TELA Bio Inc (TELA) 2020 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Stuart Henderson, Vice President of Corporate Development and Investor Relations for TELA Bio.

Thank you, Lauren, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the quarter ended March 31, 2020. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and CEO; and Nora Brennan, CFO.

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 Forms 10-K and 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, product potential, the regulatory environment, sales and marketing strategies, capital resources, the impact of the COVID-19 pandemic in our business or operating performance.

With that, I'll now turn the call over to Tony.

Thanks, Stuart, and good afternoon, everyone. I want to begin by thanking our health care community, including all hospital workers and staff, for your dedication and sacrifice as you battle the COVID-19 pandemic. We greatly appreciate your heroic contributions to saving lives.

In addition to reviewing our first quarter results, I want to use our time today to discuss the impact of this global crisis on our business and the various initiatives we have taken to position ourselves for continued growth. Nora Brennan will start with a review of our first quarter results, and then I will provide remarks on the impact of this pandemic on our business.

I'll now turn the call over to Nora.

Thanks, Tony, and hello, everyone. Please refer to our press release issued earlier today for a summary of our financial results for the first quarter of 2020. Revenue for the first quarter increased 13% year-over-year to $3.7 million. The increase was primarily driven by the rise in unit sales of our products from the expansion of our commercial organization and increased penetration within existing customer accounts. Though our revenue increased over the prior year period, it was impacted by lower-than-expected procedure volumes in the second half of March 2020 due to hospitals and patients deferring elective procedures and other factors related to the COVID-19 pandemic.

Gross profit as a percentage of revenue improved in the first quarter compared to the prior year period, increasing to 59% of revenue from 54% of revenue in the prior year period due to higher quarterly revenue and the decrease in the charge recognized for excess and obsolete inventory.

Sales and marketing expenses were $5.3 million in the first quarter of 2020 compared to $4 million in the same period in 2019. The increase was due to higher salaries, benefits and commission costs as a result of our sales expansion activities. G&A expenses were $2.5 million in the first quarter of 2020 compared to $1.3 million in the same period in 2019. The increase was due primarily to the increased costs associated with operating as a public company. R&D expenses were $0.9 million in the first quarter of 2020 compared to $1.7 million in the same period in 2019. This decrease was due to reductions in licensing payments, reduced outside development expenses and a lower level of laboratory spend. Loss from operations was $6.5 million in the first quarter of 2020 compared to $5.2 million in the prior year period.

We ended the first quarter of 2020 with $46.7 million in cash, cash equivalents and short-term investments. Based on our business plan today, we believe that our existing cash resources and short-term investments will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. We've initiated several cash conservation strategies for the second quarter, including a reduction of third-party spending; temporary base salary reductions for all employees, ranging from 5% to 35%; and a hiring freeze. We will continue to monitor our cash burn relative to our revenue and adjust our spending as appropriate.

Based on the ongoing impact from restrictions on surgical procedures and shelter-in-place policies, we expect revenue to decline in the second quarter of 2020 as compared to the most recent completed quarter and same quarter in 2019. At this time, the full extent of the impact of COVID -- of the COVID-19 pandemic on our revenues cannot be predicted with reasonable accuracy, and we will continue our suspension of full year 2020 revenue guidance.

With that, I'll now turn the call over to Tony.

All right. The world continues to face an unprecedented time of uncertainty from this global pandemic. As this crisis significantly impacts each of our lives, recovery is dictated in part by government guidelines and mandates that continue to evolve based on a multitude of factors that remain dynamic and vary by geography. Beginning in the middle of March, hospitals began preserving their time, space and resources to address the emergent and potential need for treating COVID-19 patients, and also to mitigate the spread of the virus. This change in focus has caused delays in nonemergent and elective procedures in many parts of the world.

However, over the past few weeks, we understand that certain hospitals in some areas of the country are beginning to lift their moratorium on performing elective procedures, and we have begun to see an increase in surgery volume relative to several weeks ago in new geographies.

Our portfolio, as a reminder, consists of products for hernia repair and plastic and reconstructive surgeries. The majority of these procedures can be deferred and postponed to a later date. However, hernias worsen with time and will eventually require surgery. And patients with complex hernias often have other comorbidities and health challenges that require intervention. Plastic and reconstructive surgeries are also critical to our patients' health, and we expect that most of the canceled procedures will be rescheduled. As a result, we anticipate our volumes to rebound as the country recovers from this pandemic and elective procedures come back online.

As we navigate this challenging time, I continue to be impressed by the resilience of our team and our shared commitment to emerge stronger as we position the company for sustained growth.

Our priorities are focused on these main areas: first, ensuring the health and safety of our employees, customers and patients; second, the conservation of capital; third, driving quality engagement with our customers during the presentation -- including the presentation of our BRAVO clinical data and developing a high-caliber commercial organization; fourth, the continued implementation of our recently awarded GPO contracts; and lastly, the expanded rollout of our OviTex PRS products for plastic and reconstructive surgery.

Turning first to the health and safety of our employees and our customers. Following guidelines, mandates, our employees continue to work remotely with nonessential travel restricted. To protect our employees as they work, we have increased sanitizing measures and have implemented specific protocols for employees to practice physical distancing. We are also developing safety protocols for our field-based employees as they prepare to reenter hospitals. Manufacturing at our partner facility in New Zealand continues to be operational as an essential service and in support of our customers, and to date, we have not encountered any delays or supply shortages.

As Nora discussed earlier, we have taken several proactive measures to reduce our spending for the second quarter to ensure we can invest in driving growth as we recover from this pandemic. We continue to invest in and make progress on our primary strategic initiatives, and we'll monitor our expenses as we gain visibility to surgical procedures returning.

Our commercial team remains focused on supporting our customers and developing a strong surgeon pipeline. We are continuing to operate with virtual solutions, that have allowed our teams to effectively educate surgeons on our product portfolio and clinical data. We have been impressed by the level of engagement in these virtual programs, and has successfully reached over 100 surgeons. We have also established virtual training initiatives throughout our commercial organization to increase our level of service and to ensure that our team provides supportive resources to our customers. We continue to build a pipeline of quality candidates to recruit and place in high-potential geographies to service our hospital customers when surgery volumes improve.

Clinically, we remain on track with BRAVO, our multicenter prospective postmarket study, which has shown a 0% hernia recurrence at 24 months in the first 20 patients studied and a 2% recurrence rate in the first 57 patients at 12 months. As the BRAVO data continues to mature, we plan to provide additional data over the next several quarters.

Prior to COVID-19, we were awarded multiple GPO contracts, providing us with access to approximately 1,900 hospital accounts. While interactions with supply chain and clinical resource directors within hospital systems have been limited, engagement has improved in recent weeks. As hospitals begin to come back online, we remain laser focused on leveraging the GPO contracts that we have been awarded to drive the adoption of our OviTex and OviTex PRS products.

We also appreciate that many of our hospital customers are facing economic challenges as they manage their businesses through this crisis, and we remain at their service to provide our product portfolio at significant cost savings relative to competitive natural repair technologies.

For plastic and reconstructive surgery, we are continuing with the limited launch of our OviTex PRS products and have experienced high engagement with new surgeon customers via our virtual education programs. We are working to expand our surgeon network as surgeries are rescheduled and continue to collect feedback on our product portfolio to identify additional product opportunities. We plan on leveraging our existing adaptable technology platform to develop new generations of both our OviTex hernia and OviTex PRS products.

Circumstances arising from COVID-19 are rapidly evolving and continue to be uncertain. At this time, the full extent of the impact on the COVID-19 -- of the COVID-19 pandemic on our business cannot be predicted with reasonable accuracy. Looking ahead to the coming months, we continue to actively monitor the progression of COVID-19 on our outlook, especially with hospitals beginning to come back online for elective procedures.

In closing, I want to thank everyone again for your time this afternoon and for your interest in TELA Bio. I also want to thank our team for their continued commitment to our mission. I have confidence in the fundamental strength of our business as we support our health care community to overcome this challenging time. We are well positioned to deliver on our initiatives, and I remain optimistic that we will continue our success and achieve sustainable growth in the long term.

I'll now turn the call back over to our operator, Lauren, and open it up to questions.

(Operator Instructions) Our first question comes from Raj Denhoy with Jefferies.

I wonder if maybe I could start with how the quarter has progressed. And so I appreciate that April was probably quite poor as it was for most companies and then maybe a bit of recovery, as you described. But maybe you could just ground us on how bad things got in April and what you're seeing in terms of procedures coming back.

Sure, Raj. So April started very slow and, I'd say, improved somewhat as the month progressed and has continued to improve at least thus far in May. We believe that we saw at least a decline in the 70% level for April in comparison to pre-COVID-19 surgical volumes. So far in May, I mean, it's early, but I'd say we're doing better, and we may be more like in the 50% range compared to pre-COVID for the first week. That's where we are, so...

Okay. Right. That's helpful. I guess when one thinks about the -- what have been driving your growth, right, so the adoption of the technology by new surgeons and certainly exploiting the GPO contract wins you've had recently. How has that been progressing, right?

So I imagine there was surgeons who had already seen the product that maybe couldn't access it because it wasn't on contract within their institution. Have you seen any sort of steady adoption despite not having salespeople that could push the products?

Yes. So I'll -- what I should have said to finish off -- I think your first and second question are related. So if you look at the cases that we are doing right now, I would say, on the hernia side, we're doing the more complex procedures, right? So complex ventrals will lead us out. We're also seeing PRS continue to be -- cases continue to be done. So our view is that complex ventral and PRS will lead us out.

So we have had tremendous success with virtual surgeon VIP programs. We spend up to 2 hours with the surgeons, and I think that's a unique time because they have time, and we've cranked these out. And in many of those meetings, we're gaining commitments to either expand usage of the product or to start using our products. So we've already seen some of those new customers come online and use the products in early May in places where things have cracked open a little bit.

I can say just from a color commentary perspective, that we've touched so many surgeons through this VIP Zoom process that for all of April -- most of April, I would say, they all appear to be home in street clothes like the rest of us. Recently, the last week or so, maybe 1.5 weeks, we're starting to see the surgeons in scrubs. They're in their offices, or they're somewhere in the hospital. They're by no means doing a full day's work, but they're starting to do some things, right? They're starting to do emergency cases, some emergent cases, maybe some simpler cases. They're certainly starting to see patients again. So we're starting to see a little bit of -- through this VIP program, surgeons as they migrate from home to their base of operations in the hospital.

So yes, I think it's a little bit of everything. I think as you look at the base business in April, complex ventral and PRS probably mostly legacy. And as we're starting to see May come online, we're very pleased that we're seeing new surgeons, again, more oriented towards complex ventral and PRS start to come online.

Great. That's very helpful. And maybe just lastly, Nora, for you. Last couple of quarters, operating expenses have been roughly $8.7 million, $8.8 million, and I appreciate you guys -- you're looking at cost reductions. But where can you take those expenses? How much leeway do you have to actually cut into those?

So Raj, I think when we talked last time, we went through in our variable expenses between 20% and 25%. So that's exactly where we're cutting, is -- so our commissions are going to come down naturally just from lower sales, but there's also some spending that we had around some consultants that we had or whatever variable costs we can remove, we did. So we also mentioned there's salary reductions that we put through for the entire organization, and that's really to conserve cash in Q2 to the same levels where we closed out on previous quarter of Q1 and Q4.

Yes, Raj, just a little bit of color on that. So our goal for Q2 is to try to balance the equation. Whatever we lose in sales in Q2, we're trying to cut out of the operating expense, so that we do not go backwards in cash consumption. That's been our targets.

Our next question comes from Matthew O'Brien with Piper Sandler.

A few for me. For starters, for Nora. I didn't hear the split between OviTex and PRS, can you provide that? And then the gross margins were just softer than we were anticipating. In Q1. Again, I know things came in a little bit lighter than I think you guys were anticipating given the slowdown in the back half of March. But was there something there as far as mix shift or something else that led to gross margins being a little light than what we were modeling?

No. So I'll answer the first question, Matt. So I think the mix between OviTex and PRS was about 91% for OviTex, and about 9% for PRS. So again, as we managed our limited launch on PRS, it's still staying around 10%. With respect to gross margins, again, it's as we get our arms around our inventory management. We've done a better job certainly with launches, and we've implemented some additional systems with respect to inventory management. But it's really on this excess and obsolete inventory. So as we've mentioned before, on our polypro products, we have 36 months of shelf life. It's just managing the resorbable polymer to get that up to 36 months because that's right now at 18 months.

Okay. That's helpful. And that kind of leads into my next question, and Tony, I think you kind of addressed it already as far as what's going to lead you out of this. But given what's going on, given how big and established the market is with a lot of competitors that maybe not -- are maybe not as paying as close attention as they should be, are you guys going to focus a little bit more on the near term here given what's going on with COVID on the hernia side of the business and maybe push a little more aggressively on the breast side next year -- or on the plastic side next year and beyond? Or is it still more of the same strategy going forward?

Yes, we're going to -- I think you're going to see actually an uptick in PRS as a percent ratio of our sales at least in Q2, right, as we work through the shift in procedure types. So I think we're going to be -- firmly be in the more complex ventral arena and in the PRS arena. And that's what we're going to go after and be of service, I would say. I think it's more likely be of service.

I don't think you're going to see simple inguinals and hiatals, which we've seen a big shift towards as we discussed in our previous call. I don't think you're going to see those come back. I mean the way -- as soon. I think the way we're looking at this is the simpler the procedure, the last it comes back, right? So complex, ventral, you may have an infection, you may have pain, suffering, mesh removal required, a polypropylene mesh likely has to come out. These are going to come back first, and then PRS are also going to be more emergent as well given the nature of those procedures.

So we're going to crack open PRS starting in end of May, early June, as much as possible. We've already started that process through this virtual surgeon VIP program, which has touched many surgeons. And then I think on the ventral side, we run a virtual KOL webinar series, where we just block a full day. We have our KOL do a presentation every hour on the hour, and we get surgeons to interact with our KOLs. Those are mostly focused on OviTex hernia. So I think we've got a balanced approach here that is going to basically allow us to be of service where we're needed, which is PRS and complex ventral.

Okay. That's really helpful. And then last one is just on the backlog on -- there's just -- a big part of your strategy for this year was really moving market share over to your products given the backlog some of these clinicians are going to be seeing and how busy they're going to be trying to get through it. How challenging is it going to be for you guys to add new surgeon customers over the last maybe 5 to -- 4 to 5 months of the year?

Well, I think the volume of surgeon VIPs that we've done virtually is amazing to me. And we're going to keep doing them, and we're going to make it a permanent part of our repertoire. It's not going to fully replace bringing surgeons in to have the tour like you had. I think it's very impressive to see our labs and our technology and our testing rigs and our data and meet the team.

But I think what we're realizing is that we can do many, many more within an hour to 2 hours. The management team -- full management team can be on these calls. The surgeons can have a full interaction with Q&A, and we can get 80% of what they would have got by coming here done. On a good month, we're doing 4 or 5 VIPs. Maybe 3 to 4 is more like a usual month. But at the height of this process last month, we were doing 4 and 5 a day at some point but not every day. So I think our ability to think through using screens to have our management team be highly involved in the selling process allows for the throughput and for telling the story in absolutely the perfect way, and the surgeons can understand, touch and feel what this team is about and how we're committed to innovation and cost savings.

And then if we wind up having our sales team running the logistics to make sure the product is getting to where it's got to go, that's fine with us. So we're going to dedicate ourselves to being agile, nimble, flexible, and then continue with this screen-based virtual approach. Not all of our reps are going to get back in the hospitals. We know that. So we've already covered cases through FaceTime. We're looking at can we get onto the screens in the OR through this integrated operating room, a thing that could be emerging. And I think with our clinical development team, which are very, very sophisticated clinical development specialists, we can really crank out the screen-based half-hour, 1-hour, 1.5-hour sessions, get the best possible presentation and then have our reps come in behind us and help close things out in service and provide logistics. So I think this could be a model that's in place for some time here. And that's the way we're going to choose to spend our time, totally committed to that.

The other thing that, in terms of market share movement, is everything I just described, we can do for CRDs [and VCRDs] in the supply chain, at HealthTrust or any GPO. And now they went away. They disappeared on us. Either they were redeployed or furloughed through most of the last month or so, but they're now coming back. So we're starting to do these virtual programs for them as well. So supply chain is now getting in on this. We have tailored value props and messaging for them as well. And I think that's going to help us. Because they can now help us organize surgeons for our virtual VIP program to drive implementation and cost savings.

Don't forget we offer tremendous cost savings around PRS and complex ventral. This is the sweet spot of where we offer the highest value proposition. And if hospitals are in financial dire straits, we can be a very nice solution for them right now.

So we're pulling out the stops to continue this business and to emerge from this stronger with a better toolkit that's more aligned with speed, efficiency and volume in terms of interactions.

Our next question comes from Kyle Rose with Canaccord.

So I wanted to -- just a continuation of some of the prior questions. And I guess, maybe just a little help with how much work you were able to do in the HealthTrust accounts just from a contract and in an access standpoint, I guess, upfront. And then how you expect the utilization of those accounts to kind of trend over the course of, I guess, the recovery here in May and then into June.

Yes. So I'll just ground you that we had basically 1 month, right? We had implementation started on February 1. So we had maybe -- okay, maybe 5 weeks or so. Q3 of 2019, we were in about 45 HealthTrust accounts as they started to loosen the grip a little bit as we got closer to a real implementation. By the end of Q1, we were in 65 HealthTrust hospitals. So that's really a very short amount of time. A lot of that first month was spent getting to know the process and meeting the people. So I think it's a very good sign that we made excellent progress with 20 or so accounts in a fairly short period of time.

A lot of the new sales reps that we brought on -- and I guess the other thing is that we've retained our entire commercial organization, right? They were part of the reductions, but we made the decision that, to come out stronger, that we were going to keep the team intact and then train the heck out of our sales team. So in addition to all the surgeon interactions, they've been training every day. So this is a rare time as well where we can hopefully give them Navy SEAL-type training while there's downtime, not train them while they're running around hospitals, trying to get their business up and running, so a high degree of focus on training our commercial team. And a lot of those reps were hired in the key geographies of where HealthTrust accounts are. And a lot of the surgeons that came through our VIP program so far, a decent percentage of those have been HealthTrust.

And like I said, the next phase of that is going to be to start the presentation process to the supply chain and then help organize surgeons as groups via that process so that we can continue down this track and offer our innovative cost savings products at, I think, a critical time. So I think we have a very good shot at building momentum here as the reopenings allow.

Yes, that's very helpful. I appreciate the incremental color. And then just when you think about the states that have started to lift the moratoriums, where you're starting to see cases maybe get back on the schedule. Any context as far as what percentage of revenue historically might lie in the space that look like they're getting better from a procedural standpoint? And then the same question as far as when you look at like the HealthTrust opportunity, both in -- maybe just the 65 accounts that you had -- you were in exiting the Q1. I mean, what's the opportunity there for them to become productive here in the Q2 versus maybe in the back half of the year?

Yes. So look, I think one of our -- I think Texas, Oklahoma, these are 2 good markets for us that are -- have historically been strong and also have excellent prospects for future growth as well. Florida is a place where we have not been strong, the Southeast in general but, I think, we have tremendous opportunity to drive growth. A lot of the virtual VIP program was centered around the South, which means HealthTrust, basically.

I think the way we look at this is a key piece of being Johnny-on-the-spot available for these complex ventrals and PRS cases is consignment. So we are rationally, aggressively pushing consignment where we can, and this is a program that we've always had, and we're going to continue to drive it. We have multiple versions of consignment. We have consignment via agreements directly to the hospitals. We have rep consignment. We have provisional consignment. I mean any way that a hospital can take product in, we will provide product availability for them to take it in.

And a very high percentage of our sales, I think, 90-ish percent, 87% or so in Q1, came from some type of a consignment flavor that we -- and it's probably going to be more in Q2. I know that the shipments have been growing in May. Usually, large shipments of products going out as sales come in, meaning that we're reloading the shelves and consignment, which is a good sign for future. So I think consignment is going to be the key for us to be there to provide our products and services to help patients and hospitals in that complex ventral and PRS arena.

Our last question comes from Dave Turkaly with JMP Securities.

You may have said it -- or it may not have changed, but I was wondering, would you be willing to comment on the number of reps you have and then the active hospital accounts coming out of the quarter?

Yes. Help me out, Nora.

Dave, so at the end of Q1, we ended up with about 39 territories, and about 34 of them were filled. So I think, going into April, we maybe added 1 more, but we're on a hiring freeze right now. But as Tony already mentioned, I think, earlier about how we're building a pipeline of good reps to understand the space, so we ended Q1 with 39 territories.

Yes. I mean, I think we can get to 50 from here if -- with sort of the soft circle that we have in place of reps that we have contact with. We have never stopped recruiting. We've recruited through this process, and we'll continue to recruit in this process and are having candid conversations about start dates that hopefully will align with particular regions reopening. So as we gain confidence in certain regions, we'll gain confidence in bringing new reps on to continue the build-out.

Great. And just the -- you commented on active accounts, so I'll just put one other in? And I know last time we spoke, the updated data was very solid. I'm curious to hear how that's resonating maybe during some of these VIP events. And then when do we expect to hear specifically -- I know you said in the coming quarters. But any closer -- or a bit more color about exactly when we might get another update.

Yes. So the update on BRAVO. We'll get another cut at the data in Q3 or so. We'll have 70-some-odd patients at the 12-month time point. And then what do you think at the 2 year? 50 or so? Yes, 50 at the 2 years. So the next solid cut of data will be in Q3. That's when it will be in-house. And that continues, I think, uninterrupted.

As far as where we're going to present it, we have been presenting this data on these virtual VIP tours. It's a centerpiece of our discussion, and I think it's had a very important effect on gaining commitments to use the product. We've had a lot of very good conversations about the applicability of the BRAVO data in the moderate to complex arena. So this exactly lines up with the cases that are emerging here first. So it's been very positive.

We've got abstracts. I think it's 5 to 6 abstracts drafted for various cuts of this data, including a robotic series within BRAVO that have been accepted at various meetings. These meetings have been canceled or postponed. So we're trying to figure out the best approach here on how to present this data and get it out into the hands of our sales force and surgeons efficiently. One approach is going to be just to take this interim cut and write it up as a paper and then submit the journal. So this process is already underway, and we will submit fairly soon. So hopefully, we can get the data out via that mechanism.

The other thing we're going to do is just to continue to work with the meetings and get their advice and make sure that we're not burning any bridges, that we can continue to present the data, but we are taking a logical approach on how we can get the data out. This data is super important. It's very helpful compared to competitive products in terms of recurrences and helping patients, and it's a big piece, I think, of us coming out of this strong, particularly with a focus on the complex ventral to start. So we're very, very focused and aggressive on getting the data out in the best possible way given the circumstances.

And that does conclude today's question-and-answer session.

I would now like to turn the call back to Tony Koblish for any closing remarks.

All right. Thank you, everybody, for attending this call. We really appreciate your interest in the company. We are committed, and I feel very confident that we will come out of this stronger like I hope we all will come out of this stronger. We've done a lot of good things. I've been impressed with how our team has evolved and reacted and worked hard. All of our development programs, all of our work continues in a remote fashion, and we continue to interact with our customers in a positive way. Our goal is to be of service, and we think we can add a lot helping hospitals with cost savings and high-performing clinical products, and we really appreciate everybody keeping track with us. And we'll talk to you next time. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.