All right. Good afternoon, everybody. Thanks so much for joining us. My name is Matt O'Brien. I cover med tech here at Piper Sandler. I'm very excited to have the TELA team here with us today. From the company, we've got Tony, who is the CEO, and then Roberto, who is the COO and CFO. So, guys, thanks so much for coming out. Really appreciate it.
Thanks for having us. Really appreciate it.
Sure. So, Tony, you guided the full year saying that it does not include any type of real slowdown from hurricanes or IV solutions. I know the latter is getting better.
Yeah.
But, you know, and the hurricanes are, you know, thankfully gone. But is that something that impacted things to start the quarter?
Not to start the quarter. You know, we had a very strong start in October as we did in July the previous quarter. So those signals were quite good. We certainly have heard about IV shortages in the marketplace from our reps, but also talking to supply chain folks and people that work in hospitals, and the best that I can tell is, you know, certain systems are better situated than others. They've got stocks in the warehouse, and, you know, those stocks will get worked down at some point. I've heard a lot about looking for alternative sources like out of China or somewhere else or maybe Becton Dickinson, other companies, but China has come up a bunch of times, but a four- to six-week delivery.
My theory is that if there's going to be any impact from it, it's probably in the latter part of the quarter, just because we'll know where the inventory stands, you know, or the hospital systems will know where the inventory stands as they go through the quarter. For us, we haven't really seen it yet. We've certainly heard a lot of chatter about it. This inventory stock workdown seems to be the best theory that we have thus far. We do a lot of our business in the last month of a quarter, as you know. I think it, you know, it remains to be seen whether or not it's going to have an impact. I think in general, general surgery, hernia repair does seem sensitive to these perturbations. We saw that in COVID times as well compared to other procedures.
I don't know, Roberto, if you have any other?
I think that captures it well.
Yeah. And then anything that would impact should most likely be later. So visibility right now, probably not quite there.
Not quite there. You know, I think, you know, what I will say is I'll turn it around as I should and say that we've got some really great long-term triggers regardless of the ups and downs of quarters and exogenous factors, right? I mean, the settlement for polypropylene mesh, the first one's done. So, you know, over the next few years, you know, 80% of all the implants done in hernia are polypropylene. There's probably what's approaching a $2 billion settlement that's done that really hasn't worked its way out there yet. So much the way the OB-GYN mesh issue worked its way through the system, you know, 80% of this market could be up for grabs in terms of transition. And we're superbly well situated for that.
On top of that, you know, our GPO contracting seems to be set up well for us to take advantage of that. We're making great inroads with Intuitive Surgical, you know, as part of, you know, peer-to-peer education, case observation sites, demo and training and things like that. On the hernia side, you know, I think long-term we're very well situated to get through the $100 million mark and then on to the $200 million mark.
Okay. I want to get back to some of the, I don't know, more near-term things, but the mesh settlement. I mean, Tony, we've talked about this a million times.
I know.
We all know you have a better product.
I know.
By a mile. It's not even close. It's never gotten the traction that it needs to because some docs are like, "I'll just use the cheaper synthetic that I need.
Yep.
Why is this going to be different this time with the mesh settlement? And why wouldn't they start responding in front of that like now versus wait till it's all done and then do it after the fact?
So I'll start with what's actually happening in the marketplace, right? So what's happening is there's other groupings of cases that have to go through the system. Medtronic has one grouping as well. But the main grouping with Bard, Becton Dickinson has been settled. You know, I think the preparation that they're going through is actively transitioning as many customers as they can from these permanent plastic meshes to temporary plastic meshes. So their Phasix franchise, right? Resorbable polymer products. So they have a very specific mindset around natural repair, which is similar to our mindset, right? We happen to have an excellent solution with our products in comparison to both permanent plastic and temporary plastic. So we're very well situated. Like I said, I think polypropylene has been the de facto standard since the 1960s. So as that starts to transition, there's going to be a dislocation.
That dislocation is going to be in the hands for the future of a very small number of companies. It's going to be the Phasix product. Medtronic has got a brand new resorbable polymer. They're trying to get ahead of it, but they're way behind. There's Gore and then there's us. That's it, right? So you've got a situation where one controlling company has over 50% of the market. Most of that is these polypropylene products. And, you know, I'm not the smartest guy in the world, but I would think that you'd want to get out of the way of future liability if those products continue to be implanted at the volume that they are. I mean, why would you want to settle, you know, $2 billion worth of class action every 20 or 30 years? It just doesn't make sense to me.
At some point, there's going to be some trigger where we are in a post or minimal polypropylene world. 80% of all implants being put in today are polypropylene. So we're going to get our piece, right? We're growing well, but we're grinding in the face of a much different market than what's going to happen. I guess that's really it. How fast that happens, I don't know.
Why can't the plastics companies just transition people to their biologics then? Even though we know they're not as good.
They're transitioning. The choice is to transition to resorbable polymer, right? Generation one biologics cannot get the job done, right? They can't be used robotically. They don't integrate well. They're too dense. You can't put them down minimally invasive tube sets, which precludes robotic usage. And the cost is just outrageously out of whack for high volume procedures. I mean, there's 1.5 million hernias done. You know, 750,000, almost a million are inguinals that have to be done at a reasonable price point. So, you know, we have the only tissue repair matrix or reinforced tissue matrix that has the capability of hitting a price point that doesn't break the bank, also is highly usable with Intuitive system or any robotic system, and happens to have great data in comparison to permanent and temporary plastic.
So the world is going to go, I think, from permanent to temporary plastic. And, you know, our matchup with temporary plastic is exceptional. So we will be one of the four beneficiaries of this transition.
Got it. And I know there's no crystal ball out there, Tony, but is this more like a 2026, 2027 event or, you know, this?
Yeah. I mean, all I can do is go back and look at the, and Roberto may know, but go back and look at the history of the OB-GYN situation, right? I think within three or four years that saga unfolded, three or four years of the first settlement, right? So if you go by that as an indicator, the environment for us is just going to get better and better. It should start next year, right? And then it should pick up momentum as we go into those outer years. What do you think?
Yeah, but it's still a matter of persuading the individual physicians that they want to use these products and getting the news about the settlement in front of patients. You know, patients can drive the decision-making as well. After the vaginal mesh settlements, it took several years before those products were pulled off the market. Bard has clearly learned from that, so about a year and a half, two years ago, they stopped commissioning their reps on the permanent synthetic mesh knowing this change was going to happen. About a year ago, they started rewriting their contracts to favor Phasix and trying to switch the surgeries from permanent synthetic mesh to Phasix, so they know a change is coming, and if they're driving a change to higher-priced resorbable meshes, you know, we have a very strong story both performance-wise and price-wise against that.
So to that point, Roberto, you guys are. I know you're going well above the market rates, but are there demonstrable examples of you guys getting Bard accounts because of this dynamic? They're trying to push them over to Phasix and like, "No, this one's better and cheaper.
There are conversations we're having with contracting groups. So for example, we've gone to a number of them and said, "Look, it hasn't hit yet, but your P&L is going to start to turn upside down the more volume moves to Phasix. You need to be aware of that and, you know, take your own steps to oppose that." And one of the things we've gotten back from contracting groups is one of the ways you can help us with that is getting your products reclassified out of the same categories as Bard. So the way those contracts work is, you know, Bard gives a significant discount on their units if 80% of the units are their product. And there's a big cliff if they, you know, they fall below that 80%. So it kind of caps us at 20% in the category.
If we can be recategorized such that we don't get capped, that'll help the hospitals drive down some of their expenses.
And when Roberto says categorization, it's either permanent synthetic, temporary synthetic, or gen one biologic. We've been in every single category, right? Because our product doesn't fit neatly. So the time for us to generate our own category may be now, and that may, you know, may help us a lot.
How do you do that?
Education, like anything else.
Okay.
Education.
Got it. And Roberto, just maybe sticking with you for a second there. When I look at the Q4 estimates, it's a pretty big step up in the midpoint compared to Q3 and more than we've seen historically, not dramatically, but more than we've seen historically. So why the confidence in that step up here in Q4?
Sure. So from the second to the third quarter, we stepped up by $3 million sequentially. From the third quarter to the fourth quarter, it's about a $4 million step up. So $1 million is not nothing, but it's certainly within reach. And as you know, our fourth quarter is always the strongest quarter. There are a couple of dynamics driving that. First of all, both physicians and sales reps are trying to make numbers for the year. Second, patients who have copays try to use up their HSAs by the end of the year. And then many of them try to schedule their surgeries around the holidays when they have family around to help them. So there are a lot of dynamics that give us a good feel about that.
In the same way that in the third quarter, the first month of the quarter indicated that we were on track for the quarter, we saw the same sort of data from our October sales.
Yeah.
Got it. Okay. And were you seeing things from a share-taking perspective that gave you that confidence as well for Q4?
Yeah. I think share-taking, I would classify it more as depth, greater depth into our existing hospital systems, right? The way our products on the hernia side are adopted is a surgeon will look for an entry point in the array of types of hernias they repair, and they will find an entry point where they want to use our product. And then once they see good results with our product, we can start to then widen their usage to other types of repairs. So right now we're probably, you know, in that widened usage mode. If you look at our hernia business, it's been fairly consistent as it's grown that about 60% of the units are going down either robotic tubes or lap tubes, most of them robotic tubes. So that does indicate a broadening down into the simpler procedures.
Since the 60% has been fairly consistent, it also means we're getting the more complex ventrals still. It's a shelf space, mind share, you know, think of our company for all your needs kind of thing that I think we're on the early stages of realizing.
Got it. Okay. And is that, and sorry to stick with Q4, is that improvement going to be equally distributed between OviTex and PRS, or is one going to really pull you up more than the other?
PRS historically has grown at a greater rate because it's growing off a smaller base. It's only approved in the U.S. You know, we're getting great growth in the U.K. and Europe as well. We do expect to see growth from both, but PRS just historically has outshone hernia.
Yeah. One thing to say about what's happening in Europe is there's a very deep interest for collaboration between the patient and the surgeon. In fact, the NHS has indicated that they've got to sign off, I think, you know, three separate times before the surgery that everybody agrees to the plan, right, so it's a little bit of a shared decision-making model, and if you show a temporary plastic, a permanent plastic, and our product to any patient, you know, most of them would pick our product from just a feel perspective, so that's the same kind of model that we're starting to use in the U.S. as well, but we're starting to see it take root in the U.K., which, you know, as a smaller country, our growth there has been exceptional. You can taste it of how it would translate to our country, a much bigger play.
So, you know, hopefully all that plays out in that way.
Okay. All right. Fingers crossed. DV5, everybody's super excited about that product. Can that somehow accelerate OviTex utilization?
I don't know if it can or can't. I think anything that drives robotic surgery interest in hernia is probably good for us since we have preemptively organized our company around compatibility with anything Intuitive does. I'm just going to say, you know, we view Intuitive as Apple, and we just want a good position in the App Store. So everything we do from data collection to product design is meant to work with the robot. So I don't think there's any specific features in the DV5 that would accelerate, you know, hernia repair or use of our product other than maybe it just makes it faster adoption for all of hernia, right? If we're doing 25%-30% of all hernias robotically, you know, surgeons think at the sound barrier point, it'll be about 80%.
There's going to be some rate of change between where we are today to 80%. If the DV5 accelerates that, that's the only way I can think of. But from a compatibility perspective, you got to get down to 8 millimeters, you got to stick upside down, and you got to be easy to sew. There's some basic fundamentals that I think we've solved or will continue to improve that will make us compatible as robotic surgery, you know, gets a bigger hold. DV5 is an amazing, amazing array of technology.
Yeah. There's no headwind though from DV5.
No, I don't think so. No, no. In fact, you know, if we start to see some robots, some older models or rent-to-own models into the ASC centers, that could, you know, help us as well. You know, I mean, natural repair technology using a reinforced tissue matrix, our product plus a robot in any setting is probably the best repair you can have. In fact, you know, once a month, every two months, I get a call from sophisticated investors that need a hernia repair, and they want our product plus the robot. I send them, you know, wherever they are, the closest place.
Got it. Okay. All right. You changed your sales force earlier in the year. What are you seeing in terms of those changes and how much traction you're getting from the new reps?
Yeah. So the changes were primarily outside the sales force. There was a bit of turnover inside the sales force. So our new Chief Commercial Officer, Greg Firestone, in August took out some of what he calls the helpers. He describes the doers as the people with the quotas. So we began the year with 86 full reps and 6 associate reps. We're currently somewhere around 77 full reps and a dozen associate reps. So what he's trying to do is drive productivity in territories by adding associate reps. So our rep, for example, who did $3 million last year is on track to do $4 million this year with two associate reps. And then as he comes out of the year, we'll take those associate reps and put them in a new territory, having been trained by one of our best reps.
Got it. And that's, I think, a very clear example of driving deeper to where we are, right?
Okay. What about IHR for different hernias? You know, what do you see early days there? I know it's early.
Early days is good, right? I mean, we rolled that product out in April or May or so, and the unit volume has been good. The clinical feedback has been excellent. You know, it gives us the first inguinal-specific product that is shaped and designed right. We made it thinner so that it's better on robot compatibility, even better than the rest of the portfolio. And most importantly, it's priced closer to where the premium polypropylene, you know, meshes are. It's still more, but it's by no means, you know, cutting down a very expensive ventral product, which is what we were doing before. So I think, you know, that plus the addition of LIQUIFIX makes us look like to a general surgeon as a hernia repair company. We have an inguinal suite. There's three inguinal products now, more coming probably.
There's a fixation device now, you know, whereas before they might have just looked at us as a biologics company in the style of a LifeCell or whatever, just doing the complicated stuff. But with IHR suite and a fixation suite and, you know, a complex suite, we now start to look like, you know, what is a traditional hernia repair company, which I think is good for us.
Got it. Okay. What about on the PRS side of things? How are things going there? And, you know, is there any kind of real trigger catalyst for that business?
Yeah, there is. You know, given the regulatory difficulties of that whole sector for everybody, you know, collecting clinical data is a little more complex than what we're doing in hernia. We have thousands of patients in various registries and studies in hernia side. We are starting to get our PRS data published. We've got two publications. There's probably three or four more coming that are surgeon-derived. And under the auspices of the FDA, we're doing a retrospective study, which is at about 100 patients, and hopefully we'll have closer to 200 patients. So our array of clinical data there is starting to emerge. It's taken a little bit longer time, but I think that is going to be a two- to three-year sort of slow burn catalyst that's going to help us support the usage of that product.
And then we're also, like everyone else, looking at the IDE process and, you know, figuring out how best to approach the labeling issue. And we have made great progress on that front as well. We're not quite ready to talk too much about that, but we're engaged there like a lot of the other players.
That's a pretty long and expensive process, right?
Yeah, but it'll start later once we're past, hopefully, our break-even or near break-even point. You know, we've got this thing scheduled and timed right. We've got so much hernia data, we can probably start to taper on the hernia collection and move it over. So, you know, we have levers to pull and things to manage on that to help our cause.
Okay. All right. GPO contracts. What's the latest and greatest there? I know they're pretty much covered by, I think, all the GPOs at this point, maybe one that's.
Vizient, we don't have yet.
One holdout, but what's going on there in terms of, you know, them influencing their users, especially with the synthetic mesh settlement?
Not much activity on the settlement issue and on the influence issue. I assume that's going to happen over time, I think, as we talked about earlier. I think for us, you know, we want to get that final national GPO contract. I think it comes up for bid sometime in the second half of next year. So, you know, if there's any GPO milestones to take a look at, it would be what's happening there by the end of next year. You know, the good news is that we've already been renewed by HealthTrust, which means we've done well, right? So, you know, I think our goal is to be on that level playing field, parity-ish with the bigger players.
Part of that is to just have all the GPO contracts and a sales force that's sized enough to, you know, to do a good job in those systems. I think we're not too far away from that.
Roberto, so I know you don't want to talk much about guidance, but, you know, historically you've grown above 25%. You have all this different momentum, be it international and GPO contracts and new products. Is that kind of the jumping-off part we should think about for 2025 in terms of your top-line growth?
Yes.
Okay. And then there's levers to potentially push it higher, but let's not go there yet. Is that fair?
Correct. I mean, you know, you can think about us as having two sources of growth: existing territories and customers and then new territories and customers. And so it's just how we access those two areas. Yeah, you know, I think you started off the line of questioning with, "Hey, you got the best product, you got the best everything." You know, and, you know, that's true. And we're grinding, right, up and to the right. That's what we're doing. So we will probably guide and work to grind up and to the right. And I think we've got these, you know, these really positive momentum-building triggers that are overlaid on top of it that could make it better. And we've got to figure out how to optimize those, right? And I don't think we've done that yet.
Okay. No, I mean, I want to scream from the top of my lungs about how this is the best product. What the hell are we all doing?
Yeah.
I can't even imagine what you guys think.
Some of our biggest investors have our product in their body after a failed or painful permanent mesh. So, you know, we have employees that have our mesh in them. We have investors that own the stock, don't own the stock, have our mesh in them. So, you know, call me if you don't want plastic in your body, in your belly, and you want a nice robotic natural repair that's best in class. I will help you.
Okay. All right. Let's talk about something, you know, really exciting, which is the OpEx cuts, Roberto, that you announced in Q3. How big of an impact should you get there in 2025?
So the way we described it is from the run rate of the second half of this year, we should get about $5 million-$10 million in OpEx reduction. You know, it's roughly 93 is twice the second half, excuse me, the first half run rate. You know, some of those cuts took place in August and so weren't fully annualized. So part of it will be annualization, but it should be a nice step down.
Okay. To that point, in my model, you know, OpEx is essentially flat next year versus this year. So I don't know if those numbers are right, but how do you deliver this growth, this 25% plus growth with OpEx flat? I mean, where is all this leverage coming from?
The biggest source, again, is the ratio of helpers to doers in the sales area is something that we've been, we've known we've probably been over-investing. It's kind of like advertising. You never know which half is the over-investment. With our new commercial leader coming in, he had some, you know, strong ideas and good opinions about that. One of the things that we've talked about in the past is his view was that our sales force, the actual reps, were relying too much on clinical specialists to sell PRS, that they needed to be trained well to stand alone and be able to make the sale themselves. Once we had done that, we were able to reduce the number of people who were supporting them, who tend to be fairly expensive, travel a lot. That's one source of the cuts.
So it's similar things to that, being more careful about how we support the people who are actually driving the revenues.
Got it. Okay. Last question for me is just on the profitability side of things. Can you be operating income profitable at somewhere around $30 million-$35 million in revenue per quarter?
Yes. Probably even a little bit lower.
A little bit lower. Okay. That's excellent.
We're targeting lower.
Targeting lower. Okay. And then the capital raise that you just completed, how much relief did that give you, you know, to get to that point?
So we had been saying recently as post the second quarter when we had disruption that we had enough cash to get to profitability with what we had on hand then. You know, we view what we raised as largely cushion and largely as a way of telegraphing to investors that, you know, look, we're done. You don't have to worry about something. One of the bits of feedback we were getting from investors is, you know, they couldn't get their models to work the same way. And they said, "If you have a strong quarter, you're not going to get rewarded. So you're better off just ripping off the Band-Aid now." So that's what we did.
Got it. Got it. Okay. All right. Well, it looks like we're all out of time. I'll have to cap it there. Tony, Roberto, thank you so much. Really do appreciate it.
Thanks, Matt. Appreciate your invite.
Thank you.