TELA Bio, Inc. (NASDAQ:TELA) Q1 2024 Earnings Call Transcript

TELA Bio, Inc. (NASDAQ:TELA) Q1 2024 Earnings Call Transcript May 11, 2024

TELA Bio, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group.

Louisa Smith: Thank you, Michelle, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the first quarter of 2024. 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 annual report on Form 10-K and quarterly reports on Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product development and pipeline opportunities, product potential, the impact of various macroeconomic conditions identified in our filings, the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I will now turn the call over to Tony.

Antony Koblish: Thank you, Louisa, and good afternoon, everyone. Thank you for joining us for TELA Bio’s first quarter 2024 earnings call. In this call, I’d like to highlight some critical milestones we hit in the quarter as well as update you on our continued strategic progress and ongoing growth opportunities. We’ve started the year off strong. First quarter revenue was $16.6 million, representing 39% growth over the same period in 2023 and our 13th consecutive quarter with growth of 35% or greater. We are capitalizing on the considerable momentum we generated in the fourth quarter, and our business is firing on all cylinders. As you will hear today, we are benefiting from the recent enhancements to our commercial team in addition to some key product launches that will enable us to drive significant growth through the remainder of the year.

In April, we launched OviTex IHR, a trocar-compatible, next-generation soft tissue repair platform designed for inguinal hernias, specifically for the use in laparoscopic and robotic-assisted procedures. Just like our other OviTex devices, OviTex IHR utilizes layers of ovine or sheep rumen embroidered with just enough polymer suture to provide additional strength and performance. All OviTex devices are designed to leverage a patient’s natural healing response, facilitate tissue remodeling, optimize strength and minimize the foreign body footprint of synthetic polymer. IHR is available in three configurations and will complement our existing product portfolio and allow further penetration into the inguinal market, which has traditionally been dominated by permanent synthetic meshes.

The initial response has been phenomenal with debuts of the product at two recent industry events, the Intuitive Surgical Connect meeting and at the Society of American Gastrointestinal and Endoscopic Surgeons or commonly known as SAGES. There are now 35 published or presented works demonstrating OviTex’s clinical efficacy in hernia repair. This includes a study led by Dr. Paul Szotek exhibiting a low recurrence rate of 1.2% across 259 patients who underwent robotic inguinal hernia TAPP repair using the ReBAR technique with an average follow-up of 1.5 years. Our medical training efforts are as robust as ever. In Q1, we educated more than 250 surgeons globally through TELA Bio labs and other peer-to-peer training with an emphasis on the use of OviTex in minimally invasive robotic cases.

This includes comprehensive surgeon VIP visits to our Malvern headquarters, experiences at several of our 14 case observation sites, cadaver labs in the U.S. and Europe and various other educational sessions. We also have a very busy schedule at industry and society meetings. Through March of this year, in the U.S., we engaged with surgeons at 25 industry or society meetings focusing on hernia, classic and reconstructive surgery, abdominal trauma and GPO purchasing organizations. In April, we had tremendous success at the Annual Intuitive Connect meeting where they launched their da Vinci 5 platform, and we were only one of three invited companies who provide mesh for hernia surgery. Our invitation to this meeting was a pivotal milestone in further demonstrating our credibility and growing leadership in the robotic space.

At the meeting, we had exposure to nearly 1,800 surgeons and saw tremendous interest in both LIQUIFIX and OviTex IHR. Feedback from surgeon follow-up indicates surgeons who attended were impressed by TELA’s prominent presence at the meeting. I’m also very pleased to announce that in the first half of May, we reached some major implantation milestones. Over 50,000 units of OviTex have been used in hernia and complex ab wall procedures with 10,000 OviTex PRS used in plastic and reconstructive surgery procedures. PRS now accounts for more than a third of TELA’s sales and its revenue grew 54% over the prior year. Of note, the long-term resorbable configuration of PRS, which launched in mid-2023 has grown significantly and now makes up 55% of the PRS portfolio.

Further highlighting TELA’s commitment to PRS and the opportunity it represents, on April 1, we welcomed Dr. Howard Langstein, the former Chief of Plastic Reconstructive Surgery at the University of Rochester Medical Center as TELA’s Vice President of Medical Affairs and Surgeon Strategy. He joins TELA as a member of a strategic team driving awareness of the clinical benefits of TELA’s products with surgeons and hospital administrators in the plastic and reconstructive space. On last quarter’s call, we were coming to you from our national sales meeting, where we launched the LIQUIFIX suite of products in the U.S., including both the LIQUIFIX FIX8 laparoscopic and LIQUIFIX Precision Open Hernia Mesh Fixation Devices. These products allow for precise mesh fixation while eliminating the risk of mechanical tissue damage from alternative fixation methods such as tacks, sutures or staples.

They are the only FDA-approved PMA liquid adhesive devices for use in affixing polypropylene and polyester mesh in inguinal and femoral hernia procedures and for approximating the peritoneum. The sales force received hands-on certification for the products at the national sales meeting, and we have seen tremendous interest at industry meetings since then. To date, over 87 surgeons have been trained on LIQUIFIX, and the product represents yet another addition to our complementary suite of products that elevate TELA to top of mind within the surgeon’s choice of offerings. We are driving awareness and expanding market share with the reach of our portfolio and are committed to offering premier products in the surgeon preference-driven markets of hernia repair and plastic reconstructive surgery.

I’ll now turn the call over to Roberto for an overview of our financials.

Roberto Cuca: Thanks, Tony. As Tony mentioned earlier, revenue for the first quarter of 2024 grew 39% year-over-year to $16.6 million, with OviTex growing 31% and OviTex PRS growing 54% in the period. These increases were primarily due to an increase in unit sales of our products and the continued expansion of our commercial organization. Each of these resulted in increased penetration of our existing customer accounts as well as the addition of new customers. Gross margin was 68% for the first quarter compared to 66% in the prior year period. The increase was primarily due to lower charges for excess and obsolete inventory as a percentage of revenue as a result of improvements in our inventory management during the quarter.

Sales and marketing expense was $17.5 million in the first quarter of 2024 compared to $13.5 million in the same period in 2023. This increase was mainly due to higher compensation costs as a result of the expansion of our commercial organization, higher travel and consulting expenses and additional employee-related costs due to increased headcount. General and administrative expense was $3.8 million compared to $3.6 million in the same period in 2023. This was driven by higher employee-related costs as a result of headcount increases, offset by decreases in bad debt expense and insurance expense. R&D expense was $2.4 million in the first quarter compared to $2.1 million in the prior year, primarily due to higher compensation due to an increase in employees as well as higher costs related to pre-IDE activities for OviTex PRS and outside development of new devices.

Loss from operations was $4.8 million in the first quarter of 2024 compared to $11.3 million in the prior year period. The decrease was driven by the recognition of a onetime gain of $7.6 million from the sale of certain assets related to the NIVIS Fibrillar Collagen Pack Device to MIMEDX in March 2024. This recognition is subject to adjustment in future periods as we assess our estimate of variable consideration from the transaction. Net loss was $5.7 million in the first quarter of 2024 compared to $12 million in the same period in 2023. We ended the first quarter with $37.1 million in cash and cash equivalents. Turning to the outlook for 2024. We now project revenue for the full-year to be in the range of $74.5 million to $76.5 million, representing growth of 27% to 31% from the prior year.

Following the strong first quarter and continued positive dynamics in the market, we feel comfortable in increasing our guidance range as our products continue to win market share. As we have said in the past, we expect operating loss and net loss to be less in 2024 than in 2023, even excluding the contribution from the divestiture of NIVIS. More ever, we expect operating expenses to be reasonably steady over the course of the year, notwithstanding some typical seasonality in expense. And since we expect revenue to grow sequentially, both operating loss and net loss should decline over the course of the year, again, excluding the contribution from the divestiture of NIVIS. We continue to expect that our cash and cash equivalents will be sufficient to fund us to profitability.

With that, I’ll hand the call back to Tony for closing remarks.

Antony Koblish: Thanks. Thanks, Roberto, and thank you, everyone for tuning in this afternoon. I am excited by the progress the team has made in the first quarter, and we are just getting started. We have reached the point where we are able to compete with even the largest competitors in our space. We have a well-trained, experienced direct sales force and highly competitive products backed with exceptional data. Our data on the performance of our products is outstanding, and we continue to collect more. TELA is in a strong financial position, and we fully expect to take share for years to come. I am excited by the greenfield opportunity with IHR and the potential for LIQUIFIX to open doors that were previously closed to us.

So in closing, I’d like to thank our team for their continued commitment to our mission and their relentless focus on driving growth. We are on the precipice of great things here at TELA and I’m eager to deliver on a year of strong top line growth and solid operational execution. With that, I’ll now ask Michelle to open the line for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is going to come from the line of Frank Takkinen with Lake Street Capital Markets. Your line is open. Please go ahead.

Frank Takkinen: Great. Thanks for taking the questions. Congrats on the solid start to the year. I was hoping to start with asking about sequential expectations. I know in previous calls and years, you’ve talked about Q2 being a seasonally strong quarter. I think there’s some particular excitement around that going into it with a fully staffed selling organization, IHR and a couple of other factors. How should we be thinking about all these things and what it can translate into a sequential growth from your standpoint?

Roberto Cuca: So historically, we have had sequential growth from quarter-to-quarter. And as Tony has pointed out, there tends to be a fairly healthy step-up in the first and the second quarters. If you were to look at the historical data and adjust for the hiccup we had in the third quarter of last year, so maybe look at 2022, a progression like that in revenue is something that we would expect. And as I mentioned in the prepared remarks, we do expect OpEx to be fairly steady over the course of the year such that, that step-up in revenue will drop down to the bottom line in the form of improved operating income.

Frank Takkinen: Okay. Perfect. And then maybe for my second one, I know there’s been some development related to the synthetic mesh lawsuit out there. It seems like there’s kind of a May 24 decision date. I’m not going to ask you to speculate on the outcome of that, but maybe help us think through how some of those potential outcomes could impact your business.

Antony Koblish: Well, that’s the greatest hidden secret, I think out there. But yes, there was a notice put out by one of the law firms that there has been a date set for some kind of mediation or arbitration, something like that. So we’re obviously keeping a very close eye on it. We have a communication plan at the ready in case this breaks one way or the other, I think for us to really understand what it means, we’ll have to understand what it looks like in the end, right? And then we’ll be able to sort of game plan for some of the eventual knock-on effects that come after that. But our position is clear and consistent from the beginning, right? We are a natural repair product. We founded this company with the mission of getting permanent plastic out of people’s bellies for hernia repair as much as possible, as much as it makes sense to.

We focused on products that are natural in their remodeling process are soft and do minimal damage, even if they have to come out at some point. Those are the basic tenets that we built the company around. And by and large, we’ve delivered on that. We have superb clinical data, our recurrence rate in these simple inguinal, ventural et cetera, where there has been a problem that the litigation is pointing out, our recurrence rate is in the very, very low single-digits. And so I think we are delivering on that promise. I think putting polypropylene plastic into people’s belies is not going to last forever. It’s going to come to an end at some point. And there’s very few players and products that are as well positioned as we are to be an excellent alternative.

The addition of the IHR product and the LIQUIFIX gives us a broad product portfolio now that can do any of the procedures done with any polypropylene product in any setting with any technique, robots, laparoscopic, open, you name it. So we look forward to being able to help surgeons help patients in the continuing future and keep going on our mission, which has been the original mission of the company.

Roberto Cuca: And I’ll just add a little bit of detail, which is that this was a notice in the federal MDL, multi-district litigation, focused in Ohio. It wasn’t the Rhode Island cases, which are state cases, it was a notice that said that the next case in that MDL litigation was postponed and the parties were sent to mediation with a deadline later in May. The deadline presumably can be extended. And one would think that Bard, the defendant would want to try and settle both the MDL cases and the Rhode Island State cases at the same time. That could be tricky to sync up. So it is pretty unpredictable, but the notice just did get us to finalize our plans in response to any potential settlements, which will be driven in large part by what Becton Dickinson does post the settlement.

Frank Takkinen: Got it. That’s helpful color. I will stop there. Thanks guys.

Antony Koblish: Thanks, Frank.

Operator: Thank you. And one moment as we move onto our next question. Our next question is going to come from the line of Caitlin Cronin with Canaccord Genuity. Your line is open. Please go ahead.

Caitlin Cronin: Hey, thanks for taking my questions. Just to start off, my first question is on productivity. How is that trending, including your initiatives for balanced selling? And how do you feel about the bolus of reps that you brought on at the end of 2023?

Antony Koblish: Yes. I mean we feel very good about the bolus of new reps, and we’ve enhanced our training program significantly, and we’re going to continue to enhance that training program almost to the point of perpetual training so that we have the best train team in the marketplace. We feel pretty good about the balanced selling. There’s already been an uptick in PRS as it relates to a percentage of sales. I think we were running about 30% of top line with PRS. And I believe now in Q1, we are about 35%, 36%. So I think that’s the beginning of what we’re starting to see in terms of a balanced selling approach. So we’re still finding our legs with this. But overall, I think we’re off to a good start. And we started the year with a front-loaded sales force, right?

So last year and the year before, we were hiring which made forecasting the exact number of reps at any point in time along with productivity a little more difficult. Here, we’re front loaded. We’ve got the full team in place for the full-year. So it should allow us to focus on things like training and execution, which will result in more confidence and success in the productivity.

Roberto Cuca: And one of the metrics we talk about is the time it takes for new reps to get to breakeven. And we have seen with the latest cohorts of new reps for which we have these data, that it is still running at just a bit under six months for new reps on average to get to paying for their own variable costs.

Caitlin Cronin: Awesome. And then how do you feel about cash burn this quarter and how you expect that to trend throughout the year?