Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group. Please, go ahead.

Thank you, Lisa, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the fourth quarter and full year 2022. A copy of the press release is available on the Company's website. Joining me on today's call are Tony Koblish, President and Chief Executive Officer; and Roberto Cuca, Chief Operating Officer and Chief Financial Officer. Before we begin, I'd like to remind you that during this conference call, the Company may make projections and forward-looking statements regarding future events. We encourage you to review the Company's past and future filings with the SEC, including, without limitation, the Company's annual report on Form 10-K and quarterly reports on Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product development and pipeline opportunities, product potential, the impact of various macroeconomic conditions, including the ongoing response to the COVID-19 pandemic, recessionary concerns, banking and stability and inflationary pressures, the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I'll now turn the call over to Tony.

Thank you, Louisa. Good afternoon, everyone, and thanks for joining us today for our fourth quarter and full year 2022 earnings call. I'm pleased to report that in the fourth quarter of 2022, TELA Bio continued to deliver strong revenue growth and sales of $11.6 million, up 39% over the prior year, and full year 2022 revenue of $41.4 million, representing 41% growth from 2021 overall. This was despite continued hospital staffing challenges and slower-than-expected GPO contract uptake, which Roberto will describe in greater detail shortly. Yet even with these ongoing headwinds, we are encouraged that TELA Bio's OviTex portfolio continues to gain market share quarter after quarter. Our ability to drive continued revenue growth and share capture is a result of our focus on the five factors contributing to top line achievement: sales force size, individual rep productivity, product portfolio, GPO access and clinical data. I'll spend some time describing how we advance each factor since the beginning of 2022 and how they impacted our revenue growth. First, sales force size. Given their productivity to date, including through the time of the greatest COVID-19 impact several years ago, we've sought to continue expanding the number of reps selling our products. We entered 2022 with just under 45 sales reps, and our earnings call a year ago announced the goal of reaching 55 sales reps by the middle of '22 and 60 by the end of the year. I'm pleased to report that at the close of '22, we had 61 reps, and as of today, we have a total of 68 on board. I'll talk more about our goals for hiring in '23 in a few minutes. Another important factor driving revenues is contract access to hospital members of GPOs, or Group Purchasing Organizations. In addition to our preexisting…

Thanks, Tony. As Tony mentioned earlier, revenue for the fourth quarter of 2022 increased 39% year-over-year to $11.6 million, during which OviTex revenue grew 29% year-over-year and OviTex PRS grew 72%. We continue to see a headwind in the form of staffing constraints with procedure volumes still below pre-pandemic levels, but we also experienced a transient contracting challenge, which we now believe has been corrected. Specifically, the effectiveness of the new GPO contract on October 1 had 2 impacts. First, any hospital member of the new GPO that had already been buying our products now received the discount, which on its own would just decreased revenue. However, a second effect is to open up many new hospitals to the use of TELA products without the need for prior value analysis committee approval. We had expected that increased volume would more than make up for the ASP pressure in the fourth quarter. What we found was that hospitals were administratively slow to implement the new contracts, which led to a delay in the volume uptake. This administrative challenge seems to be resolving with the incremental volume manifesting in the beginning of 2023. Gross margin was 70% for the fourth quarter and 65% for the full year. The quarter's gross margin was driven by the cost of goods of product actually sold within the quarter as well as amounts reserved for expected expiration for inventory received within the quarter, whether or not it was sold within the quarter. Because of the holidays and our manufacturers' seasonal shutdown, we typically receive less inventory in the fourth quarter than in any other quarter. As a result, we expect gross margin in the first quarter of 2023 to step down from the fourth quarter, although the full year should show improvement in 2022. Sales and…

Thanks, Roberto. As you've just heard, our momentum is strong, and we see no signs of it slowing in 2023. In fact, based on our guidance, we are expecting it to accelerate and for good reasons. In '22, we established a second key GPO agreement quickly, followed by another important national GPO win in early '23. We expect to start to see the impact of those agreements over the course of '23. We also now have impressive two-year BRAVO data in hand. We were able to open many eyes regarding OviTex with our solid one-year data, so we look forward to educating surgeons about these even longer-term efficacy benefits. And in '23, we have even more products to offer and additional reps in the field to detail them. We are in the very early days of penetrating an estimated $2.2 billion market opportunity. Even having posted impressive growth -- revenue growth for successive years since going public, our sales still comprise a relatively small percentage of the total addressable market. That is extremely exciting to us as we believe we have the best combination of proven performance, safety and value of any surgical repair solution on the market. I'd like to thank all my colleagues at TELA for making 2022 a tremendously successful year and helping to get '23 off to such a great start. With that, I'll now ask Lisa to open the line for your questions.

Thank you. [Operator Instructions] Our first question is coming from Frank Takkinen of Lake Street.

Congrats on all the progress. Wanted to start with one on -- as it relates to the guide, I heard the comment of incremental volume manifesting thus far in 2023. So maybe could you start with giving us a little more color into how the first quarter is shaking out? And then two, maybe just give us a feel for a quarterly cadence throughout 2023 as these developments start to hit the model more robustly?

Sure. Thanks, Frank. Yes, so we did not provide specific guidance on the first quarter, although what we're seeing is a reasonable strength suggesting that the uptick we were expecting volume-wise from the new contract that became effective on October 1 is beginning to hit in the first quarter. So, we are positively encouraged by that. As far as cadence, we expect to see a similar type of cadence across the quarters over 2023 with, as usual, the fourth quarter being the strongest. As you'll note, though, the fourth quarter of this past year was not quite as strong comparatively to the rest of the year as we had been in years past that we believe was due to some headwinds affecting surgical volumes, but we expect the basic cadence to remain the same over the course of the year.

Yes. I'll add a little something, Frank. Since the COVID situation started, hernia has been the more impacted by the ups and downs of staffing and OR time, and I think we saw that throughout last year. One nice element that we're seeing in Q1 thus far is hernia has been strong. So hopefully, that's a great signal that we can get all of our products growing in a clean environment like they can and should based on our development and execution against the five factors.

Got it. Okay. That's good color. And then one -- my second one on the sales force hiring. Looks like that you front-end loaded the hiring this year thus far. Can you maybe talk about how you're thinking about the cadence of hiring throughout the remainder of the year?

So just to be clear, so we finished last year with 61, and we're now currently at 68. So, we have seen good progress in the hiring. It's not clear that the full year hiring will be quite as front-loaded as it was last year. So if you think about it, we began 2022 with just under 45 reps, and we've always talked about having a mature sales force size of something on the order of 90 to 100, so more than half of our territories were still open. We then put in 15 reps over the course of last year and then an additional eight at the beginning of this year. So, it's going to become -- we need to be a bit more targeted and place in further incremental reps. So, the timing could be a bit more stretched out than it was last year.

Yes. Again, I'll add a little bit of color. I'm really bullish on the talent pool that's coming to us. Our regional manager talent is just exceptional right now. The new team that we're putting in place spliced on to the old team is just really, really good, and I think they're helping us even up our game even more in attracting and hiring excellent reps. So, I think we're in a great position to take our time and make sure that we fill each one of these location territories with the best possible talent and then align that, as Roberto said, with the GPO access, which is now broad.

Okay. Great. And then maybe last one, a little extra color on the third GPO. It sounds like there's some unique characteristics here being dual source and highly compliant. Maybe just talk about how you expect uptake within this third GPO as it compares to the other GPOs you've contracted?

Well, let me start by saying, we've never implemented a GPO in a clean environment, right? HealthTrust started as COVID started. So I think we're learning. And maybe the premier uptake, I think, it's going to be a little different than this third GPO. So this third GPO does not want us to mention their name, so we will certainly abide by that. But they are a smaller GPO, roughly 150 or so hospitals, but very disciplined, tough, I would say, in compliance. So getting on contract there, I think, shows the value proposition that our product offers. The character of all of our GPO contracts, as they become available to us and we win them, are getting better and better. And I think this last GPO is a good example. We're in the biosynthetic category, which means we can compete almost across the whole portfolio of hernias, which is great. It's a dual-source contract, which means many, many competitors are eliminated, including the market leader, which is unbelievable. So that shows we're in rarefied air, good company, and that means we have an 80-20 sort of ratio to compete for. So theoretically, over time, we can compete for at least 80% of that business. And again, that's tied to what we believe is tiered pricing for volume. So we're getting contract structures now that are usually reserved for the big incumbent dominant players. And I think that means our product set is special, and we're delivering great value. That said, we're still feeling our way to understand the best implementation process and the length of time that it takes. Right now, my best guess to be, I hope conservative, is somewhere in that three- to six-month period, we'll start to see these contracts get rolling. And I think that's probably the rule of thumb that we should use going forward.

The next question is coming from Matthew O'Brien of Piper. Your line is open.

This is Phil on for Matt. Congrats on the quarter. I guess just to touch on Q4 performance and specifically as it relates to the less-than-expected volumes from Premier, were there any particular reasons for the volume miss in that GPO specific to Premier? And has that ASP discount rolled off at this point?

Well, so two parts. So when we sign up a new GPO when we enter into a contract, it's often the case that we're already selling to some of the hospitals in that GPO. We may have gone through the VAT committee already, and so those units that previously would have been a price x will now go through at a slightly lower price because of the discount. So that discount takes effect as of the first day of the contract. So compared to the day before, you have a little bit of ASP headwind. Now the big bonus of a contract is, it opens up a lot of new hospitals to purchasing because physicians can access the products without going through their back, assuming that each hospital has administratively entered the terms of the contract into their purchasing systems. So what we found is that over the course of the fourth quarter, that process hospital by hospital to get our products into their systems under the new contract took a bit longer than we originally expected. That seems to have resolved itself by the end of the quarter, such that we're now seeing the sort of volume we expected to hit earlier coming through in the first quarter, but it was transient challenge and something that we've now worked through and learning that we're going to be applying to our future contracts going forward.

No, that's helpful. And shifting gears here, just wanted to touch on that mostly hernia-related backlog. Assuming you haven't seen much, if any, of that recapture, can you speak to how large that backlog is? I think you've characterized it about 100,000 procedures in the past. And maybe when we can start to see hospitals operating above 100%, call it, in order to start to work through that and recapture some of that backlog?

Yes. Maybe I'll just start with the methodology for analyzing that number. There is not clean data on this. So, we took third-party purchase market research and just did an analysis -- sort of an area under the curve analysis pre-pandemic, post-pandemic and came up with that estimate. As we saw '22 unfold, it did not look at all like we were catching up. In fact, it seemed like we were behind for the whole year on pre-pandemic levels, and I'll drill into a regional local example. We have a general surgeon that we collaborate with who's sort of transitioning to management for a decent-sized New England-based regional health system. And he explained it to us this way, particularly to the hernia practice or service up there. He said, look, we're running about 85% of pre-pandemic, which means that the backlog just continues to grow and maybe roll forward. We'd have to be running 115% to pre-pandemic levels to catch up. And that's just not going to happen given nursing shortages, challenges and frankly, reduction in OR block time and hernia is susceptible to that. So I think if you apply that lesson across the 100,000 and a more national view, you're probably not looking at a bolus that's going to come through this system. I think what you're going to do is slowly crawl your way up from 85% back to par and then slowly get beyond par maybe over time as the labor and OR block time challenges sort of sort themselves out over the long term. So, I think what we have is a rolling situation where it's just going to roll forward. And so, the way we're looking at it is, this is a permanent situation. We've proven that we can grow and execute in a much worse environment earlier in the pandemic. And so, our job is to figure out how to grow like this is going to roll forward for the next several years, and that's the way we're treating the situation.

So, that's very helpful. And I guess just one quick follow-up to that. In your guidance, are you assuming that 85% rate or maybe pushing a little bit higher this year? And anything above 85% might be a little bit of upside?

Yes. So, we're assuming -- our guidance assumption assumes that the availability of operating room space in 2023 is similar to what it was in 2022.

[Operator Instructions] Next question will be coming from Kyle Rose of Canaccord. Your line is open.

I was just wondering if you could start from a high level. I mean, obviously, you've had some big GPO wins over the course of the last, call it, 18 months. Maybe just frame where we are in 2023 relative to where we were entering 2022? I mean you did a great job of framing up the sales force structure there, but just how many hospitals do you have access to now versus previously? And I guess of the ones you have access to, where does your account base stand? Just kind of help us understand where your team is from actually putting pen and paper and getting access?

Yes. So I'm going to say this. I think we have not yet seen the impact of both Premier and this new third GPO contract at all, right? It's starting to happen as we speak. So if you look at the one piece of data that we can be solid and have an actual real-life experience it's HealthTrust, right? So HealthTrust started when the pandemic started, and we were unable to implement there, I'd say, for half of the three-year term of the contract. Even with that, 36% of our revenue in Q3 came from HealthTrust. 40% of our revenue in Q4 came from HealthTrust, right? So it shows you that in more normalized circumstances with the five factors getting stronger and stronger that we can really make headway when we have clean operating environment and our internal factors are strong into these systems. So there's no reason to believe why that can't be the case in the next three to six months with Premier and this new contract. Now what's really great as well, and I'm going to announce it for the first time on this call, it's a big deal that HealthTrust has renewed with us for four years. Not three years like the first contract, but four years. So they're pretty pleased with the way we've handled ourselves, the way we've executed and the performance of our product, I would say, and so that's very good. So we have three solid national scale contracts in place. I think that's a robust footprint that can handle all the five-factor expansion plans that we've gone over here today, and the sales force expansion that Roberto and I have talked about. I think that this footprint is big enough that it should allow us to have durable and consistent growth over the next two to three years, and it should be much less friction in the system than the way we've been doing it up till now. So you'll recall, at 36% HealthTrust in Q3, the balance of that were in IDN that did not roll up to a contracted GPO. So that is a much higher friction process, finding a surgeon champion, value analysis committees, et cetera. We are equipped to do it, and we will continue to do it in addition as a sidecar alongside the GPO contracts. So we actually have four contracting and execution plays to help drive growth here, and that's going to continue as we go forward.

Great. That's very helpful, and congrats on the renewal of HealthTrust there. Maybe just a little bit more on the GPO side. Can you just confirm when you're signing these agreements, do they include both OviTex and PRS? And just maybe the overall uptake or if there is a difference in uptake that you're seeing in the hernia versus the breast recon side?

Yes, they include both. The category is for reinforcement meshes basically, and it's focused on the category of products that includes both indications and both products. So, I think it depends, right? It depends on where the hospital is, right? The hospital isn't just going to adopt our product without surgeons demanding the product. So if we have better relationships than a particular hospital on the plastic side, it may start with PRS and vice versa on the hernia side, right? It's not like these hospitals automatically purchase the product. The first step after you get these contracts remains and always will remain to develop the surge in interest. And then once the surgeon realizes he's on contract, then the supply chain says okay. We'll start to put this implementation process in place, which also can take time. It's fairly bureaucratic, but it's much easier than it is just on an IDN without a GPO contract. So, it depends on where the surgeon relationship is first, whether it's on the hernia side or around the plastic and reconstructive side.

Okay. And then last question for me and then I'll hop back in I know you've outlined your five-point plan. From my view, three of those are bigger than the others as far as being on the street, new products and new GPO opportunities. You already commented previously that guidance assumes no fundamental improvement in the backdrop, at least from a hospital staffing and throughput perspective. So I guess, how do we think about the drivers of GPO new products and new headcount? Where is the biggest impact from a metric perspective that we should be seeing this year?

So, we always refer to them as five factors because we do believe that they are multiplicative. So, we get the limit case example that you wouldn't want to build a 100% sales force when you didn't have any GPOs in place. So, we've been trying to evolve them both in parallel. So, I think it's the size of the sales force and the number of GPOs that are available at the same time that's going to have the biggest impact. And to Tony's point, that we now have two additional GPOs that will be either in mostly full effect for the year or full effects of the year is going to have a great impact because the new sales reps coming in both the ones that are annualized from last year and the new ones that we hired this year, we'll have a lot of new ground to tell as far as getting new sales. So we believe that those two are the ones that will work the strongest together and the ones that we pushed hardest on advancing.

Our next question is coming from David Turkaly of JMP. Your line is open.

Maybe one for Roberto, given the comments you made on the hiring side and some of the new product launches you may have. Could you give us any color on sort of the net loss or the operating loss, even if it's just directionally versus what you did in '22? I imagine it's going to be slightly larger, but is there any color you can provide there?

So, we haven't provided bottom line guidance. I guess what I do is, I walk through each of the components of OpEx. So G&A should be the same in 2023 and 2022, very slightly higher possibly. R&D will grow a little bit as we advance some clinical studies and as we dig in further into our own internal R&D development programs. And then, sales and marketing is the one that's going to step up the most. So, there will be two effects. One is the annualization of the hiring that we did last year and the second will be the growth that we experienced this year, depending on when exactly that times out. So, I think we're not providing guidance on operating loss, but I think directionally, your thinking about it is correct.

Great. And then, Tony, I think we said last quarter, three new products, and you mentioned the two larger OviTex LPR, but that's not the second-gen hernia or PRS devices. Are they still untapped for '23 launches?

Yes. We have a third product that is getting extremely close. So, we'll keep you posted on that. So, we will deliver three new substantial products this year for sure.

Great. And then maybe I'll sneak one last one in. Who makes the NIVIS or the bovine collagen?

We're partnered with CMI in New Jersey on that product.

Thank you. This concludes today's Q&A session. I would like to turn the call over to Tony Koblish for closing remarks.

Yes. Thank you, everybody, for tuning in. We look forward to reporting on Q1 next, and we really appreciate your interest and support. See you next time. Thank you. Have a great night.

This concludes today's conference call. Thank you all for joining. Everyone, have a pleasant evening and you may all disconnect.