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

Good afternoon, everyone. My name is [ Ray Juan ], and I am a member of the JPMorgan Healthcare Investment Banking team. Thank you all for joining this session today. [Operator Instructions] With that, now it is my pleasure to introduce Juan Jose Chacon Quiros, Founder and CEO of Establishment Labs.

Thank you, and thank you, everyone, for joining us today at this JPMorgan conference. I'm going to walk you through our company presentation. I founded Establishment Labs with the objective of transforming an industry, breast aesthetics and reconstruction, through our commitment to women's health. So in doing so, we have done many things to address the main problems in this industry prior to our arrival. If you turn to Slide 4, just to explain to you about the dynamics of this market. There's been very little innovation, again, prior to our arrival, based on the fact that there was a moratorium for breast implants in the United States in the 1990s. The FDA basically banned for a period of time the use of silicone gel-filled breast implants in the U.S. and the companies that were leading that market at the time basically left it. And 2 companies remained, which eventually grew larger. There was a reintroduction of breast implant technology that had been banned in 2006. And as a result, the U.S. market got back the technologies from the 1980s and 1990s that were in use by then. If you think about what that means, it basically means that since then, until now, we have seen no innovation coming to market in the United States and, of course, very little in the international market as well. These 2 companies that were leading the market at the time of the reintroduction of breast implants in the United States got bought by Allergan and J&J. And really, what these 2 companies did with it is to get access to the plastic surgeon. And as a result, they were selling another suite of products to them but basically failed to invest in new technologies in breast aesthetics and reconstruction. Still though, breast augmentation remains the most popular plastic surgery procedure worldwide, with more than 1.5 million procedures performed every year. If you look at the next slide, what did we do? Well, I put together a group of engineers with strong science with the intent of reinventing the technology. And we did that with knowledge and science and engineering of this century. So what did we do first? We said, well, most complications and reasons for reoperation are related to capsular contracture, which is the body's reaction to a foreign body, and also implant rupture that causes gel leakage and eventually leads to a reoperation. So we said, well, we're going to address that from the get-go. And by doing this, we reduced the complication rate. So we created a new type of surface technology that I will explain in detail. We also used chemistries that were much more advanced so that we can get better mechanical properties and also less tissue interaction. Also, we created a different manufacturing process, much more optimized, and as a result, we created what we call a TrueMonobloc, which is basically a high-durability silicone shell to reduce implant rupture. And to that, we have been adding, over the years, new interesting features that are proprietary to us to increase the patient safety and peace of mind. For instance, our implants have this little microtransponder inside that can lead to patient's full verification of the origin of the implants. And the quality verification over time, should there ever be a recall of any products, they can verify that these are not the implants that are at fault. As a result, after many years of work, we have the most comprehensive portfolio of advanced smooth implants worldwide. Now when I talk about the lack of innovation in the breast implant industry, this is what it created. So basically, if you look at the complication rates, from the FDA breast implant trials, what you see is it pretty much by year 5, one in 4 women will have a reoperation due to its safety-related complication. And that is what we seek to change. If you look at this complication map, which basically maps the complication rate as a percentage and puts it next to different levels of evidence based on, for instance, our post-market surveillance over 10 years now in more than 1 million devices out there, also published peer-reviewed papers either sponsored by us, by our competitors or independent and also other sources of data, for instance, we provide a full warranty that can give financial assistance to patients that have to go for surgery because of capsular contracture or implant rupture with our implants. And if you look at all these numbers that are put into this map, you see that the reoperation rate for capsular contracture or rupture with our Motiva implants is pretty much less than 1% in many different type of data settings. For instance, if you look at this published paper, from a large cosmetic hospital in the U.K., you see that after 3 years of using our breast implants, this hospital and 16 plastic surgeons, they were able to reduce their complication rate from more than 8% to less than 1%. And if you look at those 2,502 patients that received our SmoothSilk device, basically, the complications related to the device at 3 years was basically 0. What is it that is causing that? Well, on top of all the different things that I've been talking about related to the technological superiority of our devices, there's one aspect that really shines and it's the implant surface. Why? Because this surface was designed for biocompatibility. And in doing so, we were trying to get away from the legacy surfaces that you could find in the industry. The most widely used surface in the international market at that time was what is called a textured breast implant. And basically, that texturing was created with the intent of reducing the capsular contracture rate. Now with time, it has proven to create a rare type of lymphoma called anaplastic large cell lymphoma. And of course, if you're a patient that goes for an aesthetic elective procedure, even though it is really rare, the last thing you want is lymphoma. Now the reason for textured implants, as I said, was to solve the problems related to smooth implants. Smooth implants date back -- the traditional smooth implants date back to 1962. And as a result, there isn't really much science behind it. It's just a smooth surface. So what did we do? Well, we created this very complex architecture within the category of smooth implants, with the intent of reducing biofilm formation, also reducing the amount of silicone debris that could come out of the surface and also eventually lowering the capsular contracture rate. How does that work? Well, basically, that complex architecture in our patented technology reduces inflammation. A pilot study that was done at MIT by Professor Robert Langer, which is the world's most renowned biomaterial engineer, proved that when compared our surface to a traditional smooth surface, you have less than 80% the inflammation rate of a traditional smooth surface. So what does that mean? Well, if you have less inflammation, eventually, you're going to have less fibrotic reaction. If you look at Slide 10 and you look at that image, what do you see? That the capsule created by our SmoothSilk surface is much thinner, healthier. And if you look at a traditional smooth implant, it creates this thicker capsule, eventually leading to capsular contracture. So it's all about lowering the inflammation so that we can get less fibrosis and eventually, less capsular contracture. Now based on that technological superiority, we've been capturing market share and growing at very high growth rates. But how do we do that? Well, we do it by driving the adoption rate in every single market that we go into. And we've been doing that over the years, and we are now market leaders in many different geographies across the world. We are selling our products in more than 80 countries. But we are constantly entering new markets. Actually, we have in front of us 2 of the most amazing opportunities, China and United States, which will lead to a tripling of our total addressable market. Now in some markets, we have chosen to go directly there with our own sales force, and that is the case in Brazil, which is the #2 market worldwide in number of procedures for breast surgery and also in the most important markets of Europe. Now the other thing that we are really good at is launching new and innovative products. We're an innovation company dedicated to women's health. Now that has led to very strong financial performance. And as you can see, our rates of growth have been very high. And of course, in 2020, that was affected by the pandemic. In Q2 of 2020, we were hit hard by the social distancing and other restrictions put in place by health authorities fighting the coronavirus. Now after that, and based on all the work that we did, we had a very nice rebound in Q3 of 2020, which basically had an equivalent level of sales to 2019. And then we closed 2020 with a record revenue quarter, which basically led us to have a full year of just less than 5% shy of our sales in 2019. And we do this, we capture market share all over, actually, not by decreasing prices. We are actually gaining market share with improved gross profit margins. Now going back to that opportunity of entering China and U.S. This is particularly important to us because when you think about the Chinese market, it is the fastest-growing market for breast aesthetics worldwide. It is also, of course, a market where you have a lot of new consumers that are looking for ways to spend their affluent new life status. And as a result, it has become a luxury product in China, and it has some of the highest average selling prices in the world. Now in the United States, it represents, in dollar terms, around half of the global market. And 80% of it is the aesthetic procedures. We are already working through our U.S. FDA clinical trial. And we have finished in August of 2019 all of the patients in our aesthetic cohorts, 550 patients, and we are following these patients through. It's a bifurcated trial. So we seek the approval by the FDA for the aesthetic indication ahead of the reconstruction indication. Now one of the most important things that we do is bring differentiated technology to market, things that actually make a difference. Until now, we had been primarily focused into breast aesthetics. But after a lot of work by our RDI team, we are now having a product that will change protocols in breast reconstruction. It is Motiva Flora, and it will allow us to not only sell these tissue expanders but also sell the breast implants, the Motiva breast implants, next to it. With Motiva Ergonomix2, what we look is to increase the number of accounts that uses Motiva not only through the technological superiority of our products, but also because Ergonomix brings forward a more of a consumer-centric design that is very sticky with consumers. What we are talking about here is an implant that is more comfortable and basically with our product launch this year of Ergonomix2, we do plan to get to a lot of customers to upgrade their treatments. Finally, Motiva Mia is one of the most exciting opportunities in aesthetics today. What we are creating is a minimally invasive breast augmentation, something that does not exist today. And we think that with the patient series that we are doing in several geographies, we will be able to bring this to market next year. Now going back to Motiva Flora, what I want to say that is particularly interesting, it is that it's the only MRI-compatible tissue expander in the world. Right now, if someone is undergoing the expansion space of their breast reconstruction, and there's a need for an MRI, basically, they have to take the device out because the port of those devices have magnets and metal cannot be put under an MRI. What we did is we used our RFID technology to create a port with no magnets or metal pieces. And as a result, we have a new technology that is going to improve women's health. With Ergonomix2, we're moving into the family of what is called the super-silicones. So this is ultra high-purity chemistries that allow for less extractables in the silicone but also improved mechanical properties. So I was saying before, Ergonomix has been in the market for several years. Ergonomix2 will piggyback on the success of our best-selling product worldwide and our most premium offering. With Motiva Mia, we are seeking to capture not only market share but also, most importantly, expand the market. We've sized this market as 1.9 million procedures potentially per year at peak. And what we are looking to do here is actually attract an entire new group of women to these aesthetic indication. And in doing so, with our proprietary technology for minimally invasive, we plan to redefine an entire new category. What does it bring? You don't have to use general anesthesia anymore. You go through a much smaller incision, you have less operating time, faster recovery and less pain. And all of that together is a very attractive proposition for women who are not happy with their breast size or shape, yet do not want a traditional breast augmentation. Now that product is currently undergoing different stages of testing in patient trials. Most importantly, it's a system. It requires our Ergonomix2 diamond-shaped implant, which recently received CE approval. Our next step with this is to get approval for the tools that are needed to perform the procedure. Those are a Motiva injector to safely inject the breast implant through a very [Audio Gap] safely inject the breast implant. Now we just finished an IRB-approved patient series in Costa Rica last month. 30 patients were successively performed, and these world-renowned plastic surgeons that participated in this series talk about this as truly disruptive and, of course, the new standard. Now we hope to continue our work in the first half of this year with the opportunities from the approvals to begin early market experience in Europe by the second half of this year and then a commercial rollout in different geographies in 2022. Now what I would say is that over the last few years, we've proven that with more than 10 years in 1 -- more than 1 million devices out there, we have proven that we have a better safety profile. But most importantly, that our continuous innovation is changing procedures, is giving new options to patients, both in aesthetics and into breast reconstruction. Thank you.

Thank you, JJ. We'll go to Q&A now. And as we wait for the questions to come in, first one is this. Motiva Mia sounds like a product that could open up a large new market for breast augmentation. How do you plan to position Mia relative to traditional products? And would this cannibalize?

Well, there's -- part of the work that we are doing right now is not only on the final detailing of the Mia procedure itself, a lot of the work actually is on how we are going to sell this product because this is not a traditional breast augmentation. We want to attract a lot of new consumers. So what our research has shown is that there's a good group of new customers that will come in into the breast aesthetics category as a result of Mia. Now there may be patients who were seeking a traditional breast augmentation and are attracted by the options and the innovation that Mia brings. But this would be a case of positive cannibalization because it is a much more premium offering, and we do believe that for both groups, those who are looking for a traditional breast augmentation that are enticed by Mia, but also the new group of patients that would be coming into the category. For both of them, it would mean the use of Motiva Implants and again, at a higher price point. So we're not worried about that. What we are worried about that -- about is getting this right. And that's why we're working so much on doing the work on digital, improving our capabilities, making sure that we can attract as many customers as we can in the different geographies to surgeons that will be using the Motiva Mia system.

Thank you. Next question is, how has the breast implant business changed because of the pandemic? And how has Establishment Labs adapted to these changes?

Yes, it has changed in several ways, some of which we view as positive. I'll try to mention just a few. For instance, with the pandemic, a lot of people started spending a lot more time at home. And as a result, this concept of investing in yourself has become more and more predominant. So you see that in anything from people buying Peloton bikes to people taking online courses. But also, in many cases, people saying, well, I've always thought about doing something to look better, I'm finally going to go for it. In some countries, we see it as an effect of not having to travel. So women are finding it very convenient to do these procedures at this time. But also, I think that, that idea of investing in yourself is going to stay after the pandemic. We had already seen that type of behavior with millennials that don't have any issues with aesthetic procedures. They actually see them as a very positive thing. They don't have any moral issues with aesthetic procedures or anything like that. So we think that's going to stay through. Now the other one that is very important is the fast adoption of digital. We've always been a brand that is really present in digital. We have more interactions in social media than our 2 main competitors combined. And what we have seen is that the quality of the story around improved safety and aesthetic outcomes with Motiva has created a lot of buzz around our brand. With the pandemic, basically the search for information has moved entirely online. So patients are learning about Motiva way before they choose to go see a surgeon. And as a result, we are directing them to surgeons using Motiva. Now the last one, I would say that is key to us, is the focus on safety. We've always been the brand bringing about new levels of safety. And definitely, if you're going to go through a procedure during this time, you don't want to take any chances. You're making sure that you go to the right clinic that is having the safety protocols so that you're not put in harm, also looking for the right plastic surgeon. Eventually, you want to use the best technology, even if you have to pay a higher price point.

Thank you. China and the U.S. are very large market opportunities, as you've described them. Compared to the markets that you're in now, are there any notable differences in those geographies that will make your entry easier or more challenging?

Yes. No, I think that's a very pertinent question because China is a market that's very attractive, fastest growing market, highest ASPs that you can find worldwide but also something that is -- we've seen before. The Chinese consumer has embraced digital and aesthetics at the same time. So it creates this very interesting environment for our brand to shine. When we went to market in South Korea, we did so with a direct-to-consumer campaign, omnichannel, but mostly digital. And when we did so, we created a network of surgeons that knew that they could charge more if they use Motiva Implants because of the positive view that the South Korean consumers started having towards our brand. As a result, it was a win-win for everyone. Surgeons were being able to charge a higher price point. We were charging a higher price point and patients were getting a lot of value for this. So before the pandemic, over 25% of our patients in South Korea came from China. And we have seen that same phenomenon with patients from China going to Japan, Thailand and even Vietnam for Motiva Implants. So we do think that there's a lot a buzz around Motiva Implants in China already, and we look forward to that product launch. Now when it comes to the U.S., it's super interesting because it's a market where you have a lot less players and also, where already the only implants being used are smooth implants. And when we talk about those smooth implants, we're talking about the traditional smooth implant with the surface from 1962. So of course, we are going to go-to-market with technology from this century with a lot of good data regarding safety and improved aesthetic outcomes. And I think that combination is going to allow us to get to similar market share numbers the way we have gained in Scandinavia, where we are at over 40% for Austria; or Germany, where we are now at over 30% market share; or in the countries of Asia where we've been able to prove 40% and 50% plus market share rate. So we are definitely going to make a difference in the U.S. market, although, of course, we're going to have to earn our space in there.

Thank you. Earlier this week, one of your larger competitors announced their exit from most global markets. And this is a multipart question. What does this mean for Establishment Labs, both from the standpoint of having one less competitor and about trends in the breast implant industry? And then related specifically to that exit, can you quantify the impact of their decision to exit?

Yes. Well, I'll try to answer all of those. When we went to market in 2010, most surgeons worldwide were being told by the 2 main companies, J&J and Allergan, that the best products available were textured breast implants. When we went to market, we did completely the opposite. We said we're not going to sell traditional smooth implants, but we're not going to use textured breast implants. Why? Because we believed, and for very good reasons, that based on our patient-centric risk-benefit assessment, these textured breast implants did not have enough benefits to outweigh the risks. So over the years, we were saying this to surgeons. Most surgeons were not believing us. Now eventually, I think regulators started understanding what we were talking about in the evidence from many countries, especially in the United States, became that textured breast implants were bringing about this rare form of lymphoma. And as a result, right now, over 95% of the market in the United States is a smooth market. Now in the case of Allergan, they had to recall their textured breast implants worldwide in 2019. And since then, because of that, they've been basically losing market share to many brands, including ourselves. But I think we've been at the beneficiary end of many of the companies that are using textured breast implants, not just Allergan. So what it tells you is, number one, one of the things from that announcement that is most interesting is that they are choosing to sell those devices into 4 markets where, today, you don't have Motiva breast implants. Those are the U.S., Canada, China and breast reconstruction in Japan. So that's a strategic choice not to compete with us. I think in the future, what we will see is that as we enter those markets, we will do the similar work to gain the acceptance of patients and surgeons so that we can take over that market share as well. Now overall, it also tells you something. I actually do think it's a smart move by Allergan. I do think that they've done the right choice in not selling textured breast implants anymore. But you have other companies out there selling textured breast implants like Johnson & Johnson and other copycat companies. And I think they must be asking themselves, why are they doing that? And I hope that they make a choice not to sell those devices anymore. So that trend away from textured breast implants is definitely supported by that decision made by the new owners of Allergan, and I think it makes sense. I completely support it. From a dollars sense, I think the way I view it is that it changes the -- our idea of what market leadership means. We used to think in a lot of markets, market leadership would be around 35%. And in some markets, maybe a little bit more. Now with Allergan completely exiting those markets, we think that our market leadership is going to mean 40s and maybe in some countries, over 50% market share.

Thank you. Our last question is a forward-looking question. So get your crystal ball out there, JJ. What are some of the big changes you expect to see in the breast implant market over the next 3 to 5 years? And how is Establishment Labs positioning itself to remain a leader?

Yes. I think this is a really good question. We just finished a decade in which we transformed this industry. When we entered the industry, most companies were touting textured breast implants. We weren't. By the end of that decade, most companies knew that they were getting into trouble with regulators and actually with patient advocates and women's groups all over the world with those textured devices. We were the ones that foresaw that when we acted in a way that was in line with our women's health commitment. For this coming decade, our view is to completely build an industry based on that commitment to women's health. So we can do things like aesthetic breast reconstruction. What does that mean? It means bringing to women, who have had breast cancer or are in the risk group to have a breast cancer, the options that will be necessary for them if they are thinking about that as an aesthetic choice. So aesthetic breast reconstruction can be a great option for the one in 8 women worldwide that eventually have a breast cancer, unfortunately. Then minimally invasive. I think all of aesthetics is going towards minimally invasive and noninvasive. So breast surgery should go the same way for very good reasons. And that's why our program of minimally invasive is so important to us. And we think that, that is going to bring a new generation of patients to this category, and that's one that we will define and protect. So we will continue working in those things. And then the final thing, I think it's one that is logical. I think there's going to be a move towards having non-silicone options. And I think we are working on that. We've been working on it already for many years. We already use autologous fat grafting in breast surgery with our own type of products. And we think in the future, that's going to have an even deeper effect so that you can give options to women that are silicone-based and non-silicone.

That was our last question. JJ, if you have any concluding remarks?

No, I just want to thank everyone that joined us today, and you can be sure that we'll continue our work to transform the industry as it exists but also build a new one that can create a lot of value for women worldwide and also for our stakeholders. Thank you.