Okay. Yeah, you like this? I like it. We'll go back and forth.
Okay.
A little tentative.
Sounds good.
All right. Morning, everybody. Thanks, so much for joining us. My name is Matt O'Brien. I cover MedTech here at Piper. I'm very excited to have the TELA management team up here with us today. From the company is Tony, who's the Chief Executive Officer, and Roberto, who's the Chief Financial Officer of the company. Gents, thanks for coming.
Thanks for having us, Matt.
Thanks for having us.
Really appreciate it. Maybe just start off a little bit, Tony, just, just a little bit with the background of the company. Just to help some folks that may be a little bit newer to the story, but just background of the company and how you guys are unique within this category.
Sure. So, we put the company together from the beginning. I think it's good to start with the origin to let you know what problems we wanted to solve. So, we have a long history of running medical device companies that work with implantable biologics. We've done this before. We had a board member on our old company that ran a company called LifeCell, very successful back in its day as a standalone company, soft tissue. And that gave us some really good insight through him and through their leadership team of some of the issues in hernia repair and plastic and reconstructive. And the key area that we saw initially that we could solve was just a cost problem.
You know, these generation one biological implants for soft tissue reconstruction are very expensive, even with patents, diminished, patent protection diminished. So there was some kind of a dislocation in the market that we thought we could fix by right-sizing the costs. And then, as we dug into the performance of these products, we realized they didn't integrate and heal as efficiently as possible. They tend to be made of dermal material, so skin from either a cadaver or a pig. So very dense, integrate slowly, and then they just stretch too much since they're skin, they have a high elastin content. So you can imagine if you're paying $10,000 for a device, and it stretches out, and you wind up with a recurrence in hernia repair, for example, that's not a great ROI in investment.
So we started off solving that problem, but as we studied the market, we learned that a lot of these biological materials will be used in the belly and in hernia repair after the removal of a permanent plastic mesh. And that taught us to look closely at the OBGYN mesh market and what happened there. And those products ultimately were subject to class action litigation and were ultimately pulled from the market. The mechanism of action of failure of those products is foreign body reaction, contraction, and erosion, and damaging tissue. And those products were just hernia meshes that were moved about five centimeters lower in the body. So the mechanism of action is exactly the same in hernia repair. It just takes a little longer for this negative aspect to materialize.
So we figured that there was a great opportunity to fix the permanent plastic problem in people's bellies as well, and we sort of fused the two problems together. If we could price our products correctly, get the performance, get the recurrence rate, revision rate down, get them to heal efficiently and price them right, we could actually fix all those problems at once. We could take out a lot of the plastic mesh that's used in the generation one biologics. And by and large, we've succeeded in doing that. Our clinical data shows that we fixed the recurrence problem. Our price point is exceptionally good, so our value proposition is high, and we are now the fastest growing hernia company and maybe the PRS company in the States.
We just passed LifeCell's product, Strattice, in terms of unit implantations about three quarters ago as the biggest incumbent product . We're on our way, and we're still scratching the surface. We're low single digits in terms of market share. There's a lot of room for us to grow. We have all those components in place, and now we're ready to execute and scale out.
So, Tony, that's super helpful background. I know you're going to say both, but if I had to pin you down for one over the other, which one really drives the decision-making process for clinicians? Is it the reduction of recurrence rate, or is it the price?
Yeah, that's a great question. I'm not gonna say both. Even though it is a little bit of both. I think it's weighted off of the clinical data first, right? And actually the price, I'm gonna shift that to a little bit from the price validation to is it on contract, right? So a lot of times, general surgeons are using what's on contract, what's on the shelf. So they're relying on a vetting process that happens at the corporate level or a GPO level. And so getting GPO contracts means that all of that economic value proposition vetting has been done for the surgeon. So it actually frees them in a certain way to evaluate the performance of the product, the clinical data.
At the end of the day, they're surgeons, so they want to feel good about what they're implanting. They do evaluate based on their own personal experience, in addition to what's published in the literature. I'm happy to say we have both of those working for us in the GPO contract, so I guess we have all three of those working for us.
Okay. Okay, and just to tease this out a little bit more, on the recurrence side and on the . on the performance of the product side, maybe just help us understand, you know, why that's so important and what you guys are showing?
Well, it should be more important than it actually is, I think, right? I mean, I think, you know, accepting what can be a 12% recurrence rate, and adverse events that can be quite difficult to fix, painful for the patient, for the system, difficult maneuvers for the surgeon when you remove plastic mesh, it shouldn't be tolerated, right? At 12%, you see that in literature. Sometimes it's about 1% a year that a big piece of plastic is implanted in your body, that the adverse event complication rate can go up about 1% a year. So that should not be tolerated. On the biologic gen one side, you know, when you're fixing these difficult, complex ab walls, the recurrence rate can be 30% or 40%. So this is, again, painful for the patient. Difficult for the surgeon, costly for the system.
So, you know, our recurrence rate across all of our different types of studies and hernia repairs is in the low single digits. So it's quite impressive, and I think in the end, you know, this is a slower adoption style market, but it means once you're in, you're in, it's hard to get out. And I think in the end, you know, we're going to be the winner, you know, based on this low recurrence rate, which is a consistent signal across all of our studies, all the hernia types, all the techniques, including robotic.
I want to just mention that, you know, we believe that we're going to go from 20, 20-plus% robotic repair to 80-plus% someday, and we've made a very conscious decision to make sure that all of our products are robot compatible.
Okay. I want to spend a lot of time on that in a second, though, but let's just talk about maybe more Q3 kind of dynamics and as we're thinking about things kind of earlier, you know, in Q4. But, you know, 40% growth for the years, which you guys talked about. Q4, you specifically said we're going to get back up to 40. You did 35 in Q3, so really good.
The horror.
I know, the horror of growing a business like that, but it's a little bit lighter than what we saw in the first half of the year. So just the confidence level that, you know, we're going to get back to that 40% in Q4, and, I mean, just from a volume, share taking perspective.
Yeah. So we're very confident. We're not going to talk too much about the quarter right now, but you know, when we put our guidance out that affected the fourth quarter or captured the fourth quarter, you know, we had visibility into a good part of the quarter and so felt good about it. And you know, we did have a little bit of a disruption in the third quarter that you mentioned. That began essentially a year ago when we replaced our RMs. So the first tier of management of our sales force last increased the size of that group to 12, and replaced the people who had been there. They came in in the first quarter of this year with two tasks.
One was to grow the sales force from roughly 65 to the 75 to 80 that we want to exit this year with, and then to evaluate their existing team members. And so pretty much each one of those new RMs identified a territory that they wanted to upgrade, and did that beginning at the end of the first quarter and across the second quarter. Such that we had about 12 new team members in the third quarter, whose quotas were going to be lower than what would have existed in those territories. And we had overperformance in our core team of retained reps to the tune of about 120% in the first quarter, 115% in the second quarter.
They still exceeded quota in the third quarter, but not enough to cover the complete amount of that disruption.
Okay. Let's maybe talk a little bit about the, the transition that you saw on the rep side, and I know it's super early, but, you know, these reps don't typically... They don't, you bring them in, train them. They don't, they don't, they don't get going in Q1 or the first quarter that they're-
Correct
T hat they're on board. So Q3, they got there. Even Q4, it'll be second quarter. I mean, it's going to take them time to ramp. Are you starting to see signs that they're ramping as expected, faster, slower, anything like that?
I would say as expected.
Okay.
So, you're right that we don't expect a whole lot of them in the first quarter. Many of them, though, come from other companies where they were selling hernia products or breast reconstruction products. So it's not like they're being trained up from nothing. They're just being trained on our products. We've talked in the past about our productivity of our reps in general and the new reps getting to break even, so covering their own costs within six months, which is still true and which we're seeing indications of even in this most recent class. So, you know, things are going as they should be. Most of those reps came into already existing territories, so they wouldn't have had zero quotas like a totally new territory would have.
The indications are that they're on track to get to where they need to be by the end of the year.
Okay.
Just to give you a sense, the week that we did announce our Q3 earnings, we had our largest sales school ever, about 35 attendees at the sales school, including some European and sales managers. But big school and by far the highest quality school we've ever had, class of reps. So we're very bullish on the next 12, 18, 24 months. You know, we're building a very strong commercial organization.
Where do you think those 12 new reps can get to in terms of your, the previous... Sorry, not the previous, but your existing reps that are doing 120% of quota, 115% of quota? Can they do, you know, 50% higher than the, the reps that they're replacing, 100% higher? What can they do?
That's the expectation.
Yeah.
So the reps that they replaced were contributing, were covering their own costs, but weren't growing as much as they should have been, as the rest of the organization was. These reps, we expect, will get to that point of high growth. That was the whole point of replacing them.
Okay. Where does the confidence come from as far as those twelve being the ones to, to really accelerate the, their territories?
So we have a lot of metrics over the first 90 days in training and number of visits they do, how they interact with the rest of the organization, that are early indicators of whether they'll be successful.
Okay.
We use that to determine whether some of them are less likely to be successful and exit them. And so far, we've had a lower rate of early exits than in other classes.
The other thing to keep in mind is that we upgraded our regional manager team, as Roberto said. So higher quality managers, higher, higher quality reps, right?
Yeah.
We can see, even qualitatively, that the talent and experience level is rising within the organization.
Okay, and this is the last one on this, this topic, but did those reps come in with relationships already? So it's going to be, it's not going to be.
Yeah, you know, they did. They came in with relationships, but I'm going to say this, those relationships have to be where there's access, right?
Yeah.
In today's day and age. So the good news is this is our first year now with three GPOs, and we're starting to spread out with different IDNs. So, by and large, the access is there, so the relationships can be more fruitful more quickly. So better talent meets the relationship, meets the access.
Okay.
That's kind of what we have coming together.
Okay. And then those, those regional managers that you have, I know that they're, they're really focused on, I think, it's six or seven reps each, something like that?
Yeah.
What are they driving as far as just across the entire spectrum of reps that they have in terms of growth? I mean, what are they looking for?
... Well, that, yeah, you know, that quarter growth, 40% growth every year.
I mean, that's what they're... Okay. Yep, very helpful.
I mean, everybody's compensation, bonus structure, incentive comp, commissions, is all aligned off of, those growth rates.
Yeah. And then 75 reps is where you're going. How much revenue can they do each, eventually?
Our top reps right now this year are on track to do about $3 million. Last year was about $2 million. We have a much bigger, smaller, but bigger group of $2+ million reps, and our $1 million to $2 million rep cohort is getting, you know, bigger and bigger. It's getting to be more of the fat part of the bell curve. So, you know, I think we should be able to drive at least $2 million per rep on average in later stages. And I'm also gonna say that our best reps are mastering selling all the products simultaneously and getting that leverage, but we still have $1 million, $2 million reps that are more focused on one product or the other. So we still don't have all of it working together yet.
Got it. Okay. Let's flip over to the GPO side of things. You've got three secured at this point. And I think, Roberto, you'd mentioned that there was, like, a little, you know, delay-
Hiccup.
-or hiccup. Yeah, hiccup, that's a perfect word. For the ramp with Premier, what was the cause of that hiccup? I mean, you've been with Premier for a little while now, and then, you know, when can that really start to influence.
Sure.
the top line?
Yeah. So the key with Premier is it's one of the less compliant GPOs.
Okay.
So we were already selling a lot of product through those hospitals.
Okay.
So once we signed a contract with them, those purchasing hospitals were immediately eligible for a discount, so we lost some via ASP. We expected to pick it up in incremental volume from other hospitals, but the sign-up rate for the other hospitals was slower than we expected. So we took that hit from day one in the quarter, and the ramp was just a bit slower. So we've gotten to where we need to be now. At the end of the first quarter, we were right where we expected to be. And so that's all worked out now. But, yeah, that's the source of it. And the other two GPOs are very compliant, so there was none of that, right? That's just all growth.
Okay. Tony, I mean, we've been talking about GPOs and, you know, since the IPO. When are we gonna see this? Is there gonna be an inflection, or is it just more of like a steady, good, linear growth?
I think there's still an inflection point ahead of us, right? It's a validation process that's gonna come. When it's gonna come, I don't exactly know, but I do know that if we can grind up into the right, even if it's linear at 40% growth, that we'll take that while we're working for this inflection point. One of the elements of the inflection point may just be getting the entire sales force selling both products, right? We know that our top reps, the $3 million rep, for example, does an excellent job with both products. And if you look down into the organization, any time you got both products working strongly at a hospital, it's not a one plus one equals two, it's more of a one plus one equals four, which makes sense.
It's time, it's efficiency, and it's cost savings that the hospital starts to see, judge, and respect, and then the clinical results take time to materialize. But, in each hospital, it's almost like they have to prove to themselves that this thing does what it, what they know it does based on the clinical data and the publications. So all that stuff comes together. It's a matter of getting it all to link up out there. So yeah, I think there's still a nonlinear, you know, growth rate ahead of us, but until that comes, we're just gonna work for that, you know, up and to the right, linear 40%.
Okay. Is that a focus of the RMs? Is that, is that: "Hey, you're doing great, you know, on the hernia side, let's focus on the breast side?
Yeah. You know, when we launched the PRS product at the end of 2019, coincident with our IPO, really, you know, it was a pretty conservative time, right? The FDA panel meeting had just come out and leveled the playing field around labeling for all the participants, so we went out of the gate very, very conservative. We really didn't have our reps focused on the product. We were using, you know, MSLs to have those compliant conversations with surgeons who were elect to choose to do what they need to do. So we need to, and we have been working towards getting that spread out, a little bit more across the organization. We took big steps on training this year, and then next year, we're gonna take additional steps towards training and organizing ourselves around the plastic and reconstructive indication, along with hernia.
I think the world is opening up a little bit, right? And so we're gonna sort of keep pace with best practices of what's out there.
Got it. Okay, and then-
That's a change.
Okay. Okay, all right. I do, I really want to get to Intuitive in a second, but one of your competitors is off the market right now. How big an opportunity is that?
It's not too much for us. I think it's $20 million or so in the U.S, maybe another $10 million or $20 million in Europe. You know, those. The surgeons that use that product tend to be of an older generation, you know, big, complex ab wall procedures. That's really, I mean, we're chasing that. We're marketing and selling to that, but our focus is back to the bread-and-butter, day-in and day-out procedures, like with the robot, right? So convincing an old-school surgeon that uses an older technology that a reinforced tissue matrix is better is fine if it's in front of us, and it's opportunistic, and there's a contract, and everything aligns properly. But going to chase that when we want to just build our business for the long term across all of hernia, it doesn't make sense.
We're gonna stick with the original plan. So there's a little bit, but not too much contribution.
Okay. Okay, understood. Is there a risk if that competitor gets a label specifically for breast, that could hurt your PRS business?
I think short term, there is. Yeah, I mean, there's, there's a couple of different IDEs that have just been approved. We will be one of those, in the future as well. The guidance that we're hearing, and intelligence that we're learning is these are very, very long-term processes.... I don't think there's an approval that's coming anytime soon. Our strategy is to have a fast follower set of data, which we're collecting right now. We have a retrospective, FDA-sanctioned, I might add, retrospective data collection.
Okay.
W hich is nearing 100 patients at this point and will double over time. That study design is designed to be a fast follower in case that competitor does get an approval based on their retrospective data, right? So I call that sort of like the low, whatever you wanna call it.
Yeah.
I call it the junk ball-
Right
- of capitulation.
Yeah.
So, we're ready if that happens.
Right.
But I don't think that's gonna happen. I think now that other competitors are getting their IDEs in place, I think we just need to get our IDE in place and be in it for the long haul. So I think it's gonna be a level playing field, and I will say, if any of these competitors does get a label before any others, it may shift in their direction for a short period, but at the end of the day, this is a 30-year-old procedure with products that have been used for 30 years.
Right.
Surgeons know. They know what they like and what works.
Got it.
I don't think it's gonna influence them all that much long term.
Okay. Okay, let's flip over to Intuitive. I couldn't have been-
That's part of the nonlinear inflection point in the future, perhaps. Yeah.
Interesting. All right, I wanna hear about that then. I couldn't have been more wrong about using the robot for hernias. I, I literally couldn't have been more wrong-
Me too
because I never thought it was gonna take off.
When it first started to gain traction.
Yeah
I didn't fully understand it.
Right.
Yeah.
So I've learned not to question Intuitive ever, but 20% to 80%, I mean, that's a monster amount of growth, and they are growing still quickly within hernia.
Yeah.
Just talk about the dynamics there.
Well, look, part of what clicked for me is when we started running lab training sessions with the Intuitive robot. Roberto and I both got on the robot to play around, and it was eye-opening, right? You can see better, more depth, more clarity, better color resolution. It saves your hands, your wrists, your shoulders, your neck. When you watch a surgeon who's very well trained on the robot, it's like a... it's like they're playing the piano, right? It's beautiful. And you get a better repair with puncture access, minimally invasive. You're able to still use the wrist to close primary, which you can't do with laparoscopic sticks, and you can do all kinds of pockets, and maneuvers, and tissue resections and still get the reinforcement that you want. It is a top-flight repair.
So, I think it's gonna grow. And the way we're looking at it, after this revelation smacked us, and this smacked us about five years ago, I'd say three, three to five years ago. You know, I view Intuitive as Apple of MedTech, and there's probably 1,000 companies that wanna get a pole position, primary position in their App Store, right? We are now and we're thinking of ourselves as a primary app within their ecosystem.
Yep.
And so we started behaving and, and operating the business that way last year, or this year, I should say. I'm already in next year, but this year, where we started interacting with their KOLs, grassroots, ground up, introduced them to our technology. And so now, through their proctoring and training, there's starting to be exposure in the market of, of OviTex, not just plastic, right? You don't wanna use a, a robot and all the good things it can do and put in a, a $500 piece of plastic that's subject to all this litigation. You want a natural repair. You want the best implant coupled with the best technique and instrumentation, and I think that natural repair is our story, and our robot data so far is superb.
We've focused on making it usable with the robot, and we're slowly working our way to develop relationships with KOLs that are big robot trainers and proponents, and it's just gonna come together over time. How fast that comes together, I don't know. I think we've made more progress in the last three months than we did in the last three years, right? In terms of getting seated and situated with a lot of their top trainers. So, I think the robot's here to stay. We aim to be known as the robot company that avoids putting plastic into people.
Are you gonna have any kind of, you know, partnership, or are they gonna push your product into their training labs, or?
I can't predict that. You know, I think, like I said, picture yourself being Apple, right? How many little app developers come to you to try to, you know,
Right
B eg for a seat at the table? You can't count on that. I think you have to prove yourself, great data, great economics, and just slowly work your way through the surgeon community. You know, I think that's the only way to do it, and we're making progress. You know, we really respect the heck out of what Intuitive's built. It's gonna... I'm hard-pressed to see somebody taking them out for what they do today-
Right
- for hernia.
For sure.
Yeah.
For sure. Yeah, absolutely.
Maybe other areas, but not that area.
What should we expect as far as that relationship goes in 2024?
I think just more of the same, right? I think we'll have more to say about it as we get deeper. I would be a happy guy right now if we were just part of their training ecosystem, right? Even if it's not sanctioned between the companies, but just between surgeons and ourselves, and having access to the robot and training scenarios, that's fine for us.
Okay.
That's, that's what we need. That's probably more of what's gonna happen over the next 12 months.
Understood. So that's, that's compelling stuff there, Tony. I wanna flip over to Roberto for the last minute or so. Just talk about, you know, the profitability profile of the business, and what we should expect in terms of improvements in profitability over the next couple of years.
Sure. So, we talked on our third quarter earnings call about our goal of restricting OpEx growth next year to single digits, so under 10%, with revenues continuing to grow somewhere in the neighborhood of where they've grown this year.
How do you do that? How do you get that kind of leverage on 40% top line growth?
Because we've put in place all the infrastructure other than the incremental sales reps in place to support those sales.
Okay.
So we have the B2B people, we have, you know, all the contract stuff in place, and now it's just a matter of letting the territory managers do their stuff and grow revenues.
Got it. Okay. And then maybe just real quickly, we only have a few seconds left. The capital position of the business, where are we at today? How comfortable are you with the balance sheet?
So we had $58 million at the end of the third quarter. We spent $7 million in cash over the course of the third quarter. There is some seasonality to that cash spend, but as we improve our leverage next year, you'll see that cash drain going down. So we believe we have cash on hand to get us to profitability, and we'll be talking more about that on the fourth quarter earnings call.
Perfect. All right, well, I've kept this over, so we have to go ahead and wrap up there. Tony, Roberto, thanks so much for coming and all the feedback. Appreciate it.
Thanks, Matt.
Thank you.