Good afternoon, ladies and gentlemen and welcome to the TELA Bio Fourth 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 Louisa Smith from the Gilmartin Group. You may begin..

Thank you, Towanda and good afternoon everyone. Earlier today, TELA Bio released financial results for the fourth quarter and full year 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 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 2020 Form 10-K and subsequent 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 will now turn the call over to Tony..

Thank you, Louisa and good afternoon everyone. Thanks for joining us today. I am pleased to report that TELA Bio finished the year with fourth quarter revenue of $8.4 million, up 9% from the third quarter and 48% from the fourth quarter of 2020. As COVID-19 subsided in the fall of last year, our Q4 revenue started off quite strong.

However, the impact of the Omicron variant affected procedures and performance in December compared with our expectations. As in Omicron, we believe we would have seen even stronger performance in the quarter. Sales for the year were $29.5 million, reflecting growth of 62% from 2020.

The benefits of using OviTex are clearly gaining traction with surgeons as we have continued to capture share and grow faster than the market. As you can imagine, introducing innovation and changing the status quo requires us to educate various stakeholders.

When our sales reps have the opportunity to make the case for our products, especially in person, our business thrives. However, due to COVID, traditional in-person opportunities were always – were not always an option, so our sales representatives were quick to employ virtual sales and educational sessions.

Their tenacity helped to keep our business momentum going through the most challenging periods of the pandemic.

We expect that momentum to continue into 2020, therefore, we are projecting year-over-year revenue growth in 2022 of approximately 44% at the midpoint of our guidance range, assuming COVID-related disruptions are not greater than we experienced in 2021.

In the fourth quarter, we entered into an exclusive distribution agreement with Next Science for SiteGuard No Rinse Antimicrobial Solution for use in plastic reconstructive surgery.

This was the first step in our evolution from a focus on high-quality reinforcement materials to more broadly prioritizing the preservation and restoration of the patient’s own anatomy through soft tissue reconstruction solutions and complementary technologies.

Having had the opportunity to work with SiteGuard for several months now, we are even more optimistic about the future success of this product.

We believe it is an excellent way for us to build on our expertise in tissue repair procedures and is also in keeping with our record of providing patients, clinicians and payers with effective and cost-saving solutions. We expect to continue to leverage our sales force to expand our total addressable market with additional synergistic products.

Our confidence in our future, both in 2022 and beyond, is only increasing as we grow and rest on – our growth rests on two key competitive advantages of TELA. We offer innovative products backed by compelling data, we have a high-performing and improving sales force and support functions.

First, we know OviTex is a great product line that provides excellent outcomes for patients. However, changing physician behavior requires data. The compelling results from the BRAVO Study are helping to drive OviTex adoption and increased use.

Recall that BRAVO demonstrated that OviTex performed exceptionally well with an overall hernia recurrence rate of only 2.7% at 12 months and below 5% at 24 months. There will be more data to follow when the full results are published and even more from our BRAVO 2 study in the future.

Additionally, a number of OviTex’s presentations have been optimized to capitalize on the growing use of robots in repair procedures and the need for reinforcement materials compatible with these technologies. In the fourth quarter of 2021, 57% of OviTex hernia repairs were done by laparoscopic or robotic surgeries.

In the next several years, we expect the market to evolve such that the large majority of hernia repair procedures will be done with robotic assistance, except for the most complex or extensive repairs. OviTex was designed to be flexible enough to be used in robotic surgery, but still offers the surgeon strong support where needed.

So we believe this is well placed in the market for this market development. Our PRS franchise continues to perform. On a unit basis, sales were up 90% in 2021 compared to 2020. And as with the rest of the OviTex products, we continue to develop data in support of PRS in both clinical and preclinical studies.

As the plastic and reconstruction markets continue to move away from cadaver skin-based products, we expect PRS to be a substantial contributor to our overall performance. In the fourth quarter of 2021, 12 of our reps were selling at a $1 million rate annualized. Of these, 2 reps were selling at a $2 million rate.

That type of exceptional productivity was the result of having an innovative product portfolio, combined with what we’re calling Playbook90, which we launched in early 2021.

Playbook90 provides comprehensive sales and resource training combined with performance measurement that permits us to quickly get high-potential reps up to speed while providing an early indication of those who might not be successful with our products.

The effectiveness of Playbook90 has given us the confidence to expand our sales force to approximately 55 by midyear and 60 by year-end, up from just under 45 at the end of 2021. Another critical component to our success is physician training.

When elective surgery cases decreased due to COVID, we took this as an opportunity to educate surgeons on the benefits of our products. As a result, we’ve seen an increase in the number of surgeons attending remote, live and in-person training sessions when they haven’t had access to the operating room.

In addition, we have found that once a doctor has been trained with OviTex, they are likely to adopt the technology. To date, over 300 physicians have been trained on our products. With that, I’d like to turn the call over to Roberto Cuca, our COO and CFO, for a more in-depth review of our fourth quarter and full year results..

Thanks, Tony. Revenue for the fourth quarter of 2021 increased 48% year-over-year to $8.4 million as a result of the expansion of the commercial organization and the accelerated productivity ramp from new sales reps we’ve been seeing as a result of Playbook90.

Gross profit in Q4 was $5.7 million as opposed to $3.7 million in the fourth quarter of 2020. Gross profit percentage was 68% for the fourth quarter compared to 65% for the same period in 2020. The increase was primarily due to a decrease in the reserve for excess and obsolete inventory as a percentage of revenue as compared to the prior year.

Sales and marketing expenses were $8.3 million in the fourth quarter of 2021 compared to $6.4 million in the same period in 2020. This increase is mainly due to the expansion of our commercialization activities. G&A expenses were $3.3 million in the fourth quarter of 2021 compared to $2.9 million in the same period in 2020.

This increase was mainly due to higher compensation and increased professional, consulting and legal expenses. R&D expenses were $1.7 million in the fourth quarter of 2021 compared to $1.2 million in the same period in 2020, primarily due to additional testing and development work.

Loss from operations was $7.7 million in the fourth quarter of 2021 compared to $6.7 million in the prior year period. Net loss was $8.6 million in the fourth quarter of 2021 compared to $7.8 million in the same period in 2020. We ended the fourth quarter of 2021 with $43.9 million in cash and cash equivalents.

Turning to the full year, 2021 revenue was $29.5 million, an increase of 62% compared to $18.2 million in 2020. 2021 gross profit was $18.8 million compared to $11.2 million in 2020, an increase of 67%. Sales and marketing expenses were $29.1 million for the full year, G&A and R&D were $12.5 million and $6.7 million, respectively.

Loss from operations was $29.5 million in 2021 compared to $25.3 million in the prior year, and net loss was $33.3 million for 2021 compared to $28.8 million for full year 2020. Now turning to the outlook for 2020, we anticipate revenues to be in the range of $40 million to $45 million, representing growth of 36% to 53% over the prior year.

This assumes that the impact of COVID-19 in 2022 is no worse than it was in 2021. Further disruption from COVID-19 could negatively affect this projection. As of today’s call, we have good visibility into performance in the first quarter of 2022.

As Tony mentioned earlier, the Omicron variant negatively affected sales in December, and this effect continued into the early part of this year, suppressing January and February revenues below our expectations.

We believe market is rebounding, but the overall effect is that we expect first quarter revenues to be down slightly from the fourth quarter at approximately $8 million. This expectation is incorporated into our full year projection of revenues from $40 million to $45 million. With that, I’ll hand the call back to Tony for some additional remarks..

As you’ve heard, our business was strong in the fourth quarter of 2021, even with the headwinds from COVID-19 in December. Results from October and November gave us a glimpse of how we can perform in an operating environment minimally impacted by the pandemic.

Fortunately, despite a winter flare up, as of March, things appear to be opening up again, and our results are quickly reflecting that. We anticipate maintaining durable growth and increasing market penetration with our strategic product portfolio in 2022.

Thinking beyond 2022, we believe TELA Bio has in place the key elements to be very successful medical device company, great products that offer needed solutions, compelling clinical data, a strong sales force and infrastructure, established reimbursement, a compelling value proposition and a vast market opportunity.

We look forward to becoming a market leader in soft tissue preservation and restoration. Towanda, please open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Matt O’Brien with Piper Sandler. Your line is open..

Hi, guys. Good afternoon. This is Drew on for Matt. And thanks for taking the questions, and congrats on a solid end of the year here. I do start off on the guidance. I got your comments on Q1, but you are providing a relatively wide range, almost 17 points of growth from the top end to the bottom.

So I assume you’re baking in a couple of scenarios into each of those assumptions.

So maybe you could just run through some of the factors that get you to the high versus the low end of that guidance range?.

Sure. Thanks for the question, Drew. So obviously, as I described, we included into our assumptions that COVID-19 is no worse in 2022 than it is in 2021. But we did build in some ability for it to flare up in different parts of the year.

As you know, our fourth quarter tends to be one of the strongest quarters of the year, which is one of the reasons you see the step down from the fourth quarter to the first quarter this year. And so if COVID-19 would impact one of our bigger quarters, there is room in that range of guidance to absorb that.

And then we followed the standard procedures that we do for generating our guidance, which is building up by territory and by sales rep based on their current ramp and on expectations based on our Playbook90 for how they would grow over the course of the year.

And that all combined to produce the revenue guidance range of $40 million to $45 million for 2022..

Okay. Very helpful. Thank you for that. And then just on the sales rep expansion side, it really seems like you’re starting to lean into things a little bit. Maybe you could just flesh out those comments.

Is that the right read? And then just the productivity comments as well, what – I think last year, you were targeting 50% of your reps reaching that $1 million run rate.

What’s the right way to think about the productivity of that group in 2022?.

Yes. I mean, we feel very confident in rep productivity, right? Playbook90 is a very prescriptive methodology for following steps on how each individual rep can build the franchise and the business in their geography.

It’s based on the ecosystem that we’ve built that enables every rep to succeed around every rep, and it also is based on the formula that our most successful reps have employed. So it’s based on actual data. It’s rigorous. It’s quantitative and it’s measurable. So by implementing it, we feel that there is been an acceleration in productivity.

We’re seeing reps be able to pay for themselves very quickly, 3 to 6 months. We’re seeing reps jump to productivity and sustain growth if they are able to follow the playbook very consistently. So that’s a lot of the work that Roberto did coming into the company to analyze the data.

And it’s clear to us that, that is the right inflection point for us to start the process of scaling up the sales force more meaningfully. So certainly, rep productivity, shortening the time to that productivity, all that works together that gives us the confidence to keep growing the sales force.

The other factors involved are clinical data is maturing, contracting and IDN process is maturing, and we are at the cusp of launching an array of new products in the next 24 months, which we want to have in the hands of more and more reps. We’ve also done a great job of building a training and coaching department, very proud of that team.

We ran our first sales school with this in-house coaching team and development team, and it was a great success. 16 reps or so were through the program, and it’s really a hallmark of quality. I also feel like we’re able to attract exceptional talent to the company now.

We’re at that $30 million place, which is a great place to be for a development-stage med tech company. You’re sort of beyond the concept of does it work? Can we prove ourselves? Can we build that income for reps? And now we’re starting to see the benefits of that and the talent is starting to come our way.

So there is a lot of excellent momentum and indicators that tell us we’re doing the right thing here..

Got it. Thank you..

Thank you. Our next question comes from the line of Kyle Rose with Canaccord. Your line is open..

Really thank you for taking the questions. Just wanted to talk about this overall, I guess, expansion at the organization. I mean obviously, you made some sales rep hires in the year-end. I think you’re talking about getting to 55 by midyear and 60 by year-end, if I have those correct.

And then you’re also talking about adding to the overall education team and things of that sort. I wonder if you can just put some goal posts around overall headcount at the company, and how we should kind of think about operating expenses on a go-forward basis, given the investments you’re making right now..

Sure, Kyle. We ended last year with about 120 employees. A vast majority of those employees are in customer-facing roles, sales force, clinical development specialists, business managers, etcetera. The forecast this year, if we expand and hire everyone that we plan is about 174, 175 employees roughly.

Again, with a big focus on the commercialization, but also making sure that we’re resourcing appropriately the expansion of our product portfolio, right? There is going to be sources of new products that come from multiple places. We’re going to continue to co-develop and expand the Aroa product portfolio.

You’re going to see some new stuff coming out this year and next year there. We are starting to work on our in-house, do-it-yourself product portfolio, and you’ll start to see some of that roll out probably next year. We are doing in-license activities. You’re going to see some more of that. SiteGuard is the first example there.

And then we have some co-development activities with other players as well. So there is multiple sources that we’re going to have to draw from here, and we’re going to put some investments into R&D, product development. We’re putting some investments into marketing. We haven’t done much there yet. And we’re putting investments into medical education.

We haven’t done much there yet. So those are the main areas that you’re going to see that headcount grow. And it’s all designed to wrap around the sales force to feed it products, feed it data, feed the – our surgeon customers educational activities and just expand and grow. So this is an execution story, and we are at that point.

And if COVID comes out clean this year, we’re going to see some aggressive growth..

Okay.

And then maybe just tie that to how we should think about the overall trajectory of operating expenses moving forward? I mean when I look at the sales and marketing line this quarter, is that a good proxy moving forward? And then just overall on guidance, you have obviously got multiple vectors of growth, both PRS OviTex as well as some of the new technologies.

How much of that growth for 2022 is organic, in-house versus bringing on some of these new products?.

Yes. So, let me start first with the guidance. So, the guidance range of $40 million to $45 million includes OviTex, PRS and SiteGuard. So, it does not include any additional acquisition of products. With regard to OpEx, we haven’t provided any guidance.

But the way to think about it is, to summarize what Tony said, the majority of growth will be in the sales and marketing line, second in R&D and minimal growth in G&A. And that growth will be – hiring will be occurring over the year.

So, you are not going to see as steep a step up as you might think based on the figure from 45 to 60 sales reps by the end of the year..

Okay. Thank you..

Kyle, we are hiring reps at a pace as they pay for themselves as well. So, that’s a factor to think about as well. They are not going to be burning cash for the long periods of time as they have in the past..

Okay. Thank you..

Thank you. Our next question comes from the line of Zach Weiner with Jefferies. Your line is open..

Hey. Thanks for taking the question. I just wanted to ask on data.

Can you give some color on BRAVO 1, BRAVO 2 and any of the other trials or anything that we should be watching for over the next couple of months?.

Absolutely. So, BRAVO 1, the final write-up of the 2-year data is in development right now. The goal is to get that done in the next month or so. And then we have journals picked out, and we will be submitting to the journal. So, as long as it takes for the journals to approve the data, the publication, that’s when it will be available.

I am hopeful it’s in the next three months to six months, depending on the journals process. BRAVO 2 is a robot-specific study, and that’s been up and running now for a bit of time. It’s had a slow start due to IRB and contracting being slowed down due to COVID. We expect to enroll that study over the next 12 months to 24 months.

It’s going to include many different types of hernia repairs, including inguinal and simple ventral, all done robotically. So, that’s a ways out, but I think it’s going to be valuable data.

We have also had about three or four different publications come to fruition in the last couple of months that represent a wide array of superb clinical data around different types of hernia procedures from ReBAR and inguinal to very complex ab-wall procedures. We are going to be discussing those in the coming months as well.

There is a few more of those publications that will come to fruition, and we will probably do some type of announcement as we roll those out together in a grouping that makes some sense. All told, right now, we have probably over 1,000 patients in various types of studies that range in complexity and different types of hernia.

And so we have a wealth of data that we will continue to roll out over the course of this year..

Got it. That’s very helpful. Just moving on to the financials, gross margin through ‘21 has been a bit lumpy. There are several moving parts.

But how should we think about gross margin in 2022 and how the shelf stabilization levels of price impact that?.

Sure. So, one of the things that affected gross margin in 2021 was we made a large purchase to put inventory into our European operations ahead of some regulatory changes occurring there.

When we made that purchase, we had to take an accrual for the potential expiration dating so the passing of the expiration dating for some of that products, and we took it all at once. So, one of the ways to think about the lumpiness is that, that accruals for potential expiration is not in sync with the actual sales of the products.

So, given that we now have those products and inventory have already taken those accruals, the gross margin percentage is likely to be at the higher end of the range that we saw in 2021 than at the lower end of the range in 2022..

Okay. That’s also helpful. And then I just wanted to hit one. You guys noted that COVID impact in December were more pronounced, which is similar commentary we have heard throughout med-tech.

Does that lead to any level of backlog, or is that something that you guys are able to track? And if you could give any commentary there, I understand that COVID continues to be a bit of a headwind at least through the beginning of 1Q, so maybe not any backlog recapture early in the year, but is there an opportunity for backlog recapture as the year progresses and is that in current guidance? Thanks for taking the questions..

Yes. So, Q4 was excellent, very strong. Our strongest months were November and actually December was fairly good, although it could have been better, right. In the back half of December, we started to see the impact of Omicron and a bit of a slowdown. That continued into January, and I would say, mostly in the early part of February.

It’s definitely starting to lift now. So, we haven’t seen any benefit of backlog on the hernia side yet. I expect that, that should come along. It’s difficult to say whether that will be April, May or June or whether it will sort of be spread across the rest of this year.

You will recall from previous discussions that when there is an issue with COVID or nursing shortage, etcetera, in elective surgeries, hernia tends to be impacted a little bit more than our plastic and reconstructive.

And so right now, even though we are looking very, very strong in March, plastic and reconstructive is right on target and hernia remains a little bit behind. So, I think it’s going to be a little bit of a mix between the two procedures until we get the effect of that backlog, which will occur, it’s just tough to say when.

I mean these procedures are going to have to get done. And yes, to the best of our ability to predict the backlog, it’s in the guidance..

Got it. That’s helpful. Thanks for taking the questions..

Thank you. Our final question comes from the line of Dave Turkaly with JMP Securities. Your line is open..

Thanks. Tony, I guess quick one on SiteGuard.

I think you are saying that it’s being used with PRS, but could it be used elsewhere? And could you maybe comment on sort of the ASP and the margin profile for you for that specifically?.

Sure. So, SiteGuard is going to start off in the plastic surgery market. It can be used in conjunction with PRS, and it can be used outside of the usage of PRS. We do have the ability to expand, I think from there.

We have developed a relationship with Next Science that says once the hernia application is available that will have it for that application as well. So, we are very optimistic about the use of SiteGuard across all of the procedures that our reps cover. The margin profile, it’s going to come in a little lower than our other products, I would say.

But there is going to be a mix here, Dave, as we go forward. As we roll out new products this year and next year, that are going to be puts and takes on the margins, right. So, I think net-net, once the full portfolio over the next 24 months rolls out, it’s going to be to the positive side on the margins.

But SiteGuard may be a little lower to start out before we get to all those other products. But the key for SiteGuard is to drive usage of our other products, right. We view it as a companion product.

Eventually, I think it could be a standalone product, but we are starting it out as a companion product and designed to make our products work better for patients and for surgeons..

I mean it seems pretty intuitive, there is probably not – is there a reason in any of the cases like that you wouldn’t use that?.

There is not. There is not a reason. No. We are going to just expand methodically like we usually do, Dave..

Got it. And then you mentioned capturing share. I was just curious when you look at biologics that are out there and maybe even some of the things that are sort of in between, I mean the competitors, are they still growing based on your estimate today, those specifically? I know the core market is not – hernia repair is probably not rapid growth.

But I am just curious, are you – were you saying, versus those competitors that might be most related to TELA or are you just saying versus overall?.

Well, Dave, we track IQVIA data pretty closely, right. And if you look at essentially every quarter since COVID hit, we are the only company that are supplying these types of products that have had growth every single quarter. Obviously, we are not the incumbent everywhere.

But we are rising up the stack rankings and lead tables and there are some reports out of IQVIA that show that we may be the number two biologic in hernia repair at this point or close to it. So, we are just keeping our head down and methodically growing the business. And yes, indeed, we are growing share.

And every quarter, we have been in the green when most others have been in the red even throughout all this COVID period. So, we are very bullish and optimistic when we have a clean market without COVID impact.

And we have all these factors that will come together, a productive and growing sales force and new product additions that’s an excellent recipe for continued growth, strong and continued growth..

Agreed. Thank you very much..

Thanks Dave..

Thank you. I am showing no further questions in the queue. I would now like to turn the call back over to Tony for closing remarks..

Thanks Towanda. I want to thank everyone again for your time this afternoon and your interest in TELA Bio. Have a great evening. We will see you next time..

Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect..