TELA - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First 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 Louisa Smith from the Gilmartin Group. Ms. Smith, the floor is yours.

Thank you, Chris, and good afternoon. Earlier today, TELA Bio released financial results for the first 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 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 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, product potential, the impact of COVID-19, 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, Louisa. Good afternoon, everyone, and thanks for joining us today. I'm pleased to report that TELA Bio had a strong finish to the quarter with March marking the highest monthly revenue in the company's history. Revenue from the quarter was $8.2 million, up 40% year-over-year. Although the Omicron variant caused a sluggish start to the year, our momentum built as the quarter progressed. Elective surgery volumes were down in January and February across most of the med-tech sector, where we saw simple hernia surgery hit disproportionately as hospital systems tended to prioritize more urgent non-elective surgeries. In contrast, OviTex PRS showed resilience to the effects of COVID-19, with demand growing over the period, resulting in revenues up 111% year-over-year. Our analysis of market data corroborates anecdotal reports of a backlog in the label procedures, and we expect some of that backlog to be discharged in the coming quarters. Further evidence in this regard is shown by a strong start to our second quarter. We've noted that the clinical utility and value proposition of OviTex has generated a lot of traction and we are continuing to win over surgeons as evidenced by our significant rate of growth compared to competitive products. TELA Bio is the only hernia repair company to have continuously gained market share throughout the COVID-19 pandemic. We attribute this growth to our strong product profile and our highly effective and expanding sales force. In comparison to our plastic mesh competitors who are facing questions about the long-term safety of their products, and our biologic mesh competitors who offer a costlier product, lacking the same level of biomechanical support, TELA's OviTex products offer the best of both worlds: strength and safety at a good price point. Our sales team has done an outstanding job of getting this message out, even though the pandemic appears to have broadly favored incumbent med-tech products. We are very excited to see what they can do now that the headwinds from COVID appears to be abating. And here's to hoping it stays that way. March provided a glimpse of the type of performance we can achieve when the impact of COVID is low and hospital systems are able to address the demand in delayed elective procedures. Our market share expansion is also driven by the compelling and growing body of clinical data on OviTex. As we shared with you before, recurrence rates for eventual hernias repaired with OviTex and our BRAVO Study, were only 2.7% at 12 months and remain below 5% at 24 months. We aim to build upon this clinical evidence in our BRAVO II study, which will further evaluate the safety and efficacy of OviTex during robotic repairs of ventral and inguinal hernias over a 24-month period. Another strength of the OviTex portfolio of products is their flexibility. As we're seeing in the market, use of our products, a growing percentage of hernia procedures today are performed robotically and almost 60% of OviTex hernia repairs were done via laparoscopic or robotic surgeries last year. OviTex is the only biologic product that can be delivered to a hernia repair site via trocar for use in robotic procedures. As minimally invasive procedures continue to grow in the hernia space, we expect to be able to leverage our superior utility to accelerate market penetration in this segment. As you know, even the best products don't sell themselves. So another factor in the company's continuing performance is our strong growing sales force. One of TELA's core competencies is our ability to quickly train and make newly hired sales professionals as productive as possible using the program we developed Playbook90. Over a new rep's first 90 days with the company, the program provides intensive training in the various resources available to assist in selling. The program also measures their performance and usage of these resources to help predict how quickly the reps will become self-supporting. Playbook90 was launched at the end of 2020 and helped the 2021 class of reps reached profitability in well under 6 months despite the challenges created by COVID-19. Based on year-to-date data through April, 12 of our reps sold at an annualized rate of over $1 million, 7 of those at over $1.5 million and 2 of those at over $2 million. This has obvious positive financial effects for the company, but also benefits TELA by enabling us to attract and recruit additional high-quality sales reps. The potential to earn incentive compensation on these sorts of sales figures, accelerated by the Playbook90 training is a huge draw for a highly effective and competent sales force. Sales rep performance in the last year has given us confidence to materially grow our sales team with a target of 55 reps by midyear and 60 reps by year-end, up from just under 45 at the end of 2021. Assuming we continue to see the results from our Playbook90 program, we expect this increase in our sales force will have a positive impact on our top line without unduly burdening our bottom line. This will be further amplified as we add products to our portfolio to provide a broad tissue restoration and preservation offering. SiteGuard, which is in the initial stages of its launch is the first step in this expansion. From the start, our strategy for success has been to provide innovative solutions backed by clinical data addressing an unmet need and marketed by an exceptional sales team. As we continue to execute on this strategy, we expect to see accelerated market penetration for our products. And with that, I'd like to turn the call over to Roberto Cuca, our Chief Operating Officer and CFO, for a more in-depth review of our first quarter financial results.

Thanks, Tony. Revenue for the first quarter of 2022 increased 40% year-over-year to $8.2 million. Gross profit percentage increased to 61% for the first quarter of 2022 compared to 59% for the same period in 2021. COGS were impacted by investment in inventory for our European market ahead of the expiration of CE Mark registration and the associated reserves for potential expired product we are required to take under [gap]. We are taking steps to reduce the likelihood of expired product going forward and expect to reduce these charges in the future. Gross profit in the first quarter was $5 million as opposed to $3.5 million in the first quarter of 2021. The increase was due to a combination of sales growth and a decrease in the excess and obsolete inventory adjustments as a percentage of revenue. Sales and marketing expenses were $9.4 million in the first quarter of 2022 compared to $6.3 million in the same period in 2021. This increase was mainly due to higher salaries and benefits and commission costs as a result of an expansion of our commercialization activities, higher travel and consulting expenses and additional employee-related costs due to the increase in head count. G&A expenses were $3.5 million in the first quarter of 2022 compared to $2.8 million in the same period in 2021. This increase was primarily due to higher salaries and benefits and increased professional and consulting and legal expenses. R&D expenses were $2 million in the first quarter of 2022 compared to $1.7 million in the same period in 2021. The increase was primarily due to higher salaries and benefits. Loss from operations was $9.8 million in the first quarter of 2022 compared to $7.3 million in the prior year period. Net loss was $10.9 million in the first quarter of 2022 compared to $8.1 million in the same period in 2021. We ended the first quarter of 2022 with $33 million in cash and cash equivalents. For the full year 2022, we continue to expect revenues to be in the range of $40 million to $45 million, representing growth of 36% to 53% over 2021. This takes into consideration the potential impact of COVID-19 and assumes that the overall effect of the virus will be no more disruptive than in 2021. However, a significant increase in COVID-19 infections beyond our estimates could negatively affect this projection. I'll now turn the call back to Tony for his closing remarks. Tony?

Thanks, Roberto. As you've heard this afternoon, we have good reason to be excited about our business this year and beyond. We have all the key attributes of successful med-tech company. OviTex addresses an important unmet need. Its market opportunity is large. Our clinical data is compelling. Our sales and marketing teams are executing we have established reimbursement and solid IP in place. Now that COVID's impact appears to be subsiding, we expect to generate strong growth for the remainder of the year, barring any coded resurgence. Our revenue growth far exceeds the market growth rate and we expect to continue increasing share. We are well on the path towards becoming a market leader in soft tissue preservation and restoration. With that said, I'll now turn the call over to take your questions.

[Operator Instructions] And our first question comes from

Congrats on a great quarter. Tony, I just want to hit on procedure trends. You talked about COVID headwinds impacting volumes through January and February and really recovering in March. Any color on how things are trending through April? Or we -- should we think of it at that March level? Or have things eased up a bit closer to January and February?

No, things are much better in March and April in comparison to January and February. If you look at the composition of our first quarter, January and February were very light on the hernia side, as we said in our comments, elective, delayable perhaps. We started to see recovery in March, still not up to where we expect them to be. April seems a bit better. So we expect that trend to continue to get stronger and stronger. What's nice is that once we get the hernia procedure volumes back where they should be, it's going to step -- they're going to step up to meet what's a very nice growth rate and traction percentage starting to grab hold here for PRS as well. So we look forward to having everything come together real soon.

That's helpful. And then if I could just ask one more on the backlog commentary. How long do you expect -- I guess, back up historically, you said that backlog is more in tune with surgeons staying at 100% capacity for an extended period of time. How long do you expect that backlog to keep surging schedules, I guess, fully busy? And -- can you just give some color there?

Sure. So it's Roberto here. So the way we confirmed our view that there was a backlog as we looked at the IQVIA data on procedures. And we could see that there was a clear dip from trends that has not yet been fully replaced. So we know that there's an existing backlog out there. It's hard to tell from our vantage point, whether any individual surgery in a month or a quarter is a backlog surgery or a new surgery, but what we do know is that the amount of the backlog that we have identified hasn't completely depleted. And we think it's likely to be an effect on our revenues for at least 1 or 2 quarters to come. The real issue on how quickly that gets resolved is how hospitals prioritize their surgical suites for other potentially backlog procedures, including those that are potentially more remunerative to the hospital.

That's very helpful. And then if I could just sneak one more in. I know you hinted on your prepared remarks, but just any update in the hernia mesh litigation that's out there?

Yes. So they're still working their way through some key bellwether cases. It looks like. There was just a win that went against the manufacturer and resulted in a payout to the patient. So I think we're still feeling our way through that process. We know that, that pace is going to pick up a bit, and it certainly continues to be a factor that's on the minds of patients. We know that because we're doing lots of TELA LIVE via

[Operator Instructions] Our next question comes from Dave Turkaly of JMP Securities.

Great. Tony, thanks for the color on the rep productivity. I was wondering, would you possibly give us a glimpse at sort of what the biggest PRS guys are doing now? And are these people, let's say, the folks that are doing $2 million or over $1 million, are they strong in both? Or is it really just hernia that's driving that today?

Yes. So it's a mix, right? I mean some of the older reps that have gotten super productive they're probably still centered on hernia a bit more, but TRS is coming on strong. We're encouraging a full sales process. If you look at the data, if you have a rep that's selling both products in 1 hospital, it's not just a 1 plus 1 equals 2. It's a 1 plus 1 equals 3, 3.2 to be exact. So there's some leverage in being active in a hospital. So we're still working our way through that, Dave. Right now, I would say we have more reps selling hernia, but the number of reps that are grabbing on to PRS is increasing as well.

And Dave, what you were asking about is the division of our procedures between open and laparoscopic and robotic surgeries, that's been consistent in the last quarter with what we've seen before with about 60% of that being in the robotic and laparoscopic.

Yes. I think I misspoke. I said LPR, but I meant PRS. I think Tony got it, so thank you. And then I think I know the answer to this, but I guess any color around Aroa, I think the way that, that deal is structured, we shouldn't see any inflation cost or anything like that. But I don't know exactly what's happening in New

Yes, you're exactly right on that. So the way our deal is structured with Aroa is we compensate them by paying them 27% of our revenues as kind of a royalty. We initially acquired the product from them at twice their COGS, so the initial acquisition cost can be slightly affected by inflation, but that gets corrected via the true-up for the royalty.

[Operator Instructions] I see no further questions in the queue. I will turn the conference back over to Tony Koblish for closing remarks.

All right. Thank you for your interest in TELA Bio this afternoon. We look forward to updating you on our progress next quarter. Have a good night, everybody.