TELA Bio, Inc. (NASDAQ:TELA) Q4 2022 Earnings Call Transcript

TELA Bio, Inc. (NASDAQ:TELA) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Fourth Quarter and Full Year 2022 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. Please, go ahead.

Louisa Smith: Thank you, Lisa, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the fourth quarter and full year 2022. 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 ongoing response to the COVID-19 pandemic, recessionary concerns, banking and stability 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 fourth quarter and full year 2022 earnings call. I’m pleased to report that in the fourth quarter of 2022, TELA Bio continued to deliver strong revenue growth and sales of $11.6 million, up 39% over the prior year, and full year 2022 revenue of $41.4 million, representing 41% growth from 2021 overall. This was despite continued hospital staffing challenges and slower-than-expected GPO contract uptake, which Roberto will describe in greater detail shortly. Yet even with these ongoing headwinds, we are encouraged that TELA Bio’s OviTex portfolio continues to gain market share quarter after quarter. Our ability to drive continued revenue growth and share capture is a result of our focus on the five factors contributing to top line achievement: sales force size, individual rep productivity, product portfolio, GPO access and clinical data.

I’ll spend some time describing how we advance each factor since the beginning of 2022 and how they impacted our revenue growth. First, sales force size. Given their productivity to date, including through the time of the greatest COVID-19 impact several years ago, we’ve sought to continue expanding the number of reps selling our products. We entered 2022 with just under 45 sales reps, and our earnings call a year ago announced the goal of reaching 55 sales reps by the middle of ’22 and 60 by the end of the year. I’m pleased to report that at the close of ’22, we had 61 reps, and as of today, we have a total of 68 on board. I’ll talk more about our goals for hiring in ’23 in a few minutes. Another important factor driving revenues is contract access to hospital members of GPOs, or Group Purchasing Organizations.

In addition to our preexisting HealthTrust contract and the Premier contract, which became effective on October 1, ’22, we recently announced entry into an agreement with a third national GPO. This three-year dual source agreement extends through January of 26 and places TELA in the biosynthetic category. We are very pleased with this new contract as it provides us access to a significant number of new hospitals. It’s also important to understand that this GPO is strictly administered, which means that we are getting incremental access to customers we would not have otherwise been able to reach. Our inclusion in GPO contracts allows physicians to utilize our products without having to first go through a hospital’s value analysis committee for access.

This clears the way for our sales representatives to introduce surgeons to the use of our OviTex portfolio and grow their usage from there. A third factor is the extent of our product offerings. We continue to expand our portfolio of complementary soft tissue, restoration and preservation solutions. Most recently, we announced the launch of two larger OviTex LPR device configurations. These are ellipse-shaped products designed for ventral and incisional hernia repair in robotic and laparoscopic procedures, each with a smooth side for placement within the abdominal cavity adjacent to the viscera. With 40% of reported OviTex cases performed robotically and 20% laparoscopically in the fourth quarter of ’22, we expect these two new larger pieces will allow for even broader usage of our products going forward.

At the beginning of this year, we announced the launch of the NIVIS Fibrillar Collagen Pack. This is an absorbent matrix of Type 1 and Type 3 bovine collagen designed to manage moderately to heavily exudating wounds and to control minor bleeding. Type 1 and Type 3 collagen closely resemble the native collagen of a patient and have been shown to stimulate cellular activity and contribute to new tissue development. Specifically, Type 3 collagen helps control wound contraction and the amount of scar deposition during wound healing. TELA’s NIVIS product is provided in particulate form, allowing it to be molded and packed into wounds to facilitate contact with host tissue. We’re very excited to launch this high-quality product, which is already generating physician interest and promises to be a new vehicle of growth in the future.

We also have a robust internal R&D program, developing reinforced resorbable synthetic mesh solutions for soft tissue restoration as well as additional technologies for soft tissue preservation. We expect our collaboration business development and internal R&D efforts to continue to provide our sales team with a complementary portfolio of products that will yield great outcomes for patients and surgeons. The fourth factor, clinical data is a key focus for us because these trials and studies allow us to highlight the effectiveness and benefits of OviTex. In October of ’22, we announced the publication of very positive two-year recurrence data and patient reported quality of life outcomes from our BRAVO hernia study. We recently also highlighted five other studies published in ’22 that demonstrate favorable results with OviTex in a variety of hernia and abdominal wall reconstruction applications.

We are currently enrolling our BRAVO II study, which will capture data on the effectiveness of OviTex when used in robotic procedures. As the use of surgical robot systems in general surgery continues to grow, we believe OviTex is uniquely positioned to capitalize on this opportunity, and we anticipate using the data from BRAVO II to further build on that foundation. Additionally, we are conducting a retrospective study for our OviTex PRS products, which could potentially be used to support expanded label indications. And finally, a fifth growth factor is sales rep productivity. In our most recent analysis, we have continued to see that our newest representatives reach breakeven within six months of arrival. This results from a combination of high-quality talent joining TELA in recent years and our Playbook90 training and performance assessment program.

As part of this training, reps become proficient in selling both our OviTex and OviTex PRS products to a variety of surgeon subspecialists. We continue to expand the number of accounts that purchased both categories, and when that happens, we experienced synergistic productivity gains. Specifically, accounts that purchased both OviTex and OviTex PRS are more productive than the sum of other accounts that purchased only one or the other product categories. That is 1 plus 1 equals 3 or 4 rather than 2. Our reps continually work to leverage this positive dynamic in more and more accounts, and we expect this to contribute to continued growth for TELA. Before passing it on to Roberto for more details on the financials and our expectations for ’23, I wanted to provide additional color on the growth of the sales force going forward.

A year ago, we were a company with one GPO contract, and we announced plans to expand our sales force from about 45 to 60 reps over the course of ’22. Today, we have three quality GPO contracts in place, and we are actively pursuing additional targets. To take optimal advantage of these hunting licenses, we have budgeted the hiring of between 15 and 20 additional reps this year, leading to a ’23 year-end total of 75 to 80 reps. Hiring will be more geographically targeted this year given our presence in 68 territories already. We continue to see strong sales rep candidates across the U.S., so we are confident we can grow to this range by the end of the year. Additionally, if we see as many strong applicants as we have to date and their availability lines up with the needs of our new territories, we would be sure to have opportunistic about exceeding the 20 rep target and achieving more aggressive growth goals.

We will update you on progress on this front in our quarterly calls over the course of the year. With that, I’ll turn the call over to Roberto.

Roberto Cuca: Thanks, Tony. As Tony mentioned earlier, revenue for the fourth quarter of 2022 increased 39% year-over-year to $11.6 million, during which OviTex revenue grew 29% year-over-year and OviTex PRS grew 72%. We continue to see a headwind in the form of staffing constraints with procedure volumes still below pre-pandemic levels, but we also experienced a transient contracting challenge, which we now believe has been corrected. Specifically, the effectiveness of the new GPO contract on October 1 had 2 impacts. First, any hospital member of the new GPO that had already been buying our products now received the discount, which on its own would just decreased revenue. However, a second effect is to open up many new hospitals to the use of TELA products without the need for prior value analysis committee approval.

We had expected that increased volume would more than make up for the ASP pressure in the fourth quarter. What we found was that hospitals were administratively slow to implement the new contracts, which led to a delay in the volume uptake. This administrative challenge seems to be resolving with the incremental volume manifesting in the beginning of 2023. Gross margin was 70% for the fourth quarter and 65% for the full year. The quarter’s gross margin was driven by the cost of goods of product actually sold within the quarter as well as amounts reserved for expected expiration for inventory received within the quarter, whether or not it was sold within the quarter. Because of the holidays and our manufacturers’ seasonal shutdown, we typically receive less inventory in the fourth quarter than in any other quarter.

As a result, we expect gross margin in the first quarter of 2023 to step down from the fourth quarter, although the full year should show improvement in 2022. Sales and marketing expense was $11.6 million in the fourth quarter of 2022 compared to $8.3 million in the same period in 2021. This increase was mainly due to higher salary, benefit and commission 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 $3.2 million in the fourth quarter of 2022 compared to $3.3 million in the same period in 2021. R&D expense was $2.7 million in the fourth quarter of 2022 compared to $1.7 million in the same period last year.

The increase is primarily due to an in-process research and development charge, higher salary and benefit costs due to an increase in headcount as well as increased consulting and study costs. Loss from operations was $9.4 million in the fourth quarter of ’22 compared to $7.7 million in the prior year period. Net loss was $10 million in the fourth quarter of 2022 compared to $8.6 million in the same period in 2021. Turning to the full year. 2022 revenue was $41.4 million, an increase of 41% compared to $29.5 million in ’22 — ’21 excuse me. 2022 gross profit was $27 million compared to $18.8 million in 2021, an increase of 44%. Sales and marketing expense were $43.4 million for the full year. G&A and R&D were $13.9 million and $8.9 million, respectively.

Loss from operations was $39 million in 2022 compared to $29.5 million in the prior year, and net loss was $44.3 million for ’22 compared to $33.3 million for full year 2021. We ended 2022 with $42 million in cash and cash equivalents. Turning to the outlook for 2023, we anticipate revenues to be in the range of $60 million to $65 million, representing growth to 45% — of 45% to 57% over the full year of 2022. I’ll now turn the call back to Tony for closing remarks. Tony?

Tony Koblish: Thanks, Roberto. As you’ve just heard, our momentum is strong, and we see no signs of it slowing in 2023. In fact, based on our guidance, we are expecting it to accelerate and for good reasons. In ’22, we established a second key GPO agreement quickly, followed by another important national GPO win in early ’23. We expect to start to see the impact of those agreements over the course of ’23. We also now have impressive two-year BRAVO data in hand. We were able to open many eyes regarding OviTex with our solid one-year data, so we look forward to educating surgeons about these even longer-term efficacy benefits. And in ’23, we have even more products to offer and additional reps in the field to detail them. We are in the very early days of penetrating an estimated $2.2 billion market opportunity.

Even having posted impressive growth — revenue growth for successive years since going public, our sales still comprise a relatively small percentage of the total addressable market. That is extremely exciting to us as we believe we have the best combination of proven performance, safety and value of any surgical repair solution on the market. I’d like to thank all my colleagues at TELA for making 2022 a tremendously successful year and helping to get ’23 off to such a great start. With that, I’ll now ask Lisa to open the line for your questions.

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Q&A Session

Operator: Thank you. Our first question is coming from Frank Takkinen of Lake Street.

Frank Takkinen: Congrats on all the progress. Wanted to start with one on — as it relates to the guide, I heard the comment of incremental volume manifesting thus far in 2023. So maybe could you start with giving us a little more color into how the first quarter is shaking out? And then two, maybe just give us a feel for a quarterly cadence throughout 2023 as these developments start to hit the model more robustly?

Roberto Cuca: Sure. Thanks, Frank. Yes, so we did not provide specific guidance on the first quarter, although what we’re seeing is a reasonable strength suggesting that the uptick we were expecting volume-wise from the new contract that became effective on October 1 is beginning to hit in the first quarter. So, we are positively encouraged by that. As far as cadence, we expect to see a similar type of cadence across the quarters over 2023 with, as usual, the fourth quarter being the strongest. As you’ll note, though, the fourth quarter of this past year was not quite as strong comparatively to the rest of the year as we had been in years past that we believe was due to some headwinds affecting surgical volumes, but we expect the basic cadence to remain the same over the course of the year.

Tony Koblish: Yes. I’ll add a little something, Frank. Since the COVID situation started, hernia has been the more impacted by the ups and downs of staffing and OR time, and I think we saw that throughout last year. One nice element that we’re seeing in Q1 thus far is hernia has been strong. So hopefully, that’s a great signal that we can get all of our products growing in a clean environment like they can and should based on our development and execution against the five factors.

Frank Takkinen: Got it. Okay. That’s good color. And then one — my second one on the sales force hiring. Looks like that you front-end loaded the hiring this year thus far. Can you maybe talk about how you’re thinking about the cadence of hiring throughout the remainder of the year?

Roberto Cuca: So just to be clear, so we finished last year with 61, and we’re now currently at 68. So, we have seen good progress in the hiring. It’s not clear that the full year hiring will be quite as front-loaded as it was last year. So if you think about it, we began 2022 with just under 45 reps, and we’ve always talked about having a mature sales force size of something on the order of 90 to 100, so more than half of our territories were still open. We then put in 15 reps over the course of last year and then an additional eight at the beginning of this year. So, it’s going to become — we need to be a bit more targeted and place in further incremental reps. So, the timing could be a bit more stretched out than it was last year.

Tony Koblish: Yes. Again, I’ll add a little bit of color. I’m really bullish on the talent pool that’s coming to us. Our regional manager talent is just exceptional right now. The new team that we’re putting in place spliced on to the old team is just really, really good, and I think they’re helping us even up our game even more in attracting and hiring excellent reps. So, I think we’re in a great position to take our time and make sure that we fill each one of these location territories with the best possible talent and then align that, as Roberto said, with the GPO access, which is now broad.

Frank Takkinen: Okay. Great. And then maybe last one, a little extra color on the third GPO. It sounds like there’s some unique characteristics here being dual source and highly compliant. Maybe just talk about how you expect uptake within this third GPO as it compares to the other GPOs you’ve contracted?