TELA Bio, Inc. (TELA) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the TELA Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Greg Chodaczek. Please go ahead.

Thank you, Anne, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the second year 2021. A copy of the press release is available on the company's website. Joining me on today's call is Tony Koblish, President and CEO; and Megan Smeykal, Vice President and Corporate Controller. Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's 2020 Form 10-K and subsequent 10-Qs, which identify and specific – with 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, capital resources and operating performance. With that, I'll turn the call over to Tony.

Thanks, Greg, and good afternoon, everyone. Thanks for joining us today. During our earnings call last quarter, I spoke of the exit velocity of OviTex as we experienced sales in the back half of the first quarter. I'm happy to report that the sales – that the strong sales momentum continued as revenue in the second quarter was $7.6 million, representing growth of 116% compared to the second quarter of 2020; and more importantly, 29% sequential growth over the first quarter of 2021. In the second quarter, demand for our OviTex product line increased broadly driven by the rebound in hernia procedures and a solid sequential increase in the number of customers. Throughout 2020, we spoke at length about our TELA LIVE program and the unique solutions we developed to cultivate our strong surgeon pipeline. These programs, which we are continuing to use are comprised of virtual sales solutions designed to educate surgeons about our product portfolio and clinical data. Since its inception, over 200 surgeons have attended our virtual VIP tours or our KOL webinars. And we have seen over a 150% increase in average monthly revenue among surgeons who have participated in a TELA LIVE program. Over the past several months, we are seeing the benefits of the time and effort our team has dedicated to these programs. As a reminder, during the previous several quarters, we were successful in signing up new accounts and having continued to grow these accounts. In the second quarter, we recognized revenue from 38 new customers, and the total number of customers ordering products in a quarter hit an all-time high. These record-setting numbers occur when every territory is producing. In the second quarter, approximately 25% of our revenue came from account managers hired within the past 12 months, and we are on track to have approximately half of our U.S.-based sales force to be on a $1 million run rate or better by the end of this year 2021. Hernia-related revenue grew sequentially by over $1 million in the second quarter and every type of hernia procedure demonstrated growth. As with the ongoing trends we have been experiencing for the last 18 months, laparoscopic and robotic hernia procedures continue to represent slightly half – slightly more than half of all hernia procedures in the quarter. Interestingly, we are noticing surgeons are slowly migrating towards the robot for more complex hernia repair cases leading to utilization of larger-sized OviTex. We believe this trend will continue and is one of the primary reasons we designed our BRAVO II study to evaluate OviTex for the robotic repair of ventral hernias. Moving to our PRS product. Sales were up over 200% quarter-over-quarter and up approximately 50% sequentially over the first quarter of 2021. This strong sequential growth follows the previous quarter where PRS was slightly down compared to the fourth quarter of 2020. The cycle of trialing and evaluating during a three to six months post op for plastic surgeons new to PRS is becoming more evident. That being said, as more plastic surgeons become comfortable using PRS, we believe this trialing cycle will become less prominent over time. On the commercial side, surgeon access has improved in 2021. While some areas in the United States had limited access, our sales team found creative ways to meet with surgeons. We are currently targeting 48 sales territories, which align with HealthTrust accounts. With regards to our GPO accounts, the sequential growth in HealthTrust accounts in the quarter was higher than our overall growth in overall accounts and now comprises over a third of all of our accounts. Based on the number of reengagement meetings we are attending, we believe this trend will continue. Moving to BRAVO II. In May, we announced the initiation of our second post-market study, BRAVO II. This study is designed to evaluate the clinical performance of OviTex reinforced tissue matrices and the robotic repair of ventral hernias. With the continued success of our original BRAVO study and the ongoing evolution in robotic procedures for more complex ventral hernia repair, we are very excited to demonstrate the efficacy and durability of our OviTex portfolio in robotic hernia repair. As with the original BRAVO study, we expect to enroll up to 100 subjects with patient follow-ups at 90 days, 12 months and 24 months. Patients will be monitored for early postoperative surgical site occurrences, wound-related events and other complications within three months of surgery. In addition, the researchers will also monitor the incidence of true hernia recurrence, surgical site occurrences and other complications occurring after three months post surgery. Regarding our search for a new Chief Financial Officer, the process is well underway. And we hope to announce the hiring of a new CFO in the near future. I will now turn the call over to Megan to discuss the financials.

Thank you, Tony. Moving on to the second quarter financials. Please refer to our press release issued earlier today for a summary of our financial results for the second 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 second quarter of 2021 increased 116% year-over-year to $7.6 million. Our second quarter revenue grew approximately 29% on a sequential basis due to a rebound in procedures and continued demand for our innovative portfolio of soft tissue solutions within both new and existing accounts. This increase in demand remained throughout the quarter. Gross margin was 67% for the second quarter, an increase of approximately 800 basis points compared with the second quarter of 2020. The increase was primarily due to the decrease in the charge recognized for E&O inventory adjustments as a percentage of revenue. Sales and marketing expenses were $7.5 million in the second quarter of 2021 compared to $4.1 million in the same period in 2020. This increase was mainly due to higher compensation and commissions from additional sales personnel and increased travel. The prior year period also included cost containment actions taken in response to the COVID-19 pandemic, which were not repeated in 2021. G&A expenses were $3 million in the second quarter of 2021, compared to $2.1 million in the same period in 2020. This increase was mainly due to higher compensation, increased professional fees and higher stock-based compensation. The prior year period also included cost containment actions that were not repeated in 2021. R&D expenses were $1.9 million in the second quarter of 2021, compared to $1 million in the same period in 2020. This increase was primarily due to a onetime noncash stock-based compensation expense of $700,000 related to amendments to certain equity agreements following the death of our Co-founder and former Chief Medical Officer as well as higher personnel costs and increased development costs. The prior year period also included cost containment actions that were not repeated in 2021. Loss from operations was $7.3 million in the second quarter of 2021 compared to $5.2 million in the prior year period. Net loss was $8.3 million in the second quarter of 2021 compared to $6.1 million in the same period in 2020. We ended the second quarter of 2021 with $60.3 million in cash and cash equivalents. Now turning to the outlook for 2021. We are updating our revenue guidance to be in the range of $28 million to $30 million, representing growth of 54% 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 related to the dynamic environment with the COVID pandemic and the development of new variants of COVID-19 could impact this projection. With that, operator, please open the call up for questions.

[Operator Instructions] Our first question comes from the line of Matt O'Brien [Piper Jaffray]. Your line is open.

Hi, good afternoon, guys. This is Drew on for Matt. And thank you for taking the questions. And congrats on the very nice quarter here. I wanted to start out on guidance a little bit here. Obviously, really strong Q2 but your guidance does not imply quite as much outperformance in the second half of the year. So I appreciate there's probably some conservative – conservatism baked in there. But maybe you could just kind of tease out what are some of the factors influencing that? What you're assuming as far as COVID-19, and then what we should be thinking about as far as quarterly cadence from a revenue perspective?

Yes. Thank you for that. I think – look, I think Q2 is the first quarter where we got a glimpse, I mean, just a glimpse of what we've been building, what it can do in a relatively clean environment, right? With the potential that exist sort of in a normal state. We're seeing some hotspots perk up here and there, particularly in parts of Florida, parts of Texas, et cetera. So we want to just make sure that we get to the point where we have the opportunity to function in a clean environment before we get ahead of ourselves. We're very, very optimistic about where we're heading this year, but we also want to be realistic in case there are any governors out there that sort of perk their heads up. I think it's also a good practice for us as a new public company. We've only really ever been public in this COVID period. But as a new public company to get our legs under us and demonstrate not just one excellent quarter, but several excellent quarters back to back to back. And that will give us confidence on two fronts. One, I think, like I said, we're very optimistic about what we've built and how we're operating. And I think you see the glimpse of that in a clean market environment in Q2, but it also allows us to sort of work through any of the uncertainties around procedure volumes, et cetera. So that's kind of what our mindset is. I think we want to walk before we run. Whatever other cliche we can throw at it, we just want to make that this is reproducible due to external factors, et cetera. But we're very, very, very bullish on our ability to drive this business. I think the systems and processes that we're putting in place, the access that we're developing at both HealthTrust and other IDNs, the clinical data, the growth of our robotic procedures, it's all working for us, and we like where we are.

Okay. Great to hear. And then just on the rep side of things. You called out sales force expansion, deeper penetration into accounts, you talked a little bit about rep's productivity. Can you just remind us what level of reps you're expecting to end the year at? And really, I guess what I'm trying to do get an idea of is if that number is 60 account managers, I think that's what we have, you're assuming 50% of them generate $1 million alone, that's $30 million of revenue from half year rep. So am I thinking about that correctly? Thank you.

Yes. So right now, we're actually – and this is a good demonstration of what we think is the leverage that we can generate. We've got 45 sales territories identified right now, but we only have about 38 reps, right? So we've been pruning sort of the bottom performers. So we're getting more production out of less reps. We like that. So you're correct. We're thinking approximately 50 reps by the end of this year. If you look at the metrics right now, as I said earlier, 25% of our revenue has come from reps that have been on board for less than 12 months, which also means they're starting up faster. They've got excellent access that's developing good data to work with. And some new products and robotic procedures broadening out the hernia play. So that's working well. That's up from about 17% a couple of quarters ago, right? So that's heading in the right direction. I think that indicates really good start-up progress in terms of the sales force. Right now, about 40% of our sales force is operating at a $500,000 to $1 million plus annualized run rate. So that's about 20 reps, let's call it, right, to be – for round numbers. And so that is the group that is certainly within striking distance to be on a $1 million run rate or better by the end of this year. So somewhere in that 20 maybe a little more, maybe a little less range is what we expect by the end of the year. Again, a lot of that is going to be impacted by the next couple of quarters. We feel really good about where we are, especially even in the start of Q3. But we want to just make sure that we understand exactly all the dynamics that are going on out there in the hotspots.

Very helpful. Thank you.

[Operator Instructions] Our next question comes from the line of Anthony Petrone from Jefferies. Your line is open.

Hi. This is Zack on for Anthony. Congrats on another great quarter. I just wanted to focus on gross margin here. The previous step-up in 2Q is that mostly due to the product being shelf-stable for longer? And how should we think about gross margin for the rest of this year?

Yes. So as we've discussed in the past, the number one driver of our gross margin is really that shelf life, shelf stability and basically, the amount of time that we'd be able to put on the label that it's shelf stable, right? So some of our resorbable PGA reinforced products, have been saddled with some fairly short shelf life over the last 12, 18 months. That is slowly getting better. Our goal is to have three year shelf life on all of our products by roughly mid-next year. So we are heading in the right direction. We're gaining months every month as we move forward in time. We can't accelerate time, unfortunately. So as we've said in the past, the margins will bounce up and down a bit based on specific SKUs selling within the window or not selling within the window. There's a little bit of complication in that – we've got a lot of new products. We've got a lot of new customers. So there are SKUs that go – get hot and get cold. So we still have to balance out which SKUs are the drivers. But I think we've made great progress in figuring out what our A SKUs are coupled with improving shelf life. I think you're going to see the trend overall get better and better between now and mid next year. But there could be some bouncing around, up and down, hopefully not wild swings, but as things stabilize and get smoother, it could bounce around a bit. But we like what happened with the margins. I think there's plenty of room for them to get better as we work through and get a better shelf life on the product, which is not far away.

Got it. That’s helpful. And then one on the hernia mesh litigation. I guess are your reps hearing any comments on the litigation? And is that helping drive growth for TELA products?

Yes. I mean I don't know about our reps. I can tell you that it is on the minds of the patients, right? I mean we talk to our surgeons and they definitely are experiencing uptick in patients who are asking questions like I don't want that mesh that I saw on television. I don't want any mesh at all. I want a meshless repair. And that fits beautifully with our positioning of natural hernia repair, natural repair using what we're calling the ReBAR approach. So ReBAR would stand for reinforced biologic augmented repair, and that's going to be the brand name that we hang on our procedure. This ReBAR approach, I think, is going to lend itself quite well to patient education, social media-driven education, websites, et cetera. And you're going to start to see some of that stuff roll out. And we want to be the company that steps up to meet this demand for minimal polypropylene or no polypropylene mesh being used in the future with this natural ReBAR repair. And we like being involved in that space, and we like being a part of the robot as part of that repair process. So that's where we've staked our ground, high degree of compatibility with the robot. One of our fastest-growing products is the LPR product in the hernia portfolio. Most of those are being done minimally invasively, robotically. And that's going to dovetail quite nicely with some really, really good presentations that will be coming up at stages. New clinical data, new robotic compatibility data. And yes, and that's all designed to work with this sort of fear of mesh that I think is manifesting itself mostly with patients. So that's our – that, I think, is going to be the mechanism that helps push this forward and surgeons are going to listen to patients if they're afraid to mesh. And I think with ReBAR, we offer the ability to still use "a reinforcement agent" without potentially the downside complications in the future of pure polypropylene mesh. And it means they don't really have to change their technique. They can use the same technique they've been trained on, but with a softer, more biological regenerative repair, a natural repair.

And if I could sneak one more. Can you just comment on the mix of procedures in terms of robotics versus open and minimally invasive or laparoscopic?

Yes. So our hernia portfolio was 48% open and 52% MIS robotic for Q2. Those are rough approximations we get data back from the field on specific usage. And we usually get between 50% and 60% of our usage back in data cards, and that's what the data cards showed in Q2. So 48%, 52%. 52% on the MIS robotics, very similar to where we were in Q1. So that trend implies a lot of simple procedures, good high volume and good compatibility obviously, with MIS technology, including the robot.

Got it. Thank you, and congrats on the quarter.

Thanks, Zach.

And there are no further questions at this time. Let me turn the call back to Mr. Tony Koblish, President and CEO, for closing remarks.

Thanks, Anne. So we experienced strong sales growth in the second quarter, and the momentum has continued through July. We're optimistic about our future. The sales programs that we implemented last year are leading to great opportunities in our sales territories for our commercial team. Like many of our medtech peers, we're constantly thinking about, worrying about and interacting with our customers and monitoring the COVID-19 situation and the variants. We think we have a pretty good feel for hotspots and when they spring up, it seems like they spring up quickly and then fade quickly as well. So hopefully, it's not going to be a long and drawn-out process like of the old days. It will be sort of hotspots here and there and then ramp up and then ramp downs. And I think if that's the case, then we feel great about this year, vectoring towards the high end of our guidance, and we look forward to the future. I think Q2 was a glimpse of what's possible with a clean market, and I feel like this is the beginning of TELA Bio's run and stay tuned. Thanks for your interest in the company and stay safe, and have a great evening. Thank you.

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