All right, we can kick this off. Hello everyone. My name is Mike Sarcon. I'm an analyst on the U.S. Medical Supplies and Devices team. This is day two of the Jefferies 2025 New York Healthcare Conference. This is a fireside chat with TELA Bio. From the company we have Tony Koblish, Founder, President and CEO, and Roberto Cuca, Chief Operating Officer and CFO. Gentlemen, thank you for joining us today.
Thank you for inviting us. Really appreciate the invite.
Thanks, Mike.
Sure. Maybe we can kick it off high level. Tony, for those in the audience or those listening who may not be as familiar with the TELA story, can you talk about the company's mission and the value proposition and the key markets you're addressing?
Sure. TELA Bio is a soft tissue restoration and preservation company. The two markets that we work in specifically are all things hernia repair, then all things in plastic and reconstructive surgery. We have two main product lines, a hernia based product line that is robot compatible. One of our main focuses is to have a natural repair solution that can be used robotically. From the most simple inguinal procedures to the most complicated ventral procedures, and then the breast reconstruction side. Our main reason for being is to help evolve the space beyond the use of cadaver skin more towards engineered composite solutions. On the hernia side, our reason for being, our core mission is to get polypropylene mesh out of people's bellies. You know, more and more companies, surgeons, supply chain are starting to think that perhaps this isn't the best solution.
There's been a massive $2 billion settlement around the use of polypropylene mesh in hernia repair. It tends to contract and erode and cause all types of problems. We have a product that has superior clinical results and none of those downstream complications. As this market evolves away from these plastic meshes, and you know, right now about 80% of the meshes that are implanted are made of polypropylene, which means a massive chunk of the market is open for dislocation over time. You know, we're exceptionally well situated as these natural repair solutions come to bear. Our solution is very, very unique. No one else has a product set quite like ours, and it's got patent protection that lasts a very, very long time. We call it a reinforced tissue matrix.
We use a very specialized tissue material that we can layer together and then sew with both permanent and resorbable polymer fiber. We essentially create a composite that we can engineer the properties so for example, in plastic and reconstructive, you probably want it to stretch and then stop stretching at some point. In anything having to do with hernia repair, you want rapid integration and healing, but you do not want any stretch. We are the only company that has the ability to control these properties. If our product ever has a problem and has to be removed, it really looks like a virgin primary procedure. It does not increase the zone of injury like plastic meshes do because of its natural components. It tends to remodel and integrate into the body very efficiently. We are in the right place at the right time in two big markets.
Each market is about a billion. I think the hernia repair market's a little over maybe $1.5 billion. The plastic and reconstructive market is around a billion. In the next five years, there's going to continue to be this evolution and shift. We are one of the premier companies and products supported by data and a great economic value proposition to be in the right place when that market does continue to shift. Actually, we're pushing all of the big players to follow us and try to get beyond these less sophisticated, more damaging biomaterials.
All right, thank you for that. Yeah, I mean, two follow ups on that from an economic perspective. Can you talk about, I guess we can start with abdominal wall reconstruction, you know, where you fit in, versus kind of the biologic.
When we started this company, there was really two categories of products in abdominal wall and hernia repair. One would be these polypropylene meshes which tend to be very inexpensive. And you know, for the inexpensive, you get expensive problems later, which we've seen through this mesh litigation, you know, settlement. And then first generation biological materials which tend to be made out of skin. So those tend to be very highly overpriced. Skin doesn't integrate well and it actually stretches too much for a hernia repair product. So there really were no viable solutions. Now there's an advent of resorbable polymers. So temporary plastic goes in and then eventually goes away. We're the only company that has a product that actually will remodel and heal efficiently.
The way we priced our entire hernia portfolio is about a 30%-40% discount off of those first generation biologics, which by any measure were overpriced. We're about a 20%-25% cost savings in comparison to these temporary plastic materials as they stand today. We are a premium onto these permanent plastic materials that hopefully will start to wane in use. Some of our simple products, our inguinal product, for example, is priced probably $100, maybe more than what a plastic piece would be priced at. We have a fairly wide range of pricing and flexibility that allows us to be a solution in terms of cost, cost savings, and it's virtually the same situation over on the plastic and reconstructive side.
Got it. That's great. I did want to also delve in, you started to allude to this, that you've seen some market evolution since you guys have been on the market. I think that was around July 2016 when you first started commercially.
We started commercially on the hernia side at the end of 2016, but we really did not have the capital to build a substantial effort and commercial team until the end of 2019 when we went public. Of course, COVID started in 2020. I would say most of the commercial progress that we have made from zero to our target for this year is $85-$88 million. Sales has come since that IPO, starting in 2020.
Got it. I guess where do you stand today when you know, in the abdominal wall reconstruction market from a share perspective?
Yeah, I think we estimate out to be in the 10%-12% range for the more complicated or moderately complicated ventral procedures. If you look at the overall hernia market, we may be in the 3%-4% range. That's going to change as our inguinal product starts to gain traction. It's growing rather smartly. And, you know, as our product is known more and more for its DaVinci five, DaVinci in general, Robot compatibility, I think we're gonna get more and more usage in those simpler, higher volume procedures. We expect our share to grow. On the PRS side, we launched that product set about three years after the hernia product set. We're about 2% market share roughly.
No matter how you slice it, it's fair to look at it as if you got a pretty long.
I mean, if you look at the situation in both spaces of having low market share with highly regarded, cost effective, great clinical data products. On the hernia side, 80% of the procedures are still being done with a product which in my opinion is eventually going to wane. You know, that is a lot of market that's up for grabs. That's going to slowly start to shift. On the PRS side, the plastic side, you know, I don't think cadaver skin is going to last forever as the product of choice. It's super expensive. It's complicated to harvest and manage. And, you know, there is some ick factor associated with that technology. There are about 15 or 20 of them, so there's no differentiation. They're very expensive, me too products.
There is a thirst, I think, that's starting to develop in the plastic surgery community for alternative materials. Again, we are one of them and well situated. Great.
You know, on the abdominal wall market, you talked about you've seen some competitive response. I've mentioned this to you. We hear Becton Dickinson mention Phasix on their calls a bunch now, I guess. What have you seen in terms of the evolution of competitive response as you've gained some share in the market?
Yeah, it is interesting that a company of that size and scale does call out that product, and I think there's a good reason for it. Their ambition is to shift their polypropylene business to their Phasix product, I believe. I think the CEO has been pretty straightforward about that. And, you know, there's a massive cost differential when you do that. So there's benefit to the company. I'm not sure there's benefit to the hospital systems, but there's certainly benefit to the company. You know, they've been very competitive and aggressive. It's almost like it's been coordinated with their mesh settlement. There's their settlement, which could be up to about $2 billion. And, you know, they're very good at bundling and creating tiered pricing structures and that type of thing. I think that activity has picked up. It's always been in place.
We know how to deal with it. We have very good strategy for dealing with it. Our value proposition plays very well when you get to the right audience at the hospital in terms of cost savings, even in a bundling situation with a competitor that's large. You know, we have the ability to save hospital systems considerable amounts of money and I think do better for patients. Right. Our product is softer. It does not have a high recurrence rate. Our clinical data converges to show, you know, a very low reoperation rate compared to any of the products of any of our competitors. You know, I think by any measure, we're one of the innovative technological clinical leaders in the space, and our time is coming.
Got it. You know, you mentioned IHR Inguinal Hernia Repair. I think that was cleared or you started to commercialize in May of last year. As you mentioned, that's been a good grower for you. It also broadened out your product portfolio to include focus on some of the simpler procedures. I guess can you discuss the physician receptance of the product and, you know, what type of commercial benefits have you seen from having this broader product?
Yeah, it's interesting. I have a lot to say about this. So you know, we, we're very fortunate that we've worked very hard to show our clinical and economic value propositions such that Intuitive Surgical, the company, has allowed us to come to their Connect meeting the last couple of years and I would say it's one of the best, most sophisticated, well-run meetings I've ever experienced, including society meetings. It's impressive. And you know, there's three mesh companies or implant providers I would say that were there, there was Becton Dickinson, there was us, and then there was Gore. And you know, arguably that's the most technologically advanced hernia meeting on the planet, given that the DaVinci is a super technologically advanced product.
You know, when you look at what all the companies were displaying, there was exactly one part polypropylene mesh on display at that meeting and that was Becton Dickinson's 3D Max product, which is an inguinal product. Everything else that Becton Dickinson was showing was all their temporary plastic, their Phasix product, which is what they want to put through their entire system and have a version of that product to replace all their polypropylene product, I believe, but not inguinal. The interesting thing is you cannot have failure in recurrence and reoperations in inguinal because it is such a commonly performed procedure. The fact that they still have that polypropylene on display even after settling is super interesting.
When I look at, you know, the number of units that we've moved with our inguinal product, the price advantage that we have, and the low recurrence and exceptional clinical data we have, I think we may have the only inguinal product not made of polypropylene that is a winner and a contender. Once you can crack the inguinal market, you know, that's by far the largest number of procedures and it gives you access to shelf space and mindshare space to do all the other procedures. You know, the clinical results we're seeing with our inguinal product are superb. The reop recurrence rates are super low and it may be the only product that's really viable for day in and day out usage. That is not made of permanent or temporary plastic.
Okay. I'm always a little hesitant to ask you to speculate about other companies, but do you have a hypothesis why for inguinal, Becton Dickinson still has the polypropylene?
Yeah, absolutely. I mean, you don't have to ask a company, you just have to ask a surgeon. Right. So, you know, general surgeons, if they're going to do hernia procedures at all, their bread and butter is the inguinal procedure. Right. There may be 10-25 of those a week in a busy practice. If you think about a general surgeon's local area reputation and marketing, that is the one procedure that they cannot have a failure in. They cannot have recurrence. They cannot have a temporary piece of plastic go away and pop back open. They just cannot have it. They'll be out of business. Their referral base will dry up. They're very conservative. And, you know, when you have something that's not made of the stuff that causes problems and is working well, you know, you've got a winner there long term.
We just have to, you know, continue to get the word out and continue to work hard.
Got it. Just on the concept of this broader portfolio, both simple and complex and moderate, are you seeing commercial synergies? Maybe you're able to get into accounts now offering the inguinal and pull through some of the complex and
yeah, it's.
Even more interesting than that. Right. The general surgeon mindset, if they looked at our Reinforced Tissue Matrix product, would say, oh, you know, they're a biologics company. Now that we have LIQUIFIX as a fixation device, we look like a hernia company now. It is not just the inguinal product that makes you a hernia company. That is probably the most important implant that does make you a viable hernia company in the eyes of general surgeons. We have that now. We also have a very unique fixation product that is not tacks. It does not have a sharp point, it does not poke in and have the threat of hitting nerve bundles or vascular structures. It is very easy to use. And, you know, it can glue implants in place very effectively without creating traumatic damage.
I think we're at the early stages of being viewed as a real hernia broad portfolio provider that can do almost anything in the space. That really came about with LIQUIFIX and our inguinal product coming to market. We're well over $1 million on each of those products and growing fast every quarter. You can see them stepping up. Once those products gain traction, you get the shelf space for the ventrals and the hiatals and the other types of hernias and vice versa. If we're known originally for our complex work, right, that complex work, the product works so well, has such a low recurrence rate. Why not give it a shot for the lower product? I think it works both ways.
Okay.
Yeah, that's very interesting. I did want to hone in on, we've seen some ASP erosion from the mix shift toward inguinal. Can you give us just some background on why that is and how we should think about ASP going forward?
Sure, absolutely. One of the things that Tony touched on is that when we first entered the market, we started in the more complex chest wall repairs. With larger pieces, the highest ASPs. As surgeons saw how the product performed and the successes of those repairs, they started using us for simple repairs. You know, we've now shifted down to the smallest, the inguinal repairs. As we've added those new applications to our portfolio, those lower priced products have, just because of the size of them, become much more prevalent as part of the portfolio. Just on an average basis, the ASP does go down, but these are all incremental revenues that we had not previously been getting.
So.
We view it as a positive. Over the course of 75-80 SKUs in our portfolio, much of the variability from quarter to quarter is really just the mix of the sizes that are being used.
That makes sense. Do you have any thoughts as to when the mix ultimately settles out to where it might be more stable? We'll get to kind of a.
Probably got a ways to go.
It'll be a while. I mean, one of the things that we see, for example, is in PRS breast reconstruction, just the types of surgeries and repairs that surgeons choose to do, their approach to this surgery will demand different kinds of products. More recently, surgeons have been shifting to using a larger sheet that they wrap around the implant, which increases our ASP from, you know, using a smaller sheet that they kind of sewed to the chest wall. Just even that stylistic change in the approach to surgeries can change our ASPs. It's kind of unpredictable, but at some point when we become a larger portion of the total share of the market, it should stabilize.
Yeah, I think on the hernia side, you know, if the thesis of backward and forward integration holds. Right. The more inguinals we're doing, the more bigger piece, ventrals, we'll be doing as well. So I think, I think there will be a downward pressure on the ASP. It should be made up with volume and it possibly could be made up with volume of the more expensive pieces. Because, you know, I think as inguinal goes, your share goes.
Got it.
One thing to highlight about that change in ASP is that that does not change our gross margin. The way that we compensate our manufacturer is with a 27% revenue share. Even as you see that ASP move around, our gross margin percentage does not move around because of that share.
Yeah. The design of the license is for that reason. Right. Our margins are solid, but, you know, obviously it affects top line based on. But margins are right there.
No, that makes sense. Since you brought it up, maybe it's worth delving into where your supply comes from and any impact you've talked about in terms of tariffs.
Sure. So our manufacturer is located in New Zealand. That's where there are a lot of sheep. And the base product for our products is sheep rumen. New Zealand is subject to a 10% import tax under the new tariffs because though of the way that we import the product, we buy it at a transfer price, that's a much smaller portion of the total amount that we end up paying them, the 27%. So the original transfer transaction, the 10% on that has a very small impact on our total gross margin. We expect it to negatively affect total gross margin by no more than 1% or 2%.
Got it. It is not a big impact by any means. Are there any mitigation strategies that you can implement or is this something we kind of live with and grow through?
We do sell in Europe. About 15% of our total revenues are from Europe. We currently ship the product that we sell there into the U.S. and then re-export it to Europe. One of the obvious mitigations is to ship directly so it does not get subjected to the tariff.
Got it. Okay. I did want to shift a few questions on PRS. I mean, can you talk about key growth drivers there and just also highlight one Q. I think we saw some deceleration just on a tough compare, but.
Tough compare and probably the mix of sizes again. Right. So, yeah, I mean, there's a big, big development around our PRS business. And that is we finally have good clinical data, any clinical data really, to, you know, to use as a reference for the product's performance. Up until now, you know, since we were later in the launch of this product, in comparison to our hernia platform, the collection of clinical data has been, has taken a little bit more time and has been phase delayed. Right now we've got about 360 patients in a various array of surgeon developed studies and FDA sanctioned retrospective analyses that are starting to emerge, get published and get presented. Those will roll out throughout this year and into next year. I can say the data looks excellent.
The adverse event rate is as good or better than anything on the market, including the market leaders. It has a very good profile in terms of rapid integration and very good cosmetic reproduction. One of our papers even shows an improvement in capsular contracture, which can be, you know, negative in terms of an aesthetic appeal. That is a big deal. It seems to perform very well in the presence of radiation, which is really interesting. We have not had this type of information up until now. I think that makes a big difference for us in the next few years.
I mean, with the reps having that in hand, you expect that to drive some growth acceleration.
Yeah, I think it will help the business, no doubt. I mean, clinical data has been a very key part of our hernia side and I don't think the PRS side will be any different.
Got it. You kind of briefly touched on this before, but can you for PRS, give us a lay of the land in terms of the competition?
Yeah, the top player is really AbbVie Allergan, which is the old LifeCell. Their product had an 85% market share at some point. It's now down to about 50%. I think there's been a proliferation of copycat products, you know, cadaver skin products that aren't all that differentiated. I think surgeons are starting to pick their head up and say, you know, why are these things so expensive if they're all the same? You really can't change the properties. What you harvested is what you harvest. There's a new interest, I think, in resorbable polymers, which may be a good solution as opposed to hernia. Hernias popping open when they resorb. You want them to resorb and help create a capsule, a nice pliable capsule. There's a big interest away, I think, from cadaver skin materials.
It's going to be slow given that it's been so entrenched in the marketplace. But you know, you can see it when you talk to surgeons, there's interest and you can see the growth rates on some of these alternative products are looking pretty good, including our product. So yeah, I think that market is shifting and it's shifting towards our favor again, long term for sure.
Got it. All right, that's helpful. I did also want to touch on sales reps productivity. You know, late last year we saw some unexpected attrition or kind of elevated levels of that. You've made some changes to the commercial organization and some of your processes. Could you just give us some background there? Talk about the changes you've made and what you've seen so far through this year.
Sure.
We announced on Monday that one of our board members, Jeff Blizzard, who was at J &J Abiomed previously, has joined us as our President of the organization responsible for commercialization in the U.S. and European. He, you know, this was something that we had considered could be a possibility when we brought him onto the board about a year ago and he attended our national sales meeting earlier this year. You know, as he was thinking about what he was going to be doing next, was very excited about the opportunity and has hit the ground running, is assessing the productivity of individual reps, how we can amplify that. We currently use a rep and account specialist collaboration system. That is something he is familiar with from his work at Abiomed. Thinking about how to further improve that is something he will be focusing on.
Yeah. Just to take a step back, Michael, you know, Greg Firestone remains our Chief Commercial Officer. I can't think of anybody who's better at managing supply chain contracting and implementation. He's going to focus on that 100% of his time mostly and messaging. You know, I think he's going faster than we anticipated in terms of getting contracts. It made a lot of sense to bring somebody in with the clout and horsepower of Jeff to then take over the salesforce so that we're taking maximum advantage of the contracts that Greg is getting. Too much for one person to get the contracts and then manage the sales force simultaneously. That division of labor I think fits exceptionally well. We're way ahead of where I thought we would be in terms of contract adjustments.
Once I started figuring that out, I was like, okay, we've got to get strength in two areas now. We are very optimistic long term about Jeff's presence and about Greg's ability to continue to drive the contracting process to our advantage.
Got it. I mean maybe it was more 2023, early 2024. You know, there were consistent leaked questions about where do we stand with kind of the major GPO contracts and how you're penetrating those different accounts. Can you just give us kind of a state of the union on the contracting side?
Yeah, it's been fairly stable. You know, on the big national GPO side, it still remains HealthTrust, Ascension, and Premier. You know, Vizient is coming due for requests for bid, I think, at the end of this year. I think they pushed it back a little bit, unfortunately. But we're having tremendous success in speed of contracting at the IDN hospital system level. As this shift is happening towards expensive, resorbable temporary plastic products away from polypropylene, we offer a considerable cost savings versus those temporary plastic products with better clinical data by any objective. So, you know, that's what's propelling these local area contracts that we're doing well with, which should set us up for when the national contracts come due. If you have enough of these local area IDN contracts in place, then the national, they kind of follow more easily.
There is a lot of reasons to feel good about where our business is. The contracting game is looking good and then our ability to execute and implement with the salesforce is now at a much higher level.
Great to hear. Maybe we can switch gears. Roberto, just on cash runway, that's been a big topic for investors as well. Maybe you can just comment on where we stand today and how we should think about cash burn going forward.
Sure. So, you know, as we said on our most recent call, we do believe that the cash that we have on hand is sufficient to get us to profitability. The next question is typically, okay, what does profitability look like for us? So around $27.5 million of revenue, the gross profit that we generate from that is sufficient to cover our operating expenses or cash operating expenses. We just did $18.5 million, and so that $27.5 million is not that far away. We, you know, and we expect operating expense to be fairly constant over the course of the year with revenue growing on top of that. Investors will be able to see the leverage from quarter to quarter as that revenue grows and as the cash consumption steps down. There is some seasonality to our cash consumption.
We do pay out bonuses in the first quarter and we re up our inventory in the first quarter. First quarter tends to be one of the larger cash consumption quarters of the year. We'll see a nice step down into the second quarter and then a continuing decrease in cash use over the course of the year.
Got it. I mean, can you delve into a little bit? Where's the OpEx leverage coming from? Like, what's driving that?
Not OpEx leverage, but leverage on the OpEx. OpEx is constant over the course of the year and then revenue grows on top of it.
Okay. And then I guess when you look out to 2026, not asking to provide guidance here, but kind of what are the high level moving pieces around, how you're thinking about OpEx and what you're spending.
We expect, so we guided for this year, that OpEx should be flat. Last year, we'd expect some growth, particularly with the addition of, you know, new exec, but, you know, nothing dramatic. You know, we expect that he's going to be thinking about how to reallocate the existing resources in the commercial organization. We do expect that as some of our clinical studies begin to decelerate a bit in the coming years, that'll free up some additional resource for application to commercial. We do not expect large step ups in OpEx going forward.
Goal is to hold it as steady as possible while we grow on top of it.
All right, I think that's all the time we have. Tony, Roberto, thank you for your time and for everyone in the audience, thanks for your interest.
Thank you.
Thanks Mike.