Establishment Labs Holdings Inc. (ESTA) Earnings Call Transcript & Summary

Great. Good afternoon, and thanks, everybody, for joining us for our next session here in the MedTech Track. I'm Matt Taylor, UBS' U.S. medical supplies and devices analyst, and I'm really pleased to be joined by the management team from Establishment Labs Holdings. And today, we'll have a Q&A session for about 40 minutes moderated by me, but if you have any questions, you can e-mail me or send your questions through the app link. So on the line, we've got a few members of the management team here. We've got J.J. Chacon Quiros, who's the CEO and founder of Establishment. We've also got Renee Gaeta, who's the CFO and David Erickson, who is heading up the IR function for the group. And first, I just want to thank everybody for joining us, and say, welcome to the call.

Thank you.

All right. So -- sure. Yes. So just to get started, I wanted to give everybody a level set on how the business has been doing pre-COVID, and it seemed like you had a lot of momentum even into Q1 where you had some disruption there. At the end, still resilient growth. So I was hoping you could discuss some of the trends in the growth, what's driving the growth and the resiliency of the breast implant business overall?

Yes. Thank you, Matt, and thank you, everyone, for joining us today. We had a record quarter once again in Q1 of this year. And we've been just doing this quarter-after-quarter, where we see our revenue continuing to grow, and we see our revenue continuing to grow while we see our gross margins continuing to improve. And we think this is a good reflection of the work that we've been doing. Both plastic surgeons and patients are moving to Motiva because of the technology and science that is behind it, and we think that we've been able to craft a very interesting women's health story now backed by more than 1 million implants in the market. And this story is really resonating with women that are seeking advanced breast enhancement procedures. When we look at this industry, you've got to remember, the breast augmentation goes back to 1962. And all this time, we've learned that patients that want to access these type of procedures, they take quite some time to make their decision. They will start their research, they'll talk to other people that they know. In the past, it used to be mostly their friends. If one of their friends or someone they knew had a breast augmentation, then they would talk to them before even going to see a plastic surgeon. These days, they're using mostly digital channels to be able to access this information. And this takes place in a period that we've counted between 1 and 4 years. And during this time, there's so much going on, there's so much thought that takes place that we think that these patients become very committed to their choice. And I think that, that's one of the things that we see just in over the last 2 decades, for example, in '08, '09 during the recession. We saw very little change in the number of breast augmentations taking place worldwide, also in specific regions or specific countries during recessions, what we see is that the patients are so committed to this that instead of buying a new car or doing any other spending, they tend to be committed to this one. So that's where this resiliency really shows.

Got you. No, that makes sense. Well, maybe talk a little bit more about the outlook as you see it here, both through this period of disruption from COVID, and as you start to come out of it, what early signs are you seeing of recovery? And you're in a lot of countries, actually around the world. So maybe you could speak to it that way, too?

Yes. And I'll try to make the most sense out of it. We sell Motiva implants in more than 80 countries in several regions of the world. And as a result, what we are seeing is that there are different dates in varying speeds at which these countries are coming back to business. And it usually tends to be related to the way these countries reacted to the pandemic. And in the countries that were quicker to act, we are seeing a quicker comeback in terms of not only surgeries, but also patients going back to consultation because there are 2 things at play there that are very interesting. On one side, you have all the patients that didn't get an operation during this time. All those patients, in the most part, are keeping their decision. They're just postponing the date. So you're going to see lot of these surgeries taking place as these countries allow these elective surgeries to happen. On the other hand, there's all the patients who have been thinking about it and wanted to go and see a surgeon. And for first-time consultations, social media can be a good contact point. And definitely, surgeons who have embraced virtual consultation, get a good first opinion on what they could do, what they could offer to these patients, but is not a medium for a high conversion rate. So what I think we'll see in the next few months and quarters, is these things playing out together at the same time that we are seeing the economic impact of it. So it's going to be very interesting. I think for us to gauge how fast these countries can go into resolving all the surgeries that did not take place and how fast they can get new patients back to consultation.

Right. That makes sense, yes. A little bit heterogeneous. And well, I guess I was wondering, based on that and your prior comment where you talked about the fact that you didn't see a lot of difference in the number of surgeries in the last big recession. How would you talk about this period as being similar and different to that one? And what could that mean positively or negatively for the implant market?

Yes. I think that's one of the biggest questions here because we are in uncharted territory. But we have several reference points just like different recessions, but I think one that is really important is what has been happening over the last couple of years with the regulatory action against textured implants. In the international market, textured implants were, by far, the most widely used breast implants. And now because of regulatory conditions that have been imposed in all of these companies, then we saw a quite negative new cycle, talking about the safety of breast implants in general. And yet, what we saw is that patients were very open and willing to look for new technologies. And in that sense, all the growth that you have seen in -- from Motiva over the last couple of years has been taking place in a very complex environment in terms of what's been going on in the industry itself. So we think that even if this pandemic affects the industry further than what we have seen in bigger events before, our work is to gain market share even in those conditions. So there's a -- there are good opportunities for us because of our strength in digital, because of our strength in the story that we've been able to construct around women's health because of our technologies, so we think there are many opportunities for us. We just have to be mindful of how we play our book.

Right. Yes. So maybe let's continue on that point for a minute in terms of your market share opportunities. Obviously, you've got great safety data. You're known for that. And that stands out versus some of the other implants that have had problems. You also talked a lot about moving the technology beyond that to make the implants more natural. So I was hoping you could maybe talk about that piece of it and then this virtual piece too, I've seen online you have ways for people to do virtual consults and the like. So how much of the funnel or the patient experience can actually be done virtually?

Yes. So when we took our first product to market in 2010, what we think we did different is that we were the first ones in our industry to be truly patient-centric. And our technology really showed that, in that we very quickly able to show that you had a significant reduction in the rate of capsular contracture. We were able also to prove that our implants behave differently in the body. And many women started to give testimonials saying, they feel like real breast issue. I can't tell which part is implant, which part is breast tissue. So all of these things have benefited our market share gains. Now we've been able to use social media and other digital channels in a way that others have not. And perhaps it's because the strength of the story around women's health and everything we're doing to transform the industry, it's really interesting to women who are searching for alternatives when it comes to breast enhancement. So we've been doing this now for a few years. And what we are seeing is that with the pandemic, there's even more women who are using social media and other digital channels than before. There are countries like Sweden and South Korea, where we are now market leaders. And a big amount of that is because we were able to get in contact quicker with women who were searching for options and that's because in those countries, women, in general, are using digital channels to make decisions in all sorts of things. Now when you think about other geographies like Brazil, that is very traditional and where the plastic surgeon pretty much is the one making the decision about what product is used, then it just was more difficult. We have to have more sales reps in the ground. We have to do more medical indication events but now with everything that is happening, we see many Brazilian plastic surgeons embracing virtual consultation, finally willing to do more in social media, and all of that plays into the story that we've been crafting. So we think that the effects of the pandemic in how people embrace the digital world is coming in direction that is going to benefit Motiva. So we are in a way doing our best to invest even more in our digital initiatives. At the same time that we are cutting back in some expenditures that were more with the traditional model. And perhaps, Renee, you can talk a little bit more about that.

Sure. Yes, that would be great. Do you want to go with that?

Sure. I think overall, we're seeing in those headlines, right? That everyone is moving as fast as possible to digital. We've seen not only our plastic surgeon customers, but our partners pick up and move in that direction, realizing that, right, everyone now is doing everything digitally and remotely, where you can, and people are trying to continue on their lives in a normal means as best they can. So whether or not that's adaptability to virtual consultations or check-ins that are without having to physically go into the office, that is certainly something we're seeing our customers adapt to and certainly seeing an increase in volume of women who are interested in doing their own research online. We've -- in the past few years, have started to see patients -- more patients, healthcare [indiscernible] become more active in the decision-making process from reserves, use website like we built us and others for information that they think go into [indiscernible] NPA. So I think now and how we've just seen a multitude of influx of that, where we're seeing a higher level of that activity, and women are planning for things in their life that they wanted to do anyways. And so certainly, there's an aspect of -- to this that is a physical surgery, but we're also seeing doctors change their protocols and adapt to what is going to be at least the foreseeable new norm so that they can still continue to see patients and have procedures completed.

Yes. Yes. And then maybe just also related to this point. Do you want to talk a little bit about some of the cost-cutting initiatives that you've put in place and how that will enable you during this period of disruption to help offset some of the lost revenue?

Sure. Absolutely. We certainly try to be decisive and take things -- immediate action where we could. We have made sure that we've kept in place the vast majority of our sales force or keeping our sales force engaged. We're giving them online tools and tools that they can then use with their practices and their customers so that we maintain to be vigilant and we can respond quickly. That's been a focus for us. We've only cut back on expenses on the marketing and sales side, I would say, as a result of simply activity just not being there, right? Physical trade shows, and physical trainings just aren't happening right now, but we certainly quickly adapted to increasing our online webinar space, launching new websites to make sure that we're increasing the digital initiatives. That was decisions that we made very early in the process in March. The other costs that we are definitely cutting back on and making sure that we can be in a position to be poised from a sales or commercial side is sort of any internal projects that we were working on, making sure that we're being mindful of what we're spending with consultants and other providers that, at the end of the day, it's the operational side of the business, making sure that we remain very mindful that the cash that we have on our balance sheet that we maintain that and adjusting our business accordingly. We've been proactive in thinking about different scenarios that could result. We haven't spoken in too much detail as to what we think Q2 and future quarters are going to look like, but we know that Q2 is going to be negatively impacted, and we've spoken to that. We are being very proactive in thinking about what different case scenarios look like for establishment labs. How do we run this business and pull back on those expenditures where we know we can today and then also support those initiatives that will be cost-effective and allow us to be in a position where we're investing in digital, we're investing in ways that we believe the consumer is going to make decisions going forward.

Right. Okay. That's really helpful. Thanks, Renee. Maybe I'll come back to this earlier group of questions that we're talking about establishment competitive advantages. We know safety is one. And I mentioned there's something you've talked about before, but you're really trying to differentiate on, I'll call it, form and function. So you talked about some of the investments that you've made there in the manufacturing and the coatings to really make the products stand out and make the overall experience better.

Yes. I think the focus when we first went to market was especially on the safety side. Why? Because we thought that the rates of capsular contracture, the rates of rupture, were pretty much unacceptable to us. When we first went to market, we decided not to use textured implants because it just didn't pass our risk-benefit analysis. And what we did is, we went completely countercurrent with our technology. So we have what we call is a nanosurface. And that nanosurface, of course, reduces the rate of capsular contracture. Now the second thing that it does, and it is most important to women is that it makes the body have kind of like a self-friendly reaction to the implant. So what that in turn gives as an advantage is that the breast feels softer like real breast tissue. And that is, of course, the one most important reason why women get breast augmentation is, definitely, I want my breasts to look better, but I want them to look like real natural breasts. And in that, the other thing that we did is in 2014, we brought to market the first ergonomic implant in the world. And this implant has had tremendous success because it moves with gravity. It gives not only the look and feel, but also the natural dynamics of a natural breast. And this is important, for instance, for women who are highly active. If you're doing marathons and doing things like that, then it is important that you have a type of technology that goes with your lifestyle. And now we are moving to our second-generation ergonomics device that you can use with minimal incisions. And in doing this, you can address the second biggest reason why women tend to shy away from this procedure, which is I don't want to have scars. So if we can minimize the size of those cars, we get a new group of women who are interested in the procedure. And we are, of course, moving that technology all the way to minimally invasive. And we've been talking for quite some time about our minimally invasive initiative. And this is, to us, one of the most important things for the future because we are talking about capturing a new group of women who have never thought about traditional breast augmentation because that's not what they want. However, they are using padded bras and other means of giving more volume and more shape to their breasts. If we can convince them that they don't need to wear an uncomfortable padded bra and that they can use Motiva Mia as a way of having a more natural, more comfortable type of outcome without the risk associated with a traditional breast augmentation. And to us, all this patient centricity is so important because we have understood the patient journey very well from the beginning. We've been able, over time, to look at all the reasons why women, even though they're not happy with their breast size or shape, would not undergo a breast enhancement procedure.

Right. Great. And that's a good update there, too. Yes. So I wanted to ask about the pipeline, and you mentioned minimally invasive, so that was a piece of it. But maybe just talk about how your pipeline will be impacted broadly by COVID-19. Obviously, there could be some disruption in procedures. And give us an update on time lines for the U.S.

Yes, of course. So we have been working on several of our initiatives for years now. We are awaiting for CE approval for our ergonomics 2 platform, and we are also waiting for our Flora tissue expander. So with ergonomics 2, what we are looking for is, again, to bring even more safety to women, but also all of this story around ergonomy that has been very compelling in the past and has been very good for us in terms of revenue. Now with Flora, what we are talking about is a new type of tissue expander with completely new technologies inside. So not only our proprietary surface technology, but also the type of valve that it has. So the port no longer has magnets. Now it uses RFID so that you can find it and do the expansion. As a result of that, we have the possibility of having an MRI during the expansion process, which for women who are recovering for breast cancer is quite important. And also the potential improvement in the dosage of radiation that has to be given to these patients, which has an impact in the tissue quality when you are doing the reconstruction. So both of these products are awaiting CE approval, and we are expecting CE approval to happen this year. We are hoping very much to begin market development and eventually a full product launch for both of these. In terms of Mia, the pandemic did slow down the K-Series that we were in Asia. As these countries go back to a new sense of normality, we hope that we can get new patient series going in several Asian countries. But definitely, there was some impact to the Mia time line, at least for Asia. For our U.S. approval process, there was no impact on the aesthetic cohorts. We finished those 2 cohorts back in August of last year, and we were pretty good in getting several sites compliant with the new FDA regulations for virtual consultation. So with this, we can have all the patients and their follow-up use those virtual means as a way of gathering the data. So we don't foresee any delays for the aesthetic cohorts. And those represent 80% of the market. We do foresee delays for the reconstruction cohorts. And those have been impacted by the pandemic. Basically, enrollment was stopped for several months. And in some cases, we don't know yet when these sites will start receiving patients again. So we do foresee that impact happening for the reconstruction cohorts, and those account for 20% of the U.S. market. So we think in general, it is quite positive in terms of the time lines for approvals for both ergo and Flora, in Europe and for our Motiva implants in the U.S.A.

Great. And then maybe we could talk about other key markets. Obviously, the U.S. is going to be a big one. What about China or other markets that you can move into in the future? Can you talk about the opportunity set there in some of the areas that you're not in very deeply?

Yes. China for us is a phenomenal opportunity for several reasons. Number one, it is the fastest-growing breast aesthetic market in the world. It commands the highest average selling price for breast aesthetic procedures. And the other part of it that is very important to us is that the Chinese consumer and especially in aesthetics, has truly embraced digital. And like I said before, we tend to shine when it comes to women making their decisions in that digital world. So very much looking forward to our Chinese approval. We have been working with the NMPA in China for quite some time. We are looking forward to reconnect with them because they did close down for a few months and several of the labs that we're doing the testing also close down. So we will be contacting them soon and being able to gauge if there was an important impact to our time lines. In the past, what we have talked about is about an approval date in 2021 in China. So we will update investors when we have an update from the Chinese regulators. But like I said before, super committed to the Chinese market.

Right. Okay. I just wanted to understand the contrast because you're obviously working on a lot of things to improve the safety, the approach, the form and function of the implants and the procedure overall. It doesn't seem like your competitors are doing as much to move the ball forward. And I guess the question is, why? So why hasn't there been as much innovation from the other players over time? And do you think they will start to have to react to you doing all this stuff because you're gaining share?

Yes. I think that the most important thing to consider is that because of the moratorium on silicone breast implants in the U.S., in the '90s, there was a significant pushback from certain players from entering this market. However, when the implants were reapproved in the U.S.A., what you saw is that these companies were then acquired by larger ones like Allergan and J&J. And they bought them basically because they wanted to have that relationship with the plastic surgeon, and they valued that relationship as a way of doing other business with the plastic surgeons. But they did not see it as an opportunity to invest in technology and improve on these things. We saw it early on. And the reason I founded this company is because I saw that opportunity. Frankly, I was afraid they would do something when we first went to market in 2010, and they really didn't react to it. They didn't react to it when we went to market with our ergonomic implant, and they certainly did not react when we started our U.S. clinical trial a couple of years ago, so I think that by now, they're kind of like behind. And with the renewed scrutiny on breast implants, I think that the time lines to catch up are pretty challenging for them. So we feel that the combination of these factors, and on top of that, all the work that we've done in terms of patents and other IP strategies will get us to continuing to lead the market in technology. And eventually, I think this will show up in the overall worldwide market share that we will have.

Right. That makes sense. Yes, it seems like you're building a nice lead in a number of areas. Okay. So then the last few topics I wanted to run through what we have time left here are, you did a timely capital raise in January, raised some money. Obviously, that's great to have during a period of disruption like this. Maybe just talk about the balance sheet, the kind of runway that gives you, your liquidity and how far out do you think that could take you in some different scenarios as a starting point?

Yes. So we are definitely thrilled and excited by the support from investors and did get that follow-on offering done in January. We raised $69 million gross proceeds and super thankful that we got it done when we did. When we did the offering, the intent was always to have enough cash from a runway perspective for multiple years, and that still remains true today. We are adjusting our cash flow needs and utilization of that cash. In the middle of the pandemic, we are adjusting our business accordingly to be focused to the core of our business and the needs that are required as we stand now, and are watching it very closely. So our ultimate thesis hasn't really changed, and we're still committed to that and we believe that it is sufficient cash for us to manage not only through this storm, but for the growth that we anticipate ahead of us. From a balance sheet perspective, we do have debt outstanding. We've got $65 million of debt outstanding, but it is interest-only until when it is due for payable, which is -- we already pushed that out last year ahead of all of this and ahead of the follow-on offering. It's been pushed out to September of 2025. So that would get us through any expected U.S. launch, et cetera. So luckily, there's no demand there to have to repay that debt. And of course, we'd probably look for an opportunity to refinance it. But ultimately, we're very comfortable with the cash that we have on the balance sheet and excited that investors believed in our story and will continue to do so for years to come.

Great. And related to the cash management, you talked about some of the areas where you're being prudent with spending here. And I think you mentioned on the call, some reduction in the OpEx. I guess what I'm wondering is more of a bigger picture question with all the stuff you're talking about with digital. Do you think coming through this, unless that you return back to a normal period of growth, are there going to be things that stay with you that actually allow you to operate leaner or better by not doing some of the things like travel or training that are pretty expense heavy when you do them in person?

Yes. Absolutely. I think that there's -- sorry, Renee.

Go ahead.

No, I'll make a quick point, and then I'll pass it on to you. What I'll say is that we've been doing this for years. We became market leaders in Scandinavia with 2 sales reps, but a very strong presence in social media and other digital channels. So we think there are opportunities there across the board. We don't think that everyone is just going to go back to business as usual. I think we've been able to prove that we can move very fast. We're very adaptable. We're agile. We moved our entire education platform to digital very quickly, and we have engaged with thousands of plastic surgeons already. So we definitely embraced that new world years ago, and we've adapted to old school practices when needed and as needed. But I think in several markets, people will see them as that as we don't need them anymore.

Right. Right.

Yes. I think just to follow on to that, I think that we are benefiting from the fact that, I guess, I try to always be glass half full, but certainly believe that we've learned a lot in the last 30 to 60 days about our company, about how we can operate digitally or remotely, and I'm happy to see that our management team and really the whole organization has adapted to that. So we'd certainly expect that we're going to be mindful and find unique digital ways to connect and stay connected without having to have that sort of physical travel and physical requirements to run this business lean and strong.

Great. And then I wanted to ask one about the procedure. I mean maybe you could just enlighten us about the different -- the sites of care recovery time, how that impacts recovery? And also, you are moving into more minimally invasive approaches. Maybe you could just speak to how you think that will evolve over time as minimally invasive gets adopted?

Yes. We think that minimally evasive is the future of breast aesthetics. And there's nothing here that we can talk about that hasn't been shown already by other minimally invasive procedures in other surgical specialties. Minimally invasive tends to prevail because it basically lowers the risk profile of the procedure itself. It lowers the operation time, lowers the recovery time and patients just go for it. They see it as a better value proposition. So we've been doing minimal scar for a couple of years now in Europe and has been widely successful. And on the back of that, we are now moving to full minimally invasive. And that's where the improvements in terms of just the concept itself of how you call this procedure because it is no longer a breast augmentation. You are talking about really a padded bra replacement procedure. And in the past, we've seen in aesthetics, how minimally invasive as well in -- when it comes to contour, has taken place very nicely into the market, making a lot of gains. You saw the success of Coolsculpt when they were able to tell a lot of women that we're not happy with their contour that there was a better way and a much more safer way to do it. And I think that got a lot of people interested in it. It probably eventually did help with the overall use of liposuction in general for people that did not qualify for Coolsculpt. So when it comes to breast augmentation, we think that there's a new group of women that are going to get interested in breast aesthetics because of this option, and some of them will be able to get Mia. And some of them will just have to go for a more traditional breast augmentation procedure.

Great. All right. Well, we're about up against our time here. So I guess, I just want to thank you all for joining us. This has been a really nice discussion to go over a number of the key areas that matter for your business and really get a good update for the investors on the line during this period of disruption. I know people really appreciate these touch points. So thanks a lot for joining us and really good luck as you continue to manage through some challenging times. It seems like there's a lot of things going in the right direction.

Thank you very much, Matt.

Thank you.

Thank you. Thanks. Take care. Bye.