TELA Bio, Inc. (NASDAQ:TELA) Q2 2023 Earnings Call Transcript August 9, 2023
TELA Bio, Inc. beats earnings expectations. Reported EPS is $-0.46, expectations were $-0.58.
Operator: Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. And I would now like to turn the conference over to Louisa Smith from the Gilmartin Group.
Louisa Smith: Thank you, Chris, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the second quarter 2023. 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, including the COVID-19 pandemic, recessionary concerns, banking instability and inflationary pressures the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I’ll now turn the call over to Tony.
Tony Koblish: Thank you, Louisa. Good afternoon, everyone, and thanks for joining us today for our second quarter 2023 earnings call. We are pleased to report another quarter of strong financial results and operational execution. As you will hear, we continue to deliver on our financial goals and advance our key initiatives. Total revenue for the second quarter was $14.5 million, representing growth of 39% year-over-year, which significantly outpaced the growth of the markets in which we sell. I am happy to report we are seeing an improving sales environment as procedure volume and elective surgery demand is up. In the second quarter, we saw strong hernia sales, which may reflect the first steps towards addressing the tens of thousands of procedures delayed during the COVID-19 pandemic.
If so, that bodes well for a solid second half of continued high growth. On this afternoon’s call, as always, I’ll provide an update on the progress we are making with the key drivers of revenue and revenue growth that we refer to as the five factors. Then I’ll ask Roberto to provide further color on our financial results before we open the line for your questions. Let me begin with GPO access. TELA now has contracts with three national group purchasing organizations. These agreements streamline the process by which a surgeon can choose to use our OviTex products by providing access right off the supply room shelf rather than the surgeons having to go through an administratively burdens and utilization committee process. We recently entered into a four-year contract extension with HealthTrust which, as you may recall, was our first GPO.
The original term of three years began in 2020, just as COVID-19 pandemic began impacting the healthcare system. Notwithstanding the significant headwinds, we were able to demonstrate the value of our products to the hospitals served by HealthTrust, which led to the extended contract term of this renewal. Our second GPO contract was with Premier, which became effective on October 1, 2022. As the second largest GPO in the country, it granted us access to over 4,400 hospitals. We are pleased with the progress we’ve made ramping up Premier in Q2, and it is already an important contributor to our revenue performance. Our most recently signed third GPO is structured as a dual source contract in the biosynthetic category. This means that we compete with only a single alternative supplier in this system, which is highly compliant with the contractual product offerings.
These three GPO contracts together cover over 6,000 hospitals, providing significant access to our sales representatives. This leads us to two more of our revenue driving factors: sales force size and sales force productivity. GPO contracts give us access to hospitals across the country, but we can only convert this access into sales via representatives who can call on and educate the physicians in those hospitals. In order to capitalize on the figure to hunting license that contracts represent, we’ve been meaningfully expanding the size of our sales force we have in the field targeting those geographies with the greatest GPO opportunity. As of today, we have 75 sales reps on board against the year-end target of 75 reps to 80 reps. We have continued to invest in the training of our sales force through our playbook 90 program so that they are comfortable representing all of our products in our portfolio.
We continue to revise and improve our training system with the result that our most recent cohorts of hires have reached breakeven profitability in six months or less. Another important factor underlying revenues and their growth is our continued development of clinical data. The compelling results of our studies of OviTex have played an important role in our ability to take share from older technologies. Surgeons are impressed with the exceptionally low recurrence rate of 2.6% that OviTex exhibited in our BRAVO study compared to the double-digit figures that competitive products show. We’re continuously growing our data set and initiating studies to support physicians and patients in their consideration of OviTex. We also continue to enroll patients in our BRAVO II study, which captures data on the effectiveness of OviTex when used in robotic procedures.
As the use of surgical robotic systems in general surgery continues to grow and with 45% of OviTex hernias implanted robotically in the most recent quarter for which data are available, we expect that results from BRAVO II study will be of great use of physicians and patients in making treatment decisions. In addition to collecting clinical data, we also study consumer behavior and interest in hernia treatment matters. In the study among consumers that we recently conducted, we found that there was significant concern over using permanent synthetic mesh and a strong desire for surgeon expertise in innovative more natural solutions. A highlight of the study showed that 77% of consumers who had a permanent plastic mesh prepare would prefer a more natural repair option for subsequent hernias requiring surgery.
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Additionally 95% of all respondents considered important or very important for their doctor or surgeon to be current with top innovations in medical care. The results of this study are indicative of the critical role that patients serve in their healthcare decisions and are at the heart of TELA’s mission to optimize soft tissue restoration and preservation. The impressive set of data we’ve collected supports both patients’ desire for a more natural repair product and encourages surgeon confidence to choose OviTex in future surgeries. The last factor is our product portfolio. We strive to assemble a range of products that leverages our current call points to drive expansion in the soft tissue market. We do this through our internal R&D efforts and through external business development activities.
We’ve already announced several new products in 2023, including two larger configurations of the OviTex LPR product for use on ventral and incisional hernias and minimally invasive surgeries and 510(k) clearance for OviTex long-term resorbable or LTR in plastic and reconstructive surgery. TELA is committed to creating a broad portfolio that delivers next-generation soft tissue preservation and restoration solutions and meets the varying needs of surgeons and patients. We look forward to announcing future portfolio offerings and developments as they become ready for commercialization. Continued execution of these five factors will drive meaningful sales growth and create value for the company and its owners, particularly in an improving procedure environment.
We are highly optimistic about delivering a strong second half given where we are today. With that, I’ll turn the call over to Roberto for more details on our third quarter financial results.
Roberto Cuca: Thanks, Tony. As Tony mentioned earlier, revenue for the second quarter increased 39% year-over-year and 22% sequentially over the first quarter to $14.5 million. During the second quarter, OviTex revenue grew 43% year-over-year and PRS grew 31%. Gross margin was 70% for the second quarter and was driven by the cost of goods of product actually sold within the quarter as well as amounts reserved for expected expiration of inventory purchased within the quarter, whether or not sold within the quarter. This strong showing was driven by slightly lower-than-expected inventory purchases in the second quarter as well as our ongoing inventory management and dynamic inventory redeployment efforts. Sales and marketing expense was $14.6 million in the second quarter of 2023 compared to $11.1 million in the same period in 2022.
The 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 head count particularly in our customer-facing roles. General and administrative expense was $3.5 million in the second quarter of 2023 compared to $3.6 million in the same period in 2022. R&D expense was $2.5 million in the second quarter of 2023 compared to $2.1 million in the same period last year. Loss from operations was $10.4 million in the second quarter of 2023 compared to $10.2 million in the prior year period. Net loss was $10.8 million in the second quarter of 2023 compared to $12.7 million in the same period in 2022. We ended the second quarter with $65.3 million in cash and cash equivalents after conducting a public offering in mid-April.
Regarding the remainder of 2023, we continue to expect full year revenues to be in the range of $60 million to $65 million, representing growth of 45% to 57% over the full year 2022. I’ll now turn the call back to Tony for closing remarks.
Tony Koblish: Thanks, Roberto. First, I’d like to thank all on the TELA team who helped deliver another excellent quarter. We are thrilled with the strong start to 2023 and believe that our momentum will continue for the remainder of the year. The synergies of all five factors coming together lends itself to some exciting catalysts in the coming periods, and we believe we’re in a position to drive top-line growth, capture competitive market share and expand our portfolio with new soft tissue preservation and restoration technologies. As a result of the offering in April, our balance sheet is well suited to support our dynamic growth and strategic initiatives. I’ll finish by simply saying we are still in the early days of a $1 billion-plus market opportunity but our strategy is working, and we are capitalizing on it. I’ll now ask Chris to open the line for your questions. Chris, go ahead.
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Q&A Session
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Operator: Thank you. [Operator Instructions] And our first question will come from Michael Sarcone of Jefferies. Your line is open.
Michael Sarcone: Good afternoon and thanks for taking the question. Just to start, you talked about strong hernia sales, and you mentioned that this could be the first step in addressing the backlog of procedures – so I guess, can you just give us an update on where that backlog stands, maybe how you size it and the potential for that conversion to drive growth? And maybe also comment on what kind of visibility you have there?
Roberto Cuca: Sure, Michael. This is Roberto. So the way we have calculated or estimated the backlog is, we have used market data on the total number of hernia procedures per period, so by quarter or month pre-COVID-19, we mapped out the expected trajectory given that this is a population-based procedure. So there really shouldn’t be much growth beyond the growth of population and then we looked at the actual reported procedures post the beginning of COVID-19 and essentially calculated the area between those two curves to estimate the backlog. We then checked our thinking and approach with a couple of hospital industry executives that we know and consult with on occasion, who said that they estimated things the same way, roughly 100,000 procedures.
And as we’ve said in the past, you don’t dig into or cut down that backlog unless you’re doing procedures at a rate higher than the pre-COVID-19 procedure rate. So we don’t think we’re there yet, but we think that the procedure rate has gone up over more recent periods. It’s sort of the most recent couple of quarters, and that we’re beginning to at least slow down the rate of accretion into that backlog.
Tony Koblish: Yes, Michael, our penetration is so low that there’s plenty of market for us to grow into, which we’ve demonstrated our ability to do so over the last couple of years in the COVID period. So increasing procedure volume will do nothing but help us, and it’s actually a benefit if this backlog unwinds over a long period of time. It allows us to harvest that for the next couple of years, which is advantageous for us.
Michael Sarcone: And I guess just a quick follow-up on that one. Where do procedures stand today versus pre-COVID levels?
Roberto Cuca: So we estimated that about a year ago, procedures were around 85% to pre-COVID. We’re guessing they’re somewhere between 90% and 95% of pre-COVID levels now.
Michael Sarcone: Okay. Thanks and just one more for me, and I’ll hop back in the queue. One of your competitors is working through some disruption. Can you talk about your ability to capitalize on this? And are you seeing more competitive account wins or more conversion given the disruption?
Tony Koblish: Sure. Yes, I’ll take that one, Michael. So the product in question – he’s been around for a long time. It’s what I would consider an old-school first-generation biologic material. And I think most of the user base tends to skew a bit older, that’s not to say it’s 100%, but a bit older. And in terms of hernia procedures, the product is pretty much niche in the most complicated ab wall reconstruction. And then it’s certainly used in plastic and reconstructive procedures as well. So the accounts we have found are spread across the U.S. and are quite patchy. So although the revenue volume is estimated to be about $40 million between those two procedures, it is patchy and infrequent, right, when those procedures come in.
