Q4 2023 TELA Bio Inc Earnings Call
Participants
Louisa Smith; IR; Gilmartin Group LLC
Tony Koblish; Co-Founder, President, CEO; TELA Bio, Inc.
Robert Cuca; COO & CFO; TELA Bio, Inc.
Frank Takkinen; Analyst; Lake Street Capital Markets LLC
Caitlin Cronin; Analyst; Canaccord Genuity LLC
Michael Sarcone; Analyst; Jefferies
Dave Turkaly; Analyst; JMP Securities
Presentation
Operator
Good afternoon ladies and gentlemen, and welcome to the TELA Bio fourth quarter 2023 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Louisa Smith from Gilmartin Group.
Louisa Smith
Great. 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-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, products potential the impact of various macroeconomic conditions, including lingering effects of the COVID-19 pandemic, recessionary concerns, banking instability and inflationary pressure, it 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 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've 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 12 quarters of 49%.
In the fourth quarter, we sold more than 5,000 pieces of OviTex and OviTex PRS combine. And PRS now accounts for approximately one-third of our total revenue. PRS revenues grew 75% year over 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 have launched to increase sales rep 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 PRS for all reps and incentive programs targeted at those reps who appear 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 products 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 to 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 8 assistant reps at the end of '23.
As of the end of February, we had 86 reps and 6 assistant reps. We plan to remain at these levels throughout 2024, perhaps adding a few opportunistically with some of the assistance 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 impacts. 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 into these 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 US commercial launch of two liquid fixed products we have licensed exclusively from our partner, Advanced Medical Systems. These are the liquid fixed date laparoscopic and live with liquid fixed Precision's 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 liquid fix to the U.S. because it is the only FDA approved PMA product that fixes mass and approximate tissue with liquid anchors, reducing the use of intrusive mechanical tax sutures or Staples.
The two liquid fixed 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 liquid effects will do just that by offering greater utility for surgical mesh in inguinal hernia repair by enabling mass fixation to sensitive areas such as the triangle of doom and the triangle of pain regions and the growing where other penetrating 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 and 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 room and reinforce with just enough polymer suture for added strength.
And of course, all OviTex devices are designed to leverage the patient's natural healing response, facilitate tissue remodeling and optimize strength. Architect 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 US in the second quarter of 2024.
I also wanted to elaborate on our announcement yesterday of the sale for $8 million to $12 million in total cash consideration of our distribution rights to our new that's regular collagen pack, a wound care product co-developed and designed to tell us specifications with regenerative bio sciences.
Novus represents an innovative, high quality wound healing product, and we expect it to perform even better as part of a portfolio of its acquirer. As part of the consideration we received $5 million upfront, and we retain an interest in seeing it succeed in the form of additional future payments totaling between $3 million to$ 7 million based on net sales of Natus over the next two years. The cash contribution from this divestiture strengthens our financial position and puts us on an even more solid path to profitability.
I'll now turn the call over to Roberto to review our financial results and 2024 outlook.
Robert 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 and expansion of our commercial organizations. Each of these resulted in increased penetration of our existing customer accounts as well as the addition of new customers and growth in the 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 of $17.2 million in the fourth quarter of 2023 compared to $11.6 million in the same periods 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. This does not include any of the $8 million to $12 million consideration for the sale of Navis distribution rights for the value of Navis inventory we sold as part of the transaction, both of which occurred in the first quarter of this year. Note that in 2023, Navis accounted for less than $300,000 of TELA 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 Nimbus.
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 Nabors.
As we've said in the past, we believe that our cash and cash equivalents, even before the proceeds from the divestiture of Nevis are sufficient to fund us to profitability. And the incremental $8 million to $12 million will only provide additional cushion to that. We have an exciting year ahead of us, and I look forward to updating you over the course.
With that, I'll hand the call back to Tony for closing remarks.
Tony Koblish
Thanks, Roberto, and thank you, everyone, for your interest in TELA Bio. And I'm proud of what our team accomplished. In 2023, we made exceptional progress in expanding awareness around OviTex and OviTex PRS portfolio and the efficacy of our mesh and optimizing clinical outcomes and soft tissue preservation.
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 1,500 surgeons globally through TELA Bio labs and other educational program offerings on the safe and effective use of our products.
One of our 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 talent 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 of those at Tesla for their part in making 2023 such a success and setting us up for continued outstanding work in '24.
With that, I'll now ask Michelle to open the line for your questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Frank Takkinen, Lake Street Capital Markets.
Frank Takkinen
Everything. Second 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 and our strong end of the year and typical medtech seasonality supports that. How should we be thinking about Q1 obviously were a good portion of the way through that and in the ramp of revenues to achieve the guided range throughout 2024.
Robert Cuca
Sure. Thanks for the question, Frank, on 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 down-ish from the preceding fourth quarter and then the quarters succeeding the first quarter of growth from that with the step-up from the first to the second quarter, typically being one of the larger incremental steps in the year.
And we've talked about some of the factors that drive the very strong fourth quarter and then are certainly pulling some revenue from the first quarter into the fourth quarter and past. Those are a couple of things. One is a lot of patients like the use of HSAs at the end of the year on their co-pays for surgeries.
We understand that patients some patients will schedule their surgeries around the holidays as 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 pushes produces a bit of a push at the end of the year. And so we do expect, notwithstanding the leveling off of our sales force on that sort of seasonality to persist.
Tony Koblish
I'd 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 work 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 I will 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 and the internal space.
Maybe just kind of recap that whole topic of positioning yourself correctly and the robotic tailwind as well as volumes in England, all the opportunity there, I HR specifically and the excitement around that area and how we should be thinking about that throughout the year and going forward.
Tony Koblish
Sure, Frank. So we've got about four, five years of experience in the inguinal space, but it 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 that we started off with 10 plays that the surgeon can trace out the unique shape. 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 Tenplay program and just pace it right into the product. We've made the product center, we've added a little bit more polymer. We've gone from a great fit, great shape, great shape pattern to a Tri axial pattern, which I think is ideal and 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 learning and we're adjusting the price for this set of products to be super competitive without 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 this our sales team to this product at the national sales meeting today. So we're getting great headstart on the launch.
Frank Takkinen
Yes, it's good color was that there was no bonus.
Tony Koblish
Thanks Frank.
Operator
Thank you. Caitlin Cronin, Canaccord Genuity.
Caitlin Cronin
Hi, everyone. Thanks for taking my questions and congrats on an awesome quarter and just to start, can you touch on GPO contracts and how and you were ramping in your existing contracts?
Tony Koblish
You were a little blurry there? Caitlin, we're sitting in a hotel room with a land line, which is now ancient technology. So if you could just repeat that, that would be make.
Caitlin Cronin
Sure. Yes. No one's electric Sanlam GPO contracting and how you're ramping in your existing contract?
Tony Koblish
Okay. Thank you. Yes, so we're about a 60% revenue within our GPO partners. Our target for this year is to be around 70%. We think that's very, very attainable. And if you look at the longest tenured GPO, HealthTrust and particularly the subset of HealthTrust known as ACA, we may have about 30% to 35% market share within that organization within hernia.
So I think given time, fresher addition of clinical data and maturity of our commercial structure and team and that we're slowly proving that we can penetrate into GPOs over the long haul. Obviously, we've had the longest start with of ACA and HealthTrust, but we should be able to continue that march through the other GPOs.
We are in the process of working through contracting for like with it to get to get access to that product. And then also other GPOs are going to be coming up for contract late this year. So in addition to focusing mostly this year on implementation and growth within the footprint we have.
We also keep our eye on the further processes involved in getting more contracts. And we're very confident that not only will the number of contracts grow, but our penetration will grow as well often.
Caitlin Cronin
And then just run for a quick fix and the current indication is for polypropylene and polyester mesh. Will you be pursuing an indication for use with their online business?
Tony Koblish
Absolutely. Yes, very, very good reading the fine print on that one. Thank you. Yes. So what's powerful about Equifax is that it is hyper aligned with inguinal Star and it is very much a product that is going to be used with the vast majority of the inguinal measures used today, that is to say, polypropylene and polyester.
So it's going to give us the ability to interact with surgeons who do not use our products today, and it's going to give us a tremendous entry point and platform to present our A., our new IHR. portfolio, our new our whole hernia portfolio really. And so I think it's going to be a very important driver of their hernia franchise for this year.
And then as the contract, et cetera, starts to come into play as this year goes forward and through next year, I think it liquidates itself will start to become an excellent contributor in the business as well. So there's a couple of things that have to happen that we have our eye on working with AMS. has been a tremendous partner so far in the launch phase very, very much participating with us in the rollout here at the national sales meeting. One is expanding indications here, things like ventral hernia. And two is expanding indications to our product and biologic products.
And in Europe, liquid-based has been used for several years and hundreds of thousands of procedures that are done with it is a very good learning curve and tips in parallel for us to tap into. There's a published paper, one of the surgeons out of the UK, Mr. Wilson has done hundreds of cases of liquid effects in combination with all biologic products, including our products.
So we know that at work we did have to do the work to drive the expansion of indications and different products. That said, there's more than enough to work with the liquid fixed labor that we have now since most and when those are repaired with synthetic mesh. And it's a great door opener for us as well.
Caitlin Cronin
Awesome. Thanks so much for taking the questions.
Robert Cuca
Thanks Caitlin.
Operator
Thank you. Michael Sarcone, Jefferies.
Michael Sarcone
Good afternoon and thanks for taking my question. Thank you for just on the sales incentive programs, you talked about how there are synergies Excuse the background noise when you can get a rep selling multiple more than one product into accounts.
And I think you said it could be three to four, not one to two. I was wondering if you can give us a little more color on what proportion of the sales force today is kind of selling one product versus two or just any kind of split the sales force where that could ultimately go over time?
Robert Cuca
Thanks for the question, Mike. And so pretty much all of our sales reps today are selling some of each product. And what I'd say is that on those who are selling close to balance selling, what we're trying to achieve with the incentive program represent probably about a third of our sales force, so we can move the other two thirds of the sales force to something closer.
We believe that that dynamic of the one plus one, equaling three to four will benefit the full portfolio. And so we're not going to put in place incentives that require them to jump from selling, let's say, 5% PRS. or 5% currently up to 50%, 50% immediately. But we're putting in a plan that will gradually grow them, incentivize them to grow to a much more balanced selling something that will look more similar to the breakup breakdown between the two products across our portfolio.
Michael Sarcone
Got it. That's helpful. Thank you. And then the second question for me, just on cash burn? And can you talk about how you expect cash to go the trend through the year.
Robert Cuca
Well, in the same way, that with reasonably level OpEx over the course of the year and increasing revenue, we should be seeing operating income and actually operating loss and net loss decreased directionally over the course of the year.
We expect cash burn to be doing the same thing. There is a little bit of seasonality in how our cash is spent on with the building of inventory and payment of incentive compensation, for example, but directionally cash burn should be decreasing somewhat similarly to the decrease in operating income or loss.
Michael Sarcone
Thank you.
Robert Cuca
Thanks.
Operator
Thank you. Dave Turkaly, JMP Securities.
Dave Turkaly
Hey good evening guys. As you mentioned, the accounts are using both twice as valuable. I'm just curious, are you able to give us an update on how many of those accounts you have now? And maybe if you have a target for where you think that's going to go in 2024?
Robert Cuca
Sorry, you're breaking up at the beginning. What kind of accounts we asking about?
Dave Turkaly
Exactly how many are using both today like Mountain are twice as valuable? And where do you think that's going this year? If you could maybe throw out an estimate of how that could progress?
Robert Cuca
Yes. So on probably about 50% of accounts are using both products. They may not be using them on in the same proportion as we sell across our portfolio. And there's some smaller hospitals that really don't do one kind of repeat procedure or another.
And so those are just never going to convert. But the larger hospitals that typically do both hernia repair and reconstruction, we do have some of those that really offset primarily by primarily one project of the other, which means we're just not getting to the physicians who are doing the uninsured procedure.
So to the extent that we can get our reps talking to and pitching to those physicians as well, they just become more efficient. They can do other selling in one institution rather than having to get in their car and drive across town pump, which means that they can be more efficient and effective.
And so the goal is to get as many of those potential hospitals on they could sell in back book kind of products up and running and buying books. And so at some point, it will be closer to of 80% or 90% of our accounts are buying fairly evenly across our portfolio.
Dave Turkaly
Great. And then a little fix. I was wondering if you might comment on ASP and margin profile. I think I saw the applicator can deliver something like 40 anchors or something like that per procedure. So I'm just curious how that's going to how we should think about that. As we look to this year and then beyond? Thank you.
Robert Cuca
Sure. So we haven't disclosed the price point. The exact price point. It's going to be similar to packers and staplers and the margin will be at or better than depending on the exact ASP that we're able to achieve on the rest of our portfolio. It's these are smaller dollar items.
They're really used only a single one, even though they have 40 deployments, they're only used a single one per patient and 40 anchors is up quite a bit for these sorts of applications.
Dave Turkaly
Thank you.
Robert Cuca
Thanks, Dave.
Operator
Thank you. Matthew O'Brien, Piper Sandler.
Hey, this is Phil on for Matt. Thanks for squeezing us in here and taking our questions and congrats on the outstanding quarter. On the rep side of things can you provide any additional color on the way that I think about it, two different cohorts.
One being, you know, the cohort before the sales force disruption and the other being Yes, post that disruption, can you give any color on the productivity of each group, how quickly the newer reps might near the productivity of the more tenured reps and is double digit productivity gains the right way to think about the Group as a whole here in 2024?
Robert Cuca
Yes. So on. So as I said in the prepared remarks, about three quarters of our reps have been with us for more than six months. So those would be reps that were preceding that disruption that occurred in the third quarter.
So about a quarter of them are with us for under six months, our just about six months. What we're seeing is that they are trending towards the same productivity metric that we've seen in the past of achieving breakeven, so covering their own expenses within that six months on average.
And we expect that with the additional training that we're giving them with the greater breadth of our regional managers now who manage fewer reps individually on that they will be able to at least achieve the sorts of productivity firms that our reps have in the past.
That's helpful. And then any color on the pipeline of additional GPOs that might be weighted in the wings? Might we see another one of those here in 2024? And is anything like that contemplated in the guidance? Thank you.
Tony Koblish
Yes. I mean, the next big national scale, one is busy, and that's probably end of this year or early next year. Kind of event given when the process starts, it's less critical for us, given that it's a lesser compliant organization.
And that means that we're able to go the harder route in terms of value analysis, committees and process, et cetera. But we're able to get into the IDNs that roll up to Visy in our for the most part. So right now, we've got our hands full with the three primary GPOs and other smaller IDNs and another contract that we have. But that would be the next national one.
We're working on some of the really high the regional ones like Kaiser and things like that. I don't have a good feel for when these are going to come so far. We've had excellent track record we haven't really been rejected anywhere.
So I think it's a matter of time that's going to be driven off of when the bid process starts, how long it takes them to process and award the contract and then start the contracts. It's generally a long process. So like I said, this is a year of implementation more than new contracts, but we can keep the new contract machine going. I expect it to be end of this year or sometime early next year, where you'll start to see some additions.
Operator
Thank you.
Tony Koblish
Yeah.
Operator
And I'm showing no further questions at this time, and I'd like to turn the conference back over to Tony Koblish for any further remarks.
Tony Koblish
Thank you, Michelle, and thank you to everybody for joining us and for your continued interest TELA Bio. We look forward to catching up with you next time and have a great rest of your afternoon.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
