of our hernia units went in, either through the robot or laparoscopically, and that's all stuff that is less complex and that's a great sign for us having a broad product range, right. Our goal is to be very compatible with the robot. Our goal is to be able to replace any product, in any procedure anywhere, in any hernia with a natural repair solution. And so if you look at sort of our internal trends with LPR and the 51%, and you look at that 15% across the mesh landscape, I think it's happening, it's slowly happening. We'll keep an eye on it, Dave.

I appreciate that. And then maybe just a quick follow-up, maybe for Nora. I get the guidance reiterated this quarter was strong, it was almost what we had for second quarter and we know, second quarter has got the weird comp from COVID last year. So as we're looking towards the back half and knowing -- hoping that COVID is sort of a non-event, so you had it somewhat conservative, I think given your trends you're seeing on, even the MIS and robotic. Do you think there's a chance that you could even do better than that in the back half of the year?

Dave, we certainly think that we could do better, but it is to be conservative at where we're at now. Again, until we get better clarity with respect to the hospitals and the supply chain and COVID, I think we're going to stay at this level at this point.

Yes, I think we'll see the value in -- yes, well, I agree. We'll reevaluate at the end of Q2, I think there's a lot of wood to chop between now and then. So we're setting ourselves up for success. And I realize, Anthony, I never answered the BRAVO question, so I'm just going to say a couple of words on that. Yes, the BRAVO data is excellent, it's highly differentiating, right. Until the whole thing is out of 2 years, I think there it's just not going to have the full power. And by the end of this year, we'll have everything out at two years. We've put in the 1-year data as an interim. We put that into a journal and we're waiting to hear back. So once we get that published, we'll be able to flash that 1-year data very thoroughly everywhere, and then we'll do the same thing once we're through the 2-year data, but right now the BRAVO data looks really, really good, and we expect it to finish off strong. And some other good news is, BRAVO 2, which is going to be a redo of that study, but focused on robotics, finally, we're through the COVID IRB start-up phase and we're very, very close to starting to enroll patients there. So we're pleased that we're going to round out our clinical data quite well with full 2 year and then that robotic study is just demonstrating further commitment to all things robotic with our hernia platform.

And your final question is from Kyle Rose of Canaccord.

Nora, congrats, we'll miss you. Yes, Tony a lot's been asked, but I guess kind of want to start big picture because, in the last question, you talked about the percent going through LPR in robotics. So I guess a 2-part question is, talk about the backlog that you see developing in the market, if there is a backlog, what are your hospital and your clinical partners talking there, and so we think about the delayed procedures? Obviously you're seeing in your business, a shift towards the more of the simple procedures like the MIS, using the LPR. So I'm just trying to understand, if we see more of a normalization come in the back half of the year, are we going to see this consistent flow of these LPR robotic type procedures and then add-on some of the bigger, more complex ab wall procedures. Just trying to understand what that mix might shift like towards the second half, because that would imply maybe some revenue acceleration into the back half purely on price.

Yes, that's a very, very interesting question. So look I'll go back to the start, right, of what we were trying to accomplish when we first launched this natural repair anti-plastic hernia platform, right. We wanted to be broad, we wanted to have a range that could do anything in hernia, and I think we have that and we're going to -- and believe it or not, there is way more we can do with it. We're going to put out new products over the next few years as well, that are going to help accelerate the breadth and the totality of our capability, which is good. But our initial starting point was moderate to complex ventral, that's where we wanted to start. that's why BRAVO wants this, and we wanted to prove ourselves in horrendous, difficult, complicated, contaminated, whatever the words are to describe these difficult ab wall procedures. And I think by and large, we've done that and we continue to do that. We have a very, very superb value proposition in those procedures compared to any other product. BRAVO 1 really really backs that up. So step 1 is in motion, I'm not going to say it's complete, because with more contracting and more access and more reps and more everything, that's going to grow. But step 2 was always from the beginning to leverage all of that experience and goodness in the performance of the product. If we could handle those procedures and if we could make our product that's easy to handle and implant as plastic, then we should be able to start to chip away at the simpler procedures and it's always been the plan to set up to have that natural repair alternative. And so we're in the very early stages of starting to see that happen. And the LPR has been a catalyst for that for sure. There's 4 or 5 sizes, we need more sizes, right, we need to keep buffing out the product portfolio that earmarked for the robot, because we're learning, we're figuring it out what we have to do to be as easy and simple to use this plastic, and no one else can do that with a biologic or natural repair product, but we can. So we're sort of in the third or fourth -- third inning maybe on the moderate to complex. We're in the first inning on the simple and the breadth, it's going to be driven and pulled through by the robot and by all of the product in data additions that we're developing to focus on the robot. So yes, I mean it's working, right. The plan was a 2-step plan from the beginning, that's what we're operating against and we see it happening. So yes, we're feeling pretty good about where we are with that. The other factor, Kyle, that really interesting is that, I think PRS is going to help hernia. So when we meet with these IDNs, GPOs, even HealthTrust, they want to talk about PRS first, right, that's where the massive cost savings exists. Up until Q3, Q4 of last year we were like, no, we're in limited release, we're learning, let's talk about hernia first, we'll get to PRS eventually. And that isn't exactly where they wanted to start, right. So now, it's the opposite. We're saying, all right, you're interested in PRS, so let's talk about PRS, let's get that moving. We'll lead with that if we have to, and that's going to help us get hernia on the shelf and it should work synergistically. We haven't even seen that start to kick in yet, but I think that's going to start to happen as well down the line, right, just a relative waiting of each of our product lines in terms of cost savings and value proposition.

And there are no further questions. I will now turn the call back over to Tony for closing remarks.

All right, thank you Kathy and thank you, everyone, for jumping on. So we are experiencing improving sales trend, last quarter and bleeding into the start of this quarter. We believe that we're just going to start focusing on COVID and get on with meeting and beating our numbers. The last remainings, I think that we're seeing are the supply chains opening up, so let's just hope that continues, that's going to do nothing but help us. So we're optimistic about the future. We believe, as I detailed here that we're well positioned to take advantage of all of these improving trends and thanks for your interest in the company and stay tuned. Best is still to come. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.