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

Okay. Good afternoon, everybody, and welcome back to the Goldman Sachs Virtual Health Care Conference. This afternoon session's continuing with med tech, and our next company presenting is Establishment Labs. We're fortunate enough to have the Founder and CEO, Juan José Chacón, with us as well as the CFO, Renee Gaeta, and also Head of IR, David Erickson, who many of you know. So first and foremost, tough times for everyone these days, so I just wanted to say thank you all for making the time to come to the conference virtually this year.

Thank you. Pleasure.

And I thought what we could do is actually just first ask you, if you're in Costa Rica and it's maybe a country that people aren't paying as much attention to in terms of where we are with infections, you want to just give us a sense of what's going on in that country in particular since it's very important from a manufacturing standpoint and how you're doing that?

Yes, of course. So we have our headquarters in Costa Rica. Costa Rica is one of the most important med tech hubs for manufacturing, and it has managed the situation quite well. There's only 1,400 cases in Costa Rica so far, and the death rate is less than 1%. So it's been managed quite well by the government and I think speaks to the quality of the health system here. And I think that we're quick to act in putting in place many protocols, and that has helped to keep things in a good place.

That's very good to hear. So I thought what we could do is actually just take a step back for people who might not know the story and just give you a minute or 2 to just tell people a little bit about the market. Most people will know this. We don't need to spend more than a minute or 2. But just for those who are less familiar, give a sense of just the market today in pre-COVID, where you're exposed to regionally and the growth rates pre-COVID for your key geographies.

Yes. So we are -- the total breast implant market, people estimate it between $1.2 billion and $1.5 billion globally. And that's about a 50-50 split between the U.S. and international jurisdictions. We sell in over 80 countries, and that mix is primarily made up of 40% of our revenue comes from the European region, 30% comes from Asia Pacific and Middle East and then the last 30% from Latin America. So we are quite geographically dispersed. I think it's important to note that we are not in China or the U.S. yet. Those are 2 significant markets that we are excited to add to our future commercial footprint.

Yes, that's great. And we'll obviously get to that. There's a couple of questions we've been asking most of the companies that are coming to the conference, and I wanted to give you guys a chance to answer as well. The first one is from -- just thinking about the next 2 or 3 years just down the road post-COVID, your medium-range plan. Is there anything that's changing in your strategy as a result of COVID?

Yes. I think that's a really important question. For us, when I founded the company, I founded the company because I thought there was an opportunity to disrupt an industry that has been quite important in aesthetics. It's mostly self-pay and has been led historically by 2 large incumbents, now Allergan Aesthetics and J&J. So these 2 companies basically wanted to have a relationship with the plastic surgeons, and that's why they bought those divisions, and they have them in place, but they fail to innovate. And we've been doing that over the last 10 years. We've been taking market share at a premium from our competitors. But most importantly, we've been changing the way things are done. And one of the things that we've been doing quite well is the use of social media and other digital channels to interact with women from all over the world and basically be able to learn from what is it that they want, to engage with them in a way that gets them to go to a plastic surgeon and ask for Motiva. So we -- when we think about the future, we think about can we speed up this process that we started years ago in having those digital interactions? Can we do things in a way that we are more efficient so that we don't need so many sales reps like the old business model? So all of these things have been in our minds for years. And we think with COVID, what is going on is that it seems like the opportunity is there because people have adapted quite quickly. And the other thing that we see is that the aesthetic patient has adapted quite quickly, and we see that as a big opportunity for us. And you'll see us talking about this more and more over the next few quarters and next few years. But we have a lot of things that can play very well with being closer and closer to our customers.

That's great. And I do want to get into a couple of those issues for sure. The other question we've been asking folks is just given the uncertainties out there and the different scenarios that could play out, just to walk us through the downside scenario and how you might be preparing for that. So obviously, something like a second wave in Western Europe or the U.S., not important for you, but we think about it as developments in Latin America and Asia. What incremental actions do you take as a management team, if things are to get worse in the fall?

I think, overall, when we sat down in March and really started to play this out and think about what we thought the impacts could be, we definitely knew that there would be an immediate hit, and that this could linger for some time. So we've already built that in a little bit to the actions that we've taken, but also realizing that we've come up with a couple of scenarios, but there are alternative scenarios in the future. I think at Establishment Labs, we are still a young, agile organization. We can adapt very quickly to changes in demand, changes in complex environment. We've proven that in the past. So I think that we are positioned well to continue to show that to everyone. We have taken immediate action and made decisive steps on cutting spend and reducing spends so we can stay lean and mean. But we certainly know that if it does linger or comes back in phases, we're going to have to adapt our business accordingly, and we are in a position to do that.

Okay. So let's talk about one of the things I thought we could do is just with the typical update question that I think people want to know about, and you've been answering already at other conferences and giving a lot of color to is I'll just ask that question from a regional perspective. And so you can maybe even start with what's developing there and how that relates to the implant market.

Yes. I think that it's -- certainly, we are watching Brazil very closely. It is our largest market. So we obviously put a lot of attention on that. And it's -- quite frankly, it's mixed. Brazil is even such a large country that you have to think about it a little bit like the U.S. where you've got different regions and pockets within the country that are going to respond at different times. And so we are happy to see that they are still doing procedures, and we are seeing activity there. But it is certainly at a reduced rate, and we want it -- we're mindful of how is coronavirus going to continue to play through. I do think it's a little bit too early to ultimately see what the end result is for Brazil, but we are highly focused on making sure that we're connecting to -- staying connected to the patients and to the doctors and providing them connection points now to show them our innovative products. I think, especially with coronavirus, patients are going to be really mindful of investing in themselves and what safety products, what are the safety requirements, how is that product different if they're investing for their long term themselves.

Okay. And in the rest of Latin America, would you say, I imagine it's more varied, and it's obviously much better situation in many countries there. You should -- I should say, people keep hearing you're in something like 80 countries, so you're in a lot of countries. In the rest of Latin America, is the impact more varied? I imagine less severe than what you're seeing in Brazil.

Sure. I think that Latin America as a whole is definitely lagging behind. It's probably where Europe was about a month or so ago. We're starting to see positive improvement in Europe. And so we're just watching it go through. Just as you see in the news articles that are out there or news broadcasts that are out there, it is -- Latin America is still slower. They are still shut down a little bit more. But you're right, it does vary country to country. JJ mentioned how they're handling it in Costa Rica. They've taken decisive actions. And I think as countries do that and are quick to respond to it, we've seen them be able to bounce back faster.

Yes. I would add to that, that, also, surgeons are getting better at adapting to the situation so that they can provide trust to patients. So when we look at Brazil and many countries in Latin America that when you follow the news cycle, you just say, wow, they're really getting hit hard. When you look at the number of procedures, it's actually better than it was from 45 days ago or 60 days ago when they had a ban on elective procedures. Now that the ban is lifted, these guys have put protocols in place and are able to provide these protocols to create a sense of trust and safety and are using those because for many women, not only in Latin America, all over the world, it is kind of like the right time to be able to do the recovery period at home. They don't have to worry about having to go to work, and there is a lot of things that are differentiated at this point, so it's hard to make just blanket statements about countries. Like Renee was saying, Brazil is huge. When you look at Mexico, the situation is -- it's very complex. So what we are doing is being as close as we can to the plastic surgeons, we've been doing a lot of medical education. In Brazil, we've already had over 20 webinars with plastic surgeons but also reaching patients, and one of the things that we've been doing is getting people interested in going back to consultation and also providing enough information for surgeons who want to enact these protocols. So in our last earnings call, we spoke about 3/4 of the patients pretty much in Brazil did not outrightly cancel their surgery. They just postponed it. So there are a lot of interesting opportunities as the situation gets back to some level of normality.

So let me follow up on that and ask you about Asia Pacific and Europe. Obviously, there's a lot of countries there that have handled this quite well or better and are in a better situation today, South Korea, Japan and Asia Pacific and other countries in Europe are starting to do better. Do you want to just give us as much of an update as you're able to into those 2 regions and what you're seeing there relative to the last time you reported?

Yes. We're certainly seeing improvements in both regions. It is mixed in Asia. I think Europe definitely saw -- started to see a response this past couple of weeks as they started to open up their borders more. So those 2 regions are definitely ahead and coming back. I think that all of the different countries and plastic surgeons need to put additional protocols in place. They've always been trying to connect with their patients via digital means of consultation. So we are starting to see positive notes and an indication that people are doing surgeries again and setting up the appropriate protocols, although they're certainly not at pre-COVID-19 levels yet.

Let me pause for a second. I realize that I forgot to mention at the beginning that the folks on the line listening or watching, if you have questions, just e-mail through the webcast, and I'm happy to ask them at the end. We should have a few minutes, and so please do that. So let's move on to kind of thinking about the same question but just a little bit differently, which is the new patient funnel. And I'm wondering what you're hearing about new patients coming back to the clinic and getting -- or kind of getting into that funnel, I should say, and whether there are signs that may be encouraging to you as you see that in countries that have kind of are a little bit later stage of COVID recovery?

Yes, of course. I think that something very interesting is happening. I've been speaking to surgeons all over the world. But just this morning, I was talking to these plastic surgeon from the south of Sweden, and of course, Sweden has been kind of controversial in the way it has handled the whole situation because they never really shut down. But now during their summer season and usually, they take 4 to 5 weeks of vacation. Most of the time, they're traveling abroad. And this plastic surgeon was explaining to me that they're seeing a lot of consultation. And he was saying, well, think about it. You were supposed to go on a vacation. You didn't. Now you have that disposable income, and you're thinking about what to do, and it's a good time to stay at home as well. So why not do one of the things that you've been thinking about for a long time. And we always talk about the patient journey in breast aesthetics being 1 to 4 years. So what we are seeing, I think, is that women who are in that process may be in a situation that they had planned to use that money somewhere else, like in the trip or something, and all of a sudden, they want to invest in themselves, invest in their well-being, and that can open new opportunities. And that's why we're so keen on our digital channels, on the social media because that's how we can get the message out that we can provide safety at a time of health concerns and send them to surgeons who have taken these precautions and are doing things. So we're actually glad to see surgeons who are getting back to business like that and to hear these stories of patients actually being even more interested than before or finding this time to be the right one.

Yes. I don't know if it's too early. Does that give you more confidence in the second half of the year?

No. I think what it does is it provides a level of hope that things are going in the right direction. Because one of the things that we have seen is that, and we saw it in Asia, there was a second wave that took place in Japan and in South Korea. There are clusters in large countries that are affecting the way the whole country operates. So as those things happen, we operate in over 80 countries. So I think there are countries where we will have second waves, we will have clusters, and those will affect what we'll consider normal course of business. But then there's the other side of it where you have stories like the one I just told you, where surgeons are saying, you know what, actually, it might be a good time for many patients to actually choose to have breast augmentation now. So those will be playing out against each other, and that's why we were so focused on getting most of our subsidiaries back to business as the government started reopening and getting as many tools to our surgeons, so we can have those interactions happening. What will it do for the second half of the year? I think that no one has a crystal ball at this point. We're all expecting a better second half than the first half, but it's hard to tell how good will it be.

So let's spend a minute on virtual consults. I'm really interested to hear how that's evolved. I imagine prior to COVID, it had to be very low, maybe close to 0. Maybe you -- I'd love some color on that. And to the extent that you are tracking this in any way, I would love to hear where you think it is today in terms of total consultations and how different it is by country.

Yes. I think that's a really good point because -- and speaks to the opportunities post-COVID. If you look at a country like Brazil, virtual consultation was actually outlawed. You couldn't do it. And because of the pandemic, the Brazilian government issued a decree allowing virtual consultation. So that has opened a way for a lot of surgeons to be able to follow up on patients, to have their first contact with a potential patient. However, eventually, if you want to get a surgery, you do have to come see your surgeon, pre op, and you have to make that decision. So it's too early to tell how fast we will be able to use virtual consultation to get patients to go for surgery. But what I do think for sure is that it's going to allow for a lot of new contacts. A lot of patients that said, "Well, I am not so convinced to actually go to a face-to-face consultation with a surgeon. But what about a virtual one?" So it does allow the opportunity for a lot more contact points there and also, to have better information about the patients in the post-op period. So a lot of the times, patients who are doing very well don't come back, and that kind of like poses a little bit of a challenge when we're trying to collect data, post surgery. And one of the things that we've been doing, for instance, in the U.S. is that we work with the FDA, follow their guidelines for their virtual consultation, and we were able to get many of our surgical sites for our clinical study in the U.S. up and running so that they could follow up patients using virtual consultation. So I would say it is a great tool. It's going to help us in all sorts of things with new clients, with eventual follow-up in normal course of business or in clinical trials. So I just see as one of the big takeaways of this pandemic is that both surgeons and patients are ready for virtual.

Let's also spend a minute on social media. You've mentioned it a couple of times. And I think you guys have done a good job of explaining how much of a differentiator that is for you, specifically versus your competitor. What I'm curious about is if you're tracking that in any way that you could share, just to get a sense of where we were pre and then post-COVID in terms of I don't know if it's clicks or what have you, but if there is a data that you look at that tells you whether social media impact is changing at all post-COVID.

Yes. So look, we definitely saw a dip in searches for breast augmentation starting in mid-March and through April. Since then, started to recover. The latest numbers that we have talk about approximately 80% of the searches that we saw pre-COVID but they're going in the right direction now. I think that we're going to see more and more digital interaction. And one of the things that we often point out to is that we do very well in the countries where surgeons and patients are using digital more than -- in more traditional markets like Brazil. So both in Sweden and in South Korea, for instance, who are like very, I would say, capable in terms of digital channels, we were able to gain market leadership quickly because we were able to convince patients that we were the technology for them if they ever choose to have a breast augmentation. So we will continue to invest in our digital channels. We will continue to have more presence in social media. We actually just launched our motiva.health website with new information for patients with our latest and also our surgeon locator that in some geographies, we can use to put together both patients and surgeons.

So let's talk about direct versus distributor. This is just an opportunity for you, and I want to get into that, too. And -- but in kind of an immediate term, maybe, Renee, you can help us just understand the difference in impacts you saw in the first quarter between the 2 and how we should think about the impact over these next few quarters, particularly from a distributor standpoint.

Yes. Certainly, for us, we're going to see the impacts or feel the impact of COVID-19 in our direct markets, right? We're closer to the end consumer where we basically recognize revenue when the surgery has been performed. And so we started to see that in mid-March that it started to -- as countries sheltered in place and stay-at-home orders were put in place alongside elective surgeries being suspended, and we saw that really trail off significantly in the back half of March. And then obviously, in April, most countries were shut down. We did have, for Q1, higher concentration as a result of that of distributor sales in our total makeup of the revenue. But we work very closely with our distributors to understand what's happening in their market, what kind of inventory levels they have at the local level, what forecasting they're saying. Their touch points is really another arm of our business, where we are gathering data as much as possible to understand what's happening in each of those regions. So as we look forward, for us, Europe coming back online and being -- opening up, we're going to see, hopefully, some growth there, and that's where a lot of our direct markets are. We primarily focus our direct markets in Europe and then Brazil, as we've discussed. And so positive notes there are indicating that we're going to see some strength. And then, for us, the rest of our countries that we're in are all distributor markets. So that is going to be impacted, of course, based on how Asia Pacific responds and even Latin America is going to have an impact on that. So it's a little hard to tell what the mix is going to be going forward, but we're happy to see the improvements currently what's happening.

And did you -- from just an opportunity perspective of moving more business from distributor to direct, does this current environment accelerate or decelerate your plans in that regard?

No. I don't think it changes the way we have always seen that mix. We're always looking at opportunities, but we're going to do things when the time is right. Most importantly, I think that the real direct channel is when you're using digital to get closer to the people that really make the decision. And I think this is what we will be investing in more. It is important to own your direct access to surgeons. But it is even more important to get a lot of patients to our surgeons. And I think that's really what we will be looking for over the next few years, but we're happy to look at opportunities. And if one comes that is good for us, we will go for it.

Okay. So let's move over to competition, regulatory, your product differentiation positions you quite well for the recent -- most recent bout of the regulatory action taken against textured devices. But from a market perspective, how is the market doing since the regulatory actions took place?

Yes. Actually, this is one of the key things. When we think about the pandemic and you think about how resilient are really these patients in breast aesthetics, they're actually super resilient. If you think about what has happened over the last 18 months, the negative news cycle, the regulatory actions, all of these things, you would say, would have a very negative effect in the market. Of course, we have been at the receiving end of all these patients because they want to talk about our technology. They see us as an option that is safe, and more and more surgeons are encouraged by that. But from the regulatory action, I think what we see is that the market is resilient. It continues to grow in most countries. I think in the U.S., it has been rather flat lately. But it also speaks to the opportunity. What we always say is there has got to be more options in especially innovative technology, science-driven options for the U.S. consumer in breast aesthetics. And if you see the market in the U.S. going flat or even taking a little dip, it does have to do a lot with the lack of options, the lack of technology, the lack of science behind the devices that are offered today. So we're happy to take that void once we get U.S. approval. And to us, the regulatory actions were definitely something that would happen at one point or another. When we went to market in 2010, we did so saying to people, "You should not be using textured devices." In fact, we have shied away from all that category. And as a result, in the first few years, surgeons were not that interested in our device because, at the time, textured devices were the best sold devices. Now with time, it has proven to surgeons that we have a very clear view of biocompatibility, that we have a clear view of what is needed to move forward. So we expect to continue driving forward with our message of safety, and that is definitely going to help us not only with regulators but most importantly with women who are interested in breast aesthetics and reconstruction.

And these -- those are great points. And it's obviously been a major tailwind for share gains for you. And is there a way that you describe where you are in that regard in terms of just conversion of share because of this issue? There's clearly more to go, it seems like, obviously, just given where your share is and where their share is. But how do you view it as a particular driver? Is it still a driver of growth for you as you think about the next 12-, 24-month underlying growth and not including the COVID impact?

Yes. I think it's hard to give you like exact numbers with regards to that. But what we do know is that our continuous message of safety resonates more and more with both surgeons and patients. There are some surgeons who are very conservative and they would say, "Well, I've been using this device for 25 years. Why should I change now?" And even when confronted with the evidence, they have a hard time changing. Now when the regulators kick in, of course, some of these surgeons eventually do call us back and say, "You know what, maybe I'm ready for something." Because they certainly don't want to go back to the smooth implants of 1962. And this is one of the things that perhaps we don't speak about it anymore or enough is that when you think about textured devices, definitely, it provides a potential implication with a type of lymphoma that is rare but can be fatal. So do you want to be the surgeon that gave your aesthetic patient a lymphoma? Definitely not. So although very rare, you want to be as far as possible from that. But if you take that smooth category, really what you have is an option from each one of our competitors that dates back to 1962. That's a very odd thing to see in med tech that people are still using something that is more than 50 years old. And the surface technology that we offer is a bioengineer smooth, is a next-generation type of surface that allows for what is called a cell-friendly interaction. So you have less inflammatory reaction, less fibrosis and eventually, less capsular contracture, which is one of the main reasons for reoperations. So all of that gives us kind of like the sweet spot because we're not in the textured category, but we're not the 1962 smooth. And that is a good place to be these days.

That's good color. So let's talk a little bit about new markets and new products. Start with the U.S. Obviously, that's going to be a huge opportunity for you. Is there anything you can say or update? I don't know if anything's changed with regard to the aesthetic arm of your PMA process.

So on the aesthetic arm, we continue to follow up patients. We finished the 2 cohorts of the aesthetic arm back in August and very happy that we were able to do that ahead of this pandemic. And with the pandemic, the challenge, like I was saying before, is how do you follow those patients. But we acted quickly. And we were able to set up many of our sites for virtual consultation, and we're happy to see all the follow-up that is taking place virtually these days for patients who come from that aesthetic indication. Now with the recon, it did get delayed because many of these hospitals could not even receive patients that wanted to get enrolled in the trial. Now we're happy to see that in the U.S., many of our sites are back online, are starting to enroll patients again, and that's going to help us that, although with a delay, we can finish the reconstruction cohorts.

And on the aesthetic arm, are we still thinking 24-month readout sometime in late 2021?

So definitely, the data readout will happen then because the protocol that was approved by the FDA is a protocol at 24 months. Now the guidance from the FDA talks about 36 months. So you should always think about us taking all the way to 36 months in data if we follow the current guidance that the FDA uses. But it's a good thing to know that, at the data readout time, around 80% of the patients in the aesthetic cohort would be at 3 years by then. So that gives us a lot of opportunities. And I think the difference between 2 and 3 years, once you take the modular aspect of the trial, is not really that much of a difference anymore.

Is that to suggest there's a chance that you'll be able to file with the 2-year data?

No. I think, at this point, it's too early to say that. I think that what we will do is we'll have our data readout at 24 months, and we will, of course, have a conversation with the FDA. We do believe our device has a history in the international market of now on our 10th year, over 1 million devices in the international market. So of course, it's worth the conversation. But I think from the investor perspective, they should always think about the current guidance being at 36 months.

Okay. And how about China? I mean they obviously had to close down there and that might have caused some delays. Are they back open now? And the 2021 approval time line, is that still a good one for all of us to use?

So yes, the Chinese government closed their labs that were doing some of the testing on our devices. And we are waiting for them to open a time slot for us to be able to speak to them because when they did go back online, they have a very long list of things to do. So we're expecting news sooner than later. So hopefully, by our next earnings call, we'll have a conversation on is there a delay or not. But yes, so what we've been talking about is, 2021, we'll see if it's affected by this.

Okay. And let's move to the pipeline, ergonomics, too, the latest version of your premium implants. Do you have a timing there for the CE approval?

Yes. We do expect to have CE Mark before the end of the year, and we are expecting to do a product launch in the first quarter, hopefully, of 2021. We are very excited about the possibilities with this product not only in Europe but around the world. We're talking about going into the realm of the super silicones. And this next-generation chemistries just have so many benefits potentially for patients and surgeons. And we think that also from that ergonomics product line, we're going to see more and more iterations that could come in the years to come.

Do you have a sense of how that fits into the total market? Like what -- if you've done any work on just what percent of the market might be amenable to this type of premium product.

So look, it's one thing we've been doing for years, which is to prove that in a commodity market, a non-commodity product with so many differentiators can shine. And when we first went to market with the first generation of our ergonomics device, and this was back in 2015, people were saying no one's going to pay more for those implants, and we disagreed. And now years later, it's our best-selling product in Europe. And everyone is buying it at a significant premium from our competitors. Now when we think about this next-generation device, I think that we're definitely going to see a premium there. But -- and what's going to be very interesting to see what percentage of the market does it attract. I think there's good indication that we have from all these years upselling and upgrading patients that we can get to the right price point for this type of differentiated technology and that we can gain market share while doing this.

Okay. Okay. And then for Flora Tissue Expander, just making sure the timing of the CE approval, is that still this year?

Yes. That is still this year. And actually, we announced a few days ago that we had received news from the notified body that they will be issuing the CE Mark very soon. Now our plan is to do some early product experience in Europe. Remember, this is a unique device. It has very unique features that are new. We see it as a game changer potentially for tissue expansion. Remember, it has no magnets. It uses RFID in the ports. And as a result, it is fully MRI compatible. So that's going to allow us to improve the standard of care. It's going to potentially give the opportunity for surgeons to do MRI during the expansion process, which, right now, if you think about it, if you're a patient during the expansion process and there's a reason for you to get an MRI, they actually have to extract the device. You have to go for an operation. They have to take out the tissue expander. Then they do an MRI. And then a few months later, you get another tissue expander. What does that do to that patient? I mean can you imagine the difficulties it brings to them? And definitely, that's why we are so excited about this technology. But you'll see us working through the rest of the year to get early experience from some of the best centers in Europe and then being more active in 2021 as we expand the footprint of the product all over Europe.

That's great. And Renee, we just have a minute left, but I'd love to get a comment from you on cash burn in particular. You're obviously in actually quite a fortunate financial position and been able to raise money before this COVID situation started. And just remind us of where we are in terms of cash position, debt and the burn rate this year versus last year would be terrific.

Yes, certainly. We have the strongest cash position we ever have as an organization. And you're right. We are definitely lucky and grateful that we got the offering done in January. So at the end of March, we had over $94 million of cash on the balance sheet, and we are being very mindful of spend. I think when we are reacting to the coronavirus situation, we are looking at our cash balance and operating spend in the same light as we did when we did the offering. It is our goal and mandate to bring cash burn down, and we are adjusting our business accordingly so that we have multiple years of runway with the cash on hand.

Okay. That's great. That's a great place to end it. So Renee, JJ and David, thank you so much for the time, again, especially during these times that are tough for everyone. We appreciate you coming out and doing this. And we will talk to everyone soon. Take care, everybody.

Thank you.

Thank you, Amit. Thank you.