TELA Bio, Inc. (TELA) Earnings Call Transcript & Summary

Thanks, everyone, again, for joining us here at the Jefferies 2020 Virtual Healthcare Conference. I'm Raj Denhoy with the medical device research team. Thanks, everyone, for joining us in these unprecedented times. Up next, we have TELA Bio. And from the company, we have Tony Koblish to tell us the story. So Tony, I'm going to turn over to you.

Okay. Thank you, Raj, and good morning to everybody. I really appreciate your interest in the company, and I hope you guys are all doing well along with your families, as Raj said, in these crazy times. First off, I'm going to acknowledge the safe harbor statement, and then we'll get into the presentation. So TELA Bio is a soft tissue reconstruction company. We're a commercial stage organization. We've been commercial since the back half of 2016. We've done approximately 10,000 implantations across our product set. We have a highly innovative, patented and differentiated product portfolio that serves the hernia repair, abdominal wall reconstruction and plastic reconstructive markets. And we are located just outside of Philadelphia in Millbourne, Pennsylvania. We address about $2 billion in U.S. market opportunity amongst those procedures. We have a product set that offers tremendous benefit and differentiation as compared to what's out there today. And we can back that up with both exceptional preclinical data and really superb clinical data that's emerging that we'll review. So we offer a high degree of innovation, a high degree of clinical performance relative to our competitors, and we can reduce the overall cost of care. Our value proposition is quite strong, and an indication of how strong that value proposition is, is that a small new company like ourselves was able to secure the major GPO contract with HealthTrust. And we're just starting to implement that contract as we speak right now. So if you look at the hernia repair market, which is the first market that we entered, we launched our first array of products really into the moderate and complex abdominal wall reconstruction market. But as we've developed our commercialization capability, we're really servicing the entire segment of this market. In fact, pre-COVID, if you looked at our Q4 and even in Q1, the fastest-growing segments have been the simple procedures in inguinal and hiatal and robotic surgery. And this is quite encouraging because our ambition is to have a product set that can cover the entire waterfront of hernia repair procedures. Not only do we have better products in the complex arena in comparison to traditional biological materials, but we think we have a tremendous opportunity to provide natural repair products to replace polypropylene synthetic mesh in the simpler procedures. If you followed these products in the ob-gyn space, there was considerable litigation and clinical problems associated with these products. And really, the same dynamic factors exist in the hernia repair market. There is going to be a class action litigation associated with plastic mesh in the hernia repair space in the not-too-distant future. And our goal is to be the premier provider of next-generation natural repair products across the entire platform. So if you look at the complex, our entry point, complex moderate ventral/ab wall, that represents about 60,000 procedures and $350 million. I'd say pre-COVID, we were averaging about 40% to 45% of our sales in the more complex area. And our clinical data in this complex market segment with our BRAVO data is simply superb compared to competitors. The simple ventral market, it represents about $500 million in sales, about 326,000 procedures. And we're starting to get these procedures, as I mentioned, as we prove ourselves and become known as the premier provider of natural repair solutions. In fact, tying this to the robot, if you look at the inguinal market and the simple ventral market and the hiatal market, these markets are starting to be dominated by the use of the robot. And if you look at our base product platform, about 45% of our usage has come from minimally invasive procedures with about 33%, 34% coming from the robot and the rest from LAP. We're launching a wide array of robot-specific products this year, and we have quite a pipeline of robot-based products coming along with a new clinical study that will be starting specifically focused on the robot. Our first clinical study, the BRAVO study, does have about a 30% subset of patients that have been done with a robot, and we've started to present that data as well. So we have the only biological regenerative portfolio that's been highly tuned to cover the waterfront from the most complex ab wall to the most simple inguinal, about a $1.5 billion opportunity in total. And we have the only biological product set that is really tuned and useful with robotic procedures, and that can be any robot. So we're very pleased with the potential end market opportunities for this product to be driven into the simple based on the performance in the complex and then the compatibility with the robot. If you look at the market, there's not many competitors. There's a lot of products, but there's not a huge number of competitors, dominated really by Bard and LifeCell, both of which have natural repair products. LifeCell's products really are just biologic, no synthetic. And then Bard is really dominant on the synthetic side. So we can easily put our company in the middle of this graph here and show that we can cover product range, be competitive with pricing and superior in clinical data in many instances, across this whole range of hernia repair. If you look at the landscape, synthetic mesh has been around since the '60s. It hasn't involved all that much. We make it lighter, we make it heavier, we coat it with different things, trying to make it more compatible with the body. But simple truth of the matter is if there's going to be a foreign body reaction, contraction, erosion, these products have to be revised and removed. And it's usually highly problematic. It tends to pull the tissue out with it, leaves a gaping hole and can cause serious problems to the patient, to their bowels, to their pain, et cetera. And then usually, the surgeon has to reach for a more natural repair product, to try to bail out of that difficult situation. Our piece is, let's just start with the right solution to begin with by rightsizing the cost. If you look at some of the registry data out of Denmark and Europe, it suggests that for every year, a plastic mesh of reasonable size, and I'll say reasonable size above the inguinal size is in your body, your chance goes up about 1% per year of having a problem with that mesh. And it's somewhere in the 17% to 20% range at 5 years. So we can do better, and we're positioning TELA Bio to be the answer to that problem. Resorbable synthetic mesh is really where you take plastic mesh and just make it go away in the body at some time point. These products, I think, are a direct response to polypropylene sticking around forever and causing those erosion and contraction problems. The problem with these products are that when they are present, they basically function like a synthetic material. Plastic is plastic. So contraction, erosion, all that stuff can happen when they're there. And if they resorb and go away, then they're gone. And then the question is what's holding everything together after that. So we've seen clinical data that suggests a recurrence rate that's still fairly high in that 12% or higher range at 18 -- at 18-month follow-up and longer. Biologic materials are the third category. And really, these products have been around for 30 years or so. What you harvest from a cadaver or an animal skin is what you get. It's hard to engineer them to be anything different. And in some of the studies that we've seen, a very high degree of recurrence in complex cases, 20% to 30% at 12 and 24 months. So you're dealing with a product that hasn't had much evolution, is super expensive, tough to use, minimally invasively and robotically and has a high level of stretch and recurrence. So again, we have solved the problems of biological materials by making them thin, strong composites. We can integrate them with just a little bit of polymer, not enough to cause problems, but just a little bit so that we rebar, reinforce these things so that they don't stretch. And our clinical data so far bears that out. And our price point is somewhere between permanent synthetic and resorbable. So very valuable value proposition coupled with strong innovation and superb clinical data. What we do is we have a whole range of patents that cover a very specialized biologic material, which lends itself quite well to this fabrication and construction technology. And then we use either permanent or resorbable polymer fibers. A very small amount, I want to reinforce, and we sew the polymer fibers into the biological material with a lockstitch and interweaving pattern as you see in the middle is constructive. What that means is, is that we make composite materials. And there's no situation where the polymer is a structural mesh that will disassociate from the biologic. It cannot. It's interwoven, and it really behaves as a string of suture, which is not very damaging at all. And we can make a wide array of products with surgeon feedback rather than just handing the surgeon a product and having them figure out where to use it best. We actually sit down with the surgeon and ask them what they want for the patients. And we can construct a wide array of products. This is a very prolific platform. We can launch products from this platform every year. We have since we've started commercialization at the end of '16, and we will continue going forward to launch meaningful new products into this range. So this is a very expandable tunable product platform that is backed up with superb clinical data. So what makes this possible is a very high-quality biologic material that we've partnered with a company in New Zealand called Aroa Biosurgery. We've licensed their patents to their high-quality sheep, rumen, which is the first stomach of the sheep. It comes in a super plentiful supply, which allows us to have a tremendously competitive cost of goods profile. And the first stomach of the sheep is really tripe, which means it's a food source. So we benefit from the easy harvesting and the economies of scale associated with the food supply system, and it can make medical devices out of that product. It's a very special supply chain and biological material source that allows us to build the products that we can. And then our patent portfolio covers the insertion of polymer fibers into these biological materials. So we have this thing ring-fenced from a supply chain supplier, partner perspective and then from a fabrication perspective and a final composite material perspective. So very long patent life, patent's just issued in the last few years. We're responsible for all development, commercialization, clinical data, et cetera. And for that, we get a 73% chunk of the sales, and Aroa does co-development with us and also are the exclusive manufacturing supplier, and they received 27% of net sales. They supply us finished product at 27%, and they make a very healthy margin themselves. That's how powerful the cost of goods and supply chain model is here. This arrangement allows us to slide pricing around for competitive reasons and still maintain our 73% margin. So this solution of soft tissue reconstruction, our goal is to be able to improve performance over existing materials, improve biologic response and lower upfront costs. From a cost perspective, we're seeing between 20% and 40% cost reduction, just in acquisition cost over all the leading biological materials. And from a biological perspective, we just published a 200 nonhuman primate study in Journal Hernia that shows direct comparison to every product on the market, a better healing, less inflammatory, et cetera. And our material is about 95% biologic, very small amount of polymer, less than 5%. And we can make these in a wide array of forms. The product basically looks like this, locked together layers with this lockstitch, high degree of porosity allows for blood and growth factors and natural factors to enter the product very efficiently through its permeability. And the product can be cut, shaped in any way without unraveling and allows for us to make a wide array of configurations. The first set of products, the OviTex platform, 1s and 2s. 1s stands for 1 side coated; 2s, 2 sides coated, allows us to have surgeons pick the ratio of polymer to biologic material. 2S has the most biologic material. The core or the 4 layer has the least different strength profiles, and each one of these products is designed for specific technique type. Most of the portfolio, the 4-layer OviTex and the 1S can be used robotically as well. And the 2S really functions as the open complex procedure. Product that we're just rolling out now is a 4-layer product. It's a new product. It's got 2x the amount of polymer fiber in it. And it's designed specifically to be used with the robot. It's called the LPR device. This product is just starting to roll out now. And we have -- we come in a variety of shapes and sizes. And you can see the picture on the right. It handles quite well with the robotic arms. It's easy to sew, easy to put in place, easy to unfurl. And so far, like I said, about 45% of our procedures have been done minimally invasively. And this will be a fast-growing component of our product platform going forward. So we have a very compelling clinical data set. We ran 90-plus patients in a study called the BRAVO study. At 24 months, the first readout of the final time point has been done in the last few weeks, and we show a 0% recurrence rate, which is unheard of in moderate and complex procedures. First 57 patients have been read out at 12 months. We had 1 recurrence for less than 2% rate. And that really wasn't a recurrence of the product, it was a recurrence of an adjacent diastasis next to the product. But needless to say, it needs to be characterized as such. So we have exceptional performance compared to competitive products. And then like I said, we just published 200 monkeys' preclinical data study with direct comparison to every product on the market, both synthetic and biologic in internal hernia. We have a wide array of publications as well to support beyond BRAVO, and we're starting BRAVO 2 as we speak, which will be a re-do of the study, but this time, specifically with robotic procedures. So the readout of the data will be as follows. We'll start to see by the end of this year, 50 patients at 24 months, and then we'll start to have that finished off early next year. But right now, we have 84 patients at 3 months; 57 at 12; and 20 at 24. So the primary focus and key endpoint is recurrence. The lower the recurrence rate, the better for the patient, obviously, and better for the hospital system in terms of cost and redoing extra procedures. If you look at how we compare to the 2 biggest products on the market, Phasix and Strattice, our 0% recurrence at 2 years in comparison to those products, which can run in the 20% to 30%, somewhere between 12% and 33%. So we have a very compelling clinical value proposition along with a cost advantage with these products as well. So the next product that we're rolling out, and we're just starting -- we're just emerging from a limited launch sequence where we're starting to roll the product out more broadly is our plastic and reconstructive, or PRS product. Here, we use the same technology platform. We leave polymer fibers in. But this time, we've developed these products to stretch in directional and specific ways to lock out, and they can be used in plastic and reconstructive procedures. These products that we're replacing are generally made of cadaver tissue and a very high cost. So again, our value proposition and our ability to develop more engineered, specifically innovative products here is going to be head and shoulders above what everyone else can do. The product looks vastly different. It's stented. It's highly permeable. It's reinforced in a way that allows for stretch in specific directions, in specific ways, for specific reasons. And then that stretch stops and locks out so it provides very secure control and allows for the reconstruction to stay in place for a long period of time and has proven in our early release to be quite useful for difficult procedures, revisions and also for straightforward reconstructions. So one of the key roll-ups of everything that we have here is the GPO contract, right? So great data, great products, great value proposition, great pricing, allows us to have access and be very attractive to GPOs. We just got the HealthTrust contract, which gives us access to 1,600 hospitals. And in general, our GPO contracts roll out to almost 2,000 hospitals at this point, which is unprecedented for a company our size. This allows us to put reps where we have access, and we just started HealthTrust implementation in February, and we look forward to taking that on as we move forward coming out of COVID. So we are spring loaded and poised for growth. This was before COVID, and this certainly is the case now and will be the case coming out of COVID. We have the benefit of having everything coming together at the same time, great clinical data, GPO contracts and access, a growing sales force. We were in the low 20 rep count at the end of last year, which drove almost $5 million in sales or 100% growth in Q4. We now have close to 40 reps on the ground, which we look forward to deploying and getting started. And our target is to get to 60 reps by the end of this year and 100 reps in the next year or 2 after that. And that should be enough to cover this market. So access, reps and then launching new products and great clinical data. This is a tried and true execution formula for med tech, and it's being implemented by a team that's done this before at both Orthovita and LifeCell in the past. So I mentioned our sales growth, obviously truncated in Q1. March went off a cliff for us a little bit as the COVID situation started to happen. We were tracking very smartly for Q1. But the last unfettered quarter was Q4, and we did put up significant growth and a very nice 100% growth rate year-over-year. So looking at our revenue for Q1, modest growth driven by COVID, but we're already starting to see recovery and growth as we move from April to May, and we look forward to June being even better than that. Our margins are going to improve as our shelf life improves on some of our key products, and we look forward to continuing growth. So in the COVID crisis, really what we've done here is we've moved to a virtual model. We've maintained operations, products still being manufactured. And we have launched a really strong virtual selling process. We've touched over 100 surgeons for an hour, 1.5 hours through our processes, and we feel like we gained tremendous commitments for future usage. We also did some very strong maneuvers to preserve cash, pretty strong salary cuts allowed us to keep our company intact, preserve our sales force and replace lost sales from COVID with those cuts and allow us to keep our cash conservation and burn fairly constant from Q1, which is what our goal is going to be, to do all of that and allow us to come out the other side strong and take advantage of the spring loaded nature of our opportunity. We have the benefit of having multiple shots on goal as we emerge from COVID. We can be led by cancer procedures with PRS, by complex eventual procedures, which have to be done, and then finally, the more simple inguinal and hiatal procedures will follow last, we think. So we're not a one-procedure company. We have diversity of opportunity. And we can take advantage of those opportunities, depending on which procedures come back first coming out of COVID. So from an investment highlight perspective, this is a well-disciplined and experienced team. We have the ability to drive sales growth. We have all the things working for us, a growing sales force that can drive $1 million-plus territories on an annual basis. We have superb clinical data emerging that is just being presented. We have GPO contracts, particularly HealthTrust, that haven't even started to kick in yet. And we're launching significant new products with PRS and LPR. So that gives us the opportunity to drive significant growth coming out of this COVID crisis. Whatever procedures are available to us, we feel very confident that we're going to get our piece of those procedures given all those factors that are coming together. And lastly, we've got a great patent portfolio that's very fresh and very young. And that's the end of my presentation. Thank you.

Thanks, Tony. We have just a couple of minutes left before the hard stop at 25 after. One question that's come up several times is given the unprecedented nature of COVID and the accessibility of your sales reps to the hospital, how are you training surgeons? And do you think that's going to be a continued impediment as we even move beyond COVID into the next several quarters?

Well, our products have been designed to fit very closely with existing procedures. So there's not a very deep high level of training required. There's a little bit here and there. So we've switched to this virtual model, like I said, even 12 months before the COVID crisis. We started our KOL presentations via webinar rather than state dinners locally. We still do those on occasion, but it allowed us to go from 1 KOL webinar a month to maybe 3 a week. So we feel very, very, very good that we're able to continue those presentations on a peer-to-peer basis. One thing that's been very good in this is the virtual VIP, where we get our leadership team together, and we do 1 hour to 1.5 hours with surgeons virtually, and that's worked exceptionally well. We've done probably close to 40, 45 of those, might even be 50 at this point. Some days, we're doing 3 a day, 4 a day. So those have been very productive. They're driven by our reps, which means where we have reps is where we have access into the hospitals. And where we're cultivating relationships through this virtual VIP program, we're already starting to see the results and benefits of that. As we see areas reopen, we're seeing those surgeons that have come through our programs start to use the product already. So like I said, I feel very good about our virtual program. There's not a ton of training required. There's a little bit, but we're going to come out of this very strong. We're actually starting to shift to the supply chain. Supply chain disappeared a little bit through the heart of the crisis as they were redeployed into other activities, but they're starting to come back now as well, which means that we're starting to do these virtual programs with supply chain executives. So I think we're going to continue this no matter what. With COVID, without COVID, I think it's a strong communication tool.