TELA Bio, Inc. (NASDAQ:TELA) Q4 2023 Earnings Call Transcript

TELA Bio, Inc. (NASDAQ:TELA) Q4 2023 Earnings Call Transcript March 21, 2024

TELA Bio, Inc. misses on earnings expectations. Reported EPS is $-0.53 EPS, expectations were $-0.44. TELA 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 Fourth Quarter 2023 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 fourth quarter and full year 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-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, products potential, the impact of various macroeconomic conditions, including the lingering effects of 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.

Antony Koblish: Thank you, Louisa. Good afternoon everyone and thanks for joining us today for TELA’s fourth quarter and full year 2023 earnings call. Today, I’d like to cover two main topics; how we did in the just completed quarter and year and how we laid the foundation for even greater performance in 2024. Our fourth quarter was very strong and I’m delighted to report that we have never been better positioned for success in our history as you will hear today. As a result of our outstanding Q4, we entered 2024 with considerable momentum, which is reflected in our guidance. Fourth quarter revenue was $17 million, up 13% sequentially from the third quarter and 46% over the fourth quarter of 2022. I’ll note that this is the 12th consecutive quarter we’ve had at least 35% year-over-year top line growth with an average growth rate over those twelve quarters of 49%.

In the fourth quarter, we sold more than 5000 pieces of OviTex and OviTex PRS combined, and PRS now accounts for approximately one third of our total revenue. PRS revenues grew 75% year-over-year year versus 34% for the hernia products and we expect this pattern to continue given that PRS is the more recently launched product line. When we last spoke to you in November, we described several initiatives we had launched to increase sales productivity after we experienced some disruption in the third quarter. Specifically, we rolled out updated continuous training programs for our new reps, more intensive training on OviTex’s PRS for all reps, and incentive programs targeted at those reps who appeared to be falling short of quota as well as those who are on track to surpass it.

We believe these programs are part of what helped us achieve record revenues in the fourth quarter, so we are going to continue the training and over quota incentive programs while adding a new incentive target targeting balanced selling across our product lines. As we’ve described to you in the past, accounts that buy both our hernia and PRS products tend to be more than twice as valuable as accounts that only buy one or the other product. That is, one plus one doesn’t equal two, it comes to something more like three or four. Leveraging the new PRS training we’ve launched, we are going to start incentivizing reps to sell both products, providing greater compensation to those who succeed in doing this. We expect this initiative to be a real contributor to revenue growth in 2024 and beyond.

One big difference in 2024 from last year is that we are beginning the year with essentially the full complement of reps we expect to end the year with. Our goal last year was to grow to a field sales force of 75 to 80 reps, and we achieved that and beyond expanding from 61 reps we exited 2022 with to 86 reps and eight assistant reps at the end of 23. As of the end of February, we had 86 reps and six assistant reps. We plan to remain at these levels throughout 2024, perhaps adding a few opportunistically, with some of the assistants likely converting to full reps over the course of the year. What this means is that the variability in our rep count is not likely to negatively affect sales in 2024, and from a productivity perspective, more than 75% of our reps have been with us for six months or more, which remains the average for a rep to reach breakeven or the point where they are covering their own variable costs.

We expect we will continue to see turnover in 2024, although at lower rates than in prior years and with little expected negative impact. Our focus for the year then, is not on recruiting but on training and improving the productivity of the reps we have on board. Playbook 90 remains the cornerstone of today’s efforts, supplemented with the additional, more intensive training described earlier. I am actually speaking to you today from our national sales meeting, where we have rolled out two significant new product offerings for our sales force to promote. Earlier today, we announced the full formal U.S. commercial launch of two LIQUIFIX products we have licensed exclusively from our partner, Advanced Medical Systems. These are the LIQUIFIX FIX8 Laparoscopic and LIQUIFIX Precision, open hernia mesh fixation devices.

The first is indicated for minimally invasive femoral and inguinal hernia repairs and for approximation of the peritoneum, while the second is indicated for open inguinal and femoral hernia repairs. Both products have been available and successful in European markets for more than three years. We’re really excited about the opportunity to bring LIQUIFIX to the U.S. because it is the only FDA approved PMA product that affixes mesh and approximates tissue with liquid anchors, reducing the use of intrusive mechanical tacks, sutures, or staples. The two LIQUIFIX products are designed to minimize the risk of mechanical tissue trauma. As we’ve often said, we want to create a portfolio that drives growth, increases awareness, expands market share for products across our entire hernia franchise, and demonstrates our commitment to improving all aspects of hernia repair.

We believe LIQUIFIX will do just that by offering greater utility for surgical mesh in inguinal hernia repair by enabling mesh fixation to sensitive areas such as the triangle of doom and the triangle of pain, regions in the groin, where other penetrating or fixation methods could result in vascular or nerve injuries and cause chronic pain. We also introduced our reps to OviTex IHR, our new OviTex inguinal hernia repair product, a next generation soft tissue repair platform designed specifically for inguinal hernia repair. Just like our other OviTex devices, OviTex IHR uniquely utilizes layers of sheep rumen reinforced with just enough polymer suture for added strength. And of course, all OviTex devices are designed to leverage a patient’s natural healing response, facilitate tissue remodeling, and optimize strength.

OviTex IHR will be available in three configurations, two anatomically shaped and one rectangular, all of which are specifically designed for inguinal hernia repair via robotic and laparoscopic approaches. TELA remains committed to the future of robotics and minimally invasive surgery with OviTex, and we’re taking many steps this year to advance the recognition of our products as the first choice for minimally invasive hernia repair. We expect to formally launch OviTex IHR in the U.S. in the second quarter of 2024.

NIVIS Fibrillar Collagen Pack, a:

Regenity Biosciences:

NIVIS:

NIVIS: I’ll now turn the call over to Roberto to review our financial results and 2024 outlook.

Roberto Cuca: Thanks Tony. As Tony mentioned earlier, revenue for the fourth quarter of 2023 increased 46% year-over-year to $17 million and grew 41% for the year to $58.5 million, with OviTex growing 36% and OviTex PRS growing 51% for the year. 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 and growth in international sales. Gross margin was 68% for the fourth quarter and 69% for the full year, compared to 70% and 65% for the prior year periods respectively. The slight decrease in the fourth quarter of 2023 versus the fourth quarter of 2022 was primarily due to an increase in our excess and obsolete inventory adjustments incurred during that period.

For the full year the gross margin improvement was driven by improved inventory management processes and lower amortization of intangible assets. Sales and marketing expense was $17.2 million in the fourth quarter of 2023 compared to $11.6 million in the same period in 2022. This increase was mainly due to higher salary, benefit and commission costs as a result of the expansion of our commercialization organization, higher travel and consulting expenses, and additional employee related costs due to increased headcount. As Tony mentioned earlier, we hired in the fourth quarter of 2023 to achieve the steady-state sales force size we expect for 2024. The effect was to increase expense at the end of 2023, but once that normalizes over the first quarter of 2024, we expect sales and marketing expense to be relatively level for the rest of 2024.

General and administrative expense was $4.1 million compared to $3.2 million in the same period in 2022. R&D expense was $2.7 million in the fourth quarters of both 2023 and 2022. Loss from operations was $12.3 million in the fourth quarter of 2023 compared to $9.4 million in the prior year period. Net loss was $12.9 million in the fourth quarter of 2023 compared to $10 million in the same period in 2022. We ended 2023 with $46.7 million in cash and cash equivalents. We ended 2023 with $46.7 million in cash and cash equivalents. This does not include any of the $8 million to $12 million consideration for the sale of NIVIS distribution rights or the value of NIVIS inventory we sold as part of the transaction, both of which occurred in the first quarter of this year.

Note that in 2023, NIVIS accounted for less than $300,000 of TELA’s total revenue. Turning to the outlook for 2024, we anticipate revenues to be in the range of $74 million to $76 million, representing growth of 27% to 30% over the full year of 2023. 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. Moreover, we expect operating expenses to be reasonably steady over the course of the year, notwithstanding some typical seasonality and expense. And since we expect revenue to grow sequentially, both operating loss and net loss should decline directionally over the course of the year, again even excluding the contribution from the divestiture of NIVIS.

As we have said in the past, we believe that our cash and cash equivalents, even before the proceeds from the divestiture of NIVIS, are sufficient to fund us to profitability and the incremental $8 million to $12 million will only provide additional cushion to this. We have an exciting year ahead of us and I look forward to updating you over the course of it. With that, I’ll hand the call back to Tony for closing remarks.

Antony Koblish: Thanks Roberto and thank you everyone for your interest in TELA Bio. I’m proud of what our team accomplished in 2023. We made exceptional progress in expanding awareness around the OviTex and OviTex PRS portfolio and the efficacy of our mesh in optimizing clinical outcomes and soft tissue preservations. Throughout 2023, we dedicated resources to introduce more than 10,000 specialized hernia and plastic reconstructive surgeons at 72 industry and society meetings to our brand and product portfolio, and we educated more than 1500 surgeons globally through TELA Bio Lab and other educational program offerings on the safe and effective use of our products. One of TELA’s key differentiators is the compatibility of our reinforced biologic products with hernia procedures performed robotically and laparoscopically.

In 2024, we plan to continue educating the market with a particular emphasis on the use of OviTex in minimally invasive robotic cases. As part of that initiative, we are excited for TELA to be part of the upcoming Intuitive Surgical Connect meeting next month. In closing, our team is poised to deliver another strong year of financial performance and solid execution. I would like to thank all those at TELA for their part in making 2023 such a success and setting us up for continued outstanding work in 2024. 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] And 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 a really strong finish to the year. I was hoping to start with one on the 2024 guidance. Obviously you had a strong start or strong end of the year and typical medtech seasonality supports that. How should we be thinking about Q1? Obviously we’re a good portion of the way through that and then the ramp of revenues to achieve the guided range throughout 2024?

Roberto Cuca: Sure. Thanks for the question, Frank. So we expect that the seasonality that we’ve seen in previous years is likely to replicate in 2024. So that means that the first quarter is typically flat to slightly downish from the preceding fourth quarter, and then the quarters succeeding the first quarter grow from that, with a step up from the first to the second quarter typically being one of the larger incremental steps in the year. We’ve talked about some of the factors that drive the very strong fourth quarter and then are essentially pulling some revenue from the first quarter into the fourth quarter in the past, those are a couple of things. One is a lot of patients like to use up HSAs at the end of the year if they have copays for surgeries.

We understand that some patients will schedule their surgeries around the holidays so they have family at home to look after them and then both physicians and sales reps are trying to make numbers for the end of the year. So that typically produces a bit of a push at the end of the year. So we do expect, notwithstanding the leveling off of our sales force, that sort of seasonality to persist.

Antony Koblish: I’ll just add a little bit of color Frank, additional to what Roberto said, I don’t think Q1 is going to behave much differently than the normal seasonality patterns that Roberto suggested. But by us building out the sales force to the desired size in Q4 and getting the time and tenure and maturity on them, we’re really setting up for that Q2 and beyond, which is generally a great step up for us. So that’s a little bit behind the thinking.

Frank Takkinen: Okay, that’s helpful. And then let me go just ask one more and then hop back in queue. Clearly a lot of conversation about robotic inguinal IHR I’m assuming is going after that market. A lot of volume there in the inguinal space. Maybe just kind of recap that whole topic of positioning yourself correctly and the robotic tailwind, as well as the volumes in inguinal, the opportunity there, IHR specifically, and the excitement around that area and how we should be thinking about that throughout the year and going forward.

Antony Koblish: Sure Frank. So we’ve got about four or five years of experience in the inguinal space, but it’s a little bit not optimized. But it was a very ideal period of time to learn and to make sure that we baked in our product portfolio design, technique design and pricing scheme to work. So it gave us a great test bed. We started off with templates that the surgeon could trace out the unique shapes. We developed various rolling techniques to get it down the intuitive trocars and then various techniques from there. And we had some success, but we were using the basic product portfolio that is more applicable to the ventral space, so the pricing is a little bit misaligned. So what we’ve been able to do is take all the learning from that template program and just bake it right into the product.

We’ve made the product thinner, we’ve added a little bit more polymer. We’ve gone from a grid shape pattern to a triaxial pattern, which I think is ideal for deployment, maybe a little stickiness inside the body and superb for strength given that the product is a little bit thinner. We’ve been able to maintain a similar strength to other products. And finally, we’re taking all those technique learnings and we’re adjusting the price for this set of products to be super competitive in what I will call the premium segment of the inguinal market. And so, as we’ve mentioned in the script, we’ll have this product on the shelf at some point in April or Q2 and we expect to roll it out with the sales force after all this learning that’s taken place over the years.

And we’re really pleased to expose our company to our sales team, to this product, at the national sales meeting today. So we’re getting great head start on the launch.

Frank Takkinen: Perfect. Good color. I’ll stop there. Congrats on the progress.

Antony Koblish: Thanks, Frank.

Operator: Thank you. And one moment, as we move on to our next question. And 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: Hi, everyone. Thanks for taking my questions and congrats on an awesome quarter. Just to start, can we touch on GPO contracts and how you were ramping in your existing contracts?

Antony Koblish: You were a little blurry there, Caitlin. We’re sitting in a hotel room with a landline, which is now ancient technology, so if you could just repeat that, that would be great.

Caitlin Cronin: Sure. Yes, no worries. It was just on GPO contracting and how you’re ramping in your existing contracts.