Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg Chodaczek from the Gilmartin Group. Please go ahead.

Thank you, Felicia, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the third quarter of 2022. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and Chief Executive Officer; and Roberto Cuca, Chief Operating Officer and Chief Financial Officer. Before we begin, I'd like to remind you that during this conference call, the company may make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's 2021 Form 10-K and 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 COVID-19, the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I will turn the call over to Tony.

Thank you, Greg. Good afternoon, everyone, and thanks for joining us today for our third quarter 2022 earnings call. I'm pleased to report that TELA Bio had another strong quarterly performance. Third quarter revenue was $11.2 million, a 46% increase from the same period in 2021. While we are pleased to see further revenue growth, I continue to believe we haven't seen the full potential of our products as hospitals are still contending with staffing shortages, reduced operating hours, resulting in postponed surgeries and health care professionals taking longer than usual vacations during the summer after having put them off last year due to COVID. The good news is the magnitude of these headwinds continues to lessen, which we believe will result in increased procedural volumes and further revenue growth. In particular, the backlog of surgeries we've described on past calls remains high, showing substantial future market opportunity. And notwithstanding headwinds affecting the entire industry, we continue to see OviTex gain market share each quarter. Our success has been driven by our continued focus on the five factors driving our revenue and revenue growth. These are group purchasing organization access, compelling clinical data, sales force size, sales rep productivity and product portfolio expansion from internal R&D and business development. By improving on even one of these factors, we can grow revenues. By enhancing multiple factors, we can achieve the sort of revenue growth we're reporting today. And by fostering all of them going forward, we can tap into even higher growth potential. Let's take them one by one. Our GPO access efforts are progressing very much on track. As you know, we already have an agreement in place with HealthTrust and that organization's members routinely account for approximately a third of our revenues. October 1 was the day that our…

Thanks, Tony. Revenue for the third quarter of 2022 increased 46% year-over-year to $11.2 million, growing 7% sequentially from the second quarter. OviTex revenue grew 29% year-on-year and PRS more than doubled, growing 108% year-over-year. Gross profit percentage was 66% in the third quarter of 2022 compared to 60% in the same period last year. The increase was primarily due to a lower provision for excess and obsolete inventory. Sales and marketing expense was $11.2 million in the third quarter of 2022 compared to $6.9 million in the same period in 2021. This increase was mainly due to higher salaries and benefits and commission costs as a result of the expansion of our commercialization activities, higher travel and consulting expenses and additional employee-related costs due to increased head count, particularly in our customer-facing roles. G&A expense was $3.5 million in both the third quarters of 2022 and 2021. R&D expense was $2.1 million in the third quarter of 2022 compared to $1.4 million in the same period last year. The increase was primarily due to higher salaries and benefits due to an increase in headcount as well as increased consulting and study costs. Loss from operations was $9.5 million in the third quarter of 2022 compared to $7.2 million in the prior year period. Net loss was $10.7 million in the third quarter of 2022 compared to $8.3 million in the same period in 2021. We ended the third quarter of 2022 with $54.2 million in cash and cash equivalents. Finally, for the full year 2022, we continue to expect revenue to range from $42 million to $45 million, representing growth of 43% to 53% over the prior year. I'll now turn the call back to Tony for closing remarks. Tony?

Thanks, Roberto. So as you've just heard, things continue to proceed according to plan. TELA Bio has put in place and continues to expand and improve on each of the five factors driving our success and growth in the competitive medical device industry. We have an exceptional product portfolio sold by a highly effective sales force. We offer our customers an excellent value proposition of functionality in price. Our supply chain is strong and our products are backed by a substantial volume of published clinical data. When combined, this has a very powerful impact and is why we are consistently generating such strong results. The one area of improvement we heard that the investment community wanted us to address was our balance sheet. To that end, we bolstered our cash position with an equity raise in August and are now well funded to further execute on our strategy. I'd like to commend our team's ongoing tenacity in delivering strong performance despite the lingering challenges COVID presents for our markets. Looking forward, we will continue to focus on growing our five drivers of revenue and value growth. Finally, I'd like to reiterate something we've said to investors before. We are still in the early stages of a tremendous opportunity. We estimate the market for our OviTex products is $2.2 billion, which leaves plenty of room for us to capture further share and drive significant future growth. With that, I'll now ask our operator to open the line for your questions. Felicia, please go forward.

[Operator Instructions] The first question comes from the line of Frank Takkinen from Lake Street Capital Markets.

Congrats on the results and all the progress. I wanted to start with one question following up on your comments, Tony, related to the Premier GPO. You said something on the lines of good start with sales accounting for a noticeable portion in October in the Premier contract. Maybe just talk a little bit more about the early start to Premier, any anecdotal feedback you're hearing? And a more pointed question, how long do you think it could take for Premier to become a larger portion than HealthTrust of total revenue?

Yes. So the biggest, most positive news thus far around Premier is not so much the dollars contributed in October, as I described to Premier accounts, we like those a lot. But it's the large systems that were starting to get access to an approval. There's been a very nice array of large systems that I think are going to be tremendously productive for us over the next year. So it takes time to move an organization as large as Premier. Three months is not going to be the measure, as I think you're alluding to with your question. There's a lot of setup work going on, communication across all those 4,400 hospitals, that's a lot of people in coordination, but it's working. And we're starting to get those approvals in some of these big systems, and we really, really like the future potential. The other most important aspect of Premier is that we are in the biosynthetic category, which puts us head to head with the leading resorbable synthetic material, which is likely over a $200 million business at this point, which means that we have graduated from the tough, tough cases associated with biologics to a product that is being acknowledged by a Premier Group purchasing organization that had utility across a wide array of procedures. So that's a big deal for us. And all of that's going to work together to propel us forward. I will remind you that the growth that we've achieved so far, and when we started off as a public company, we were less than $15 million in sales. We've done that with one GPO contract and that contract has really been difficult and impaired to execute against during the COVID period, but we're still running about 36% of our revenue through HealthTrust. And I think HealthTrust is quite pleased with our execution and the way we conduct business, and we look forward to continuing that relationship for a very long time. So we are at the very early stages of attaining a level playing field around access. We'll get another significant GPO fairly soon in the next three to six months. And I think that contract characteristic will also allow us to have wide access. So I think they're all going to work together, right? All these GPOs will work together. And I hope they're all very strong. I'm hoping that HealthTrust grows and it's a race between HealthTrust and Premier to see which one is bigger. So that's sort of where my thought is on that. I think we've got tremendous opportunity in those two. There's another one coming, and we look forward to maximizing the opportunity and potential in each one of those. That's what our partners expect us to do because we offer significant clinical value and cost savings. It's a partnership that works together.

Got it. Okay. That's helpful. Then maybe a bigger picture one on the competitive landscape. Obviously, the fastest-growing hernia mesh on the market right now, implying you're taking share from likely multiple players on the market. But I was curious if you have any feel for who you're taking the most share -- market share from in the hernia space?

Well, we're so underpenetrated in this big market, and there's so many crosscurrents and shifts happening between the categories, synthetic polypropylene mesh, resorbable plastic mesh and Generation 1 biologic mesh. I would say Generation 1 biologic mesh may be the biggest shift, but we are definitely, as we expand into a wider array of procedures. We are starting to see the synthetic polypropylene shift starting to come our way, not quite as pronounced, but it's starting. We're in the early stages there. And then in that biosynthetic category, I've got to say we offer a significant value proposition around both clinical data and performance, much better recurrence rates and a better economic value proposition. So I think that's the next wave for us is to get more competitive and take share in those plastic segments, both permanent and temporary.

Okay. And then maybe just one last one for Roberto. Can you maybe run through what's contemplated for the low end of the guide versus the high end of the guide?

Sure. So as always, there continues to be uncertainty not directly from the effect of COVID-19, but now from the second order effects. So we're seeing a couple of dynamics, something that occurred in the third quarter that we wouldn't expect to see in the fourth quarter is that a lot of physicians, and we confirm this anecdotally at a couple of our cadaver labs, a lot of physicians who had not taken vacations last year because of COVID took more extended vacations this year, two to three week vacations, which reduced procedures. We know that nursing staffing continues to be a challenge. There are a number of nurses who have exited the profession or are taking hiatus. And depending on when or if they come back, that will affect how many procedures get done. And then one thing we're seeing in hospitals is that to manage their expenses -- some hospitals are postponing surgeries that look like they might run into overtime and require additional payments to that nursing staff. So that staffing pressure as well is something that could swing us from the bottom to the top of the guidance range. It's not likely to be COVID infections directly but there's knock-on effects. And then I'd just add that in the Southeast, we're still seeing some challenge from the effects of Hurricane Ian.

Our next question comes from the line of Matthew O'Brien of Piper Sandler.

This is Phil on for Matt. Congrats on the quarter. I guess just for starters, how is the market trending so far in Q4? And if you could provide color on how Q3 went? Anecdotally, we've heard from other companies on that COVID vacation elongation. So was there a noticeable step-up at the end of Q3 that's kind of trended forward here in Q4? And are we still below that pre-COVID level of volume in that 80% to 85% range.

Yes. I'm going to start with that last piece first. I believe we are still below. We had some good conversations with general surgeons who have more of an executive management role in some health systems and they feel like they're still running at 85%, which means they're not really eating into the backlog. So it may be a projected rolling backlog, right? They're going to have to get up to 115% on a regular basis for a long period of time to work the backlog down. So I don't think that backlog at least in hernia, has really been solved yet. So the fact that we can grow so well with that is just excellent. And we're well-positioned as that rolling backlog slowly resolves itself to be very well situated, taking share and being in the right place at the right time with the data that we have at the natural repair product in the face of all the headwinds around plastic feels pretty good that we're in the right spot.

Sure. And so as far as the cadence of Q3 and Q4, so July began fairly strong. We saw some of that vacation effect more in August. We've got some bounce back in September with a caveat that at the end of September, Hurricane Ian did affect our Southeast territory, which tends to be one of our more successful territories, and we've seen some drag-on effects from that at the beginning of the fourth quarter.

Yes. I think overall, the fourth quarter has started stronger. There's still these weird air pockets that you run into like we have discussed in the third quarter. But by and large, fourth quarter is usually strong, and we don't anticipate that it should be any different this year, given the ups and downs of what we're contending with these second [network] derivative knock-on effect that Roberto described. Those aren't going to go away. They seem to rise up and then calm down.

No, that's helpful. And I guess just finally, you're still on pace for 60 reps this year, so call it about 15 reps added in 2022. Looking ahead to 2023 and I can appreciate if you don't quite have this color yet. But are we -- are you expecting to add a similar amount of reps, call it, 15 in 2023 or do you have any insight on to your expectations?

Sure. So we are actually right in the middle of our budgeting process right now. So we're building up all components of the P&L, and that's obviously taking a particular attention to sales and marketing. What I'd say is I'd be surprised if we didn't add any reps, but the exact quantum of them is still up in the air, and we'll have a lot more to say about that on our fourth quarter call.

Yes. But one thing I will add to give you a little directional color as to what our thinking is. Our rep productivity metrics remain good three to six months, and the access is getting bigger and wider. So we are very conscious of the fact that we want to take advantage of this access as the GPO contracts come online.

Our next question comes from the line of Kyle Rose of Canaccord Genuity.

And apologies, we've been bounced around to a couple of calls here. I wonder if you could talk a little bit more about the sales rep productivity. I think in the beginning, you talked about the newer cohort hitting breakeven earlier than expected. So congrats on that. But maybe just where are they seeing the most success early or from the Playbook? Is it on the traditional OviTex side or on the PRS side of the business? And then can you just confirm with the Premier contract. Does that include both OviTex and PRS?

Yes, all of our contracts that we are engaged with are for all products. So that's excellent. I would say we've got a cohort of reps here that have been very strong on the hernia side. And then we have a newer cohort of reps that are starting off very strong on the PRS side. You'll recall that one of the things that we're really focused on and maybe this will be more of a next year metric is sell both products in one place, one hospital. It's a nonlinear positive impact on the business. It's roughly a one plus one equals four versus one plus one equals two so that's likely a focus going forward, which is going to do nothing but aid in that rep productivity. I think one of the learnings from this year, just to not get too granular around color, is that it's probably best to bring our new cohorts, new classes of reps on, not during the summer months, right? So things tend to slow down there. Maybe it's a good time to train them. I think we have to think through when we run the training classes. I mean, we certainly like a Q1 training class. We like an end of Q3 training class. So I think we're still figuring that out. But we're very encouraged by the productivity metrics, and it certainly has a feel that we're in the early stages of that getting even better with the access that's now available to Premier and future access that we will generate through other contracts. So we'll be monitoring this very closely, and there's nothing but upside, I think, in these productivity measures going forward.

Great. And then when you talk about PRS broadly, where are you at from an early adopter to a middle adopters perspective? I realize it's still early here, but there's not a lot of data in the market for any of the competitive technologies. So just really wondering what you're running up against from -- as a governor on some of the productivity from an upside perspective.

Well, we're three years behind, right, in the uptake in comparison to hernia. So I think PRS is progressing very well in comparison to the progression in the early stages of the hernia business. And I think it's going to do nothing but get stronger, again, driven by the five factors, right, bigger sales force, better access. And there's some interesting products that we're looking at for the future that are going to hang around the PRS business, which I think will be very helpful. And lastly, it's really the clinical data aspects, and we're collecting under an FDA retrospective study, a significant amount of PRS clinical data. We're doing it the right way. So as that emerges, I think that may be one of the last elements in the five factors that will help to propel PRS going forward. Otherwise, four of the factors are in pretty good shape around the PRS business. We're just a little bit earlier in the progression. So I'm going to say we're very much still in the early adopter phase.

Our next question comes from Dave Turkaly of JPM.

Just a follow-up on the productivity commentary. I think in the first quarter, you gave us sort of a sales force cascade with sort of the number of folks that are doing different levels of sales. And I was wondering -- I don't know if you have that specific data in front of you, but I guess we should assume that you've got more people doing over $1 million, more doing over $2 million. Any thoughts there? Any color how it looks today?

Yes. So Dave, we don't have that data on us right now, and we're trying to move away from it for a reason that we've discussed occasionally. So one of the ways that we increase productivity, we'll occasionally take and we're doing this more often now, we'll occasionally take a stronger performing territory and subdivide it, providing a portion of it to a new rep and holding the old rep, giving them an override, so that they're not economically harmed for some period of time. So the measure doesn't work quite as well, doing that going forward, the 1.5 and the two cut points. What I'd say, though, is that on an unsubdivided territory level, we're continuing to see territories get larger. We're continuing to see more of them pass through the thresholds. And at the bottom end, with our newer reps, we're continuing to see the reps climb through the ranks from the $0.5 million to the $0.75 million to just under $1 million, even more quickly than we have in the past.

Yes. I'd say we're pretty pleased with the progression, if you look at that 1 and $2 million quantity, even with all of that.

Got it. And then maybe just a quick follow-up, Roberto, can you just remind us the terms on the debt, like the rate maturity? And then I know you've been building some inventory. I was wondering if this sort of level that you have now is what you think is kind of the normal level for you moving ahead, particularly as we're hopefully getting out of these COVID headwinds [indiscernible], but any comment there on sort of that level.

Sure. So let me start with the inventory. So we do expect that inventory going forward is going to grow more similarly to the weight of revenues. Over the past year, we had to do some inventory stock-ins to prepare for potential disruptions, particularly in Europe. So now that we're at a bigger base of revenues. Again, the inventory should grow more closely at the same rate as revenue does. As far as the debt facility goes, the all-in interest rate is something on the order of 9% chopped up into a couple of different types of payments. It's an interest-only facility for three years, which can be extended to four years if we meet certain thresholds, which we expect are pretty easy to meet. And then there's amortization over the course of either the last two years or one year to that fifth year.

Our next question, our next and final question comes from the line of Zach Weiner of Jefferies.

Congrats on another good quarter. I just wanted to touch on backlog again. You made a comment that you haven't seen much backlog or capture. So curious if you could talk about how large that backlog is and how you think about backlog recapture as we -- some of these headwinds start to ease up a bit?

Sure. So I'll start and then Tony can jump in. So the way we estimated the backlog was to take a look at the growth rate in hernia immediately before COVID and then measure the trends [that out] and then measure the variance from that trend in the actual hernia repairs we are seeing. And then we checked that with some physicians that we know, including some hospital administrators who confirmed that on the order of 100,000 cases sounds right. Now, if you think about the backlog as essentially an inventory, you're going to get patients coming out of the backlog and new patients going into the backlog. And Tony's point was that if you're not doing procedures at the same rate as you were before the backlog was established, you're doing them at a lower rate, you're not going to be working down the backlog and it may even continue to grow. So what we had been seeing and hearing from physicians and hospitals is that the rate continues to be on the order of 85% of pre-COVID levels, which means that even though the same individual patients are not in the backlog, it may have turned over, the size of the backlog has not decreased substantially.

I don't have much to add to that.

Okay. Very helpful and comprehensive. I appreciate it. I guess following up on that, is the backlog consists of mostly OviTex or PRS, the combination? Any color on that?

I would say it's mostly hernia. Yes. I mean, PRS is a different animal. It's connected to cancer surgery. So I think there's going to be a different approach there.

Yes. As we've commented on past calls, the PRS market tends to be much more resilient to COVID disruptions because those breast reconstruction surgeries are connected with mastectomies associated with cancer, which are surgeries that you can't really delay and which had priority even during COVID, whereas the hernia cases can be delayed. One observation we heard from one of the hospital administrators we talked to is that what they were seeing is that hernia cases that they were repairing looked like they were more serious. The tears have gotten larger as patients delayed them. But you are able to delay them until some point when they become emergent.

Got it. That's helpful. And then quickly on BRAVO 2. I know you said you're starting to enroll in. Can you just give some color on kind of what that trial -- or what that study is going to look like and how we should think about the timelines there?

Absolutely. So BRAVO 2 was significantly delayed by COVID, not a high priority on many hospitals list to do a post-market clinical study when so much other stuff was going on. So I think we're coming out of that. We're in the double-digit enrollment now. We have a whole group of new sites that are coming on board. And I think it's -- we're starting to see it move. So I don't know exactly when I can give any color on when enrollment will be complete. I think we've got to see maybe a couple of more quarters of performance and how these new sites perform before we can do that. So I don't think we're in a position to do that right now. But one thing I do want to emphasize is that we're looking at BRAVO 2 mostly as a confirmatory study. It's robotic in nature. But right now, 40% of our cases day in and day out are done robotic and another 20% are done laparoscopically for a total of 60% are done minimally invasively. There is a subcomponent of patients within BRAVO 1, which were done robotically. So that data is there. And then we've got well over 1,000 patients in various registries, single-arm studies, case series from a wide array of surgeons for a wide array of hernia types. And those recurrence rates and clinical data signals are exactly what we're seeing with BRAVO 1, low, low single digits. So I think we've got enough proof source to show that we've got an excellent product portfolio for everything from the most complicated procedures to this most simple in robotic procedures. And we've filled a lot of that data in during the COVID period. So we made good use of the time. So I think BRAVO 2 will report out on it. I think it's going to be a great study, and I think it's going to be very confirmatory. We'll learn some interesting things, but I don't feel like it's holding us back right now in the MIS and robotic procedure grouping.

Just one more for me, I'll try. I appreciate the color on extended vacations and whatnot during this summer, certainly something that we've heard through other areas of med tech. Any way you could put some numbers around how much you think that impacted growth and where -- or where revenue could have been in the quarter had it been more of a normalized quarter?

Sure. So that's a pretty tricky one to estimate because there are a couple of dynamics that are occurring all at the same time. So one of them is, obviously, the total number of procedures have been suppressed by staffing by that desire possible to avoid overtime. And so that gets you to that roughly 85% of prior procedure levels. The challenge is that, that's not necessarily proportionally distributed the same way. So one of the things we've been hearing is that hospitals have been prioritizing more lucrative surgeries, so knee replacement, hip replacements at the expense of less lucrative surgeries, which would include hernia repair. So some of the dynamic may be the prioritization of those, again, more lucrative surgeries over our surgeries and some of it may just be a reduction in the total number of procedures that are taking place because of vacations. So that's a very long way of saying it's really difficult for us to make an estimate of that. We're pretty confident that, that is one of the effects that's been contributing to the quarter. We just can't come up with a number for how much that is.

At this time, I would like to turn the call back over to the speakers for any further additional comments.

Thank you, Felicia, and thank you for joining us this evening, and thank you for your interest in TELA Bio. We are definitely in the early stages of ramping this business and I look very much forward to the continuation of our growth over the next 12 to 24 months. We're very excited. The team here is very motivated, and it's a great place to be inside this company right now. So thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.