Good morning, everyone, and thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Cronin, and I'm one of the medical device analysts here at Canaccord Genuity. With us today is TELA Bio, a public company focused on novel soft tissue solutions for hernia repair and reconstructive plastic surgery. With me today is Tony Koblish, President and CEO, as well as Roberto Cuca, CFO. Before we begin, I want to remind everyone of any relevant disclosures which can be found on our conference and/or firm website. So we'll begin with a brief presentation by the TELA team, followed by a fireside chat, and I'll try to leave a couple minutes at the end for questions from the audience. With that, turn it over to Tony and Roberto.
Thank you, Caitlin. Appreciate it, and thank you to the Canaccord team for inviting us. Forward-looking statements. So, we are on track for a mid-$70 million range this year. We've been a fast grower. We didn't really have much in the way of sales back in 2018, so much of the growth that we've attained has been, you know, since that time. I am a co-founder of the company, and I can tell you that we've organized a team of people to solve some very specific problems, which I think are very topical.
The first problem that we endeavored to solve is in hernia repair, first-generation biological materials tend to be made of either animal or human skin, processed, and they tend to be super expensive, and they tend to stretch out, which means a very high recurrence rate. So we wanted to fix that problem, one. But I think a much bigger problem is the use of polypropylene mesh in hernia repair. We know what happened to polypropylene mesh used in the OBGYN, essentially pulled from the market after a long, grinding battle, litigation, class action, all that stuff. There was tens of thousands of procedures there. The use of polypropylene mesh in hernia is millions of procedures, and that process is in motion. We thought it would happen much faster when we founded the company.
We figured that the same forces, whether they be legal, whatever, that went to work on the OBGYN mesh problem, would go to work on the hernia mesh problem, and that has been the case. The leading purveyor of polypropylene mesh has about $1.9 billion reserved, and they are getting close to a settlement, which is gonna have, I think, a profound impact on the market. About 80% or more of mesh implanted in the U.S. is polypropylene. So, we wanted to create a safer, more natural repair solution that had as good or better clinical data, as good or better utility and usage with the robot, and I believe we've done that. One of the digressions that I'm gonna start with today is Europe.
So it's very rare that a small medical device company cranks, grows aggressively in Europe. We are doing that, and it's been happening the last several quarters, slowly but surely. Don't really believe it, don't really believe it, but it keeps coming and coming and coming. And I think we're poised to have an exceptionally strong second half, coming out of Europe, primarily driven by the U.K., and this is related to what's happening in the U.S. The NHS, you know, typically is driven by cost, but in this particular situation, they're driven by maybe polypropylene isn't the best solution for hernia repair. So they're partnering with us in interesting ways, and we'll have more to say about that maybe at some point in the future.
And this mindset shift away from polypropylene and towards natural repair is having a profound impact on our growth rate in Europe. So imagine when the shift in the U.S. happens. It's behind, it's behind where the NHS is, for sure. But if there's a marquee high-value settlement that gets announced in the next weeks, months, whenever, it's still in motion, you know, there's gonna be a profound change, and we are superbly situated with our data set, our robot compatibility, our Intuitive Surgical compatibility, and a commercial team that is up and down, but maturing and has GPO contracting and is able to compete with everyone else. That's a hell of a first slide. So the product portfolio is broad, right? And it's because you have to be able to do everything that polypropylene does, right?
So we have complex ab wall, we have ventral, we have hiatal, we have minimally invasive LPR, laparoscopic robotic products, and we have our newest suite of products called IHR, which is inguinal hernia. So there's 650,000 inguinal hernias. We haven't had a natural repair product that was earmarked specifically for inguinal until recently, and we do now. So we have a complete suite. There's more products coming next year, which are gonna continue to enhance this suite of products. I think in the next 12-24 months, we'll have the most usable, widest array of products for hernia repair and even plastic and reconstructive surgery. One of the things we really focus on is performance data. So you know, one of the key measures is recurrence.
So you fix a hernia, you wanna make sure that it doesn't come back. Obviously, if you're the patient, if you're the doctor, if you're the hospital system, you don't want it to come back. So that bottom row there gives you an indicator of where our recurrence rate falls in comparison to others, larger companies, other products that are earmarked toward natural repair, etc. So clinical data doesn't always win the day. I know that's frustrating. It's not like a pharmaceutical or a drug in devices and with surgeons, but we have a superb basis to start from. And all of our data, not just this particular set of data, all shows the same thing: super low, super low recurrence rate.
It's not so much the materials, it's not so much what, you know, the inherent properties of the products, it's our knowledge on how we designed them. We put a superstar team together of the best biologics minds, the best polymer minds, and we have an algorithm to design products, which I think is reproducible and can result in these types of data. Now, on the plastic and reconstructive side, the mission isn't quite as intense, but is equally important. We are working hard to get cadaver skin out of breast reconstructions, right? It works well there, but it integrates fairly slowly. Again, skin dermal materials stretch, so having a material that stretches infinitely isn't always the best answer.
So we've taken the best of what's done with cadaver skin, and we've applied our techniques in engineering and design principles to do things like lockout, so the stretch is controlled, faster integration, etc. So we're about a 70/30 ratio between hernia and plastic and reconstruction. Generally, the plastic and reconstruction business is growing faster. It's about three years behind where we are on the hernia side, and we are in the process of collecting clinical data on the PRS side. So part of the key to being known as a hernia company is to have a complete array of products. I think we have that on the implant side, but fixation without suturing, without penetration, atraumatic fixation is part of the story. We've licensed a product from AMS Surgical in the U.K.
First, cyanoacrylate glue ever implanted for use inside the body for gluing meshes in place. So this is a very new product for us. It's a super complement to the IHR product and the simple hernia products that we sell. And it gives us the presentation to surgeons as a full-service hernia company. This product is so unique, it opens up dialogue for us to present our products, our core OviTex products, and get introduced to new surgeons. So very optimistic about the product portfolio, our position, the transition away from polypropylene towards natural repair over time and the way we're situated there. I'll turn it over to Roberto.
Thanks, Tony. The med tech math. These are the 5 factors that drive revenue and revenue growth. We use them to think about, you know, what we're gonna do over the long term and short term, and even when we come into the office, in the morning, you know, what do we need to focus on? So the first is the number of reps we have in the field. We've been growing that fairly substantially over the past couple of years. We're now at what we believe to be our long-term level of reps, 86 full-time reps, 6 associate reps who are likely to convert into full-time reps, and then it'll be ±3-5 reps from there. But the rep growth that you've seen in the past, we've now achieved.
We're now focusing more on the individual rep productivity, so how much each rep can sell. We have a rep that last year sold $3 million in his territory. The goal is to get on an average to about $2 million per rep. So, you know, with roughly 100 reps, about $200 million in revenue. To assist with that, we continue to expand the product portfolio, so different presentations of the technologies that we have, as well as, for example, the addition of ancillary products like the LiquiFix glue gun. GPO access is extremely important in this marketplace, so being able to walk into a hospital, talk to a physician about our product, explain to them why it's a superior option for them and their patients.
One of the first questions that the physician will ask is: Is it on contract? Am I able to use it in this hospital? So getting these products on hospital contracts, across the U.S. is an important initiative for us. We now have three out of the roughly five targeted big GPOs that we expect to get. We have work ongoing to get the last two, but we have very good access and continuing to develop and improve access. And then finally, is the clinical experience and data. Tony showed some of that, with regard to hernia. We're collecting additional data in PRS, in an effort to potentially get the product specifically listed on the the label for breast reconstruction.
But, as Tony said, it doesn't always win the day, but it's a very useful tool to have in discussing with surgeons. And then that all comes together to deliver the sort of revenue growth you're seeing here. We, based on the way that we have struck a deal with our manufacturer, we have a revenue share with them. So, our products are, we provide 27% of our revenue to them. We spend about 1 or 2 percentage points in shipping, so 70% is the target gross margin for our products. That applies to both, lower ASP products, like the IHR products that we launched recently, and products that sell at lower prices, for example, internationally. So our EU products are at this gross margin as well.
And this all comes together to drive revenue growth sequentially in, you know, a pretty strong sequence. We had a little bit of a headwind in the second quarter, but we've averaged pretty close to 30-35% growth year-over-year for a long time now. So with that, I will turn it over to Caitlin for some questions for us.
Great, thanks for the presentation. So just starting with the Q2, I think this is a good place to start, given you released results earlier this week. Maybe just provide the audience some context. You faced a number of challenges with a couple of cyberattacks, slower procedural volumes, and a few surgeon departures. Just maybe provide some more color and also kind of the status of these headwinds.
Yeah
into the Q3.
I'll start. I'll start. So the most profound impact were these ransomware cyberattacks. I can't really think of an overlay that would've been worse situated for us, right? So, you know, our... We have three GPO contracts. The last one that we got, I'm not really supposed to say the name, but it's 140 hospitals, and it's in the news. You know, we have about 650 hospitals, on average, as customers. We don't have 140 hospitals from this GPO, but it's a good number. And it was just annualizing, and the growth was the strongest. It is a contract that is very positively situated for us. It's only a dual source. It's us and another company, and it's not the other company is not the market leader.
So by any measure, there's a lot of positive factors there, that went against us. You know, we didn't really have a sense for what was happening, you know, until probably, you know, end of May, June, or so. We have PO lag, but there was certainly, cancellation or moving of surgeries in our particular space out of that system or elsewhere. The other interesting thing is that our top rep, who's a $3 million rep, you know, his key hospital system was down for over a month, trying to figure out how to pay Bitcoin to a cyber hacker. And, same situation exactly. But that wasn't this GPO. It was outside of that GPO.
So it makes me wonder if there was some softness, et cetera, out there due to, you know, this stuff kind of flowing around the U.S. I can tell you, we have a new board member, who's part of the J&J MedTech group, and he said they were definitely seeing softness. Certain of their divisions, they're recasting some of the reps' quotas and compensation if they had a heavy Ascension... I'm sorry, third GPO coverage. So, you know, it's not a great answer, but it had a profound negative impact on us for the second quarter.
But one of the keys is that it was very much confined to the second quarter. So, you know, the best evidence for that was that, our July was a very strong July. We, you know, if you're a growing company, every month should be a record month. We tend to be skewed towards the last month of the quarter. But our July was the highest first month of a quarter that we've had historically, which gives us good indication that, again, these disruptions were limited to the second quarter.
Yeah, I mean, we just gotta keep grinding. Long, long haul here. You know, there's a lot of tailwinds that are gonna ebb and flow, but we just need to keep going.
Mm-hmm. You reiterated your guidance for the full year, on the call. What really gives you guys the confidence to continue to expect that, that number for the full year?
Sure. So we've been describing guidance this year as a commitment to investors. And you know, as part of making that commitment, we structured guidance and projected it with an ability to withstand you know, some unforeseen disruptions. So we weren't certainly hoping for what happened in the second quarter, but we were prepared for what happened, and that was reflected in the guidance. And now that you know, we've been able to confirm that that disruption, again, was confined to the second quarter, we're able to say that the rest of the year should look much like what we expected it to. Coupled to that, we have a new Chief Commercial Officer who began in late May, May 20th. He's been with the company for a long time, but only took on this new role recently.
He's been instituting some new programs, new metrics, new training that we believe is going to even further lift results in the second half.
Got it. And then how did these challenges really impact your, your cash burn in the quarter, and where do you stand from a cash perspective now?
Sure. So we ended the quarter at $26.6 million. Obviously, had we had greater revenue, that would've dropped to the bottom line. We made some adjustments to offset that. But you know, we do expect, as we said on the call, for that cash, as revenue grows, as our OpEx declines, and we get additional leverage, and then with the contribution from a revenue share from a divested product, that should contribute $3 million-$7 million in cash, that all should come together to get us to profitability.
And then maybe just touching on the NIVIS comment that you just talked about. You know, the $37 million, how does that really work, and you know, over how many quarters is that gonna be spread out?
Sure. So, the company that acquired it, MiMedx, paid us $5 million upfront in cash. That's on our balance sheet now, and that ran through our P&L in the first quarter. There is a guarantee of an incremental $3 million and a cap at $7 million, so we can make as much as $7 million. And the way we earn it is that we get 50% of their revenues in each of the first four quarters of the term and then 25% of their revenues in the subsequent four quarters.
Okay. Makes sense. Then, you know, the hurdles you had in the U.S. in the quarter were challenging, but OUS, you made some commercial progress.
Yeah.
You know, can you touch on those updates?
Yeah. I mean, the U.S. is, the OUS, Europe, has been a bright spot, which is rare for a small, small medical device company with a limited product portfolio, as you know. But, you know, we have a very good team there, and, there is this focus on polypropylene and the problems with it, that doesn't exist yet here in the States. And, you know, it's at the NHS level, particularly in the U.K., and we've put a small, really strong group of reps together that are, you know, showing what is possible with this flow in that particular direction. You know, they've been doing nothing but picking up speed, and I think Roberto and I have both been sort of like, eh, ignoring it, because it's too good to be true, but it keeps coming and coming and coming.
You know, I think the second half of this year is gonna be super strong, coming out of Europe. So, if that's a glimpse of what can happen in a country at the scale of the U.S., then we're pretty happy.
That's great. And then maybe just touching on IHR, which is,
Mm-hmm
... one of your newer products. You know, you've said this is the key to really unlocking mass adoption-
Yeah
... as versus your other prior hernia products, which were addressing more complex and lower volume procedures.
Yeah.
You know, can you just describe what you mean by, you know, mass adoption and driving that with this product, and then also, how has uptake been since the launch?
When we think of mass adoption, we think of total conversion, right? We have a product portfolio that one surgeon can do all of their different hernia repairs with. Typically, surgeons may pick and choose a little bit from different companies. Mostly, they stick with the market leader and their array of products. They have a very wide array of product portfolio, obviously. Our goal is to be able to emulate that width and breadth of product portfolio, and with IHR, I think we're there. So, there's 650,000-700,000 inguinal hernias repaired, mostly with the robot, every year. So there's so many halo effects associated with that.
One is, you know, if you can get that surgeon using the IHR product, you can get them to do the complex and ventral procedures, which are higher ASP, which is our bread and butter, where we started with, and where our data, frankly, is, most of our data, although we have great inguinal data as well. And then being tied to the da Vinci robot is a huge deal, not just for inguinals, but for hiatal. Many, many ventrals are starting to be done robotically, so robot compatibility is a must. At some point in the future, I don't know how long, 80% of all hernias are gonna be done robotically. So to have a footprint and a product range that's highly compatible with da Vinci is super important, and the IHR is there. It's priced correctly. It's designed correctly.
You can put it down minimally invasive tubes. You can sew it in easily upside down. It has an anatomical fit that is unique. So, you know, the uptake of the product, I think we'll have 400 or 500 implanted by the end of this year, roughly, roughly. So, you know, the strategy out of the gate is robot, robot, robot, get into the proctors and trainers, and then try to get surgeons that are currently doing our ventral and complex ab wall to use IHR in their inguinals. That's the first step. I think next year, we'll start to figure out how to have the inguinal lead, you know, to more growth. But for now, it's go where we are already.
Just touching on the robotic piece of it, you attended a couple of the Intuitive meetings recently.
Mm-hmm.
You know, why is that so important, engaging with Intuitive surgeons and, you know, how was reception at those meetings?
Yeah, that's a big deal, you know? I mean, if you're on the outside, you don't even know these meetings are happening, right? It's like you're just not in the club. You know, to get involved and invited, you know, there was only two or three mesh providers there. We were by far the smallest player, but we had the most energy, and we had the most booth traffic, and we were the most fun, that's for sure. There was a level of validation just by being there that you can't pay any amount of money for.
You know, if there was 1,000, and 1,000+ general surgeons, you know, that got exposed to our product in some way, shape, or form, that includes sponsoring a drink, that includes having a video play, that includes our booth, you know, that's invaluable, and it has happened from the ground up, right? Intuitive won't give you the time of day. There's so many companies that have products that wanna, you know, be compatible with their app store, right? We're all building apps for them at this point, and you really have to separate yourself from the pack to get invited into their app store. To do that, you have to have data, ease of use.
You gotta show that it helps enhance the robot experience, and I think we've done that. So it's a very big deal. The ground up was, I think they got comfortable with us through their KOLs and proctors that do case observations, and so that's a great way to do peer-to-peer selling as well. So we're gonna try to enhance peer-to-peer selling and case observation sites as well. So, you know, to a certain extent, whatever we can do to, you know, dock in with them, emulate them, we will do.
Then just briefly touching on your commercial organization, you know, last year you upgraded and increased your sales force size substantially for your next leg of growth and with some time since this overhaul, how do you think about how the reps are doing that you hired and upgraded and, you know, do you think that they're trending well?
... Yeah, absolutely. So we, you know, we put in first, about two years ago, the RM level, so the, the level above the reps. We had them identify reps that they wanted to upgrade. They did that over the course of last year. We then expanded further at the end of last year to get to our targeted levels. We've had some churn, which is typical, you know, quarter to quarter. But, these reps, in particular, managed by these, upgraded RMs, are really doing well and getting up to speed, and they become much better at selling both products, so across the portfolio. One thing I'd like to emphasize, Caitlin, is, you know, we've been on a hiring and building tear in the commercial team. That's over, right?
So in terms of OpEx leverage, topline growth, you know, that's a big piece of our go-forward plan, is to get leverage for what we've built.
Mm-hmm.
That's where we are.
Just finishing on that point, your expectations for just, you know, cash flow, breakeven, going forward, just given that kind of decreasing spend, or at least stabilizing spend?
Yes. So we do expect to be able to get to profitability with what we have on hand, including the contribution from the NIVIS divestiture. That's a combination of both revenue growth, both this year and next year, and then improvement in OpEx. So I think a lot of people assumed that, you know, OpEx would have to stay where it is. In fact, we can get some decrease, and further leverage by managing that next year.
Great. Any questions from the audience before we end?
On IHR, is the idea that even at a much lower ASP, the volume will make it such that you could sort of transform the company? Or is the idea behind IHR a lower ASP that will allow them to go to higher ASP, products that will therefore transform the company?
Can you repeat the question? Sorry? Repeat the question. Yes, so the question is thank you for reminding me. The question is, you know, what is the nature of IHR? Does it transform the company by lower ASP, higher volume, and mass adoption, or does it transform the company by, you know, getting the higher end products used as well? I'm gonna say the latter. You know, I mean, I think mass adoption means we wanna dominate all facets of hernia. There's a lot of individual nuances across hiatal, inguinal, ventral, IPOMs, retrorectus, ab wall reconstructions. We have something for all of it, and we certainly don't wanna neglect the higher ASP, bigger pieces. The pathway to getting that habit of pulling our product day in and day out, though, flows through the inguinal at some level, right?
If you're doing, you know, 3-10 inguinals a week, as a busy hernia general surgeon, that habit, that shelf space, that mind share is super important.