TELA Bio, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Telebio First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow after the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group. Ms. Smith, the floor is yours.

Thank you, Chris, and good afternoon. Earlier today, Telebio released financial results for the first quarter 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 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 2021 Form 10-K and 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, product potential, the impact of COVID-19, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. With that, I'll now turn the call over to Tony.

Thank you, Louisa. Good afternoon, everyone, and thanks for joining us today. I'm pleased to report that Telebio had a strong finish to the quarter, with March marking the highest monthly revenue in the company's history. Revenue from the quarter was $8.2 million, up 40% year over year. Although the Omicron variant caused a sluggish start to the year, our momentum built as the quarter progressed. Elective surgery volumes were down in January and February across most of the med tech sector, where we saw simple hernia surgery hit disproportionately as hospital systems tended to prioritize more urgent, non-elective surgeries. In contrast, Ovitec's PRS showed resilience to the effects of COVID-19, with demand growing over the period, resulting in revenues up 111% year over year. Our analysis of market data corroborates anecdotal reports of a backlog in delayable procedures, and we expect some of that backlog to be discharged in the coming quarters. Further evidence in this regard is shown by a strong start to our second quarter. We've noted that the clinical utility and value proposition of Ovitex has generated a lot of traction and we are continuing to win over surgeons as evidenced by our significant rate of growth compared to competitive products. Telebio is the only hernia repair company to have continuously gained market share throughout the COVID-19 pandemic. We attribute this growth to our strong product profile and our highly effective and expanding sales force. In comparison to our plastic mesh competitors, who are facing questions about the long-term safety of their products, and our biologic mesh competitors, who offer a costlier product lacking the same level of biomechanical support, Tela's Ovitex products offer the best of both worlds, strength and safety at a good price point. Our sales team has done an outstanding job of getting this message out, even though the pandemic appears to have broadly favored incumbent MedTech products. We are very excited to see what they can do now that the headwinds from COVID appear to be abating. And here's to hoping it stays that way. March provided a glimpse of the type of performance we can achieve when the impact of COVID is low and hospital systems are able to address the demand in delayed elective procedures. Our market share expansion is also driven by the compelling and growing body of clinical data on Ovitex. As we've shared with you before, recurrence rates for eventual hernias repaired with Ovitex in our BRAVO study were only 2.7% at 12 months and remained below 5% at 24 months. We aim to build upon this clinical evidence in our BRAVO II study, which will further evaluate the safety and efficacy of Ovitex during robotic repairs of ventral and inguinal hernias over a 24-month period. Another strength of the Ovitex portfolio of products is their flexibility. As we're seeing in the market, use of our products, a growing percentage of hernia procedures today are performed robotically, and almost 60% of Ovitex hernia repairs were done via laparoscopic or robotic surgeries last year. Ovitex is the only biologic product that can be delivered to a hernia repair site via trocar for use in robotic procedures. As minimally invasive procedures continue to grow in the hernia space, we expect to be able to leverage our superior utility to accelerate market penetration in this segment. As you know, even the best products don't sell themselves. So another factor in the company's continuing performance is our strong growing sales force. One of TELUS core competencies is our ability to quickly train and make newly hired sales professionals as productive as possible using the program we developed, Playbook 90. Over a new rep's first 90 days with the company, the program provides intensive training in the various resources available to assist in selling. The program also measures their performance and usage of these resources to help predict how quickly the reps will become self-supporting. Playbook 90 was launched at the end of 2020 and helped the 2021 class of reps reach profitability in well under six months. despite the challenges created by COVID-19. Based on year-to-date data through April, 12 of our reps sold at an annualized rate of over $1 million, seven of those at over $1.5 million, and two of those at over $2 million. This has obvious positive financial effects for the company, but also benefits TELA by enabling us to attract and recruit additional high-quality sales reps. The potential to earn incentive compensation on these sorts of sales figures accelerated by the Playbook 90 training is a huge draw for a highly effective and competent sales force. Sales rep performance in the last year has given us confidence to materially grow our sales team with a target of 55 reps by mid-year and 60 reps by year-end, up from just under 45 at the end of 2021. Assuming we continue to see the results from our Playbook 90 program, We expect this increase in our sales force will have a positive impact on our top line without unduly burdening our bottom line. This will be further amplified as we add products to our portfolio to provide a broad tissue restoration and preservation offering. SiteGuard, which is in the initial stages of its launch, is the first step in this expansion. From the start, our strategy for success has been to provide innovative solutions backed by clinical data, addressing an unmet need, and marketed by an exceptional sales team. As we continue to execute on this strategy, we expect to see accelerated market penetration for our products. And with that, I'd like to turn the call over to Roberto Cuca, our Chief Operating Officer and CFO, for a more in-depth review of our first quarter financial results. Thanks, Tony.

Revenue for the first quarter of 2022 increased 40% year-over-year to $8.2 million. Gross profit percentage increased to 61% for the first quarter of 2022 compared to 59% for the same period in 2021. COGS were impacted by investment in inventory for our European market ahead of the expiration of CE mark registration and the associated reserves for potential expired product we are required to take under GAAP. We are taking steps to reduce the likelihood of expired product going forward and expect to reduce these charges in the future. Gross profit in the first quarter was $5 million as opposed to $3.5 million in the first quarter of 2021. The increase was due to a combination of sales growth and a decrease in the excess and obsolete inventory adjustments as a percentage of revenue. Sales and marketing expenses were $9.4 million in the first quarter of 2022 compared to $6.3 million in the same period in 2021. This increase was mainly due to higher salaries, benefits, and commission costs as a result of an expansion of our commercialization activities, higher travel and consulting expenses, and additional employee-related costs due to the increase in headcount. G&A expenses were $3.5 million in the first quarter of 2022 compared to $2.8 million in the same period in 2021. This increase was primarily due to higher salaries and benefits and increased professional consulting and legal expenses. R&D expenses were $2 million in the first quarter of 2022 compared to $1.7 million in the same period in 2021. The increase was primarily due to higher salaries and benefits. Loss from operations was $9.8 million in the first quarter of 2022 compared to $7.3 million in the prior year period. Net loss was $10.9 million in the first quarter of 2022 compared to $8.1 million in the same period in 2021. We ended the first quarter of 2022 with $33 million in cash and cash equivalents. For the full year 2022, we continue to expect revenues to be in the range of $40 to $45 million representing growth of 36% to 53% over 2021. This takes into consideration the potential impact of COVID-19 and assumes that the overall effect of the virus will be no more disruptive than in 2021. However, significant increase in COVID-19 infections beyond our estimates could negatively affect this projection. I'll now turn the call back to Tony for his closing remarks. Tony. Thanks, Roberto.

As you've heard this afternoon, we have good reason to be excited about our business this year and beyond. We have all the key attributes of a successful med tech company. Ovitex addresses an important unmet need. Its market opportunity is large. Our clinical data is compelling. Our sales and marketing teams are executing. We have established reimbursement and solid IP in place. Now that COVID's impact appears to be subsiding, we expect to generate strong growth for the remainder of the year. barring any COVID resurgence. Our revenue growth far exceeds the market growth rate, and we expect to continue increasing share. We are well on the path towards becoming a market leader in soft tissue preservation and restoration. With that said, I'll now turn the call over to take your questions.

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A roster. And our first question comes from Zach Wiener of Jefferies. Your line is open.

Hey, everyone. Congrats on a great quarter, and thanks for taking the question. Tony, I just want to hit on procedure trends. You talked about COVID headwinds impacting volumes through January and February and really recovering in March. Any color on how things are trending through April? Should we think of it at that March level, or have things eased up a bit closer to January and February?

No, things are much better in March and April in comparison to January and February. If you look at the composition of our first quarter, January and February were very light on the hernia side, as we said in our comments. Elective, delayable perhaps. We started to see recovery in March, still not up to where we expect them to be. April seems a bit better. So we expect that trend to continue to get stronger and stronger. What's nice is that once we get the hernia procedure volumes back where they should be, they're going to step up to meet what's a very nice growth rate and traction percentage starting to grab hold here for PRS as well. So we look forward to having everything come together real soon.

That's helpful. And then if I could just ask one more on the backlog commentary. How long do you expect, I guess, historically you've said that backlog is more in tune with surgeons staying at 100% capacity for an extended period of time. How long do you expect that backlog to keep surgeons schedule that gets fully busy, and can you just give some color there?

Sure. So it's Roberto here. So the way we confirmed our view that there was a backlog is we looked at the IQVIA data on procedures, and we could see that there was a clear dip from trends that has not yet been fully replaced. So we know that there's an existing backlog out there. It's hard to tell from our vantage point whether any individual surgery in a month or a quarter is a backlogged surgery or a new surgery. But what we do know is that the amount of the backlog that we have identified hasn't completely depleted, and we think it's likely to be an effect on our revenues for at least one or two quarters to come. The real issue on how quickly that gets resolved is how hospitals prioritize their surgical suites for other potentially backlogged procedures, including those that are potentially more remunerative to the hospital.

That's very helpful. Thanks for that. And then if I could just sneak one more in. I know you hinted on your prepared remarks, but just any update in the hernia mesh litigation that's out there?

Yeah, so, you know, they're still working their way through some key bellwether cases, it looks like. You know, there was just a win that went against the manufacturer and resulted in a payout to the patient. So, you know, I think we're still feeling our way through that process. We know that that pace is going to pick up a bit, and it certainly continues to be a factor that's on the minds of patients We know that because we're doing lots of tele-live via Zoom, and we have a lot of surgeons starting to come back for in-person VIPs. And, you know, we're developing some nice tools to help surgeons be able to more efficiently manage that dialogue with patients. And I'll refer you to abouthernia.com, which we think is a great resource. for educating patients and taking the edge off of some of those conversations that surgeons have to have with patients about the mesh litigation. So, you know, I think it's progressing. It's still doing its work in the market and, you know, we couldn't be better positioned to be the natural repair solution to, you know, to help patients out if they don't want to have permanent plastic put into their bodies.

Thanks for taking the questions. Congrats on another great quarter, guys. Thanks, Zach.

Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, please press the pound key. Our next question comes from Dave Takali of J&P Security. Your line is open.

Great. Thank you. Tony, thanks for the color on the rep productivity. I was wondering, would you possibly give us a glimpse at sort of what the biggest LPR guys are doing now, and are these people, let's say the folks that are doing 2 million or over a million, are they strong in both, or is it really just hernia that's driving that today?

Yeah, so it's a mix, right? I mean, some of the older reps that have gotten super productive, they're probably still centered on hernia a bit more, but TRS is coming on strong. We're encouraging a full sales process. If you look at the data, if you have a rep that's selling both products in one hospital, it's not just a one plus one equals two, it's a one plus one equals three, 3.2 to be exact. So there's some leverage in being active in a hospital. So we're still working our way through that, Dave. Right now I would say we have more reps selling hernia but the number of reps that are grabbing onto PRS is increasing as well.

And Dave, if what you were asking about is the division of our procedures between open and laparoscopic and robotic surgeries, that's been consistent in the last quarter with what we've seen before with about 60% of that being in the robotic and laparoscopic.

Yeah, thank you for that. I think I misspoke. I said LPR, but I meant PRS. I think Tony got it, so thank you. And then I think I know the answer to this, but I guess any color around AROA, I think the way that that deal is structured, we shouldn't see any inflation costs or anything like that. But I don't know exactly what's happening in New Zealand or if there's anything we need to think about. But it's certainly on the minds of lots of folks. I think you're in a little bit of a unique situation, but any thoughts there?

Yeah, you're exactly right on that. So the way our deal is structured with AROA is we compensate them by paying them 27% of our – revenues as kind of a royalty. We initially acquire the product from them at twice their COGS, so the initial acquisition cost can be slightly affected by inflation, but that gets corrected via the true-up for the royalty. Thank you very much. Thanks, Dave.

Thank you. Again, to ask a question, please press Star 1 on your telephone. Stand by as we compile the Q&A roster. As speakers, I see no further questions in the queue. I will turn the conference back over to Tony Koblish for closing remarks.

All right. Thank you for your interest in Telebio this afternoon. We look forward to updating you on our progress next quarter. Have a good night, everybody.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.