Soft Tissue Repair Demand Will Drive Steady Procedures Despite Margin And Profitability Headwinds

Catalysts

About TELA Bio

TELA Bio develops and commercializes soft tissue repair and reconstruction solutions, including reinforced tissue matrices for hernia and plastic and reconstructive surgery.

What are the underlying business or industry changes driving this perspective?

• Although surgeon demand for advanced soft tissue reconstruction solutions is growing and TELA Bio has surpassed 100,000 global implantations, the company may struggle to translate procedural growth into accelerating revenue if newer sales territories ramp more slowly than anticipated. This could cap top line expansion and delay operating leverage.
• Despite expanding clinical evidence and real-world data supporting OviTex and OviTex PRS, competing hernia and reconstructive platforms from larger medtech players could blunt pricing power and limit mix improvement. This may constrain gross margin expansion and slow progress toward net margin improvement.
• While the enlarged, more specialized sales force and LIQUIFIX partnership are designed to capture increasing global surgical volumes, the need to keep operating expenses roughly flat may force tighter spending that reduces the effectiveness of these commercial investments. This could limit step changes in revenue productivity and earnings growth.
• Although international markets, including the U.K. NHS and broader European adoption, represent a sizeable long-term opportunity, protracted procurement cycles and country-specific reimbursement hurdles could delay revenue contribution from abroad and prolong the period of consolidated net losses.
• While the upsized debt facility and recent equity raise provide sufficient capital to reach targeted high 20 million dollar quarterly revenue for breakeven, slower than expected growth in hernia and reconstructive procedure share could push out the timeline to profitability and elevate financing risk around future earnings generation.

Assumptions

This narrative explores a more pessimistic perspective on TELA Bio compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming TELA Bio's revenue will grow by 16.3% annually over the next 3 years.
• The bearish analysts are not forecasting that TELA Bio will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TELA Bio's profit margin will increase from -50.6% to the average US Medical Equipment industry of 13.1% in 3 years.
• If TELA Bio's profit margin were to converge on the industry average, you could expect earnings to reach $15.9 million (and earnings per share of $0.37) by about December 2028, up from $-39.0 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.4x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Medical Equipment industry at 29.2x.
• The bearish analysts expect the number of shares outstanding to grow by 2.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained double digit top line growth driven by expanding U.S. hospital contracts, accelerating European adoption, and record LIQUIFIX utilization could support a structurally higher revenue base. This would make it more likely that the share price trends upward over time as investors re-rate the growth profile, with a positive impact on revenue and earnings.
• Ongoing clinical data generation, including more than 50 OviTex publications, growing OviTex PRS evidence, and new hiatal hernia studies, may entrench TELA Bio as a preferred soft tissue solution as the market moves away from traditional synthetic mesh. This could support pricing power and drive long term improvement in gross margin and net margin.
• Rapid scaling and increasing productivity of a larger, better trained sales force, combined with enhanced field leadership and a deeper bench of territory managers, could unlock operating leverage faster than expected and reduce OpEx as a percentage of sales. This could drive margin expansion and accelerate the path to breakeven earnings.
• Strengthening of the balance sheet through upsized debt facilities and new equity capital may reduce perceived financing risk and give management flexibility to invest through macro or procedural slowdowns. This could improve investor sentiment and support a higher valuation multiple, benefitting net income and earnings stability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for TELA Bio is $1.25, which represents up to two standard deviations below the consensus price target of $3.45. This valuation is based on what can be assumed as the expectations of TELA Bio's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $1.25.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $121.2 million, earnings will come to $15.9 million, and it would be trading on a PE ratio of 4.4x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $1.15, the analyst price target of $1.25 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.