Good afternoon, ladies and gentlemen, and welcome to the TELA Bio First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Thank you, Michelle, and good afternoon, everyone. Earlier today, Televio released financial results for the first quarter of 2024. 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 identified in our filings, the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I will now turn the call over to Tony.

Thank you, Louisa, and good afternoon, everyone. Thank you for joining us for TELA Bio's first quarter 2024 earnings call. In this call, I'd like to highlight some critical milestones we hit in the quarter as well as update you on our continued strategic progress and ongoing growth opportunities. We've started the year off strong. First quarter revenue was $16.6 million, representing 39% growth over the same period in 2023 and our 13th consecutive quarter with growth of 35% or greater. We are capitalizing on the considerable momentum we generated in the fourth quarter, and our business is firing on all cylinders. As you will hear today, we are benefiting from the recent enhancements to our commercial team in addition to some key product launches that will enable us to drive significant growth through the remainder of the year. In April, we launched OviTex IHR, a trocar-compatible, next-generation soft tissue repair platform designed for inguinal hernias, specifically for the use in laparoscopic and robotic-assisted procedures. Just like our other OviTex devices, OviTex IHR utilizes layers of ovine or sheep rumen embroidered with just enough polymer suture to provide additional strength and performance. All OviTex devices are designed to leverage a patient's natural healing response, facilitate tissue remodeling, optimize strength and minimize the foreign body footprint of synthetic polymer. IHR is available in 3 configurations and will complement our existing product portfolio and allow further penetration into the inguinal market, which has traditionally been dominated by permanent synthetic meshes. The initial response has been phenomenal with debuts of the product at 2 recent industry events, the Intuitive Surgical Connect meeting and at the Society of American Gastrointestinal and Endoscopic Surgeons or commonly known as SAGES. There are now 35 published or presented works demonstrating OviTex's clinical efficacy in hernia repair. This…

Thanks, Tony. As Tony mentioned earlier, revenue for the first quarter of 2024 grew 39% year-over-year to $16.6 million, with OviTex growing 31% and OviTex PRS growing 54% in the period. These increases were primarily due to an increase in unit sales of our products and the continued expansion of our commercial organization. Each of these resulted in increased penetration of our existing customer accounts as well as the addition of new customers. Gross margin was 68% for the first quarter compared to 66% in the prior year period. The increase was primarily due to lower charges for excess and obsolete inventory as a percentage of revenue as a result of improvements in our inventory management during the quarter. Sales and marketing expense was $17.5 million in the first quarter of 2024 compared to $13.5 million in the same period in 2023. This increase was mainly due to higher compensation costs as a result of the expansion of our commercial organization, higher travel and consulting expenses and additional employee-related costs due to increased headcount. General and administrative expense was $3.8 million compared to $3.6 million in the same period in 2023. This was driven by higher employee-related costs as a result of headcount increases, offset by decreases in bad debt expense and insurance expense. R&D expense was $2.4 million in the first quarter compared to $2.1 million in the prior year, primarily due to higher compensation due to an increase in employees as well as higher costs related to pre-IDE activities for OviTex PRS and outside development of new devices. Loss from operations was $4.8 million in the first quarter of 2024 compared to $11.3 million in the prior year period. The decrease was driven by the recognition of a onetime gain of $7.6 million from the sale of certain…

Thanks. Thanks, Roberto, and thank you, everyone, for tuning in this afternoon. I am excited by the progress the team has made in the first quarter, and we are just getting started. We have reached the point where we are able to compete with even the largest competitors in our space. We have a well-trained, experienced direct sales force and highly competitive products backed with exceptional data. Our data on the performance of our products is outstanding, and we continue to collect more. TELA is in a strong financial position, and we fully expect to take share for years to come. I am excited by the greenfield opportunity with IHR and the potential for LIQUIFIX to open doors that were previously closed to us. So in closing, I'd like to thank our team for their continued commitment to our mission and their relentless focus on driving growth. We are on the precipice of great things here at TELA and I'm eager to deliver on a year of strong top line growth and solid operational execution. With that, I'll now ask Michelle to open the line for your questions.

[Operator Instructions] Our first question is going to come from the line of Frank Takkinen with Lake Street Capital Markets.

Congrats on the solid start to the year. I was hoping to start with asking about sequential expectations. I know in previous calls and years, you've talked about Q2 being a seasonally strong quarter. I think there's some particular excitement around that going into it with a fully staffed selling organization, IHR and a couple of other factors. How should we be thinking about all these things and what it can translate into a sequential growth from your standpoint?

So historically, we have had sequential growth from quarter-to-quarter. And as Tony has pointed out, there tends to be a fairly healthy step-up in the first and the second quarters. If you were to look at the historical data and adjust for the hiccup we had in the third quarter of last year, so maybe look at 2022, a progression like that in revenue is something that we would expect. And as I mentioned in the prepared remarks, we do expect OpEx to be fairly steady over the course of the year such that, that step-up in revenue will drop down to the bottom line in the form of improved operating income.

Okay. Perfect. And then maybe for my second one, I know there's been some development related to the synthetic mesh lawsuit out there. It seems like there's kind of a May 24 decision date. I'm not going to ask you to speculate on the outcome of that, but maybe help us think through how some of those potential outcomes could impact your business.

Well, that's the greatest hidden secret, I think, out there. But yes, there was a notice put out by one of the law firms that there has been a date set for some kind of mediation or arbitration, something like that. So we're obviously keeping a very close eye on it. We have a communication plan at the ready in case this breaks one way or the other, I think for us to really understand what it means, we'll have to understand what it looks like in the end, right? And then we'll be able to sort of game plan for some of the eventual knock-on effects that come after that. But our position is clear and consistent from the beginning, right? We are a natural repair product. We founded this company with the mission of getting permanent plastic out of people's bellies for hernia repair as much as possible, as much as it makes sense to. We focused on products that are natural in their remodeling process, are soft and do minimal damage, even if they have to come out at some point. Those are the basic tenets that we built the company around. And by and large, we've delivered on that. We have superb clinical data, our recurrence rate in these simple [ inguinal, the ventrals ], et cetera, where there has been a problem that the litigation is pointing out, our recurrence rate is in the very, very low single digits. And so I think we are delivering on that promise. I think putting polypropylene plastic into people's belies is not going to last forever. It's going to come to an end at some point. And there's very few players and products that are as well positioned as we are to be an excellent alternative. The addition of the IHR product and the LIQUIFIX gives us a broad product portfolio now that can do any of the procedures done with any polypropylene product in any setting with any technique, robots, laparoscopic, open, you name it. So we look forward to being able to help surgeons help patients in the continuing future and keep going on our mission, which has been the original mission of the company.

And I'll just add a little bit of detail, which is that this was a notice in the federal MDL, multi-district litigation, focused in Ohio. It wasn't the Rhode Island cases, which are state cases, it was a notice that said that the next case in that MDL litigation was postponed and the parties were sent to mediation with a deadline later in May. The deadline presumably can be extended. And one would think that Bard, the defendant would want to try and settle both the MDL cases and the Rhode Island State cases at the same time. That could be tricky to sync up. So it is pretty unpredictable, but the notice just did get us to finalize our plans in response to any potential settlements, which will be driven in large part by what Becton Dickinson does post the settlement.

Our next question is going to come from the line of Caitlin Cronin with Canaccord Genuity.

Just to start off, my first question is on productivity. How is that trending, including your initiatives for balanced selling? And how do you feel about the bolus of reps that you brought on at the end of 2023?

Yes. I mean we feel very good about the bolus of new reps, and we've enhanced our training program significantly, and we're going to continue to enhance that training program almost to the point of perpetual training so that we have the best train team in the marketplace. We feel pretty good about the balanced selling. There's already been an uptick in PRS as it relates to a percentage of sales. I think we were running about 30% of top line with PRS. And I believe now in Q1, we are about 35%, 36%. So I think that's the beginning of what we're starting to see in terms of a balanced selling approach. So we're still finding our legs with this. But overall, I think we're off to a good start. And we started the year with a front-loaded sales force, right? So last year and the year before, we were hiring, which made forecasting the exact number of reps at any point in time along with productivity a little more difficult. Here, we're front loaded. We've got the full team in place for the full year. So it should allow us to focus on things like training and execution, which will result in more confidence and success in the productivity.

And one of the metrics we talk about is the time it takes for new reps to get to breakeven. And we have seen with the latest cohorts of new reps for which we have these data, that it is still running at just a bit under 6 months for new reps on average to get to paying for their own variable costs.

Awesome. And then how do you feel about cash burn this quarter and how you expect that to trend throughout the year?

Sure. So as I described from a P&L perspective, we do expect OpEx to be reasonably steady over the course of the year and revenue to grow on top of that such that, again, P&L metrics of profitability will get -- will improve steadily over the course of the year, ignoring the contribution from NIVIS, which makes it better for the full year. There is some seasonality to our cash flow since we tend to buy additional inventory in the first quarter and we pay out bonuses towards the fourth quarter. So if you overlay that sort of natural seasonality on top of that P&L progression, we feel comfortable with the cash burn and the way the cash is going to progress over the course of the year.

And our next question is going to come from the line of Michael Sarcone with Jefferies.

Just to start, do you think maybe you could talk about how you're thinking about IHR contribution for this year and maybe what you've got baked into '24 guidance?

So there are 2 dimensions to the IHR contribution for the year. So the first is, just as a reminder, we're already a participant in inguinal hernia repairs. We do have products that are currently used even in robotic going down trocars. Roughly about 16% of our revenue is -- previously was in inguinal hernia repairs. So we expect that IHR will have a fairly quick pickup uptake amongst the surgeons who were already doing in inguinal hernia repairs using our products. In addition, there's a lot of greenfield opportunities, as Tony mentioned, to introduce the product to physicians who are maybe using synthetic meshes and are familiar with our products, but wanted something a little bit more targeted for inguinal repairs. And so we expect to see some pickup from that as well. So we haven't quantified that exactly and what the breakout of that in the $74.5 million to $76.5 million for the year is, but we do expect it to be a noticeable contribution to that amount.

Yes, I'll add to that, Michael. We're off to a good start. Just a couple of weeks. We've got well over 50 implantations, which is great. And we're thinking about this, as Roberto said, but really a forward and backwards integration, right? So this will allow us to get to new customers, which will elevate the rest of our product portfolio in ventral and complex ventral. But we started off in complex ventral and then more simple ventral. And a lot of those surgeons don't use us for inguinal. So I think reversing that, our customers that are solid on the ventral side and the complex side, I think, are going to take a good hard look at us and adopt our products on the inguinal side. So it gives us that complete product portfolio. I like the fact that it gives us mind share, routine usage capability, shelf space and with the addition of LIQUIFIX, it gives us complete parity with our largest competitors, right? We have a very novel atraumatic fixation system that we think offers significant advantages compared to tackers. And now we've got a full range to go after the whole suite of procedures.

Got it. That's really helpful. And just second one, could you maybe just give us an update on your GPO contracts and how you're ramping there?

Yes. So it remains the big 3 contracts that we have in place. Our revenue contribution from all the various GPOs, even the smaller ones and the big 3 is approximately 60%. We think it's going to grow up to 70% in the near future. We're certainly on track for that. We're continually getting access via IDNs, supply chain and by smaller GPOs, and we are active in terms of looking at getting the next large GPOs. We're very confident that we're going to get them all. The large GPOs, I think their bid requests aren't due till much later this year. So it might be more of a next year event. But rest assured, we're very confident in our ability to continue to sell within the IDN framework, which represents over 40% of our sales today and has been very consistent. So we've also had great success in getting IHR on our existing contracts as a line extension. And we're actually starting to see some success with LIQUIFIX as a new technology. That's going to take a little more time to get contracts for LIQUIFIX, but the new technology designation, which we seem to be getting in certain places is going to help us speed that up as well. So everything on the GPO front is looking very positive.

And our next question is going to come from the line of Matthew O'Brien with Piper Sandler.

Maybe for starters, just the Q1 result was quite good. Guidance for the year is well below what you just delivered in Q1, and I know there's a comp dynamic to think about. But with all these different growth metrics or growth drivers that we're seeing out there, I guess, why not raise the guidance range a little bit even higher versus what you did and then kind of what you've been doing over the last couple of years?

Sure. Thanks for the question, Matt. We approached our guidance this year as a commitment to our investors. So we are going to hit these numbers. And we put the guidance range where we felt very confident that, that was doable given what we know. Understanding that as we learned more over the course of the year, quarter-by-quarter, and if we felt more comfortable, we would increase it to reflect that. So we did do well compared to consensus this quarter. We raised the range by a bit more than that. Part of the dynamic is what sort of fractions we can use and what sort of numbers. But we feel comfortable about the slightly raised range. And as we get more data under our belt, we will reconsider the range going forward.

Okay. Understood. And then, Tony, you've been talking about really strong training for quite a while. And I'm just wondering when we're going to start to see a little bit more of this inflection point in terms of utilization. I mean I know you're growing really well, but this is a massive market that you're going after. What do you think is needed? You've got all the data. You've got great products, indications, [ what made them really see it, ] this inflect from here?

Well, I call it the quasi parity, right? So if you look at our history, right, we had no capital until the end of 2019, as you know. So commercialization really started in earnest in 2020. And we did well for 2 or 3 years, but we were hampered in building out our infrastructure due to the COVID start, but we grew crazy good even through that. But to be successful in this market, parity in terms of sales force size, roughly, parity and GPO access roughly, parity in terms of product portfolio capability across all types of procedures roughly, right? I mean we haven't had all of that in place until now, right? What we had was excellent proof of concepts, great data, a very good mission that I think is well understood and appreciated by patients and some surgeons. And I think more and more surgeons are getting interested in our mission. So I think it's -- I think what you're seeing is surgeons tend to be slower, conservative adopters, which I think you want them to be. They want to prove things out first before they jump in. But we are a company that started with zero on the ground, right? Nothing. And so it's taken us time to methodically build this quasi parity with the big players. And I think we can go toe-to-toe now, starting now at the start of this year. So I think this is the next phase of our evolution and growth, Matt.

Our next question comes from the line of David Turkaly with Citizens JMP.

Sorry, I might have missed it. Did you say -- and I know sales force expansion is not a big part of this year, but you're still at 86 reps and 6 assistant reps?

We are at 87 reps and 7 associate reps.

Yes. No, we're very consistent from last time, Dave.

Got it. And then you mentioned the Intuitive meeting and your commentary about some further penetration in existing accounts and adding some new. I'm just curious if there's anything tangible you could leave us with maybe even in terms of new accounts because that sort of seems like it would be a great opportunity for you guys to scope out some new surgeons. And I don't know if there's any quantifiable number you could give us, but I'd love to hear your thoughts on that meeting.

Yes. I mean the meeting was great for us. I mean for a short meeting, we had over -- well over 70 really solid validated leads. A lot -- there's a very nice percentage of those have already turned into cases or case commitments. It felt like we were part of the ecosystem, right? I always say, Intuitive Surgical is the Apple of medtech in our time. And they only pick the best partners to go into their application store. And I felt like being in that app store was a big deal for us. We never take it for granted. We appreciate it immensely. And I think it's going to do good things for us, right? It's going to open up the world to seeing us, who we are. A lot of the surgeons were seeing us for the first time. So that kind of thing takes time, but the Connect meeting was an excellent, excellent start. And we want to do more, though, as I think the case observation sites is something that's also very, very good. We've got many, many robotic surgeons that are now opening up their ORs for surgeons to come in and take a look. And that's great for the robot, and it's great for OviTex, too. So I think -- I always think that Intuitive may be the giga GPO that sits on top of all the other GPOs, right? We want to make sure that everything we do is in good standing with them and that we focus on our compatibility with the surgeons who use the products, so the robot. So I think we're slowly attaining that, Dave. It's nothing but good.

And I'm showing no further questions at this time. And I'd like to hand the conference back over to Tony Koblish for any further remarks.

Thank you, Michelle, and thank you, everyone, for joining us. We appreciate your continued interest in TELA Bio. Have a great rest of your evening. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.