Tela Bio, Inc

Jan 31, 2025

Summary

Tela Bio is a rapidly growing med tech company with a leading product that is well positioned for a sea change in the industry. Trading at 1.9x 2024 revenue and 1.5x my estimate of 2025 revenue on an EV basis the company presents an attractive risk-reward opportunity given 70% gross margins and expected cash profitability by the end of 2025.

Reasons to buy:

Why does the opportunity exist?

Layout: 

We’ll start with hernia - history, treatment, current trends and status quo followed by a generic overview of key market players. Then we’ll discuss Tela Bio in detail. I’ll conclude with valuation and risks.

Hernia

Writing about medical subjects is always challenging. One could write ten pages on hernia and barely scratch the surface. But as a generalist investor one has to understand the big picture and to do so one must simplify. The following discussion is a gross oversimplification yet I believe it is a directionally correct one. At the risk of offending any medical professionals who read this, let’s begin.

Basics

Hernia is a medical condition in which the internal part of a body pushes through a weakened tissue or muscle that surrounds it. Something that was in comes out, finds itself out of place and begins to cause problems. The typical symptoms are swelling and pain. Quite logically, fixing this issue requires putting the thing that came out back and ensuring it does not leave the place by strengthening the weak spot that made the “leak” possible in the first place.  

Hernias result from a combination of pressure of the internal organ to come out and weakness in the muscle or tissue that holds the organ in place. The most common causes of hernia are lifting heavy objects and obesity. Other causes include smoking, constant coughing, improper nutrition  and pregnancy. 

The two most common locations for hernias are the groin and abdomen. A hernia in the abdominal area is called a ventral hernia, while one in the groin area is known as an inguinal hernia. There are other areas where hernia can occur like inner thigh, chest and belly button. Those exist but are not as common as inguinal and ventral hernias. 

Before researching the company, I’ve heard of hernia but never knew much about it. I was surprised to find out that hernia repair surgery is one of the most commonly performed surgical procedures in the world. Numbers vary from source to source, but we can say that between one and two million hernia repair surgeries are performed in the US and approximately 20 million around the globe annually. For example, TELA mentions in their 10-K that an estimated 611,000 ventral and 1 million inguinal hernia repairs are performed each year in the US. We can speculate that hernia repair surgery is the second most commonly performed procedure in the world after C-section. 

Treatment

The history of hernia treatment spans thousands of years, with significant advancements occurring in the past few centuries. The earliest written reference to hernias appears in the Egyptian papyrus dating back to around 1550 BC. Throughout most of history hernia treatment was quite rudimentary: compression equipment, lifestyle changes and herbs to ease the pain. Surgical interventions in the past were dangerous and often fatal due to the high risk of infection. In the 19th century advancements in antiseptics and anesthesia combined with better anatomical knowledge improved surgical outcomes a lot. At the end of 19th century Eduardo Bassini, an Italian surgeon, revolutionized hernia surgery by developing a method to repair the hernia defect by suturing layers of abdominal muscles together for more strength. He is considered to be a father of modern-day hernia surgery.

True breakthrough in hernia treatment was the introduction of plastic mesh in the 1950s. Why? Because the biggest problem with hernia is that it often “comes back” after the treatment (called recurrence). This makes sense. Say you have a weak tissue spot and intestines broke through it and came out. Surgeon opens you up, pushes intestines back in place and sews back the tissue. The tissue spot that was weak in the first place had already been broken through is now likely even weaker. Unless you change your lifestyle drastically there is a high chance of intestines breaking through again. That’s why introducing plastic mesh was so instrumental in reducing the recurrence rates in hernia surgeries. Mesh serves as additional protection and does not let the inner organs come out. Plastic mesh continues to be widely used today in hernia repair surgeries. 

The last thing we’ll mention in a history of hernia treatment is minimally invasive surgery (MIS). There are two generic types of MIS: laparoscopic surgery and robotic surgery. Laparoscopic surgery became possible in the 1990s and robotic surgery started to gain popularity in the 2010s and the trend continues until today. With these surgeries the surgeon does not have to cut the patient open (open surgery). Instead the surgeon makes a number of incisions and performs the entire procedure (pushing intestines back, placing a mesh, etc.) through those incisions. This is possible as the surgeon can see what’s going on the inside because of the camera. Minimally invasive surgeries are gaining popularity today because of reduced recovery time, less pain and shorter hospital stays. The main difference between laparoscopic and robotic surgeries is that in laparoscopic surgery the doctor manipulates instruments directly and in robotic surgery the doctor uses a console to control robotic arms which perform the procedure. Another big difference is that a laparoscope (camera) provides 2D vision as opposed to 3D vision that is possible with robotic procedure.  

This pretty much covers the evolution of hernia treatment - from “here is tea to ease the pain, a bandage to compress the affected area, and, please, eat less food” to a robot, which is controlled by a human, pushing your organs around and placing a foreign object inside your body.

Mesh

There are two main types of meshes - synthetic and biologic. Synthetic meshes have two subtypes: permanent and temporary. The names are quite self-explanatory. Synthetic mesh is made of synthetic materials like polypropylene, and biologic meshes are made of human or animal tissue. Permanent synthetic mesh stays inside forever, temporary one is absorbable, and fully disintegrates after some time. The former one is often called plastic mesh, the latter one has many names like resorbable, bioresorbable, absorbable and some others but they mean more or less the same thing. 

What are some differences between plastic and biologic meshes? Plastic mesh is stronger, holds intestines better but it is a foreign material and is more prone to infection, body rejection and discomfort. Biologic mesh is absorbable and integrates well with original tissues but may not always be strong leading to higher recurrence rates compared to plastic mesh. Plastic mesh is used in straightforward simple surgeries, biologic mesh is used in more complex surgeries where there is risk of infection, or a need for tissue regeneration. Plastic mesh is cheap, biologic is expensive. 

Resorbable mesh is gaining popularity because it claims to offer the best of both worlds - providing durability and strength when needed during the healing process immediately after surgery, while also being absorbable in the long term so patients don’t have a permanent piece of plastic in their bodies.

What makes TELA unique is that they created their own category of mesh - biosynthetic. They took a biologic matrix and enhanced it with fibers of synthetic material, truly offering the best of both worlds. Because synthetic is only used for enhancement, its amount is approximately 75% less than that of the most widely implanted permanent synthetic mesh. To make the deal even sweeter TELA has products in which the reinforcing synthetic fibers are resorbable as well. 

To sum up, we have the following types of mesh: plastic, resorbable, biologic and biosynthetic. 

Trends

Two key trends are important to the thesis: increasing reluctance to use plastic mesh and the shift from open to minimally invasive hernia surgeries.  First trend is mostly driven by the number of lawsuits against mesh manufacturers, and the second one is driven by advancements in robotic surgery technology.  

Hernia mesh lawsuits have been filed against several manufacturers, alleging that defective mesh products caused severe complications such as chronic pain, infections, adhesions, and organ perforation. Plaintiffs claim that companies, including Bard, Ethicon, and Atrium, failed to adequately warn patients and doctors about the risks associated with their products. The lawsuits began surfacing in the early 2000s, but large-scale litigation gained momentum around 2016, following product recalls and increasing reports of complications. In October 2024, Bard agreed to settle approximately 38,000 hernia mesh lawsuits, including 25,000 cases in federal multidistrict litigation (MDL) in Ohio and over 15,000 cases in Rhode Island state courts. While settlement terms remain undisclosed, Bard previously allocated $1.7 billion for product liability claims, suggesting significant payouts. Other manufacturers like Ethicon and Atrium have also faced legal challenges, with Ethicon’s Physiomesh withdrawn in 2016 due to high failure rates. 

The first robotic inguinal hernia repairs were performed in 2007, followed by ventral hernia repairs in 2009. It is estimated that fewer than 1% of all hernia repair procedures were performed robotically in 2013, increasing to 14% in 2023, and projected to reach 21% by 2027. Robotic hernia procedures are performed using cutting-edge, multimillion-dollar equipment, yet doctors are still implanting plastic mesh developed in the 1960s. The leader in the robotic machine industry is a company called Intuitive Surgical. Tela Bio CEO calls them Apple of medtech in our time. Their product - da Vinci machine - is the most commonly used robot for robotic hernia procedures. Tela Bio has developed a number of products that specifically fits da Vinci machine. Why is this important? Not all modern meshes (bio or resorbable) are fit to use in robotic surgery. If a patient wants robotic surgery but does not want plastic there are only a few options to use and TELA’s product is one of them. Point is that TELA has less competition in a growing subsegment of the market. 

Players

Market leaders are Ethicon (owned by Johnson & Johnson), C.R. Bard (owned by Becton Dickinson or BD), Medtronic and Lifecell (owned by AbbVie). The smaller companies yet important to the industry are Gore Medical and Novus Scientific.

Current market is a result of relatively recent M&A activity. BD acquired C.R. Bard in 2017 for $24 billion. Medtronic expanded its hernia mesh portfolio through the acquisition of Covidien in 2015 for $50 billion. Allergan, which became part of AbbVie in 2022, acquired LifeCell Corporation from Acelity L.P. Inc. in 2017 for $2.9 billion.  

Let’s put the commonly used mesh products in the categories we defined earlier.

Permanent synthetic mesh:

Temporary/Resorbable mesh:

Biologic mesh:

Permanent plastic mesh is the cheapest one - from $200 to $1500 according to different sources. Resorbable mesh leader is Bard’s Phasix with prices ranging between $4000 and $6000. TELA claims that their products offer 20-25% savings compared to Phasix. TELA provides the most savings with biologic mesh. They claim a 30-40% cost advantage over market leaders like LifeCell’s Strattice.

Tela Bio

History

In 2002 Anthony Koblish became CEO of Orthovita, a small medtech company focused on orthopedics with annual sales of $10m. Fast forward nine years to 2011, and the company's revenue had grown to $95m, though it was still losing $1m per quarter. Stryker Corporation then acquired Orthovita for $316m, with Koblish owning roughly 2% of the company at the time of the sale.

Looking for their next venture, Koblish and his associate from Orthovita, Dr. Maarten Persenaire, decided to enter the soft-tissue reconstruction market. They recognized how transvaginal plastic mesh lawsuits, which began in the early 2000s and culminated in class action suits, could have parallels with the hernia mesh market. This insight led to the founding of Tela Bio in 2012. 

In 2016 TELA started commercializing their products in the US after obtaining their 510(k) clearance from FDA. In 2019, they went public at $13 per share, offering 11m shares and raising $52m. They did $15m in sales in 2019. At the time of the IPO, Koblish had already sold most of his shares, retaining only 6% (which was reduced to 2.6% after the offering). Two notable funds participated in the IPO—OrbiMed and EW Healthcare—and both are still holding shares. Other stakeholders worth mentioning who have recently taken action include First Light Asset Management, which sold out, and AIGH Capital Management, which increased its position.

Next, we observed a series of dilutive offerings to keep up with the cash burn. In August 2022 TELA sold 4,600,000 shares at $8.00 per share for $34.4m. In April 2023 the company sold 5,219,190 shares at $9.50 per share to get $46m. In October 2024, 17,800,000 shares were floated at $2.51 per share to get $43m.

Management

CEO Anthony Koblish is a “million-dollar pay, own 3-4% of the company” type guy. Of course, we want “own 30%, pay $300k” type of guy. However, Koblish has demonstrated his ability to scale and sell a company with Orthovita, which is valuable. There is another important factor - the mesh industry is dominated by the following players: Medtronic with a market cap of $118b, J&J with a market cap of $362b, and BD with a market cap of $72b. Koblish built a company that entered a competitive industry where products go into surgery rooms, started from scratch (0 sales in 2016), and will likely do $100m in sales this year. Yes, there was dilution. But I think it’s remarkable what has been done so far.  

Co-founder Maarten Persenaire, who was the Chief Medical Officer, passed away in 2021.  

Another key figure who was with TELA from the very beginning is Skott Greenhalgh. He was the head of research and CTO but is not currently listed on the management list. For some reason I struggled to find the related info. 

One individual who deserves special mention is Greg Firestone. He has been with the company since 2017 and has held the title of Chief Commercial Officer since May of last year. Greg apparently played a key role in strengthening the Group Purchasing Organizations (GPOs) distribution strategy and in enhancing the overall sales strategy.

Product

TELA’s product is called Ovitex. OviTex portfolio consists of multiple product configurations intended to address various surgical procedures within hernia repair and abdominal wall reconstruction, including ventral, inguinal, and hiatal hernia repair. OviTex is made from layers of ovine rumen (sheep forestomach) interwoven with a minimal amount of polymer suture for added strength. This design minimizes the foreign body footprint of synthetic polymers and leverages the patient’s natural healing response. OviTex devices are available in sizes ranging from 4×8 cm to 25×40 cm.

TELA adds acronyms to Ovitex for naming their products, differentiating them by functionality and use. Ovitex LPR is optimized for laparoscopic and robotic surgeries, Ovitex IHR is designed for inguinal hernia repair, and Ovitex PRS is intended for plastic and reconstructive surgeries (more on this later). The “basic” ones are Ovitex Core, Ovitex 1s and 2s. Core Ovitex products go for $3000.

OviTex products are manufactured by Aroa Manufacturing at their facility in Auckland, New Zealand. The partnership description is somewhat cryptic, but the bottom line is that Aroa takes its cut, leaving TELA's gross margins just below 70%. Aroa Manufacturing is a publicly listed company on the Australian Stock Exchange under the ticker ARX.AX. It trades at 2.6x sales, has recently turned cash flow positive, and is debt-free. 

The majority of products are shipped directly from Auckland to the headquarters in Malvern, Pennsylvania. The headquarters is leased and houses the research and development operations, controlled environment room, and office space, and currently totals approximately 41,000 square feet. 

TELA sells these products directly to customers, which are hospitals and ambulatory surgery centers. Except for stocking distributors in Europe, TELA does not use distributors to sell the products. 

PRS

Tela Bio is a hernia mesh industry play. Throughout its short history, the company has consistently introduced new products, one of which is Ovitex PRS. Ovitex PRS, introduced in 2019, is a beast of its own. It is a product for the plastic and reconstructive surgery industry. Biologic matrices in this industry are used in various scenarios: head and neck surgeries, nasal septum repair, cleft palate repair, eyelid reconstruction, and scalp and dura defect repairs. They are also utilized in chest wall, pelvic, extremity, and breast reconstructions following oncologic resections or tissue harvesting procedures. Ovitex PRS is most commonly used in breast reconstruction surgeries after mastectomies.

Most go-to products in this market are made of human cadavers and are very expensive. Ovitex PRS took the industry by storm, as reflected in the numbers we’ll discuss later. Ovitex PRS roughly goes for $5000 and offers 40% cost advantage over competitors. 

Go-to-market

We could say that 90% of all hernia procedures use mesh. In 80% of those plastic mesh is used leaving the rest with biologic mesh. Although the raw procedure count number split is roughly 80/20, the sales split is 50/50. Why? Because biologic meshes are really expensive. That’s where TELA entered the game offering up to 40% savings. As a reminder, players in the market are healthcare behemoths so it was tough to get in. TELA had to start from scratch, build their name and reputation which they succeeded in doing. The ultimate goal is to get into straightforward simple procedures which are currently dominated by cheap plastic meshes. The path could be characterized by the following: from complex procedures with expensive biologic mesh to simple higher-volume procedures with cheaper mesh. 

Group Purchasing Organizations (GPOs) are entities created to leverage the collective buying power of multiple businesses to obtain discounts from vendors. TELA landed the third largest national GPO - HealthTrust - before COVID and recently renewed a four-year contract with them. TELA landed the second largest national GPO - Premier - in 2022. Another undisclosed national GPO added TELA into their list in 2023. The largest national GPO is Vizient and the CEO is certain that TELA will eventually secure a contract with them. 

Sales from the GPO channel account for 60% of the company's revenue, the rest coming from IDNs. Management believes GPOs will account for 70% of revenue very soon. It is important to understand that these GPOs have thousands of hospitals so TELA has just scratched the surface in terms of coverage. Currently 700 hospitals worldwide use TELA’s products while Premiere alone has more than 4000 hospitals in their network.   

Another important point about GPOs is that they categorize the participant companies into specific product categories. HealthTrust categorized TELA under biologic mesh but the other two categorized them under biosynthetic products. This means finally TELA can sell into simpler procedures at higher volumes. 

From management: “our hernia portfolio continues to perform with OviTex recently becoming the most implanted biologic hernia repair mesh in the United States, reflecting the growth recognition of the clinical utility of the product for this application”. The strategy is working. 

Numbers

LTM revenue is $69m. Company guided $75m for 2024. Revenue CAGR from 2017 to 2024 is 50% - not bad! TELA grew sales every year since they started, including the COVID year. Since 2019 they have added 500 hospitals in which their products are sold. 

                                    YTD                2023                2022                2021
Ovitex Hernia             $34m               $39m               $29m               $23m
Ovitex PRS                 $17m               $19m               $12m               $6m

As we can see, the growth is very impressive, especially for Ovitex PRS, which now accounts for almost a third of sales. Tela Bio began selling in Europe in 2019, but 2024 was really the year when sales picked up significantly. In the latest quarter, TELA reached $1m month in Europe, which is an impressive figure and, I assume, will continue to grow. Importantly, Ovitex PRS has not yet received CE certification in Europe. While it's unclear when that will happen, if the growth there is anywhere similar to the US, the story could become even more exciting. 

A problem for the company has been the expense CAGR for the 2017-2024 period, which stands at 25%. Greg Firestone is addressing this issue by optimizing the sales strategy. Additional cost-saving measures have been implemented, and we are expected to see the results starting in Q4 and beyond. 

TELA had $17 million in the bank at the end of Q3. Since then, they have raised an additional $43 million. I estimate that they will finish the year with around $50 million in cash. With a quarterly revenue of $28 million, the company will break even on EBIT, considering a forward cash burn of $8-9 million. I believe TELA will enter 2026 cash flow positive. 

The company has $40 million in debt at a rate of SOFR plus 6.25%, maturing in 2027. I am not concerned about this. 

There is some seasonality to cash flow because the company buys additional inventory in the first quarter and pays out bonuses towards the fourth quarter.  

In the latest quarter TELA sold 5000 Ovitex hernia units, of which 60% were used in minimally invasive procedures. This number is growing which reflects strong adoption of OviTex LPR and IHR products. According to the CEO, whenever you hear about OviTex being used in a robotic procedure, you're probably talking about us displacing a permanent synthetic mesh. In other words, robotic procedure is a proxy for synthetic replacement.

To sum up, the numbers are likely to trend positively due to several key factors: sustained growth in Europe, the launch of Ovitex PRS following CE certification, deeper penetration into existing GPOs driven by dual-category placement and brand recognition, success in securing new GPO contracts, and cost reductions from previous management initiatives.

Valuation

EV/Sales ratio for 2024 is not very representative because the company is burning money. We’ll adjust the EV adding back the amount of cash that will likely be spent next year before reaching profitability - $40m. I assume $10m cash in the bank at the end of 2025. 

Share price                  $2.64
SOI                              43m
Equity                         $114m

Cash                            $50m
Debt                            $40m
EV                               $104m

Revenue (2024e)         $75m
EV(modified)/sales     1.9

Revenue (2025e)         $98m
EV/sales                      1.5

Additional

More info that did not fit above.

Hernia awareness has grown significantly in recent years, partly due to lawsuits and lawyer advertisements that have brought the condition into public conversation - even turning it into a meme in some circles. Compared to 10-15 years ago the number of specialized hernia surgeons has increased. Patients today are more informed and actively discuss options with their doctors, including the type of mesh used in procedures. This is good.  

Risks

Conclusion

At current price TELA represents an investment opportunity with a favorable risk-reward ratio. One more year of decent execution by the company could likely result in stock doubling. Looking beyond a year, I suspect the company will become an attractive candidate for acquisition by a larger player after it crosses the $100m revenue mark.