TELA Bio, Inc. (NASDAQ:TELA) Q3 2023 Earnings Call Transcript

TELA Bio, Inc. (NASDAQ:TELA) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Good day and thank you for standing by, and welcome to the TELA Bio Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to introduce your host for today’s call, Greg Chodaczek. You may begin.

Greg Chodaczek: Thank you, Justin, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the third 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 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 Annual Report on Form 10-K and quarterly reports on 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 various macroeconomic conditions, including the COVID-19 pandemic, recessionary concerns, banking instability and inflationary pressures, the regulatory environment, the introduction of new products or product enhancements by us or others including those which may be perceived to negatively impact the demand of our products now or in the future, sales and marketing strategies, capital resources or operating performance. With that, I’ll now turn the call over to Tony.

Tony Koblish: Thank you, Greg. Good afternoon, everyone, and thanks for joining us today for our third quarter 2023 earnings call. We are pleased to report another quarter of strong financial results and operational execution. Revenue in the third quarter with 15.1 million growing 35% year-over-year. Notably, this was the 11th successive quarter of 35% growth or greater, driven by continued market share gains and increased surge in adoption of the OviTex product portfolio. PRS growth was especially strong up 46% year-over-year, notably driven by the launch of the long-term resorbable version of OviTex PRS, which includes specific design features aimed at enhancing the clinical utility of OviTex PRS for surgeons and patients in plastic and reconstructive surgery.

In addition, our hernia portfolio continues to perform with OviTex recently becoming the most implanted biologic hernia repair mesh in the United States, reflecting the growth recognition of the clinical utility of the product for this application. Today, I will review with you the progress we’ve made on the five factors that combined to drive our growth, Roberto will provide a more detailed review of our financial results, and then I’ll make closing remarks before opening line for your questions. I’ll start by discussing sales force size and individual sales representative productivity together, as they had a joint impact on our Q3 revenue. As of today, we have 79 commissioned sales reps, with our goal being to end the year with 75 to 80 filled positions.

Of these 79, 55 have been in their roles for at least six months. During our second quarter earnings call, we had 75 reps of which 50 had at least six months tenure. The newness of a third of our reps at our last call was the result of turnover in the second quarter effected by new regional managers who we have hired at the end of last year, and who identified opportunities for upgrading talent in certain territories. While 35% organic growth is outstanding, we believe it would have been even higher, but for the transition of territory responsibilities in the second quarter. That said I am pleased to report that the newer reps are quickly progressing along the learning curve and their productivity ramp is consistent with our standard six months to break even profitability metric.

Therefore, we anticipate the impact of reps’ turnovers to be meaningfully lower in Q4. Additionally, we have taken the following steps to accelerate the productivity of our newer reps and our sales performance in general. First, we rolled out intensive PRS sales training to ensure that all our reps are comfortable selling the product compliantly and effectively. This additional training added to the availability of the OviTex PRS long-term resorbable should help all our reps, particularly those with less than six months experience on the job. Second, we’ve implemented two supplemental incentive programs in the fourth quarter further to drive increased performance through the remainder of this year and into next. The first incentivizes those reps already on track to achieve their quotas to further outperform.

The second provides a boost to those reps who might be short of quota, but who have the potential to contribute incrementally more. These steps are already helping us to properly return to over 35% growth as anticipated, and should set us up for a strong 2024 performance. Moving on to the third factor driving revenue growth, GPO access; expansion within existing GPO contracts is on track and efforts to add additional GPIOs and IDNs are going well. TELA has contracts with three national group purchasing organizations that enable enhanced and more efficient access to hospitals and surgeons throughout the country. These GPO contracts are critical to TELA’s commercial strategy and provide the opportunity for surgeons to use OviTex product right off the hospital storeroom shelf without requiring approval from hospital administrations.

The first of our three GPO contracts is our long-standing relationship with HealthTrust with whom we resigned a four year renewal. The second contract is with Premier with whom we’ve now had a full year of implementation as it became effective on October 1, 2022. Premier is the second largest GPO in the country, giving us access to over 4400 hospitals within its extended network. Lastly, our most recent GPO relationship offers us a dual source contract in the biosynthetic category. There’s tremendous upside opportunity for TELA within these three contracts, as well as from new contract opportunities and we look forward to providing updates as our access further expands. Our fourth factor is the range of complementary products in our portfolio that enables us to leverage the existing sales force and call points across the soft tissue reconstructive space.

We have launched four products so far in 2023; the first to the large size OviTex LPR for use in minimally invasive surgery and the inhibitors of fibrillar collagen pack are gaining market share with different levels of surgeons familiarity to leverage by our sales force. The third, OviTex PRS long-term resorbable launched in the third quarter and it’s taken off quickly, given surgeons prior knowledge of the product line and interest in the new performance characteristics. Finally, and most recently, we are in the process of launching the LiquiFix hernia mesh fixation devices, LiquiFix8 and LiquiFix Precision. These products, which are indicated to fix mesh to tissue inside the body and to close the peritoneum, the membrane surrounding the abdominal cavity have been marketed in Europe under the brand LiquiBand FIX8 and represent the first product of its kind to be approved for sale in the US.

We believe that this product line allows our sales force to call on surgeons in a technology space where they are comfortable and will increase access to additional surgeons eventually opening opportunities to also discuss the benefits of OviTex in other areas of their hernia practice. Regarding our fifth factor clinical data, we continued to collect data both prospectively and retrospectively for our hernia and PRS products respectively. We’re proud of the performance of our products and we’ll expand our datasets through, for example, our BRAVO II study, which measures the effectiveness of OviTex products when implanted robotically. I’d like to now address the question that has been top of mind with investors, that is what is the potential negative impact of GLP-1 agonist drugs on the market that TELA serves.

Specifically, if patients lose weight on these medicines, how might that affect the rate of hernia repair and plastic and reconstructive surgeries? With regard to the latter, much PRS is used in plastic and reconstructive procedures that we believe are both unrelated to weight loss and an account of weight loss. With regards to hernia, we have consulted with general surgeons in this space whom collectively have identified four potential ways in which GLP-1s may, in their opinion, actually increase the need for hernia repairs. First, an important contra indication for surgery, in general, and hernia repair specifically, is morbid obesity. Patients who lose weight could become newly eligible for repairs that a surgeon might previously have advised against.

Second, a risk factor for hernia is physical activity, and to that extent, it would be reasonable to expect more need for hernia repairs with weight loss. Third, obesity can conceal existing hernias, in particular umbilical hernias, and weight loss can reveal the need for these repairs. Finally, GLP-1s are apparently associated with acid reflux conditions, which could necessitate hiatal hernia repairs and response. Although these examples indicate the potential for GLP-1s to increase the need for hernia repair, the real takeaway is that we do not expect GLP-1 to meaningfully reduce hernia repair rates in any reasonable scenario. With that, I’ll now turn the call over to Roberto to review our financial results and outlook.

Roberto Cuca: Thanks, Tony. Third quarter revenues grew 35% year-over-year to $15.1 million, with OviTex and OviTex PRS growing 30% and 46% respectively. These increases are attributable to the ongoing expansion of our commercial organization leading to new customers, increased existing customer penetration and a growing international sales presence. Tony mentioned that revenues and growth would have been even higher absent the disruption of second quarter sales rep turnover and described the steps we’re taking to quickly regain previously planned performance levels. It’s worth noting, though, that in those territories that were continuously failed, that is those not affected by turnover, performance was consistent with the higher level of revenue growth we had expected.

This validates that our underlying forecasts assumptions other than turnover were robust and reliable. Gross margin for the quarter was 69%, compared to 66% in the same period of 2022. The margin improvement was driven primarily by more efficient inventory management practices, which resulted in a decrease of obsolete and excessive inventory as a percentage of revenue year-over-year. We expect our gross margins to continue at around this level as we operate using more rigorous inventory practices. Operating expenses were $20.6 million in the third quarter compared to $16.8 million in the prior year period. This increase was a result of additional headcount as we continue to expand our organization, consequent higher compensation and employee-related expenses, increased travel expense, as well as an increase in consulting fees and higher study costs.

Loss from operations was $10.2 million in the third quarter of 2023, compared to $9.5 million in the prior year period. Turning to our outlook for full year, we now expect revenues to range from $57 million to $60 million, reflecting growth of 38% to 45% over the full year 2022 and applying revenue for the fourth quarter ranging from $15.5 million to $18.5 million, compared to $11.6 million in the fourth quarter of 2022. Although both the third and fourth quarters have come down from our prior expectations, we anticipate that the steps Tony outlined that we’re taking to address the sales force turnover disruption will allow us to return to sequential growth, more similar to that reflected in our prior guidance, or said another way, we believe the sales rep disruption is largely behind us and that our sales growth rate from Q3 to Q4 is on track with our prior expectations, but from a lower base due to the impact of the turnover in the second quarter.

We ended the third quarter with $58 million in cash and cash equivalents compared to $65 million at the end of the second quarter, meaning that we used $7 million in the quarter. As our revenues continue to grow and as OpEx is held to a much lower growth rate, we expect cash usage to decline. We’ll have more to say about this on our fourth quarter earnings call when we announce revenue guidance for 2024. But for the moment, know that we remain confident in our cash position and continue to believe it will be sufficient to fund us to profitability. I’ll now turn the call back to Tony for closing remarks.

Tony Koblish: Excellent. Thank you, Roberto. I’d like to reiterate my excitement for the success TELA Bio has achieved to date. On September 30, we completed our 11th consecutive quarter of 35% or more year-on-year growth. This was driven by our continued focus on developing and expanding each of the five factors in parallel to achieve consistent share capture. Notwithstanding our exceptional performance so far, TELA represents only a small part of the hernia market on a unit basis with plenty more room to expand and the possibility of a material growth inflection in the future. We are focused on taking full advantage of this opportunity to improve patients’ lives with our products. I want to thank the TELA team for their achievements this quarter, especially those who helped us efficiently expedite the impact of the sales transition.

As a result, we remain on track for continued strong growth. We are confident about our future prospects as we believe we have the key pieces in place to continue to take share including extensive GPO coverage, broad sales coverage in high volume markets, industry leading product performance data, a robust R&D pipeline that continues to deliver new products, and experienced management team, and a path to profitability with our current balance sheet. And even though we keep growing our market share each quarter, most of the market is still there for the taking, and we plan to do just that. With that, I’ll now ask Justin to open the line for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Frank Takkinen from Lake Street Capital Markets, your line is now open. Great, thanks

Frank Takkinen: Great. Thanks for taking the question. Hey, Tony, Roberto. Just wanted to follow up on some of the sales force commentary. I was hoping you could take us a little bit deeper into maybe the reasoning behind some of that turnover and why it was higher than expected. I don’t know if there was a certain background or characteristic associated with those less effective in the sales force, essentially getting at what’s the — what are you doing differently now to ensure a more stable sales organization that can grow per rep productivity more effectively and consistently?

Roberto Cuca: Sure, thanks for the question, Frank. I’ll start until and Tony can jump in. So as we’ve discussed before, we revitalized our RM team, so that’s the regional managers who sit above the territory managers, which is what we call sales reps, in the fourth quarter of last year, to the tune of about 12 new RMs. And those RMs came in the first quarter and evaluated their teams of approximately seven reps apiece. And over the course of the first quarter, roughly one of each of those RMs identified a territory manager that they felt could be upgraded, the territory might be at above breakeven levels of revenue but the growth was not where we wanted to be to be getting to $200 million in the short term that we’re hoping to get.

So over the course of the second quarter, those RMs independently proposed and then followed through on replacing those TMs, the territory managers. So that happened starting at the end of the first quarter, extended through the second quarter, and was complete by the second quarter such that, as Tony mentioned, on our second quarter earnings call, we mentioned that we had 75 reps, of which 50 had been with us for six months or more suggesting or indicating that 25 had been with us for six months or less. So those were the turnover reps, roughly 13, and then the remainder were new hires to expand our sales force. So essentially, what we’re doing is reaching higher up into the organization from the perspective of lower performers and replacing reps that might be hitting greater than breakeven numbers, but whose growth had become a bit slower.

And the RM had determined that that could be upgraded. So, that all took place in the second quarter. We entered the third quarter, in the first month, believing that we’re on track to hit numbers notwithstanding, but it’s awesome that heated off in the latter part of the third quarter. And so what we’re doing to answer the second part of your question, which is what are we doing to make sure that we get back on track and that we have the right reps in place, and that they’re growing at the rate growth rates, we have a couple of programs in place for the fourth quarter, to both address the fourth quarter and the longer term. So the first is we have two new training sessions in place. So our new sales reps are gone through a longer introductory training session and then all reps are going through deeper PRS training.

One of the things we found is that new reps tend to be a little slower on the uptake of PRS sales and that’s a greater potential source of sales and growth. And then second, we put in place two incremental IC plans, one for those reps that are on track to exceed their quotas for the fourth quarter, to incentivize them to further than they already are well beyond their quotas, and then for those reps that might be short of their quotas, that is targeting forecast to be short of their quotas, an additional incentive plan to give them additional motivation to sell and not just wait for the reset of their quotas in the next quarter.

Tony Koblish: Yeah, Frank, I think philosophically, right, where we run the business with an eye towards long-term durable, sustainable growth and quality right. So we did a massive upgrade in talent with our regional manager team and we gave them the task of figuring out where we had some stagnation or slower growers, and they did just that. And we made the decision to do it again to have the strongest team in place at the end of this year. This year is going to be what this year is going to be but we’re already thinking about next year. And if you just look at the key metric, which is we drove this type of growth, with only about 50 or 55 reps that were even on board for six months, we’ve got a bolus of 25, 25 plus reps, that are right now getting trained seasons and matured and we want them to be passing through that six months point of productivity, hire talent, by the way, right as we start next year.

So we’re thinking ahead, not just to triage what Roberto mentioned for the rest of this year, but really, the focus is the 12 months after that and then 12 months after that. Our goal remains $200 million company as efficiently and effectively as possible.

Frank Takkinen: Okay, that’s good color, and then maybe just for my second one, can you just talk to some of the factors between the low end and high end of guidance?

Roberto Cuca: So, just the rate at which we’re able to get our reps up to speed, unpredictable things in the economy, we expect to see, as we normally do that the fourth quarter is the strongest of the year, we tend to see a strong push in December as both physicians and our sales reps push to hit their numbers. But exactly how that all comes together is really something that’s a little bit variable and so the range just accounts for that variability.

Tony Koblish: We can have a big run [Multiple Speakers] things come together at the end of quarters, right. So we want to make sure that we have this thing maturing and peaking at the right moments, not just in a year, but during each quarter as well, so timing.

Roberto Cuca: Thanks, Frank.

Frank Takkinen: Got it. Thanks for questions.

Operator: Thank you. And one moment for our next question. And our next question comes from Caitlin Cronin from Canaccord Genuity. Your line is now open.

Caitlin Cronin: Thanks for taking the questions. Hey, what’s up? I know you talked a little bit in the last question about how you saw a little bit of weakness kind of coming out of the Q3. What have you seen coming into October and November for Q4 in terms of the business environment and just kind of rep productivity?

Roberto Cuca: Sure, so one of the ways we analyze the quarters is we measure the ratio of the first month of the quarter to the actual fully achieved quarter. So we have historical data on that, obviously, ever since post-COVID, well it isn’t even pre-COVID but it’s useful post-COVID, and what we see is that the ratio of our actually achieved October sales to what we forecast for the fourth quarter is right in line with our historical data of what actually occurs. So we feel pretty comfortable based on that and then based on the activities, the tactics that were put in place to get our reps back up to speed, that we’re on track for hitting the quarter.

Tony Koblish: Yeah. And to back up what Roberto said, Caitlin, if you look at July, right in Q3, that metric that Roberto mentioned, as a percent, the first month was not in line, right, so there was a difference.

Caitlin Cronin: Got it. Makes sense. Okay. And then just for my second question, any thoughts on 2024 growth, or at least maybe comment on thoughts where the Street is right now for 2024, a little bit over 80 million?